By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A top food store chain yesterday revealed sales have fallen 10 per cent since the VAT rate hike, with this and other uncertainties forcing it to postpone further expansion plans.

Gavin Watchorn, AML Foods' chief executive, told Tribune Business that a combination of the VAT increase, the Bahamas' planned accession to full World Trade Organisation (WTO) membership and related taxation reforms, together with rising energy prices had prompted its Board of Directors to pause construction of new stores.

The BISX-listed food retail and franchise group, which operates the Solomon's and Cost Right brands, still intends to pursue real estate acquisitions for sites that "make sense" as new stores, but will not 'go vertical' until it sees how these developments impact consumers and the wider economy.

Recalling how group-wide sales plummeted 15 percent in the first four to six weeks after VAT was introduced in 2015, Mr Watchorn estimated it would take between two to three months for consumer spending to "normalise" following the move to a 12 percent rate.

The AML chief added that while store transaction volumes were unchanged, their value had declined, although he warned against "making rushed decisions" given that the new VAT rate has been in effect for just under three weeks.

"I think Bahamian consumers are going to need some time to adjust," Mr Watchorn told Tribune Business. "When VAT was introduced in January 2015 we saw about a 15 percent decrease in sales for maybe the first four to six weeks.

"Before the latest increase we some great weeks. One store was up 50 percent the week before, but they're [sales] down about 10 percent since we went to 12 percent. What we're not seeing is less transactions but less spend. What we're seeing is not what we want to see, but it's not unexpected."

Based on AML Foods' annual sales of $163.057 million for the year to end-April 2018, the post-VAT hike's 10 percent sales decline stands to cost the BISX-listed group some $16.3 million annually on its top-line. Yet it is unclear with this trend, and the magnitude of the fall, will hold for the long-term.

Mr Watchorn said the sales peak immediately prior to the 12 percent VAT rate's implementation, as Bahamians stocked up on groceries and other products to beat the increase, meant it was hard to determine when - and where - consumer spending will level off or 'bottom out'.

"It will take some time," he emphasised. "We have to see what happens with the 'zero rating' of breadbasket items that will provide some relief to consumers. We have to wait a couple of months before it levels out and we see what the normalised level of consumer spending will be.

"We've got to see what it levels out at. We don't want to want to be making rushed decisions in the first weeks, especially as the last week in June was so strong. We have to be lean as always, so we're looking at where we can reduce costs and save money. It will be three months, maybe a little more, before we see how consumer spending fares."

AML Foods' data provides one of the first insights into the VAT hike's impact on the Bahamian retail sector and consumer demand. It will likely fuel existing concerns about the increased taxation's impact on jobs and the wider economy, given that the Government is forecasting the rate increase will suck an extra $400 million from consumers' pockets this fiscal year.

In the meantime, Mr Watchorn said AML Foods had decided to slow down its store expansion strategy given that it - and the wider business community - needed to "digest" how VAT will impact consumer spending and a WTO accession "coming towards us next year".

"We are going to continue to look for sites, and if a site makes sense and ideal real estate location, we will look at that," he told Tribune Business. "But in terms of converting 'green field' into new stores, as a Board we have decided to wait until we see the impact of all these things.

"We have some active discussions going on with parties on different sites. To buy it is one thing, and you're buying for the long-term, but there's too much uncertainty for us to be making a commitment to build large stores right now."

Besides the VAT increase and WTO accession, Mr Watchorn cited rising energy prices as another issue that had given AML Foods pause for thought. Besides global oil prices, he cited the additional charge that will ultimately be added to consumers' electricity bills to finance Bahamas Power & Light's (BPL) rate reduction bond restructuring, adding: "Someone has to pay for the debt on the books at BPL as a result of gross mismanagement."

The AML Foods chief also said there was "a little bit of uncertainty" over how the Government plans to replace revenue that will be lost as a result of having to eliminate, or substantially reduce, many import tariff lines as a result of joining the WTO.

The Minnis administration has said it will likely have to replace between $100-$200 million in lost revenue, but is currently unable to give a precise figure because the terms of the Bahamas' accession have yet to be negotiated.

Mr Watchorn questioned whether the chosen replacement would be a "consumer tax" or "business tax", and how it would be collected. He added that he did not "see the benefit to consumers" from joining the WTO if the Government eliminated import tariffs on one hand, only to levy new or increased taxation on the other.

His comments indicate AML Foods is going to be far less aggressive with the expansion strategy it unveiled in its 2017 annual report, which aimed to add two new stores in southern New Providence over the next five years.

It had planned to continue rolling out its 'neighbourhood' food stores based on the model established by the recently-opened Solomon's Yamacraw outlet, having already acquired a 4.506 acre site on Charles Saunders Highway, between Seabreeze Estates and Pinewood Gardens, as one such location. Another site was being sought in southwestern New Providence.

Meanwhile, Mr Watchorn said AML Foods had this week opened a new staff training centre in Freeport, adding: "We're quite excited about the benefits it will bring to us up there over the medium to long-term."

The BISX-listed group is now planning to construct and open a similar 4,000 square foot training centre, adjacent to its Solomon's Yamacraw store, before the 2018 calendar year-end.

"We will be breaking ground shortly, and it will be operational before the end of this year," Mr Watchorn said. "It's kind of a win-win for us."

Tribune Business sources yesterday suggested AML Foods had originally planned to base its Nassau training centre, and relocate its head office, at the former City Markets headquarters building and warehouse on the East-West Highway.

However, its $3 million purchase of the site has become bogged down in the ongoing litigation involving the property's owner, the City Markets employee pension fund, and Tribune Business understands that AML Foods is close to walking away from the deal unless it can close quickly.

Mr Watchorn declined to comment, citing the ongoing litigation, but a source familiar with developments, speaking on condition of anonymity, said: "AML is prepared to walk away from this if it is not resolved quickly. It cannot let its strategy be held up because of issues with the property."

The City Markets employee pension fund trustees are currently embroiled in a legal challenge over whether they have the right, and ability, to sell the former head office and warehouse building as revealed by Tribune Business earlier this year.

AML Foods has two years left on its existing lease at the Town Centre Mall, and is searching for a new location for its Cost Right brand as well as a new headquarters site.