Apparel, shoe prices can't match Customs cut, Govt is warned


Tribune Business Editor

Clothing and shoe retailers are warning the Government not to expect the 20 percent Customs duty elimination to translate into consumer price declines of the same magnitude.

Michael Maura, the Bahamas Chamber of Commerce and Employers Confederation's (BCCEC) chairman, told Tribune Business that the sector was concerned that the Government expects the duty elimination to result in a "one-for-one" decline in prices.

He explained that merchants could not afford such cuts in an environment where energy and other businesses costs continue to rise, as they needed to maintain gross margins and revenues to ensure they covered salaries and business expenses.

And, while many clothing, shoe and sporting goods retailers believe the duty elimination has offset the VAT hike's impact, Mr Maura said some had been deterred by the bureaucracy and other concerns from applying for this exemption.

"I've seen both sides of the coin," Mr Maura said of clothing and shoe retailers. "Some have complained the paperwork and process required to receive the duty-free exemption is too much for them.

"Some have said they prefer to pay the duty rather than submit the paperwork and confidential information on pricing. Many believe pricing should be determined by the market, and some are concerned that the Government believes a 20 percent duty reduction should equate to a 20 percent reduction in sales price.

"We all have to operate with the cost and ease of doing business, the cost of BPL and real property tax not decreasing," he continued. "There cannot be a one-for-one clothing, apparel reduction by 20 percent because duty has gone down by 20 percent. You have to keep the gross margins and cover the salaries and business expenses."

Mr Maura said it was too early to draw general conclusions on how the VAT rate hike to 12 percent, and introduction of exemptions (zero ratings) for breadbasket food items and medicines, had impacted businesses, consumers and the wider economy.

Acknowledging that "everything has to settle down", Mr Maura said feedback provided to himself and the Chamber to-date suggested the impact "from a business perspective" had been less painful than when VAT was first introduced in early 2015.

He added that the initial 7.5 percent VAT represented an increase that was of much greater magnitude than the recent 4.5 percentage point jump. "This one was not as bad as it was not to the same degree," Mr Maura said.

"From the businesses I have spoken to, what I have been advised is there has been an uptick in the number of sales transactions at the expense of the dollar value per transaction. While the volume number has gone up, the dollar cost per transaction has declined, and some people believe consumers are buying what they need as opposed to what they want to have."

Mr Maura said the 12 percent VAT hike was implemented during a period, July to August, that was traditionally soft for retailers and merchants apart from those catering to the Back to School market.

"From a sales perspective I would say overall it's been a bit of tough period over the last couple of months for retailers," he added. "Some have been the beneficiaries of not being negatively impacted by the 4.5 percentage point VAT rise because of the reduction on apparel and shoes." Some also increased their marketing spend in the wake of VAT's introduction, with discounts also employed to drive traffic.

Breaking down businesses he has spoken to by category, Mr Maura said restaurants had seen a "moderate decline" in patron spending although numbers had not fallen. Consumers, though, were equating a 15 percent gratuity and 12 percent VAT as adding 27 percent to their meal costs.

"Spending and the cost of doing business has increased tremendously as VAT has increased the cost of utilities and supplies," Mr Maura said of the restaurant industry's message. "Breadbasket items being reduced has not materially helped."

Electrical, paint and building materials stores had informed him of a drop in Saturday and Sunday spending by consumers, with persons adjusting to reduced disposable income by "shifting from purchasing premium brands to purchasing less expensive brands".

The Chamber chairman said the sector had informed him "construction contracts have been a saving grace, as these sales have not changed. Commercial sales have not been impacted significantly as yet, likely due to the Government's delay in the VAT assessment".

Some inner-city grocery stores had suffered sales declines of 25 percent, though, while costs such as energy had increased. Mr Maura said he had been informed that consumers were buying "only what they need", and only coming in if they lived within walking distance.

This stood in contrast to grocery stores in more affluent areas, where "higher disposable income and unwillingness to sacrifice preference" meant the expected increase in bread basket food sales had yet to materialise.

As for beauty stores, Mr Maura said he had been told that while sales were down by 10-15 percent in July, August was flat when compared to 2017 numbers.

General merchandise stores also reported that July was "very slow", possibly due to consumers spending heavily prior to 12 percent VAT's arrival, but August and early September saw improvements.

"Pharmaceutical companies are seeing their VAT credit/government receivable climbing," Mr Maura added. " They wonder if they will see grocery retailers shifting their buying of over the counter medicines from abroad and to the local pharmaceutical sector in order to avoid the payment of VAT at the border. The decision would obviously be influenced by the prices charged by the pharmaceutical wholesalers."