High costs hinder growth

Sunday Business Post - Managing Your Business supplement - September 2007

The government must address the major issues that are curtailing business growth in Ireland, including taxation and red tape, in order to allow small businesses to become more profitable, writes Dermot Corrigan.

The current taxation system in Ireland is hindering growth in the SME sector, according to Pat Crotty, chairman, Small Firms Association (SFA).

Crotty will give the opening address at the SFA's annual conference in Dublin Castle next Tuesday. For many of the business owners attending the event Crotty said indirect taxes have become a major issue.

"In the last ten years we have gone from fifth to 15th in Europe in terms of the relative competitiveness of our cost base,” he said. “The costs that are going up all the time, out of line with everything else and in excess of inflation, are all related to government controlled or influenced agencies."

"We are a low income tax economy, but we are a very high indirect tax economy,” said Crotty, who runs a hotel and restaurant in Kilkenny. “I am in the tourism business and the people who come here on their holidays from Europe find the cost of food and all sorts of other items very high."

"This is not because of the cost of producing or selling food, or drink, it is the taxes on it. Our taxes on things that are not particularly luxury goods are taxed at a luxury rate. The average tax on food and drink in Europe is between five and nine per cent. We go between nine and 13 and a half per cent on food, and up to 21 per cent on drink. That has to be addressed sooner or later."

Crotty said consumers complaining about the high cost of goods or services often do not realise indirect taxes are partly to blame.

"Local authority charges do not affect Sean Citizen in the normal course of events,” he said. “They are not paying for their water, or paying rates just because their property happens to take up a piece of ground. Business is the only one paying those. We are picking up the tab for the local authorities."




Crotty rejected the notion that Irish businesses are ripping off their customers.

"The rip-off label is totally unfair,” he said. “I am a consumer as well as a business operator, and so is everyone that works for me. I would have staff that complain that people do not understand why our product is the price it is. At the same time when they walk out onto the street with their consumer hat on they are the ones giving out about the price of the next product. People can understand why their own product justifies a price and cannot understand why they are being charged so much themselves. People have never got their head around it.”

In general, Crotty said that the price of goods in Ireland were not rising. He said smaller businesses, not consumers, were taking the brunt of cost increases in the economy.

"We have had years of the perception of 'rip-off', so it is now very hard to get a price increase. This is evidenced by the regular factory gate surveys which show that really prices are not going up, which means that all the cost increases are being absorbed by businesses," he said.

Crotty said the services sector is not being affected as severely by the ‘rip-off’ misconception.

"The services sector seem to be able to get the prices they need, but this means that we seem to very dependent on services and if the economy does take a dip and cash dries up the services will suffer too and then we are in trouble on both fronts," he said.


Global marketplace
Crotty said a major challenge facing SFA members was the open, globalised market Irish companies now operate in.

"We are a small open economy,” he said. "In the global economy everything affects us - fluctuations in interest rates, wars, the price of oil, things that we absolutely cannot control. They all affect consumer confidence and business confidence.”

The recent turbulence in the Irish stock market is an example of this, said Crotty.

"Things like the sub-prime lending in the US can throw everything out of kilter. A lot of people are working on a knife edge and for some of them it will make life very difficult."

Energy price increases in recent years are another issue for smaller Irish businesses, Crotty said.

"If you are producing a product that requires a significant energy input to make, your costs can change very dramatically with the price of oil,” he said. “Any hope of getting an increase in your sales price is very small."

Crotty said SFA members now operate a globalised business model, with customers all over the world. This poses new challenges, especially for smaller manufacturers.

“As a small economy we are really price takers in the international market,” he said. “We can not go to the market and say 'here is our price'. The customer will say 'fine, we will go to China'.”

Crotty said that the regulatory burden on smaller businesses in Ireland was a serious issue for SFA members.

“The difficulty is that people who are in manufacturing are largely competing with the Pacific Rim and Asia and other developing economies and they do not have the same regulatory burden,” he said. “The regulatory burden in developed economies does significantly impinge on your capacity to compete. It is a cost that your competitors do not have."

Full employment in Ireland is a challenge for smaller businesses that have to cast their nets further afield to find qualified staff, said Crotty.

“For the growth of our employment base we depend on immigrant labour,” he said. “We need skills that we do not have in the country."

Crotty said that his members’ efforts to secure non-EU staff were hampered by the amount of red tape involved at government level.

"The main difficulty, other than sourcing, is the bureaucracy involved,” he said. “The advertising and interviewing processes could take a month or two. Then you could have another three months wait to get the permit, and then maybe not get it in the end. We have been talking to the government about streamlining the procedure. There needs to be more urgency and the process needs to be more businesslike."

Crotty said Irish business owners and entrepreneurs would have to become more innovative, and move up the value chain, if they wished to compete successfully.

"In the long term research and development and innovation are the key,” he said. “We can not just be 'me-too' operators when we are selling a product or a service, we have to be leaders, be at the edge in terms of where products are going. That way you can get a good price."

Crotty said that the government, and in particular Micheál Martin, Minister for Enterprise, Trade and Employment, was aware of the importance of innovation. However, he said government efforts to help smaller businesses needed to improve.

"The government are aware of it now and, in the last budget made significant progress in terms of supporting companies to do R&D,” he said. “It still is not a catch-all. It will benefit bigger companies more than small companies, but at least it is beginning to knock on the door of small companies."

Crotty said small business owners could not afford to be complacent, regardless of their current rate of success.

"No matter what business you are in you cannot say 'Well we had a good year. Now I am going to put the money in my back pocket or buy a boat or whatever',” he said. “If you are not making your business stronger you are actually getting weaker, because everyone else is improving. Things are generally just getting a bit tougher all the time, so your preparedness depends on your capacity to grow and react."

"The statistics show that our record at growing small businesses into larger businesses is really quite poor,” he said. “Small businesses that have really good ideas actually tend to be bought out by the bigger players, they do not get to become a big business themselves."

Crotty said business owners that establish and develop a small business initially are not always able to take the business on to the next stage without outside help.

"People have the skills and the ideas to start up a business,” he said. “It is growing the business that becomes difficult. While a business is small an owner/ manager can be the jack-of-all-trades. As it grows it can be difficult to see and realise when it is time to bring in other people, to buy in other skills. Owner/managers can often be very much hands-on, and as a result head-down. They say it was my idea so I know best. They do not see that to get to the next stage they might actually have to take their hands off and have a look at where they are going and what skills they need to grow the business."

Crotty said that carrying out research, or being really innovative at the level required to compete on a global level in the modern economy, required substantial knowledge and resources.

"People have a capacity to take a business to a certain level,” he said. “After that you need, particularly for R&D and innovation, you need serious expertise. That means someone handing over their idea to someone else or giving part of it to someone else to see how it develops. It also means a very substantial investment; there is no R&D or innovation that comes cheap. As soon as you start talking to innovation centres or third level institutions about trying to develop something you can get into big bucks very fast."

Crotty entered the business world in 1980 as a baker. At that time, he said the Irish economic situation was very different.

"I remember the bad old days of low employment, high inflation, very high interest rates and no confidence,” he said. “In the bakery business we did micro-costing, you were looking for fractions of pennies in profits to justify your existence. Anyone who lived through it would never forget it and it makes them more careful and more thorough."

It is difficult to explain the situation in Ireland in the 1980s to younger people, said Crotty, even those who now own their own companies.

"They do not even know what you are talking about," he said. "We now live in a consumer society. Back then people did not have money."

When Crotty realised that there was no future for him in the bakery business, he moved into the hospitality sector.

"I had properties that I could move toward new markets,” he said. “As a baker the next progression was food in general and now I am in the bar and restaurant business. I am in a very good city for that, Kilkenny is one of the primary tourist destinations in Ireland and it is a growing place in its own right."

Crotty has been an elected member of Kilkenny Corporation since 1999, serving as Mayor of Kilkenny in 2003. He was also chairman of Kilkenny Tourism for several years and chairman of the South East Regional Tourism Authority. He has also served as president of Kilkenny Chamber of Commerce and is current ly a member of Kilkenny City and County Vintners Federation Committee.

Crotty was elected to succeed Angela Kennedy as chairman of the SFA in December 2005.

"The main job of the chair is to chair the board meetings,” he said. “Around the table, we have a diverse mix of opinions. We have people who think about the big picture and understand it in terms of how it impinges on their own business. It is because we get such a useful mix of opinions that we can come up with good policies for lobbying the government and government agencies and representing our members' interests."

In addition to his many other roles, Crotty served as president of Kilkenny Chamber of Commerce for two years.

“The main difference between the SFA and Chambers is that they work at ground level,” he said. “They are trying to trickle up from each chamber to a central agency to find out which issues to lobby at national level. We start at national level and are entirely focused on national issues that affect most people in business that need to be addressed to government."

Crotty said part of his job was to ensure that SFA members made full use of their membership and contacted the SFA when they required assistance.

"People who are operating small business can have their heads down most of the time,” he said. “Suddenly a problem appears and they do not know what to do or where to go. They should ring us or at least go look at our website to see the range of services that are there. There are only five staff in the office, but they have answered so many queries so many times that they know the answers. Our most frequent phone-calls from members would be on employment and HR (human resources) issues, insurance or service supports.

Crotty said this year had seen changes in the SFA boardroom, with four new members joining the SFA National Executive Council.

"I have been saying for years that while we had very good voices around the table, we needed to broaden our membership of the board,” he said. “We have done that this year, we have brought in new people from completely new backgrounds in technology and services and they are beginning to feed into the system now. That will make us stronger."

The new faces on the Small Firms Association's National Executive Council include Colin Anderson, general manager of Athlone Optical; Carol Ann Casey, managing director of CA Consulting in Dublin; Barry Coleman, managing director of Pensions Matter, also in Dublin; and Brian O'Kane, managing director of Oak Tree Press in Cork.

Crotty said that, despite the challenges, these were good times to be involved in business in Ireland.

"Every day should be a challenging day for anyone in business, and it tends to be particularly for small businesses,” he said. "But in ten or fifteen years we may be looking back on this as the good old days. It could be a lot more challenging, and it likely will be."