In the spotlight - Tesco invests in Ireland

In something of a surprise move, Tesco this week announced plans to open more stores in Ireland, one of the European economies most affected by the downturn.

Tesco, the largest retailer in Ireland, is to open six stores and refurbish one other as part of a EUR113m investment in the country, which it claims will create just under 750 jobs.

The expansion comes amid some tough trading conditions in Ireland, which throughout 2009 and into 2010 implemented some of the hardest austerity measures in Europe. Public-sector salaries have been cut by 5-15% as Dublin looks to cut government spending and reduce debt.

Consequently, Ireland's retail sector has struggled. In 2009, Irish retail sales dropped 14.1% in volume terms and 18% in value terms. Food sales volumes fell by 3.7%, while the value of food sales slid by 9.5% amid price competition from the country's supermarket chains.

And food retail sales are still falling. In value terms, sales of food, beverages and tobacco fell by 9.2% year-on-year in May, according to the latest data from Ireland's Central Statistics Office. The figures also represented a 1.9% fall on April.

The volume of food, beverage and tobacco sales was also down, falling 3.5% on the year and 1.7% on April.

For its part, Tesco saw its sales in Ireland fall 7.5% in the year to the end of February.

Nevertheless, a "significant price reduction programme" started in May 2009 led to transaction and volume growth towards the end of Tesco's fiscal year and the UK retail giant claimed in June to have seen an "impressive sales recovery" continue in the first three months of its new fiscal year. With the opening of yet more stores, Tesco clearly feels confident enough with its sales progress to invest in the business.

However, it is not just Tesco that has been in expansion mode in Ireland over the last 12 months. Last year, Aldi announced ambitious plans to open 35 stores and a distribution centre in Ireland by 2012.

And Tesco has not been alone in investing heavily in price to lure customers over recent months. In the last year, Aldi, Lidl, SuperValu and Centra owner Musgrave Group and Dunnes Stores have embarked on price-cutting campaigns.

Such competition inevitably leads to concerns about retailers' profits, something Tesco does not disclose for the Irish market. However, its position as one of the world's top four retailers suggest it would have some of the deepest pockets among Ireland's retailers.

Ireland's suppliers have voiced their own concerns about margins and, in response to Tesco's announcement this week, the Irish Farmers Association repeated its claim that food producers were not being treated fairly.

IFA president John Bryan said Ireland's multiple retailers "would be better off fixing [the] fundamental problem" of producers "not getting fair play" than "undertaking unnecessary capital investment".

Bryan said: "I believe the over capacity of the sector is self-evident and that returns to the primary producer are being forced down in order to pay for the excess capacity and capital expenditure by the multiples."

Bryan went to claim that "the food supply chain is broken" and urged the Irish government to regulate the retail sector.

Unsurprisingly, Ireland's retailers oppose more regulation, including a proposal being considered by the country's government for a statutory code of practice to oversee the sector. Ireland's politicians are also mulling a voluntary code but what is clear is that regulation remains very much a live issue in the country.

Ireland remains a very tough market and faces a great deal of economic and regulatory uncertainty. Tesco, however, ostensibly feels the time is right to expand in one of its key overseas markets.