The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

AML Foods’ chief executive yesterday said the Bahamas was “only now seeing the real impact of Value-Added Tax (VAT)”, suggesting that its effects would “bottom out” doing the weakest point in the economic cycle.

Gavin Watchorn told Tribune Business that the 7.5 per cent levy’s true burden on Bahamian consumers would be exposed between now and September/October, given that those two months were traditionally when economic activity was at its lowest.

He added that the BISX-listed food retail and franchise group was “planning for the slowdown” whether it occurred or not, and the possibility that consumer spending - a key driver for the Bahamian economy - may “not get better” before year-end.

AML Foods largely managed to shrug off VAT’s impact for the three months to end-April 2015, as sales declined by just 1.6 per cent or $500,000 year-over-year, dropping to $34.81 million from $35.379 million.

Mr Watchorn, though, suggested that the peak winter tourism season, which coincided with AML Foods’ first quarter, had helped to shield Bahamian consumers from VAT’s worst effects.

Lower global oil prices also helped to offset VAT via lower energy and gasoline costs, but Mr Watchorn said the Bahamas was now entering a period where hotel hours were reduced, and many winter residents had headed home for the summer.

“While I think the implementation of VAT was much smoother than what people were expecting, the sky didn’t fall, there has been a consumer reaction and that had to be expected,” Mr Watchorn told Tribune Business.

“Salaries generally are not increasing, certainly not be 7.5 per cent, and we’re a very consumer driven economy.”

Tribune Business was in the past shown surveys by the College of the Bahamas (COB) suggesting that nearly two-thirds of Bahamian economic activity is driven by consumer spending.

With VAT extracting $150 million in net new revenues out of the economy for the 2015 first half, and potentially $300 million for the full year, consumers have already moved to adjust their spending patterns to compensate.

“We’re a relatively small economy, so spending is replicated significantly,” Mr Watchorn said. “A dollar spent in my store gets spent five other times. It goes into an employee’s salary, and gets spent in restaurants and at the movies.

“The knock-on effect on spending is quite significant. And when they draw back on spending, it has a major impact.

“Consumers are still in the adjustment phase with VAT, and making decisions to manage their finances to suit the circumstances that exist today.”

With reduced work weeks and hours in the hotel industry, due to the onset of the summer tourism season, Mr Watchorn said consumers were likely to feel a deeper bite from VAT as incomes and spending power reduced.

“I believe we are only now seeing the real impact of VAT,” he told Tribune Business. “The timing of VAT implementation was when we were in high season in the hotels, and there were a lot of winter residents.

“Now, the hotel workers are working less hours, and the winter residents have gone back.”

With Bahamian retailers traditionally enjoying “a couple of heavy spending periods” over the next two months, due to the summer vacation period and the ‘Back to School’ season, Mr Watchorn said these would likely provide a ‘litmus test’ for VAT’s true consumer impact.

“We’re now, over the next couple of months, going to see the real impact of VAT; the real bottoming out,” the AML Foods chief told Tribune Business.

“I think the true effects will be seen at that point between now and September and October, which are certainly the weakest points in the economic cycle, corresponding with the slower hotel and tourist season.

“We’re planning for it, whether it comes or not. We’re planning for the slowdown in consumer spending, and it not getting better this year.”

Mr Watchorn said all businesses should be making similar adjustments in preparation for a further drop in consumer spending, although he conceded: “Not everyone has that ability.”

AML Foods’ chairman, Dionisio D’Aguilar, in his first quarter message to shareholders said the BISX-listed group had “seen an immediate and noticeable impact on our sales volumes” due to VAT.

While transaction counts (volumes) had remained “constant”, average consumer spend per transaction had declined during the three months to end-April 2015.

Still, AML Foods was able to produce a slight net income increase for the quarter to $1.47 million, compared to $1.446 million the year before.

Referring back to the company’s financial struggles of more than a decade ago, which it has now put behind it, Mr Watchorn said: “If you look back at AML’s history, if someone had told me then that we’d produce the quarter we did given the introduction of VAT, I wouldn’t have believed them.”

He added that AML Foods’ investments in energy efficiency and reduced consumption were “helping to offset reduced gross margin dollars from changing consumer habits”.

“We knew VAT was coming, and we have worked quite hard on improvements to our business, knowing we expected a consumer reaction,” Mr Watchorn said.

“We’re doing a lot of good things internally that are helping to maintain our sales numbers.”