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Dutch Retailers Face Profit Blow as Taxes Chill Spending

Retailers in the Netherlands may have their earnings pinched this year as increased sales taxes and higher excise duties push prices up at a time when household confidence is at the lowest level since 2003.

“I am worried about the higher VAT rates and the fact the Dutch government didn’t come up with a good solution for the stagnant housing market,” Ton Anbeek, chief executive officer of furniture retailer Beter Bed Holding NV (BBED), said in a telephone interview.

To meet European Union budget rules, the Dutch government will boost the highest value-added tax rate on consumer goods to 21 percent from 19 percent after reaching an austerity agreement with opposition parties last month. Excise duties on tobacco and alcohol will increase starting in October. Dutch consumer confidence hit the lowest level since 2003 in March, according to the Central Bureau of Statistics, after consumer spending dropped 1.3 percent in February.

Retailers such as Beter Bed and shoe-store owner Macintosh Retail Group NV (MACIN) will be hurt the most, compared with grocers including Royal Ahold NV (AH) and Sligro Food Group NV (SLIGR), because a lower food and beverage sales tax rate will be maintained, analysts at ING led by Marc Zwartsenburg said in a May 4 note.

“Austerity measures will impact Dutch retail companies negatively as consumers feel the squeeze” from higher prices combined with stagnant government salaries, according to ING. “The obvious effect is that an average household has less money to spend or can buy fewer items for the same amount of money.”

Counting Costs

Beter Bed, which has almost 1,200 stores across Europe selling beds and mattresses, said in March that Dutch revenue began falling in August 2011, before the latest round of austerity, while sales grew in Germany. The company is responding by reducing store sizes in the Netherlands.

“We’ll have to make sure we’ll take the right measures to keep the costs for beds and mattresses low,” CEO Anbeek said. “The effect should be neutral in the end.”

Macintosh doesn’t expect a higher VAT rate to affect “the number of shoes we’re selling,” Chief Financial Officer Theo Strijbos said in a phone interview. A much bigger threat to earnings is the possibility that “retailers in trouble” will cut prices, he said.

Macintosh, which owns shoe stores such as Brantano and Steve Madden, and also sells furniture, said April 25 that it’s operating under “tough market conditions,” though sales are rising thanks to the acquisition of Jones Bootmaker in the U.K.

Housing Market

The $800 billion economy in the Netherlands entered a second recession in three years during the second half of last year. Unemployment rose to 5 percent in March from 4.1 percent last June, according to Eurostat, and house prices have fallen more than 10 percent since 2008.

Non-food retailers also will be hit harder than grocers because some of their earnings depend on the housing market, said ING, which has hold recommendations on the shares of Macintosh and Beter Bed. Macintosh’s “Living Division” accounts for more than one-fifth of the company’s revenue.

The budget package the Dutch government agreed on is meant to reduce the budget deficit to 3 percent of gross domestic product in 2013. Savings from the package are expected to reach 12 billion euros ($15.6 billion) in 2013, including an increase of the retirement age, lower health-care expenditures, a freeze on civil servant wages and a reform of mortgage rules to reduce risks to households and lenders.

Beer Production

As of next year, interest payments on new mortgages can only be deducted from taxable income if the loan is fully paid back within 30 years. The government also doubled the bank tax to pull in 600 million euros and announced it will increase excise duties on tobacco, alcohol and soft drinks to raise 625 million euros.

With duties going up, beer volumes will come down, having an impact on brewers including Heineken NV (HEIA) and Anheuser-Busch InBev NV (ABI), Karel Zoete, an analyst at Rabo Securities, said in a note to investors.

“The gap between Dutch and German excise duties is already quite big, and increasing that will certainly lead to consumers starting to buy their beer across the border,” Cees-Jan Adema, director of the Dutch brewers association, said in a phone interview. “Our members are very worried.”

A majority of Dutch entrepreneurs say that the measures will negatively affect business. Still, in a survey of 705 companies, 47 percent of executives said they have become more positive the Dutch will find a way out of the crisis after the deal, researcher Panteia said on May 3.

“People now are aware of what is coming and this might even help consumer confidence,” Macintosh CFO Strijbos said.

Sweder van Wijnbergen, professor of economics at the University of Amsterdam, is also optimistic.

“The negative effects are limited,” he said in an interview. “We have an extremely open economy and if consumption is discouraged, imports will decline and that doesn’t hurt Dutch production that much. The potentially negative effects on capital markets with a larger deficit are bigger and have direct consequences.”

To contact the reporter on this story: Maaike Noordhuis in Amsterdam at mnoordhuis@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net

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