Chris Wilson engages in the debate over internet retailers vs. brick and mortar shops.
For starters I would like to declare my interest. I buy things from online stores. Quite a lot of things in fact: whole menageries of items varying in utility, price and quite often taste, or so I’m told. Some of these purchases come from Australian retailers and wholesalers, and some from various overseas companies.
This means that according to Gerry Harvey I’m doing the wrong thing by the country. I should accept without question paying more for goods in bricks-and-mortar shops as ‘It’s the right thing to do’. This provocative accusation was enough to rouse me from my holiday-induced apathy to reveal some of the half-truths being peddled by some in the retail industry.
Gerry Harvey, the founder of Harvey Norman, along with other retail moguls including Solomon Lew, the former chairmen of Coles-Myer and current Myers chief Bernie Brooka have banded together to form the ‘Retail Coalition’ in order to lobby against the sizeable threat online shopping represents to their business model.
The main complaint of the major retailers thus far has been that small importers and consumers are exempt from paying GST on shipments of imported goods with a total value of less than $1000. They claim that this exemption puts Australian businesses at a disadvantage to foreign suppliers and that furthermore, an extra 10% levy should be placed on foreign imports.
|Item||Australian online retailer price||Foreign online retailer price + shipping||Mark-up over foreign total in percent|
|Levi’s 501 Jeans||Just Jeans
|Skechers Metabolise Women’s Sneakers||Betts
|iPod Touch 64GB||Harvey Norman
|Apple (US Retail)
|Dead or Alive by Tom Clancy||Angus and Robertson
|Barnes and Noble
For the record, the Government has stated that this exemption exists because the cost of enforcing it would be greater than the revenue it collected. The GST is a 10% value added tax, so if the GST exemption is the only difference between Australian retailers and their foreign counterparts you would imagine that all imports purchased online are 10% cheaper, not including shipping.
The problem with this argument is that a quick search comparing identical goods from Australian retailers and foreign online retailers shows some serious discrepancies. As an example of this, take the table on the right. It compares identical items from Australian retailers and overseas retailers inclusive of shipping (all in Australian Dollars).
While this is hardly an exhaustive or particularly scientific sample, it illustrates the point that even after shipping is considered, goods from overseas websites are still far cheaper than the prices offered by Australian retailers. It is certainly not just the GST exemption causing these price differences.
Why are Australian retailers’ prices so much greater than those in the US and elsewhere? In the end it comes down to operation costs; Australian stores pay more than twice as much in rent as their American counterparts; the average retail rent in Australia is AUD$1167 per m2 compared to AUD $499 per m2 in the United States.In defence of retail stores, they do offer a certain advantage in some areas; being able to try on clothes and shoes before you buy, being able to talk to an employee in store and getting your goods instantly being three obvious examples. The premium we pay for these services still seems a little steep to me though.
Wages for lower income earners in Australia are also higher, with the Australian minimum wage (for adults) currently set at AUD$15 per hour whereas the average minimum wage in the US is less than half that at AUD$7.20 per hour. Australian retailers also lack the economies of scale of their American counterparts, with a much smaller consumer base dotted over an entire continent. From this it seems that Australian retailers are not engaging in shameless price gouging; they’re simply trying to cover their costs. Even once we consider that the Australian Dollar is overvalued by about 5%, the discrepancies in retailer costs are still sizeable.
Retail rents are much higher in Australia for two major reasons. The first reason is simple supply and demand. Land in the major CBDs and the inner suburbs is scarce and therefore expensive. Unlike in the US where most retailers set up large stores in strip malls on the edge of towns and cities, retailers in Australia tend to clump together in more central shopping complexes where rents are higher (obvious Perth examples being Floreat Forum, Westfield Innaloo and the under-construction Claremont Quarter).
The second reason is Westfield Group. Westfield owns 44 centres with a total of 3.6 million square metres of area that is rented to 11,474 retail outlets. While not a monopoly, Westfield’s market power means that they are a contributing factor to the high retail rents that afflict both Australian retailers and consumers alike. Westfield chief Frank Lowy was initially vocal in his support for the Retail Coalition’s campaign but suddenly lost his voice mid-January when commentators pointed out the role Westfield has played in creating the problem in the first place.
What possible solutions are there to the grievances of both retailers unhappy with being undercut, and consumers fed-up of being overcharged? A simple solution involves making more land available in cities for retailers to set up shop. This doesn’t simply mean gazetting another suburb somewhere halfway to Mandurah or Lancelin. Perth in particular is screaming out for more medium density development in the inner suburbs.
By using already developed land more efficiently, total land supply will increase, leading in theory to a decrease in rents. Decreasing minimum wages is a political impossibility and would lead to a slump in consumer confidence; more trouble than it’s worth. Another measure would be promoting more competition for Westfield’s complexes, though it is hard to see where said competition would come from at the moment.
Another argument, and one that I’m quite sympathetic to, is that the members of the Retail Coalition are trying to avoid having to adapt their business model. The internet retailers have simply found a different model more suited to a large section of today’s consumer, and instead of adapting to face the challenge the old-model retailers are insisting a handicap be placed on online imports in the interest of ‘fairness’.
It is simply globalisation coming full circle; starting in the 1970s production was outsourced from Australia and other developed nations to wherever it was cheapest to produce. Now consumers are using the internet to do the same, and purchasing wherever it is cheapest to do so. The Retail Coalition seems to be pro-globalisation, but only when it suits them.
So is the Retail Coalition campaign finished? Have the consumers won? While the Retail Coalition certainly lost the first round, they are gearing up for another lobbying effort in the not too distant future. They registered as a company in mid-January in order to better fight the GST exemption, and have started rallying Australian producers to their cause such as the Furniture Industry Association of Australia among others.
You can be sure that they will be refining their arguments in order to protect their business model. Remember, despite all of their appeals to patriotism and to supporting Australian jobs their arguments are old fashioned protectionism dressed up in new clothes for the internet age.