Quantcast
Channel: Alister Air » Running notes
Viewing all articles
Browse latest Browse all 2

The last lament of a dying retailer

0
0

I wanted to consider the issue of GST on online sales, as raised by Gerry Harvey recently. I think he’s wrong – at least at the moment. He’s engaging in rentseeking – or at least, trying to.  It’s worth looking at what’s happening, and why. Harvey claims that parity of the Australina dollar with the US dollar hurts retailers in Australia, and that there is not a level playing field, as GST does not apply to sales with a value of less than $1,000.  It’s worth noting that online retail sales are a relatively small part of total retail sales – about 3%, according to Assistant Treasurer Bill Shorten, and of those, 20-50% are from overseas.

The real reason

Briefly, retailers like Harvey Norman are slowly dying.  They’re mediators – they exist in between producers of goods and the consumers that want them.  In many cases, they add no value for the consumer except the dubious advantage of physically seeing the good(s) to be purchased.  To do this, one must travel to a retail outlet, suffer through trying to locate a sales assistant, and then – if the good is purchased – either pay more for delivery, or arrange it.  For some goods, there is value in this.  For a washing machine or a refrigerator, there probably isn’t (or, of there is, it’s not worth the few hundred dollars of markup a retailer charges).

The business model of getting people to come to you to give you extra money for no actual reason is coming to a close.  This should be something to be happy about.  No amount of interest-free scams periods is going to help keep it afloat.  Retailers will actually have to do something to justify their markup, and if they can’t, they’re going to fail.  Special protection for retailers who can’t adjust to the coming reality is unjustifiable.

An analogy

Analogies are always shaky, but there is one that serves.  When I first travelled overseas, a travel agent was almost a necessity.  They arranged your travel, confirmed visa conditions, booked your ticket, and (one hopes) got you the cheapest flight.  At some stage earlier than this, they were even used for interstate travel  They acted as a mediator between you and the airline.  This is no longer required – travellers can check visa requirements themselves, and find the cheapest flight through a range of online services.  The idea that you’d need a travel agent to find a cheap fare to London seems quaint now.  Travel agents have had to adjust to this new reality[1].  Travel agents used to make money from selling traveller’s cheques (remember those?).  These days, a small amount of currency from the local bank and a debit card gets you access to local currency.

Why it’s not the GST

The GST effect is unlikely to be a significant assistance to small (sub $1,000) purchases of goods for import.  This is because the price difference for comparable goods is often much larger than 10%.  As an example, I purchased a USB Blu-Ray DVD drive last year.  I checked three local computer parts suppliers (I also tried Harvey Norman, but that was a waste of everyone’s time).  One had no idea such a thing existed, and two could order one in for about $250-$300.  Or, I could buy a superior product from from a supplier in Hong Kong, shipped to my door for under $100.  I could pay $10 GST and still be significantly ahead.  What we’re seeing here is inept retailers, who have not needed to manage a supply chain for efficiency.  They’re adding no value (by which I mean, they’re not saving me money).  I’m under no obligation to subsidise Gerry Harvey’s inefficient supply chain management.

Why it’s not parity

The argument that parity of the Australian dollar with the US dollar is making online shopping cheaper for consumers seems, on the face of it, to be remarkably odd.  There are two main reasons for this – checking through the goods in a Harvey Norman, few of them would be made in the US.  And if we’re getting good exchange rates, why can’t they?

Which currencies are being converted?

I’m not a retailer.  There might be some eminently sensible reason why retailers are converting Australian dollars into US dollars and then into renminbi to buy Chinese goods.  It would seem more likely to me that there could be a direct AUD-CNY conversion, especially as China needs to buy our exports, and we only take AUD for them.  So I don’t see any particular reason why parity with the USD should have an effect here.  A comparison of the last twelve months of monthly average exchange rates for the CNY and the USD shows that they’ve varied against the AUD by reasonably similar amounts – at the December peak, the AUD bought 13.57% more CNY than at the June trough, and 16.51% more USD over the same period.  This is worth noting, and contributes, but not to the factors that consumers are experiencing.  So the AUD is a little stronger against the more relevant currency, but the improvements over the last 12 months have varied (comparing January to December, the difference is 6% more CNY per AUD and 9% more USD per AUD).

We’re getting good exchange rates – why aren’t the retailers?

Retailers should be able to make more efficient currency transactions than Visa or Mastercard (or Paypal) will charge individual consumers. Retailers will hedge their exchange rates so as to allow for some certainty, but it would be an odd thing to do to be paying much for a currency hedge for the next 12 months or so – there is a recovery of sorts happening in the US, but it’s very sluggish[2].  Individual consumers aren’t somehow getting a special deal from currency changes that’s unavailable to the retailers.  If anything, scale should tip the playing field in their favour.

Why none of this is (yet) a problem (unless you’re a retailer)

Unsurprisingly, the backlash has begun[3]. Today, the only meaningful downside is faced by those inept retailers who’ve been able to apply ridiculously inflated markups to generic goods.  They’re shortly going to die, and unless they innovate, they probably should.  Few mourn the loss of travel agents getting in the way of the cheapest air fare, and taking their cut of foreign exchange conversions by selling traveller’s cheques.  Some adapted, and some didn’t. But it’s probably not worth being too concerned just yet about a 10% GST on at most 1.5% of retail sales when much of the price difference can’t be explained by the tax-free status of low-cost imports.  Retailers deserve the shake-up.  If retailers could present data supporting their arguments, I’d be more sympathetic

What about the workers?

Firstly, any time you here a billionaire claiming something’s in the interest of his or her workers, it’s a safe assumption that that person is lying.  It’s not worth assuming that any owner or manager of a large retail chain has a genuine concern for their workers – reducing the CEO’s inflated pay packet and giving their workers a pay rise would be a signifier of real concern.

Retail is a very important employer of Australians – it gave many workers their first job, and any sector that’s that large is worth paying attention to.  But no favours are done by – for example – a tariff on imports.  You keep a few more people in jobs (possibly), but all consumers necessarily spend more on goods than they’d need to, which costs other jobs.

But there are two ways forward for workers in retail.  Retailers are going to need to justify their value, rather than act as oligopolists.  They can do this in two ways, and both require additional skills.  Firstly, improve service.  If retail staff are knowledgeable about their area, consumers are more likely to reward that.  After-sales service can assist here.  Services can’t easily be imported – Apple’s workshops in their stores are a great example of how to generate customer loyalty.  Secondly, price properly. Retailers are going to have to justify their existence to their customers, and the sooner they start the more likely they’ll survive.

Australian retailers are going to need to have to engage with online retailing.  People are going to need a reason to come and give you their money, and Harvey Norman certainly doesn’t give you one now.  If I know what I want to buy, why should I not be able to discuss my purchase with an informed staff member, and complete the transaction online?  Gerry Harvey has, it seems, forgotten a key lesson of sales – don’t make it difficult for people to give you their money.

But it will be a problem soon

Someday.  And there are some reasonably straightforward ways to address this without dropping the GST exemption to $100.  If I were Bill Shorten, immediately after washing my brain in bleach I’d be asking Treasury to start planning.  The points of entry into the country are clear.  What’s harder is how to implement an import taxation regime without affecting gifts, for example.

Tariffs and taxes on the importer are out.  There’s often no importing corporation to apply the tariff to – China Post sends something to Australia Post, who send it on. Applying the GST is possible, but the primary reason not to do this today is that the cost of applying a GST would be likely to be greater than the amount of money it would raise.

This is a matter that will have to be addressed.  But it should be addressed as part of a considered response, rather than because a selection of inept retailers can’t work out how to compete in a market economy.

FOOTNOTES
1. The ABS has an outline of travel agents and their income sources from 2003-2004.  22,609 people were employed in the sector in June 2004.
2. There’s something to be said for hedging against the renminbi.  There are solid arguments that China is keeping the value of the CNY artificially low.  The Chinese government has given every indication that it will continue to fix its exchange rate according to targets that support its export industries, but if this were to suddenly change, one could expect the CNY to rise quote quickly.  This is extremely unlikely to occur.
3. In spite of the stupidity of the article claiming that retail employs 15% of the population – try 15% of the workforce.


Viewing all articles
Browse latest Browse all 2

Latest Images

Trending Articles





Latest Images