Struggles of the Australian Retail Sector

Source: Benson Kua

I was watching an episode of one of my favourite political TV shows, The Drum (Mon-Fri, ABC News 24 at 6pm) when Dick Smith was introduced as the program guest. I watched with bewilderment as Smith began ranting and raving – it went something like this:

“(without the GST revenue from electronic retail sales) we won’t have the money to pay decent wages to our nurses…our police, you won’t be able fund the ABC in a decent way, this money is gone forever.”

 Tim Wilson from the Institute of Public Affairs correctly called Smith’s claims “absolute rubbish”. Our tax revenue base is not reliant on GST collections from electronic retail sales, which Smith estimates at $600million. The current budget estimates indicate that tax revenue in 2011-12 will be $329billion, clearly showing that this lost revenue will hardly effect the government’s ability to fund important services. Furthermore, as Wilson pointed out, if consumers are finding the goods they desire online at lower prices, this gives them more discretionary income to spend on domestic goods and services, boosting domestic economic activity which will help raise tax revenue for the budget bottom line. Smith agreed with Tim’s assessment, but then began a counter-argument which included the notion that perpetual economic growth is a myth…not wasting my time on that argument today.

The constant commentary from vested interests such as Smith and Gerry Harvey (owner of Harvey Norman) has placed a sharp focus on the declining domestic retail sector in Australia. Retail figures for 2011 were flat at best, with large declines in spending on domestically-stocked clothing, shoes and books.

Harvey has been arguing that he cannot compete with online electronic retailors, because they do not have to pay GST on items under $1000. The problem with Harvey’s argument is that the cost differential between Harvey Norman’s prices and online retailers from overseas is not 10% – it is much larger. The fact is bricks and mortar retail stores such as Harvey Norman and JB Hifi are struggling to compete with online retailors because, unlike these Australian retail giants, they don’t need to maintain physical stores, and pay relatively high wages to staff to supply the customer with the goods they desire. Furthermore, the high Australian dollar is making imported goods relatively cheaper compared to domestic retail goods, further eroding their competitiveness.

The same situation is occurring in the domestic clothing business. Retail outlets such as Myer, David Jones and Fletcher Jones are struggling to compete with cheaper online retailors from overseas. All these retail outlets are now slashing prices to entice consumers to purchase their products – this is eroding their bottom line, and causing their stock prices to plummet. In 2011, retail stocks underperformed the market by 7%, with Myer (-40%), David Jones (-41%), and Harvey Norman (-45%) amongst the worst performing equities on the ASX.

Regardless of this awful situation for domestic retailors, this is not a time for government intervention to help domestic retailors compete. This is a mistake that is made in Australia when vulnerable industries become exposed to global competition. The emergence of online shopping should be lauded – it gives consumers a larger variety of products that otherwise would not be available, and allows for better decisions to be made by making price comparisons simple – which ultimately boost consumer utility. If government interfered in the market by, for example, taxing imported retail goods to protect domestic industry, consumers would lose this utility gain and there would be no incentive for the domestic retail industry to innovate and vehemently compete for sales from domestic consumers. Protectionism is never the answer, and only serves small vested interests in that industry to the detriment to the majority – the consumer.

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