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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8 thoughts on “Struggles of the Australian Retail Sector”

  1. Dick Smith and Harvey Norman are just having a cry because gone are their glory days. Typical case of where young blood (online retailers like Kogan) weed out the older and deliver more value to the consumer.

    Classic “Innovator’s Dilemma” where the big firms always jump on the new technology bandwagon too late.

  2. Exactly right Scott, economies always go restructuring – policy makers need to accept that, and adapt to changing conditions eg. allow for labor mobility to clear the structural unemployment so those that lose their jobs in uncompetitive industries can shift to more productive industries in the economy. Unfortunately, the short-termism of politicians means they prefer to protect these industries.

  3. I think we should be very thankful to be in Australia though, where due to campaign finance laws and a generally more economically progressive climate, we have largely moved past protectionism. The lack of a Common Agricultural Policy or similar here is to be particularly praised. I mean I think the fact that Harvey et al can’t run ads through a SuperPAC and that even if they could, it might well be very ineffective, means that we have largely moved past populist protectionism. There is obviously work to be done- parallel importing laws, car subsidies etc. but I think we’ve moved in the right direction. And I think the best antidote to the short-termism of politicians is changing the minds of the people- as the backlash to SOPA/PIPA shows in the US, it doesn’t really matter what experts say sometimes, merely what the people and various groups think and do around proposed policy.

  4. Daniel – Despite pressure to go in the American direction, Australia’s campaign finance laws remain among the most liberal in the world (though there are draconian regimes in place in NSW and QLD). There are no restrictions on how much Gerry Harvey can spend or who he can give it to, provided he fills in AEC disclosure forms.

  5. What also must be considered in this discussion are not just the hard facts about what is really happening in Australia’s evolving retail sector, but what it spells out for the future progress of our domestic economy. What I enjoyed most about this article are the solid underpinning facts about the retail sectors current situation, (falls in retail stocks of some of Australia’s Iconic retail giants) because it gives an insight into how average Australian consumers are trending.

    This pessimistically on my behalf makes me think ‘hang on what is going to happen to the 1 million or so people working in the retail sector serving me coffee or assisting me to choose the right tyres for my car?’ Is our trending preference to shop online killing the lower end of the employment scale?

    This should lead us as rational ‘fans of economics’ to consider what type of people are employed within the retail sector and coming from a retail background myself I can assure readers that most are like you and me, either university students, high school drop outs, tafe students, small business owners, families and immigrants wanting to begin a life in Australia etc.

    Besides my ranting above, lets talk some economics and with the prospects of China’s GDP forecast to fall below 9% in 2012 in contrast to 9.7 in 2011, I feel that domestic retailers are going to find it tougher than ever this year to compete with cheaper online stores based on the fact that production from china will most likely slow down due to increased interest rate and fall in capital investment within china for the next two to three quarters, which could create unwanted inflationary pressure on retail imports to Australia, widening the gap between the online stores and our brick and mortar retailers.

    So why is government intervention bad when rational competition between the online shops and domestic retailers is so divided?

    Great article Dean, I think you have opened really big can of worms.

    • Great to see your passion for economics Phil!

      On those serving you coffee, cafes/restaurants are booming in Australia – there is little scope for overseas competition since they are such localised industries. Furthermore, consumer spending has shifted away from clothing and shoes to cafes and restaurants, with good growth in consumer spending over the last 12 months in both.

      On the others employed in retail, it’s just a matter of engaging the consumer. The Apple Store has had phenomenal sales numbers in the last 12 months – yes, they do sell their own product, but they engage their customers with great marketing and fantastic products. Furthermore, we should not over-emphasise online retail spending. It still only account for around 6% of overall retail spending – Australians still enjoy the shopping ‘experience’.

      On the rest of your post on Chinese growth forecasts, look out for future articles on the China story!

      • Thanks Dean and with regards to the point about coffee shops in my comment, after re reading what I had written it was inappropriate on my behalf to use that as an example. But I do hope that the premis of my argument has not been clouded because of this mistake.

        And just to add to your comment about not over emphasising to much on online shopping as it only accounts for 6% of total retail sales, I just wanted to mention that the ‘potental’ growth and impact of online shopping will over the next decade reshape how average consumers choose to purchase goods and services. This overall is the basis of consumer theory and becuase of this retailers such as Hearvy Norman and JB Hi will find it mostly impossible to compete with the growing online sector.

        So I do beleive that we should continue to over emphasis the impact of online shopping as it’s growth is limitless for the forseable furture.

  6. Fair point, Daniel. It is true that Australia does not have ridiculous overarching protectionist economic policies such as CAP’s, and we have made great strides in opening up our economy over the last 25 years, although the last 5 years of government has done very little in this regard. I am just hoping that we don’t fall back into the simple political stand point of protecting domestic industry.

    On Gerry Harvey’s bitterness, the reason Harvey’s ads would be ineffective is the consumer couldn’t care less about his business. They may show a little, short-term despair at the front page of the paper speaking about job losses at Harvey Norman, but I have a suspicion that they may conveniently forget about the headline and continue buying cheap good online. It’s not even that people understand or even care about the gains of trade for the overall economy; they just understand and focus on their own personal utility gains! (the beauty of the selfish consumer).

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