Australian retailing under the microscope

May 26, 2010: Maxwell International managing director, John Swainston’s submission to the Productivity Commission enquiry into Australian retailing, while providing one of the most comprehensive presentations of the arguments for the imposition of GST on privately imported products, also delivers an insightful snapshot of the strengths and relative weaknesses of Australian retailing.

The following article doesn’t focus on the GST issue, as that has been dealt with many times over elsewhere – but looks at some of the points and observations he makes on the Australian retailing environment.

Unlike many participants in the debate, Mr Swainston first acknowledges that there are a whole range of issues beyond saving 10 percent in GST which may encourage Australian consumers to purchase offshore. These include lower prices not attributable solely to the imposition of GST, greater range and choice, and availability of products not distributed in Australia.

‘If an item is not available in Australia, government should not artificially restrict access to such goods,’ he says, ‘Provided the consumer fully bears the cost of the decision to purchase that item across the full transactional process of the supply chain, including processes that involve government agencies carrying out the laws of the Parliament.’

– And there are a whole raft of these beyond the GST, including compliance with Australian safety regulations, adherence to Australia’s tight consumer laws and end-of-life stewardship (recycling) responsibilities.

BELOW: Some of the costs Australian retailers bear with which their overseas competitors are not unburdened . (Source: John Swainston.)

The dollar’s the thing

Mr Swainston says that the ‘first factor’ of Australian retail competitiveness relative to overseas markets is not the GST, or price gouging, or rents, or geography, or consumer laws, but the exchange rate.

He notes that the local perceptions of price gouging stirred up in part by the public lobbying of ‘several high profile retailers’ (that would be Gerry and Solly) have increased with the appreciation of the Australian dollar – and the parallel fall in value of the US dollar.

This is a point not often made in this debate: The Australian dollar has appreciated against a whole range of currencies, and at the same time the US dollar has fallen against those currencies, compounding the price difference Australia versus US.

He provides a useful insight into the way wholesalers set local prices to contend with a fluctuating currency, noting that ‘importers, required to offer consistent prices to their customers, take a midway path in currency planning’ because the Aussie dollar is such a volatile thing.

Importers, he says, hold back some of the gains when the dollar hits unusual highs, and in turn cushion their retailer customers from ‘excessive negative bumps in the low point of the A$ cycle.’

‘Currency variation…is a key factor in current advantages in overseas purchase’. But it has not always been thus, and he reminds those of us with conveniently short memories that in late 2008/early 2009, ‘Australians….enjoyed prices lower than those available from the USA, even when taking into account GST.’

Looking at the retail environment, Mr Swainston acknowledges the ‘elephant in the room’ – an oligopolistic tendency in retailing in Australia (though not in thoose terms): ‘The pharmacy industry, the food sector, the electrical and electronics sectors, home improvement – all have seen diversity of retailers reduced, and relative market power for such retailers has progressively increased….It has discernibly led to increasing demand of concessionary prices from importers. This in turn has lowered wholesale margins.’

This, he says, is the market working to the good of all – provided the market power doesn’t get too concentrated. Smaller retailers might disagree with his assertion that the efficiencies ‘category killer retailers’ have forced on importers is ‘the market working as it should, providing sufficient choice and diversity so that consumers are better served in price terms, but not concentrated so much that monopolistic tendencies emerge.’

He states categorically – conceding that many find the acknowledgement uncomfortable – that in Australia ‘retail margins are generally above those seen in many other retail markets, or in internet-based businesses operating overseas. This cannot be ruled out as a factor in price differences seen in Australia.’

Geography

Mr Swainston notes that Australia is as near as large as the USA, but with a population of 22 million as opposed to 310 million. This is not only a factor in making distribution costs higher, but ‘generally every element of cost has a lower marginal cost in the USA than does Australia.’

‘Generally, consumer products in the USA are among the lowest found anywhere – large population, favourable economics of distribution, low taxation, and relatively high disposable income.’

The impact of the GFC tended to lower margins even further in the US, while Australian ‘enjoyed a non-recessionary marketplace’ over the same period.
And besides: ‘The largest global markets have long been offered lower FOB prices, because of the size of the orders placed by traders from large markets (USA), or countries who pay in advance and have lower costs of distribution.

‘In the case of photo products, it is likely that Australian independent distributors will typically have paid between 5 and 15 percent more for goods ex-factory than their US counterparts. This single factor is likely to be the primary base cost disadvantage faced by Australian wholesalers and retailers, an in turn by consumers.

‘The further impost of GST and other on-costs…exacerbate the fundamental cost base difference.’

But what about subsidiaries? We asked Mr Swainston whether parent companies ramped up the cost to their subsidiaries even further than that 5 to 15 percent figure. His response was that transfer pricing laws limited the scope of that sort of price manipulation (ie, it’s illegal to ramp up local prices excessively as this leads to local tax avoidance issues.)

NOTE: This is by no means an objective precis of John Swainston’s Productivity Commission submission. To access his full 15-page report, click here.


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