The state of retail in Australia

The state of retail in Australia


With the hyper competitive world of online retail taking Australia by storm, the retail industry has been disrupted by new technology and shifting customer preferences.  Traditional brick and mortar retailers have been forced to compete with leaner and more agile competitors. These competitors are no longer bound by borders and Australia’s relatively under developed retail industry has attracted a multitude of foreign competition.

Foreign competitors that are not technically operating within Australia cannot bound by Australian rules and regulations. In some respects, this serves as a significant disadvantage to domestic business. This has been a topic that retail lobbyists have long been pressing.

Recently, there has been significant discussion on the issue of GST (Goods and Services Tax) and how taxation has eroded the competitive advantage of Australian retailers. Specifically, retailers argue that the Low Value Threshold (LVT) on the GST has created an ‘uneven playing field’ between Australian and foreign retailers. The LVT allows for imports into Australia under the value of $1,000 to be exempt from GST. As a result, an Australian consumer would be able to avoid paying GST on an item purchased online from a foreign retailer, provided the value of this item was below the threshold.

Lack of consumer centric focus 

The ‘uneven playing field’ argument ignores the fundamental issues with elements of the retail industry in Australia and seeks to apply a bandaid to what is essentially an inherently complex issue. In a nutshell, parts of the Australian retail industry are not as consumer centric focused relative to comparable overseas industries. It is the outdated business models of many Australian businesses that has significantly disadvantaged them in the international retail dogfight and not a lack of government intervention.

In order to highlight this disparity, it is worthwhile to briefly consider why Amazon, a highly successfully foreign retailer, is instinctively referred to as a consumer centric brand. This is perhaps most obvious with the Amazon Prime program, where customers are given free shipping on a myriad of items in exchange for a fixed yearly fee. While free shipping is not a new concept, Amazon has been traditionally associated with significantly lower prices when compared to other online retailers. While many retailers tend to mark up their prices to the extent that they sacrifice competitiveness in order to provide ‘free shipping’, Amazon’s already low prices make the prospect of free shipping extremely tempting.

Amazon creates significant value to its customers through this combination, but it does so in a manner that promotes customer loyalty by allowing customers to feel as if they have invested into the brand. Once customers are apart of the brand, Amazon’s industry leading initiatives keep them there. For instance, Amazon’s refund policy allows unsatisfied customers to receive a refund on orders before the product is sent back. Amazon’s A-Z program guarantees all purchases made from 3rd party sellers on the Amazon website and the 24/7 customer support department acts as a safety net for concerned customers.

Likewise, brands such as Zappos have consistently pushed the envelope and generated tremendous goodwill with customers through unconventional initiatives. For instance, Zappos picked up all the tolls on the Massachusetts Turnpike tollway on Thanksgiving. Zappos is the master of extremes. Its longest customer call lasted approximately 6 hours.

It’s this sort of behaviour that has been noticeably absent from most Australian retailers. Consumers don’t expect to have their tolls paid, but they do expect retailers to demonstrate that consumers are central to their brand. This goes beyond introducing compelling products, although this remains an undeniably important pillar of retail. It’s about eliminating the relative ‘coldness’ of online interactions and creating a brand that is centred on building relationships.

The days of setting up shop and solely relying on foot traffic are long gone. Customers are more savvy. They have the infinite resources of the internet at their disposal and comparing stores, prices and products is effortless. Competition, both domestic and abroad is fierce and the barriers to entry in most areas of traditional retail are historically low. As a result, retailers are now forced to compete on the notion of customer experience.

Relatively overpriced 

Of course, there are other underlying issues that are contributing to the ‘uneven playing field’ between domestic and foreign retailers. It cannot be ignored that on average, products are perceived to cost more in Australia. The savvy consumers of today are aware of this and are consistently seeking value in their purchases. This often leads to consumers overlooking Australian retailers in a bid for lower prices.

Dr Oliver Marc Hartwich argues that, in general, retail products are grossly overpriced in Australia. He makes his argument in part, by comparing a range of products sold in Australia to the United States, Canada, Japan and Germany. For example, Asic Gel DS Trainer 16 (Men’s) shoes sold in Australia for $219. In Canada these shoes cost $197. These same shoes retail $104 in the USA and for $132 in Germany. Likewise, an external hard drive (WD Elements desktop 1TB) cost $84 in Australia. In Canada the cost was $74. The same hard drive retails for $64 in the USA . In Japan, this hard drive retails for $75 and in Germany, the price is $77.

Australian retailers argue that the LVT as it currently exists is to blame for these prices. However, this is not a logical deduction when looking at the figures. For example, the Asic Gel Trainers sold in Australia for $219 would attract a GST amount of $19.91. However, the difference in price when compared to the USA and Germany far exceeds this amount. Likewise, the aforementioned hard drive would attract a GST amount of $7.64, yet the difference in price between all listed countries exceeds this amount. While this is of course an isolated sample, it seems to illustrate a broader trend.

In purchasing overseas, customers are forfeiting their rights under Australian Consumer Law; accepting (usually) longer postage windows and costs and are often purchasing products that were not designed for Australian conditions (i.e. mobile phones). Incentives for consumers to purchase locally do not need to be artificially boosted with a lower LVT because they already exist. As a result, retailers that can overcome the perception bias relating to price will obtain an immediate competition advantage.

Higher cost base

Of course, a large part retail price inflation within Australia can be attributed to high cost bases relative to comparable businesses operating in other countries. Australian retail rents are currently listed as being amongst the most expensive in the world.

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While it may come as little surprise that relatively high rental rates are a large contributor to higher overheads for Australian brick and mortar retailers seeking to compete in the online space, it is important to note that the issue of rental rates is inherently complex and is better addressed in a separate blog post.

Likewise, the issue of relatively higher wages in Australia also contributes to a larger cost base for businesses. Of course, like the issue of retail rental prices, the issue of wages is also complex and the underlying causes are not the subject of this blog post. For all intents and purposes, it is sufficient to acknowledge that wages are indeed higher in Australia relative to most countries.

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The take away point

It is incredibly short sighted to suggest that taxation is largely responsible for the shift of Australian customers overseas. While there is arguably more risk in buying overseas, customers are willing to overlook this in exchange for the value many foreign retailers create. This value is often delivered in the form of superior service and lower prices. Lower prices abroad are likely to have more to do with higher overheads fuelled by high wages and rental prices and less to do with the imposition of the GST on Australian retailers. Consequently, the lowering of the LVT will stifle consumer choice and do little in terms of making Australian retailers more competitive.

 

2 Comments

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  1. 1
    Jesse

    Justin, this is a very insightful article. I’ve seen commentary on news websites and they never mention the wages or rent issue. I also agree that in general we lack many brands with the ‘wow’ factor. They just aren’t cutting it and to be honest, it feels like as consumers we’re being taken for a ride and played for fools.

  2. 2
    James

    Canada has a sales tax. So do many states in the USA. We’re already on a level playing field. Changing the GST is just plain silly. Just revenue raising.

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