Aussie retailers need freedom from Choice

June 2, 2011: Know what’s wrong with your retail business? Choice does: You’re charging too much and your customer service is lousy!

‘The pressure from overseas online competition is a much needed wake up for Australian retailers to be more competitive. We need to move beyond a complacent culture of high prices, high margins and poor service,’ said Choice’s communications director, Christopher Zinn, in a press release supporting the Choice submission to the Productivity Commission enquiry into retailing.

‘The final and most significant explanation for the price differences between many goods sold in Australia and the price of identical products sold overseas is the difference in profit margin obtained by the retailer,‘ concludes Choice in its submission.

The submission is an overtly political document, little concerned with a fair assessment of the local retailing scene. The political adversary the consumer advocate has in its sights is the largest sector of the Australian economy: retailing. Choice sees far more to like among offshore retailers selling online than Australians selling online, and especially locals selling out of shops. As such, it certainly doesn’t want the 10 percent GST-free threshold removed.

Choice – ‘The People’s Watchdog’ (formerly the Australian Consumers Association) sheets much of the ‘blame’ for relatively high Australian retail prices home to Australian retailers: ‘Choice believes there is evidence that Australian retailers have not passed on (or passed on in a timely manner) an adequate amount of the savings associated with an appreciating Australian dollar.’

In both the Choice submission, and the original Australia Institute report which forms its core, there is no real acknowledgement that there is another significant player in the Australian supply chain in the form of the local distributor, whether they be part of a multinational corporation or an Australian-owned business.

Either these two organisations are so far removed from genuinely understanding Australian retailing that they simply overlooked the local distributor link in the supply chain, or they willfully ignored the role globalised companies play in setting local RRPs for fear of undermining this pretty shifty attack on Australian retailers.

Reading the full Choice submission will raise the blood pressure of any photo retailer grappling with exorbitant rents, predatory pricing for print services, favoured pricing for larger, favoured competitors, online retailers avoiding GST,or serial tyre-kickers.

It’s unfortunate that Australia’s leading consumer advocacy organisation has adopted a stance which is so contemptuous of Australian retailing: Does being pro-consumer necessarily demand an anti-retailer stance. (Can’t we just get along?)

‘I guess we are using “retailer” loosely, as they are at the end of the supply chain,’ Choice media manager, Ingrid Just (pictured above right), explained to Photo Counter.

Regardless, she added, the reality is that ‘the buck stops with retailers’, whose reputations are destined to be tarnished simply because they are at the end of a chain in which price differentials are considerable.

The brand [“Australian retailing”] is suffering because of inbuilt inefficiencies, she said.

She said Choice’s submission to the Productivity Commission was more a ‘Please Explain’ as to why prices are higher in Australia than an explanation in itself.

A reading of the submission challenges this. It’s basically an indiscriminate hatchet job on Australian retailers, with no attempt to separate Big Retail from the many thousands of retailing battlers.

She referred several times to the need to eliminate ‘inefficiencies from the supply chain’ as a way of delivering Australians lower prices – but was not clear what exactly these inefficiencies are, or how they could be eliminated by retailers.

Cheaper online

The most important reason for shopping online, nominated by respondents to an online survey by the Australia Institute report at the core of the Choice submission was, far and away, price (nominated by 85 percent of the 1400 people surveyed), followed by ‘To compare products and prices’ and ‘To buy things that can’t be found in store.’ All sound and logical reasons.

The regular mantra by (non practicing) ‘retailing experts’ – that people shop online because Australian retailers are so lousy at customer service and have crappy shops, seems to be belied by the fact that ‘to avoid shopping centres’ and ‘to avoid salespeople in stores’ were among the lowest ranked reasons for shopping online, just above ‘For Privacy’ (what are they buying?) and ‘Other’.

Nonetheless Choice then devotes several pages of it 38-page submission to ‘proving’ that Australian retailers are all round pretty bad eggs, with poor ranges, high prices and bad customer service.

The Australia Institute survey reveals another incorrect ‘common understanding’: Convenience also falls a long way short on price as a reason to shop online. Even the majority of the group the survey tagged ‘Mall Haters’ nominated price as the most important factor encouraging their online shopping.

This seems to put a boot into the motherhood argument that even if you need to charge a higher price than a big box mover to do so, if you offer exceptional customer service, sound product knowledge and a great retail environment, you will prosper in retailing in Australia.

The Choice submission takes the arguments by the likes of the Australian Retailers Association, COSBOA and PMA and dismisses them one by one. But in a fairly insidious piece of sophistry, it holds each argument up to scrutiny and demolishes it as the reason for high Australian prices and then does the same to the next, when what retailers and their lobbyists are arguing is that it’s not one single issue – but a whole range of factors in the local environment – GST-free sales, high rents, etc, – which are rendering local retailers uncompetitive against offshore sellers.

So for instance, a common complaint of small retailers in particular (the type who tend to offer exceptional customer service and know their products) is that they are cynically used by consumers to check out a product or confirm a correct size prior to buying the same product online. Without actually saying this is not true, Choice observes that ‘b&m (bricks and mortar) stores seem to be benefitting from the internet as they are able to allocate fewer resources to providing customer service, given that consumers are coming in to purchase products already armed with the relevant information.’

Choice also attempts to diminish the argument that Australian employment will be impacted by online/offshore retailers, countering The National Retailers Association recent prediction that 50,000 jobs could be lost to offshore retailers.

‘Such figures fail to take into account jobs created by online commerce…Even losses of sales to overseas vendors will create added wealth for consumers who will be looking to spend their savings elsewhere.’

The logical conclusion is that we should all buy as much as possible overseas and this will make us all wealthy. Except that Australian retailing is Australia’s largest employer. What will the newly unemployed former retail staff buy? Online retailing will create jobs in IT or distribution, Choice offers. Too easy!

Higher wages in Australia? Not so, says Choice, citing a Productivity Commission issues paper which argued that ‘take-home pay “after the payments of commissions, which are said to be much more prevalent and generous in the USA than Australia” can be higher in the US compared with Australia’. So that ‘…the labour costs incurred by Australian retailers could not be used to justify the very large disparities in domestic and international retail prices.

-And no-one has said they could. But they could surely be a factor, just like…rents!

But even when it comes to high Australian retail rents, where boutique store retail lessees pay up to 10 times the price per square metre of larger chains, Choice seems to think it’ simply a matter of freedom of choice: ‘Retail rental prices are determined largely by the willingness of retailers to pay for floor area with a large volume of potential customers moving past. The more profitable a retail outlet is, the higher the rent it will be able to afford.’

Choice does concede that ‘the highly concentrated ownership structure of retail property in Australia has resulted in a significant portion of the high prices charged by Australian retailers being acquired as rent by the owners of the retail properties’ – but has no suggestions on correcting this state of affairs, or even passing judgement on what is a major factor in the prices paid by Australian consumers.

High quality customer service in store in Australia? Who needs it, asks Choice: ‘there can also be no doubt that many customers do not require such service, are not willing to pay the high price charged for that service in the form of higher retail prices.’

Distributions costs? Nah. ‘It seems unlikely that this fully accounts for the significant price differences,’ Etc, etc – see what they are doing here? Nothing fully accounts for higher prices in Australia, so none of the factors should be taken into consideration.

Wholesale prices to retailers? ‘…it seems unlikely that this fully accounts for the significant price differences.’

And then this gem of insight into How the World Works:

‘Many popular products, such as clothes and shoes, electrical and electronic goods, are also made in China or other Asian countries and exported to the US as well as Australia.’

– And of course, Australian retailers just phone up that factory in ‘China or other Asian countries’ and have the products shipped direct and at exactly the same price retailers in New York might get them for – except of course the bad Australian retailers just aren’t passing on savings they are enjoying though the appreciation of the Australian dollar.

Having used fuzzy logic and sleight of hand to counter the mostly valid reasons as to why Australian retailing is a challenging sector in which to prosper, Choice is left with that one bald, unequivocal and demonstrably false conclusion:

‘The most accurate explanation for the price differences between many goods sold in Australia and the price of identical products sold overseas appears to be the difference in the profit margin obtained by the retailer.’

The submission then goes on to expose the high mark-ups by Australian retailers. Using ABS figures from 2006/7, it provides figures for average mark-ups in a range of channels. Camera retailers will be interested to see that ‘Electronical and electronic goods’ mark-ups are on average 85 percent!

Choice is unable to supply a similar chart of average mark-ups in other countries, but simply presents a range of products with a direct currency exchange calculation, which shows just how badly your average Australian consumer is being dudded by your average Australian retailer.

The entire Choice submission is chock-full of tricky and mendacious reasoning. ‘The People’s Watchdog’ should stick to exposing dud washing machines.

On the other hand…For one of the most sophisticated analyses so far of pricing in Australian retailing and the future impact of online, read this piece by Ross Gittins in yesterday’s Fairfax press.