Productivity Commission restores sanity to retail debate

coat_of_armsThe Productivity Commission’s Draft Report on the “Economic Structure and Performance of the Australian Retail Industry” is an overdue injection of rationality and facts into a debate previously dominated by emotion.

The Productivity Commission’s Draft Report on the “Economic Structure and Performance of the Australian Retail Industry” may not have given the industry what it first asked for – a competitive shield against offshore retailers – but it has instead done the industry a tremendous favour by highlighting the real issues the sector faces.

To understand why, think back to late 2010 when large retailers, led by Gerry Harvey, bemoaned the fact that no GST is levied on imports valued at under $1000. Their calls came at a time the Australian dollar had reached levels that made internet shopping even more attractive.

Harvey and others draped a metaphorical flag about their shoulders and lamented the hospitals and schools that would go unbuilt because of the GST loophole and bemoaned the likely destruction of local jobs. Government, it was shouted, must “do something” lest these terrible outcomes become reality.

For what it is worth the Australian Retailers Association begged Harvey not to use that argument, predicting – correctly – that he would be pilloried as someone who has ignored online retailing, wished to crush a new wave of competitors and wanted to preserve high margins at the expense of consumers.

Debate quickly devolved into a few arguments, including:

  • Those who bemoaned the state of Australia retail, which they feel is unimaginative, ignores customer service, offers a limited range of expensive goods and therefore;
  • Niche retailers who begged for relief, saying that they don’t have the wherewithal to improve their operations and face far higher costs than offshore competitors;
  • Major retailers who persisted with Harvey’s arguments;
  • Online retailers who pointed at their bricks and mortar colleagues and haughtily scoffed that they need to get with the program and stop whingeing about new competitors, wherever they may be located, because the genie is out of the online bottle.

None of those arguments were particularly nuanced because they deal only with the most visible phenomena in the retail market. Structural issues were ignored.

Hence the value of the Productivity Commission’s draft report, which hoses down the more heated parts of the debate with some cold hard facts about just what is going on in Australia’s malls and shopping strips.

On the declining dollar value of retail sales, for example, the report states “ … many retail goods have become cheaper. More recently, the appreciation of the Australian dollar has also placed further downward pressure on the prices of imported goods. While this trend spells a challenge for some retailers, consumers are better off — they are buying more retail goods, but at relatively lower prices and are able to use the additional remaining income to satisfy other preferences such as for services or savings.”

The report also points out the “… relatively high profitability of some Australian retailers in comparison with their counterparts overseas… ” and “ … the relative profitability of some retail companies in comparison with other Australian industries.” It also says Australia’s level of retail productivity “… remains below that for most comparable countries in Europe and North America.

The Draft Report also notes that retailers do have many local challenges.

Zoning of land draws particular attention, as the Commission feels “… planning guidelines on where retailers can locate are extremely complicated and often prescriptive and exclusionary. In effect, they make it difficult for some new entrants to find suitable land and enter the market and for existing businesses to expand or alter formats.”

Opening hours regulations and workplace laws are also mentioned in the report as being less-than-favourable for retailers.

All of these issues are far more complex than those that sparked the initial debate. As such, the Draft Report serve us all well because we now have something more substantial to discuss than the perceived disaster that comes with the $1000 GST threshold. And the issues the Draft identifies are within the Government’s power to address. Industrial relations and zoning regulations are, after all, determined by governments.

On productivity and profitability the Draft also serves the public well by pointing out that our retailers are inefficient and often operate on decent margins, which belies some of their arguments.

Which is not to say that retailers don’t have many genuine grievances. But thanks to this Draft, industry and consumers alike now understand those better, making its publication an important moment that should spark better and more nuanced debate about the industry’s needs.

Footnote: The report also points out that lowering the GST threshold would be counterproductive, stating: “Reducing the threshold to $100 would raise an additional $470 million from about 15 million parcels, but would cost consumers and businesses approximately $715 million, still far exceeding the revenue raised.”

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