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Home / Business / Economy / Official Cash Rate

Retail failures ignite debate

NZ Herald
13 Oct, 2011 04:30 PM5 mins to read

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COMING OUR WAY: Sorting packages for shipment in one of Amazon.com's US warehouses. Photo / AP

COMING OUR WAY: Sorting packages for shipment in one of Amazon.com's US warehouses. Photo / AP

Across the Tasman, the "bricks vs clicks" debate has been smouldering for some time. But earlier this year it briefly burst into flame when a string of high-profile retailers, including book chains Borders and Angus & Robertson, went to the wall.

Major Australian retailers lobbied the federal Government to scrap the A$1000 threshold that allows consumers to buy foreign goods without paying GST - a call that was echoed by the NZ Retailers Association, which is grumpy about our own $400 threshold.

Local retailers believe the threshold encourages consumers to shop at overseas websites such as Amazon. But Amazon is also under pressure from rivals in Britain and the US, who are unhappy that it also avoids charging sales tax there because of its lack of physical stores.

The cash-strapped state of California is leading the charge in trying to persuade US authorities to remedy this situation. But Australasian politicians seem reluctant to take sides.

"I think we've just got to remind ourselves the creation of the telephone certainly caused a change for the messenger boy industry," Australian Prime Minister Julia Gillard was recently quoted as saying on the issue.

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However, no-one can accuse the Aussies of being glib. In August its Productivity Commission released a 419-page draft report into its retail industry, which essentially concludes that retailers should stop whingeing and adapt as best they can.

The commission's own analysis of "bricks vs clicks" retail prices shows significant differences for identical items - in some cases by more than 50 per cent.

It notes the issue is complex and that price discrimination (charging different prices in different markets) is a "common and generally legal business strategy to maximise profit performance of suppliers". It also agrees it is unfair to compare Australia to the much larger US market, with its cheaper cost structures and much more intense competition.

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It concludes, however, that retailers will have to find their own solutions or risk being snubbed by consumers, and has called for a shake-up of industrial relations, delivery systems, workplace laws and trading hours. "Retailers that do not, or are unable to, respond effectively to such pressures will face serious challenges," it suggests.

The Reserve Bank of Australia has added to the debate with research that examines the effect of currency fluctuations on consumer prices.

The paper quotes an OECD report which claims that in 2005 and 2008, on an apples-for-apples basis, Australians were paying around 12 per cent more than the OECD average for goods such as clothing, footwear, household appliances, furniture, vehicles and books. While German and French consumers were paying even more, US and Japanese consumers were paying significantly less. New Zealanders were only marginally better off than Australians, with prices here 10 per cent above the average.

The RBA notes many factors are to blame, such as differences in shipping costs, and domestic costs such as wages which make up about half the final price of retail goods. But it also notes that "pricing to market" is common, and that changes in exchange rates are rarely fully passed on.

As noted economist Paul Krugman has pointed out, this is because foreign suppliers tend to charge whatever they think a particular market can bear, taking into account their likely competition and often ignoring what they believe are temporary fluctuations in exchange rates.

According to the RBA, over the past two decades retail prices have moved more in line with exchange rates - a trend it expects to accelerate as consumers become more aggressive about comparing prices online.

Meanwhile, left-wing think tank the Australia Institute has also raised concerns about the power of search engines to direct consumers to particular retailers. At present, the institute notes, "the online marketplace is in theory open to virtually anyone with sufficient technical know-how and a viable business model". It fears that will change if companies such as Google are not forced to be more transparent.

It is possible, it suggests, "that the internet will follow the path that various other information industries have gone down over the past century or so. In telegraphy, telephony, radio and television, a familiar pattern has unfolded. After an initial period of innovation and vigorous competition, a small number of players often end up enjoying almost complete control of the mainstream market."

As online giants such as Amazon, Apple and even Google itself continue to expand, some sceptics are indeed questioning whether journalist Chris Anderson may have been wrong all along about the "long tail" of the internet.

In retail, some start-ups have certainly proven far more innovative than older companies. But it is also true that in many cases it is the large, established brands that consumers are turning to online.

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In Britain, department store John Lewis is frequently cited as a current success story. And grocer Tesco, which already accounts for one in seven pounds spent by British shoppers, now sells even secondhand cars online.

However, the US Government is showing signs of taking such issues seriously. The Justice Department's antitrust division is reviewing Google's acquisitions, and the Federal Trade Commission is also investigating whether Google may be freezing out smaller retailers.

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