Wednesday, 22 May 2013

Click "buy", wave goodbye

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The physical retail world is under enormous pressure from the online. There's nothing wrong with competition, argues Sam Encel, but the playing ground should be more level than it is.

Anyone travelling through Bali in the ‘90s will remember those little aluminium tubes of coloured glue, with straws to blow them into balloons - great for idle afternoons by the pool, probably not so for the formation of young brains, due to the noxious fumes. I paid about 20 cents a pack in Bali and sold them at recess for the terrific mark-up of $2, however I was soon forced on to the black market by school policy; under-table transactions at the back of class and clandestine rendezvous in the car park were my introduction to commerce.

Things evolved, and towards the end of high school I’d moved onto electronics arbitrage. Gadgets were much cheaper in Japan and available long before they were in Australia. I’d leave school on a Friday afternoon to fly to Tokyo, arrive Saturday morning, take a train to the electronics district and buy anywhere between $10,000 and $15,000 in cameras, computers and MP3 players to be sold on eBay. If I had any spare time, I’d get some McDonald’s and relax at an internet café before flying out on Saturday night. I only did it about 10 times before competition from other wily, pimpled teens put me out of business, but it was fun while it lasted.

The fact that I was circumventing local industry didn’t cross my mind at the time, but today the shoe is on the other foot. Soon I’ll be working in the family business, which has been distributing and retailing audio-visual equipment for over 60 years, and I’ll be up against far more competition than a few jet-lagged teenagers.

Change in the industry over the past 10 years has been striking. We’re all well versed in the threat by now: people aren’t buying less, but shifting their spending to online retailers and hollowing out conventional physical presences as a result. With that comes the spectre of job losses in a sector that is responsible for 10 per cent of employment – either to more efficient online domestic operations, or more alarmingly for some, overseas online retailers.

Offshoring is great. It usually means lower prices (yay for consumers!), and creates capital and employment in developing countries. Unsustainable businesses and industries in Australia shouldn’t be propped up because of sentimentalities, and if retail gets trumped by online based on merit, then so be it.

We don’t, however, want to shed jobs and lose them to the world simply because of self-imposed and arbitrary hurdles. Retail faces a maelstrom of regulatory constraints that it needn’t, and that online doesn’t.

A workplace relations regime designed to protect the rights of the employee with draconian unfair dismissal provisions has entirely the opposite effect. It’s too hard to let bad people go, and as a result, small businesses are wary of hiring new staff, even when there’s a need. Council zoning artificially inflates rents in designated retail precincts and deflates them in industrial areas.

My problem with online retail isn’t that it’s undercutting bricks and mortar – it’s that it does so by freeriding. How many of us have gone into a shop to try something out and then bought it online? That’s fine until physical stores disappear and you’re left staring at a screen wondering whether your flat, hobbit-like feet will fit into that pair of size x-ty-two Nikes.

Gerry Harvey has been the butt of some undeserved vitriol for his campaign to subject personal online imports to the same arrangements as business. In principle he’s correct. Yes, I might be able to get an automated European schnitzel-crumber for half the price on the net compared to the high street here, and applying GST and duty won’t stop me from doing so. But there’s also plenty of products where the differential between online and physical is only 10 to 30 per cent and the even application of tax might nudge me to buy locally.

The problem is the practicalities. In its recent inquiry into the retail industry, the Productivity Commission estimated that for Customs to drop the low-value threshold (where tax and formal import arrangements apply) from $1,000 to $100, $500 million in revenue would be gained at a cost of $1.2 billion in administration. Yikes.

On the face of it, online plays just a bit-part in the chipping away of bricks and mortar. It represents about six per cent of total retail sales in Australia, a third of which goes to offshore operators. It’s growing fast though – by 10 to 15 per cent over the next three years. And many physical retailers are already price-setting based on online to address comparison shopping.

So do we make online more like retail, subject it to the burden of regulation and pummel everyone equally?

Economics isn’t a game of tit for tat and closing loopholes isn’t a panacea. Let’s focus on a broken IR system, antiquated trading laws and stifling zoning restrictions for a start. Elevate retail – don’t drag down online.

Sam Encel

Sam Encel is a risk management consultant, carbon dioxide producer and self-loathing Liberal. He moralises in 140 characters or less at @samencel