No. 161

ARE YOU BEING SERVED? WHY RETAIL ONLINE WORKS

Stone the crows! No, we’re not being served

The Crows bought a suit the other day and some shirts to match. The suit was made by Manly tailor Steel and May and the shirts came from UK online outlet Charles Tyrwhitt. Neither of which have a bricks and mortar Sydney store.

Cue outrage from retailers, angry with competitors who do not pay store front rent in the case of the former, or charge GST in the latter, for taking an unfair advantage. Cue caws from the Crows.

The idea, that increased import duties will save retailers, took off at Christmas 2010 when Gerry Harvey and other monster merchants demanded a drop in the $1000 minimum before duty is charged on small imports.[i] They stopped when social media went berserk and the federal government gift-wrapped the problem and passed it to the Productivity Commission.[ii] The PC, in that irritatingly evidence-based way it has, demolished the case for more protection in the resulting report – concluding the “low value threshold” (ie LVT) for GST exemption, “is judged to be a minor part of the competitive disadvantage faced by retailers.”

The Commission also concluded “there are strong in-principle grounds for the LVT to be lowered significantly, to promote tax neutrality with domestic sales. However, the government should not proceed to lower the LVT until it is cost effective to do so.” [iii]

It’s a different argument altogether, but any shop in a storm – and retail lobbies have added tax neutrality to their previous position that the Internet just isn’t fair:

 Australian retailers have a right to be able to compete equally in the online space. (They) are currently being impeded by the LVT, which puts them at a disadvantage when marketing products to their consumers; who will then make the choice themselves as to where they buy from. There are also wider positive implications for reducing the LVT, such as the fact that states will uncover significant revenue.[iv]

NSW Treasurer Mike Baird unsurprisingly agrees. State treasurers are known to scan the news for references to “uncovered revenue sources”. Not, you understand that he is exclusively focused on the $300 million Ernst and Young estimates dropping the LVT to $20 would generate for the NSW Treasury next financial year, heavens no.[v]

 Competition is a good thing. I’d be the last person to propose some kind of tariff system for propping up inefficient enterprises. But is it fair to local retailers have the playing field sloping dramatically in the direction of their overseas competitors’ goal lines. [vi]

 He has a point, just not the one he is making. There is no case for exempting some goods from consumption taxes, simply on the basis of where they are shipped from, unless collecting an impost costs more than it raises. The Yanks seem to be settling on this with the Senate passing legislation that requires vendors to pay state sales taxes.[vii] Amazon already pays sales tax in states, accounting for half the US market, and while the case for a cyber-GST still has to make it past the no-taxing tea partiers in the House, and survive a possible court challenge, it seems that sooner or later, it will be in place. [viii]

With a US precedent and Ernst and Young showing how a sales tax could be collected, without costing Canberra a bomb, the case appears to be made.

But, while it will help NSW Treasurer Mike Baird, it will do sod-all to save retailers, because price is not their only problem.

The reason the Crows stay out of the stores is that when they flap into them they are ignored by sales staff, when any are in view. Bird-brains we may be but the Crows do not buy bespoke because they are encumbered by cash – it is because it is a superior experience to retail shopping in Sydney, especially CBD department stores, an experience which too often ends in time wasted in futile attempts to find something that suits.

Superior service is why Amazon is not worried about sales tax. But this is something big Australian retailers are not especially good at.[ix] Retailing is a model for the old Australian economy, which relied on captive consumers taking what they were offered at the prescribed price, because they had no alternative – until the arrival of the internet invited us all into a global bazaar. Retailing is still to catch up.

As the Productivity Commission puts it,

There is considerable scope for Australian retailers to be more innovative and find operational efficiencies that will enable them to generate greater output from a given level of labour and other inputs. The pursuit of international best practice productivity and service levels will require improvements on many fronts. These include: better customer and after-sales service; superior logistics and management of working capital; greater automation; better management and leadership; and a multi-skilled and flexible workforce prepared to lead and facilitate innovative means of delivering value for customers, in some cases with better staff and management alignment in these tasks through incentives or commissions.[x]

 Charging GST will not stop the Crows buying shirts offshore or bespoke suits from a local specialist. For a start, the imports will still be cheaper, the range better and the fit superior. And a made-to-measure suit, which isn’t that much more expensive than an off-the-rack label, is all but impossible to beat. That the shopping experience is superior on screen to what it is on a shop floor makes any argument that extending the GST to imports will invigorate retail a hard sell indeed.

 

ENDNOTES


[i] AAP, “Gerry Harvey denies he is in GST retreat,” The Australian, January 7 2011

[ii] Mathew Murphy, “Harvey hurt by buyer backlash,” Sydney Morning Herald,” January 7 2011, Bill Shorten, The future of Australian retail,” December 18 2010 @ recovered on May 11

[iii] Productivity Commission, Economic structure and performance of the Australian retail industry, November 2011, xiv @ http://www.pc.gov.au/__data/assets/pdf_file/0019/113761/retail-industry.pdf recovered on May 11

[iv]Australian Retailers Association. “Retailers urgently need government to take action on GST threshold,” January 23 @ www.retail.org.au/ArticleDetails/tabid/232/ArticleID/383/Retailers-urgently-need-government-to-take-action-on-GST-threshold.aspx recovered on May 11

[v] Ernst and Young, Levelling the playing field, April 3 2013, recovered on May 13. The report was prepared for the Australian National Retailers Association.

[vi] Mike Baird, “We must plug the online loophole,” Australian Financial Review, May 9

[vii] Katie Walsh, “GST threshold fix could bring states $2.5bn” Australian Financial Review, May 9

[viii] Tom Gara, “Another Amazon battle, this time headed for Washington,” Wall Street Journal, March 29

[ix] “Tax in cyberspace, The Economist, May 4

[x] Productivity Commission, op cit 363

'2012