Retail And Its Competitive Future

Margy Osmond is Chief Executive of the Australian National Retailers Association (ANRA), which was established in 2006 as a lobby and research organisation to be the voice of Australia’s largest retailers. On Wednesday 10 October 2012, Margy Osmond addressed The Sydney Institute to discuss the competitive future of retailers in Australia.

  RETAIL AND ITS COMPETITIVE FUTURE

MARGY OSMOND

 Thank you very much for your kind welcome this evening. To be honest, I would have to say that representing large retailers doesn’t always guarantee me a kind welcome, so I’m doubly grateful. I note that you were asked to turn your phones off, and that is customary at the beginning of one of these speeches. But please feel free to turn them back on again. As far as I’m concerned, I wouldn’t like you to miss out on any opportunity to have a bit of a shop.

I seem to remember I had an opportunity to address you all here at the Institute in 2010. Then, we were fresh from the Global Financial Crisis and feeling the benefit of a few government hand-outs – always happily received. These were designed to stimulate the wider economy. But even then it was clear that tough times were ahead.

However, only the most pessimistic of commentators would have expected the number of retail failures we have seen, and the now, clearly permanent, change in the Australian consumer. It is fair to say that saving is in fact the new black, and it is not showing any signs of a style change in the near or medium future. While on the subject of major change, if back in 1922 when Woollies was founded you had suggested to the founders of Woolworths or Coles that water would be one of the biggest sellers in the future, you would have been laughed out of the store. So, clearly from a retail point of view, change is what we’re used to and change is what we’re good at. But we’ve never seen it on quite the level we are seeing now.

Great retailers are all about flexibility, embracing change and recognising trends. Critically, when I hear so often in the media and the social media world about how out-of-date our retailers are, I am constantly amazed. Icon brands, like Woollies, Coles, DJs and Myer, are facing a world of change, with consumers very much in the driving seat. Their longevity as businesses is a product of their complete focus on the customer, which is why we will still be shopping with them when 2050 rolls around. As Grant O’Brien from Woolworths has said, a new shopping revolution is occurring all around us, and it is tremendously exciting.

I want to take you on a journey into that potential future, with the caveat that all such crystal ball gazing is, of course, speculation. Unlike a number of high profile federal government regulators and politicians, I am not certain what the future holds for retail. But I’m prepared to take a stab, although I’m not as certain as some of them appear to be.

I want to touch on some of the issues that are going to affect the future success of our sector materially. Especially as one of the biggest employers in the country. To ensure that we’re all on the same page, let’s start this journey with some vital measurements that are at least agreed upon and consistent.

The Australian retail sector is one of the drivers of the Australian economy and is the key indicator of the nation’s economic performance. It is the one part of the economy that is constantly, every day, every minute, connected to the Australian community. Always there is somebody shopping. The sector accounts for 5 per cent of the national economy, and is twice that of agriculture, forestry and fishing, despite the relatively high level of publicity all of those sectors get. The retail sector is Australia’s largest employer, with 11 per cent of Australia’s workforce employed in retail. That’s 1.2 million people. If you bump that up to the number of jobs affected by retail, there’s another half a million Australians who owe their livelihood to the retail sector.

Retail is especially important as an employer of young people and women, particularly those seeking part time work. About half of all employees aged 15-19 and one in five employees aged 20-24 work in retail. At least on the eastern seaboard, if it were not for retail, there would be virtually no jobs for young people in regional communities. Whenever you hear, “Oh, we don’t need bricks and mortar”, have another think about the structural impact of not having, particularly, the large supermarkets in those environments.

Retail is the second largest employer of women. Six hundred and ninety thousand women work in the sector and more than 424,000 of those work part time and accommodate their families while they work. By a huge margin, food retailing is the single largest segment of the sector. In 2011, retail sales were $240 billion, distributed between food retailing at just over a $100 billion. Department store goods, clothing, household goods account for around $43 billion; hospitality and services about $32 billion and other retailing about $35 billion. Within the food retailing segment, supermarkets and grocery stores account for a fairly big proportion of sales. I include all variations of the grocery store in that and it’s something just over $80 billion.

So, how are we actually sitting in the market place at the moment? Well, it’s been a case of up, down and shake it all around for the retail sector of late. There was a dive in July that was fairly nasty and then a slight up-tick in the August retail figures of about .2 per cent. The latest interest rate cuts may help. We’re grateful that the RBA decided to pull those rate cuts forward and not leave them till November/December, as they did last year. But, the other question we have to ask is whether our radically changed and highly conservative consumer is at all impressed by 25 basis points. On the basis of what we’ve seen up to now, the answer would probably have to be no. It takes 50 basis points to get shoppers shifted at all. We’ll certainly be looking for another Christmas present from the RBA on Melbourne Cup Day, which is when the next interest rate announcement is.

Sentiment figures – you may or may not have noticed – were released today. Sadly, sentiment figures are no longer a very good reflection of people’s willingness to spend. Confidence used to tell you all you needed to know. Now, it’s a less worthwhile measure. However, for the sake of discussion, today’s figures showed a slight increase in confidence. We’re always happy to see at least some increase. It was an up-tick of about 1 per cent this month. Given that the survey period covered an interest rate cut, it should have been much better.

Retailers will take some comfort from today’s figures but it’s certainly not enough to get us tap dancing out in the streets. There are some strong signals from the sentiment figures that people may be ready for buying major household items. I have what I call the, “sofa index”, which plays in over this period. If you are prepared to make a major household purchase, like a fridge, it will be when you absolutely need it before you’ll go ahead and buy it. If it’s a sofa, you’re inclined to say, “Oh I can live with that for another year, I’ll just get fresh cushions.” So when people buy sofas, this for me is the first sniff of a recovery. From today, I say watch this space on the soft home furnishings front, as it will be the giveaway.

In recent times, the correlation between confidence and actual spending has not been strong. This boils down to two issues. It is about competition policy and the willingness of regulators and politicians to take aim at the biggest target – that means large supermarkets. The other issue is the rush of change that technology is bringing and the lack of political will or understanding of what this means for public policy. The most pressing issue is how governments will deal with the uneven playing field created by their failure to collect GST on overseas, online purchases. And, having said it’s two issues, there is one issue which overrides all. That is the Australian consumer and the manifest change in the way they think, the way they shop and how much they are prepared to spend. And that is not going to change anytime soon. The cautious consumer is a reality for us all now.

Competition is one of my favourite topics. Imagine the case of being criticised for lowering prices for consumers and then in the same breath criticised for not paying growers and manufacturers more; or being threatened with constant reviews of your behaviour, and each time they were held, being showed that there was a highly competitive marketplace. Imagine having the responsibility for mum and dad shareholders to make a profit and grow, but being constantly threatened with new impediments to that growth; or having responsibility in your business to hundreds of thousands of Australians whom you employ and whom you need, to keep your business strong. This is the life of a supermarket member of the Australian National Retailers Association.

The knee-jerk grandstanding around the issue of competition in retail, particularly in the supermarket space, is an area of constant concern and should be for everyone. Let’s be clear. Consumers win with an open and competitive market, no argument. Regulations and market restrictions boost vested interests and they prevent new market interests and harm consumers. They harm the outcomes for consumers. However, in the supermarket world, recent price wars between the two major players, Coles and Woolworths, show that politicians and even the head of the ACCC would disagree with that contention.

Price competition has inspired at least three parliamentary inquiries into food production and retail law. Most importantly, it has underlined how the media and many within the political system have an in-built, largely unquestioned, bias in favour of producers over consumers. Let’s be clear once again, this is about prices for consumers. Over the 116 submissions to the 2011 inquiry into supermarket price decisions on the dairy industry, only three were supportive of cheaper consumer prices for milk. The rest were a mixed representation of producer interests at the expense of consumers.

We need to put the first myth about competition to rest. Despite comments from media shock jocks to the head of the ACCC, the fact is that we have a highly competitive supermarket sector. We do have two major supermarket chains, but both face increasing competition on price from international competitors, like ALDI and Costco, as well as from IGA stores, who are now actively seeking to be price competitive. All of those three rising competitors for supermarket buyers are showing significant growth profiles. Despite the reality, there is an emerging enthusiasm amongst politicians and regulators to consider regulating the supermarket sector in favour of a ideal competitive market place, whatever that is.

One of the most worrying developments is the increasing noise we hear in relation to divestiture. Divestiture is an argument about putting a cap on the market share of some of the largest players. It’s based on American legislation. Recently, the Liberal National Party in Queensland, at its State Conference, and the Nationals most recently in the last month at their own Federal Conference, moved and accepted a motion in favour of divestiture, or the breaking up of companies perceived to be anti-competitive or misusing their market power.

On the surface, you might say that sounds like an awfully good idea. But if you experiment with that and unpack it a bit to say a market cap might be set at 25 per cent, the potential job losses and store closures that accrue from that are terrifying.

Let’s just take a seat like New England. There would be between 500-600 jobs lost and four major stores would close. In that market place, who would buy those stores, if they were sold? The most likely option is an overseas buyer, who will care little or nothing for the local communities or the local jobs. The money would go back to the country of origin. So, it’s an argument that deserves unpacking whenever you hear it. To be fair, when this issue was raised in Canberra at the federal conference, it was opposed by many National Party members, as a barrier to jobs growth and potentially leading to more foreign ownership.

What is being proposed is a legislative response based on a US divestiture model. It is all about a monopoly which we don’t have in the supermarket space in Australia. Most of the case studies come from the US and the legislation hasn’t been particularly successful there. Commentary out of the US itself cautions that breaking up a company via the court system can often take so long that the issue of market dominance will shift with new players entering the market, alongside changes in technology or community interest. Arguments over this have gone on for decades in the United States. It would be fair to say that the only people who are making good money out of it all are the lawyers.

Ultimately, divestiture means that economies and efficiencies of a large company are lost and consumers bear the brunt of those higher costs. Divestiture can also mean significant financial impacts on small investors in those companies. We would argue that the support for the divestiture model is hugely misguided. And, since the 2008 grocery inquiry, competition has dramatically increased. The inquiry itself made a very clear point in terms of a workable, competitive marketplace.

That point has been emphasised yet again as part of the federal government’s national food plan, which stated that the retail grocery market has continued to evolve since the ACCC Grocery Report. ALDI has continued to expand and Costco has entered in three jurisdictions. These businesses have size and supply chains in place to provide substantial and differentiated choice to consumers in parts of Australia.

The view of the National Food Plan was supported by the federal Treasury, no less, which stated in its submission, “International supermarket chains such as ALDI and Costco are also emerging as a new source of competition for the major supermarket chains in Australia. Further retail competition is likely to put more downward pressure on prices, foster innovation and increase consumer choice.” I never disagree with Treasury.

Importantly, the National Food Plan outlined that, despite some stakeholder concerns, the government believes that there is insufficient evidence to support many of the misused market power allegations against the supermarkets. And that’s pretty conclusive. However, in June 2012, the head of the ACCC, Rod Sims, argued that supermarkets were engaging in incremental acquisitions of small outlets and that this raised significant competition concerns. Nevertheless, he noted that growth by the major supermarket chains had brought benefits to consumers as a result of their scale. The bottom line is that we have a competitive market place and it’s going to get more so.

You could, however, be forgiven for thinking, if you were Coles and Woollies, that despite their contribution to the economy, jobs and communities, they are damned if they do and damned if they don’t, on most fronts. I hope next time you see coverage of this, you’ll roll it down the line and think about thee jobs and communities that owe such a great deal to some very big, iconic Australian companies.

The next challenge is technology. There’s a great deal of discussion at the moment on the change technology is bringing to retail, and the approach other countries have to the issues that it generates, and how they deal with being part of a global economy. Concerns around the failure to collect GST on items and services bought online from overseas has caused some hot and heady emotional commentary over the last several years.

Importantly, whatever anybody says, there can be no denying that the growth in this part of retail activities is huge. It’s growing at an enormous rate. Even the Productivity Commission in its discussions on online retailing suggested that in the next five years we might get to as much as between 15 and 19 per cent growth in sales online. And, in the figures NAB released in the last month or so, it is already showing 22 per cent growth – an alarming pace.

The government has stimulated two reviews to look at this issue in smaller and larger degrees. In 2011, the Productivity Commission conducted a broad-ranging inquiry into the retail sector which we supported fully. One of the recommendations of the Productivity Commission was that there are strong, in-principle grounds for a low value threshold, exemption for GST, and duty on imported goods to be lowered significantly to promote tax neutrality with domestic sales. All of which means that the commission thinks the threshold should be lowered, but they’re not quite certain how to do it.

At the moment, if you purchase a product online from overseas and it’s worth less than a $1000, you pay no GST on it. If it’s worth more than $1000, the likelihood is you probably haven’t paid GST on it either, because the government is aware and tracking something like $58 million in fraud for people misrepresenting the value of the purchase that they’re bringing into the country. And this with the active engagement of the supplier of the goods.

Nevertheless, the Productivity Commission also recognised that, based on current logistics and customs systems and the current level of consumer goods coming into Australia from overseas websites, a complete removal of the LVT exemption for GST would result in very high costs to collect the tax. The argument goes that it would cost more to collect than the government would make from the tax.

The Productivity Commission also noted that in many other jurisdictions, such as the UK, Europe, Singapore, New Zealand, Canada, the US and Japan, there is a low value threshold significantly lower than $1000 as it is here. In the UK it’s £15 and in Canada it’s $20. Both these countries are unashamed in their attitude towards protecting local businesses, and have set the thresholds low. In the UK, if you bring in a package from overseas worth more than £15, you will also pay a handling fee to the Royal Mail for delivering it to you, as well as the VAT. So it’s quite a sizeable impact.

Beyond those two recommendations, the Productivity Commission also made a recommendation to have a closer look at the low value threshold in the future. The investigation was conducted by the glamorously named Low Value Parcel Processing Taskforce, and it also found that the systems upgrades needed to lower the threshold were largely about the international postage system. So, the second report has effectively debunked and killed the idea that it will cost more to collect than can be made out of a low threshold level for the tax. Happy days said we.

The Productivity Commission estimated that if there was no threshold, the government would collect around $480 million, close enough to $500 million, in GST on goods alone. We know that if you actually include services in that mechanism, such as downloads of music and books and goodness knows what else, the figure comes up to about $1.6 billion. I’d certainly like that money to be flowing into State Treasury, to be going to schools, hospitals and roads. That seems to me not a bad thing.

The entry of state treasurers into this debate is extremely welcome from our point of view, It emphasises the fact that any of the revenue raised will be going toward roads, schools, hospital, communities across the whole country. As the debate goes on, retailers of all sizes are feeling the pinch and we will see even more closures, and more jobs lost, potentially. It’s particularly in the discretionary spend space and while regulators and commentators fiddle while Rome burns. We are rolling into another Christmas with no resolution to this issue. Christmas, as you would all be aware, is the biggest spend time of the year.

We’re yet to see the federal government’s response to the latest report. Minister Bradbury has been very transparent about the report and made it as public as quickly as he possibly could. But we now have to wait and see what appetite the government has to pursue this.

The bottom line is that overseas-online shopping is growing. As it grows, it will become even more of an issue, and a complex issue, to deal with. Nobody is suggesting that it’s the sole problem facing the discretionary spend sector in retail. But it is part of a very difficult landscape currently and must be dealt with.

In the coming election, retail and its relationship with households will be very much in the spotlight, along with the issues I have raised here today. The lack of a digital mindset in the government sector is an ongoing problem. And understanding the impact of new technology and the impact it will have on the retail sector can’t be underestimated.

Governments seem set in a mindset that’s all about analogue, not digital. Let me give you a couple of examples. One of the fastest growing areas for retail is called “click and pick”, which means you sit in your living room, buy on the computer and then pick it up from the loading dock, or from some other venue. What are the implications in that for state planning authorities? What are the implications in that for police, and security authorities, when people may choose to be picking things up 24-7 with accompanying bad guys, who may very well see this as an opportunity. What does this mean for the design of shopping centres in future? Do we need so much parking? Do we need different access? Are there different traffic provisions? As the future goes on, and we buy more online, are our roads and systems geared to cope with an ever increasing number of small trucks, which will be part of a logistics chain delivering all of those packages to more and more venues?

When we look at these issues, some of the most important are in technology and its implications for the changing skill base. We’re going to see more and more high tech and service workers and opportunities within retail. It’s going to be an increasingly complex and exciting place to work. Large retailers – particularly large supermarkets – have done some highly innovative work in mapping where their future will take them in terms of those jobs.

Is it going to be all about being able to buy your groceries at the train station by running your mobile phone over a display of groceries, and having them delivered by the time you get home from your train journey? We’re already seeing that being tested here. It’s certainly been operating for some time in places like Korea. Are you going to be shopping and watching fashion parades live-streamed from Paris, with the racks in your store offering the goods you view? If you’ve shopped there before, the latest Burberry store in London recognises you, and it will tell you what you bought before and explain the goods that you have in your hand. You can pick up a handbag and put it on a special plinth which will tell on a glass screen where it was made, and what it is made out of. Enticing and scary at the same time.

Or is it about the ability to do your Christmas shopping from your computer or during your break at lunch time, organising for purchases to be wrapped and waiting for you at the end of your journey when you go home for Christmas. It’s not even a case of you having to collect a purchase – it’s waiting for you at a special depot, at the airport at your destination.

Is it that at some point during the not too far distant future, you’ll be able to buy fresh groceries from a store that’s in the bottom of a building, below what will be a vertical farm, with groceries – fresh groceries – grown on the floors of a sky scraper. This is already being trialed in the UK and they’re having considerable success with it from a co-up farming point of view.

It is it going to be the ability for you to send an avatar shopping instead of yourself? You’ll now have your own personal avatar, that’ll whip into the store and try on the goods, in your size, and send you back the pictures to see whether you like them or not. There are stores that are already experimenting with this. When you walk in the store, it recognises your mobile phone, knows what you bought previously, what colours you prefer, what size you are, and it creates a holographic fashion parade for you. You can say, “I’ll try that one, that one and that one” and it will be waiting for you in the changing room.

This will spell the end of the checkout chick. The scanner which is going to acknowledge you and everything you have in your basket as you drive past it, and bill your mobile phone, is not far away either. The coming decade is going to be a wild ride for all of us in this sector. And one key truth at its core is that consumers are in the driving seat. They, and their mobile devices, will be design the future for all of us.