tip off

Retail, labour, and getting what you wish for

The state of retail isn’t as bad as business likes to make out — and any fault lies with governments and poor management as much as high labour costs, Glenn Dyer and Bernard Keane write.

Judging by the continuing complaints from business and its media mouthpieces, Australian retailers are doing it tough and need help from government to fight nasty unions, workers who foolishly value their weekends, internet competition and evil invaders from offshore. And once he’d got his feet under the desk, Treasurer Joe Hockey asked the Productivity Commission in April to go off and look at the cost structure of retail and how it fared against foreign competition. The PC last looked at retail in 2011; since then, foreign competition has risen along with the dollar, and consumer demand has continued to change — most significantly in the shift to food consumption.

Last week the commission produced an interim report. Unfortunately for retailers, the PC didn’t quite get the message about the required narrative. The underlying tone in the report is that for all the whingeing from industry, it remains very profitable, productive and attractive for offshore rivals.

The commission points out that “in recent years, prices of labour, rent and energy have risen more than the retail price index. As a relatively labour intensive sector, retail is particularly exposed to increases in labour costs.”  But that’s not the major problem confronting the industry — it’s government. The very start of the report states bluntly:

Costs of doing business in the retail sector are inflated by unnecessary regulations, and governments’ progress to address costly anticompetitive provisions has generally been slow and patchy.”

“The costs of doing retail business — the subject of this study — are largely driven by geography, markets and commercial decisions. However, there are some costs that are heavily influenced by government regulations such as those affecting trading hours, the transport and delivery of goods, utility charges, product labelling and food safety.”

Somehow you can’t see retailers being game to push for lower food safety standards. But strangely, the PC fails to echo retailers’ lamentation about labour. In fact productivity in retailing — both labour and so-called multi-factor productivity — are very solid:

Labour productivity growth in retail trade from 1993-94 to 2012-13 has been comparable to that of the 12-industry market sector (2.5 per cent in retail compared to 2.4 per cent in the 12-industry market sector)… and although retail multifactor productivity growth has slowed, it is strong relative to the market sector as a whole … retail trade MFP growth has been higher than the 12-industry market sector for most periods since 1993-94 and has, on average been double the growth rate of the market sector as a whole.”

That’s one reason why, despite all the wailing from the sector, in the last 20 years, the industry’s net profit margins have remained fairly stable at just under 6%. And that’s despite the slowing in sales growth since the financial crisis, with growth in retail trade turnover averaging 2.2% per year compared to 4.8% in the five years before the GFC …

Meantime, there’s been a rising tide of competition from offshore retailers, such as Costco from the United States, Zara from Spain, Topshop from Britain and Aldi from Germany. But that reflects how Australia is an attractive market for efficient retailers, despite its small size; these bigger offshore retailers see an opportunity to invest here to take advantage of local retailers who have failed to innovate or respond to changing consumer demand. The PC notes about the slowness local retailers in expanding online:

It is estimated that in 2011, Australian listed retailers’ online sales accounted for about 1.5 per cent of total sales, while in the United States, comparable retailers had online sales of around 8–10 per cent. The slow uptake of online retailing by many retailers is consistent with a historical pattern in the Australian retail sector in which uptake of innovation has been gradual. However, this is in sharp contrast to Australian consumers’ enthusiasm for online shopping.”

That says a lot about the realties of retailing in Australia — many companies are well run, competitive, cost-efficient and innovative, but many are not and want the government to solve their problems and protect them.

For another perspective on the labour issue, let’s go one step up the food chain (literally) to a report prepared for the Australian Food and Grocery Council by KPMG. Predictably, the report also targets high wage costs:

“Out of all the countries included in the 2014 Competitive Alternatives report for the agri-food industry, Australia has the highest wages and salaries. Labour costs have continued to increase as the Australian wage price index increased by 14.5 points between December 2009 and December 2013.”

Hmmm, 14.5 sounds like a lot, yes. Except, over four years, that’s around 3.7 points a year — not much ahead of inflation. And most of that increase occurred before mid-2012. That’s the point at which wages growth began slowing significantly, to under the rate of inflation. In the year to March, the wage price index only rose 3 points, meaning wages bills have been shrinking in real terms.

Moreover, the KPMG report itself is alive to the implications of that. The report notes the recent slowdown in wages to — what else? — complain:

“… recent household consumption growth slowing to below average has put pressure on many of the local manufacturers. This has been driven by unemployment levels rising and some decrease in wages growth …”

Well, there ain’t no pleasing some people, is there? Either wages are too high, driving costs up, or they’re not high enough, and that undermines demand.

Business, especially in the retail sector and its supply chain, ought to be careful what it wishes for.

3
  • 1
    klewso
    Posted Thursday, 12 June 2014 at 1:23 pm | Permalink

    So they’ll ignore this one?

  • 2
    StefanL
    Posted Thursday, 12 June 2014 at 4:04 pm | Permalink

    Imagine how low the demand for fancy stuff would be if we were on Gina’s preferred wage of $2 per day.

  • 3
    AR
    Posted Thursday, 12 June 2014 at 4:14 pm | Permalink

    A body-form tee-shirt with epulets?

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