Michael Baker
Smarter Writer

Michael Baker is a retail consultant and vice-chair of the ICSC's Asia-Pacific Research Council

Michael Baker
Smarter Writer

Michael Baker is a retail consultant and vice-chair of the ICSC's Asia-Pacific Research Council

This Christmas shopping season is without doubt the most ferociously competitive in Australian Retail. And it isn't an exception; it's the new norm because globalisation and technology have irreversibly transformed the whole Retail game.

Now, the competitiveness of Australian retailers matters a lot more than it did in the past. They are no longer just competing among themselves but against the big boys, some of the most powerful global retailers, whose merchandise can be accessed in physical stores and with the click of a button.

When competitiveness counts like it never has before, so does the cost structure of retail businesses. And the bloated cost structure of Australian retailers is now being cruelly exposed. This problem – and how it can be remedied – was the concern of the authors of the recently released Productivity Commission report, Relative Costs of Doing Business in Australia: Retail Trade.

The Productivity Commission did not pull any punches and cut right to the chase, stating that the cost of doing business is inflated by unnecessary and anti-competitive regulations which governments had been dragging their feet to address.

Shop Woman shopping Fashion store

Labour and occupancy costs – worse than for overseas competitors

This foot-dragging has allowed the two largest costs of doing business – labour and occupancy – to balloon faster than retail prices over time and to comfortably exceed those of retailers from overseas, with whom they are now competing.

The Productivity Commission found that unit labour costs and occupancy costs are both higher in Australia compared to the United Kingdom and the United States. Clothing, footwear and furniture retailers operating in Australia were particularly hard done by in relation to their overseas counterparts.

Governments are at the heart of the problem

The report was particularly critical of the lack of progress in the areas of trading hours restrictions and planning regulations. The former, particularly in WA, SA and Queensland, "are increasingly out of step with changing patterns of work, leisure and shopping”.

The Productivity Commission was scathing not just about the restrictions themselves, but also about their inconsistency across local jurisdictions.

The absurdity of the regulations would be comical if they weren't imposing such a burden on both retailers and consumers: "Jurisdictions to varying degrees restrict trading hours by hour of the day, day of the week, whether it is a public holiday, the geographic location of the shop, its physical size, the number of owners and/or employees and product lines sold. This leads to highly localised and firm-specific trading arrangements within and across jurisdictions, thus increasing complexity and compliance costs for businesses.”

The Productivity Commission then throws cold water on the idea that the regulations are really protecting any of the small businesses that it purports to. Instead of going to the small shops when the big ones are closed, the report argues, many shoppers just drive out of their way to access the big shops in neighbouring jurisdictions where restrictions are not in place.

Government inactivity on relaxing planning and zoning regulations also came in for a shellacking. Why, for example, should the impact on existing businesses be a factor in deciding the outcome of approval processes? Protecting incumbent players in a market in such a way is anti-competitive and, by extension, anti-consumer.

Key takeaways for small retailers

 

  • The Productivity Commission's report doesn't necessarily mean that the bell is tolling for a massive push toward deregulation. But it does provide further ammunition for the unmistakable shift in sentiment in Australia away from protections for small retailers (in the case of trading hours) and large retailers and shopping centres (in the case of planning regulations). In other words, don't bank on continuation of the status quo.
  • Every small retailer in the country should be behind relaxation of planning controls, which restrict (a) the supply of retail space, and (b) how that retail space is used and what is sold there. These controls mean only one thing: upward pressure on rents and diminished retailer profitability.
  • Controlling occupancy costs remains a double-edged sword: the cheapest place to operate is on the suburban strips, but lack of foot traffic relative to shopping centres is becoming an increasingly acute problem. In other words, you lower your costs and top-line simultaneously. So depending on the product category, retailers have to carefully structure their real estate to ensure that demographic and foot traffic requirements are met without blowing out costs with costly leases.
  • The slow pace of deregulation makes the economics of e- and m-commerce very attractive. However, retailers should generally attempt to marry e-commerce with physical locations. Consumers increasingly expect an omnichannel presence, whether that means the retailer actually has its own physical store(s) or partners with an entity that does.

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