A cosy club: Why we pay more at the store
The Australian Competition and Consumer Commission and successive governments have failed to curb retailers’ increasing market power, which is why Australians pay more at the store.
Gerry Harvey may be one of Australia’s well known and most successful “traditional” retailers, but he has seriously misjudged the consumer support for online retailing. He is not alone in getting it wrong. Major retailers and shopping centre landlords have also been very unhappy with Australian consumers going online to buy from overseas websites.
Why are the major retailers and shopping centre landlords unhappy with the growth of online retailing? Simply because online retailing offers very strong competition to the major retailers and shopping centre landlords. In the “old” days before the rise of the internet, consumers were basically forced to visit shopping centres and department stores to purchase products.
In those old days mail order wasn’t a serious threat to the established retailers and shopping centres. The delivery of mail order catalogues was time consuming, expensive and typically a “hit or miss” affair. A mail-order retailer knew that the customer was out there, but “connecting” with the consumer in the “pre-internet” days was a real and, at times, insurmountable challenge.
When offered, mail order would most likely be offered by established retailers but only in a tightly controlled manner.
The established major retailers would take great care in not cutting prices or profit margins on products sold through mail order. After all, if customers could get items cheaper through mail order why would they go in and shop in the retailer’s store? The established major retailers were not going to allow mail order to cannibalise sales at their retail outlets.
With mail order kept under tight control and with the absence of real competition from independent mail order-only retailers, the major retailers concentrated on adding retail outlets and buying out their traditional competitors. Through mergers and acquisitions the major retailers got bigger and more powerful thereby allowing them to push up retail prices.
The major retailers dominated the shopping centres and the shopping centre landlords benefitted from consumers being forced to buy from retail outlets in shopping centres. As a result, shopping centre landlords, such as Westfield, also started to become very powerful.
With the ACCC and successive Governments failing to stop the shopping centre landlords from increasing their market power through acquisitions and clever self-interested use of planning and zoning laws the shopping centres became little regional monopolies, especially as the town centre shopping strips started dying off in the face of the shopping centre onslaught.
As the major retailers and shopping centre landlords became increasingly powerful they started to exert their market power. The major retailers were keen to push up retail prices in the same way that shopping landlords were keen to push up retail rents.
That explains why retail prices and rents in Australia are so much higher than those overseas. We have all seen it when shopping overseas while on holidays or when buying from an overseas website. Higher retail rents in Australian shopping centres translates into higher retail prices for the simple reason that shopping centre rents are such a significant cost of doing business in Australia.
So any retailer with an outlet in a major Australian shopping centre is at an immediate disadvantage as compared with overseas retailers. For many it would be surprising to know that CBD retail rents in Sydney, Melbourne and Brisbane are some of the highest in the world. The rents in Sydney’s Pitt Street Mall precinct, for example, are second only to New York.
That tells you that customers shopping at major Australian shopping centres will be paying much higher prices for products than those overseas. With Australian retailing and shopping centres increasingly dominated by a cosy club of major players, retail prices and rents keep going up and Australian consumers keep getting price gouged.
Confident of their dominant position the major Australian retailers and shopping centre landlords simply told us how “successful” their business model was. Sure, anyone can be successful if they have such a dominant market position that they can keep raising retail prices and rents at the expense of consumers.
The only problem is that confidence led to complacency from the major players.
As Australian major retailers and shopping centres kept raising retail prices and rents their overseas competitors were busily building their online platforms. Amazon.com is perhaps one of the best known examples. Those overseas online platforms are now quite sophisticated and most importantly offer variety and convenience at much lower prices than the Australian shopping centre outlets of the major retailers.
Major Australian retailers have not been so keen to develop online websites offering cheaper prices than those available in their retail outlets. Like mail order in the old days, the major Australian retailers didn’t want to cannibalise sales at their retail outlets. That’s why despite all the threats, major Australian retailers have been slow to develop overseas websites to avoid GST.
Why would an Australian consumer go to an Australian retail outlet if the consumer could buy the same product much cheaper from the major retailer’s overseas, or even local, website? Besides, any overseas website set up by a major Australian retailer would face real competition from the ever-growing competitor websites around the world.
Significantly for consumers, the strong Aussie dollar has highlighted the huge savings from shopping online through an overseas website. This is where the internet has overcome key problems faced by the old-fashioned mail order business. The internet allows consumers to “connect” with an online seller. The consumer can find the online seller and all the online seller has to do is offer confidence and a cheaper price.
That explains the rush of Australian consumers towards online purchases. Contrary to what Gerry and other major retailers may think, removing the $1,000 GST-free threshold for goods imported by consumers won’t stop consumers buying online from overseas websites. The reality is that the savings online are so great that the overseas price can be so much cheaper than the Australian price even if GST was added to consumer imports under $1,000.
Australian consumers are hooked on buying online from overseas websites, and the sooner Gerry and other major retailers realise that, the sooner they can think of innovative ways to offer Australian consumers lower retail prices.
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