Comparisons between US and Australian retailers: some facts

The heightened interest of Australian consumers in buying things from offshore websites isn’t really motivated by a desire to avoid paying the 10 per cent goods and services tax applicable on items bought in Australian stores. Rather, it reflects the availability of a much wider range of merchandise, usually at substantially lower prices, than is generally available in-store in this country.

To be sure, the price comparisons are even more favourable with the Australian dollar at close to parity with its US counterpart: but in most cases the price differences would be eyebrow-raising even if the A$ were still in the low 80s.

One would expect online retailers to have lower operating costs than otherwise similar “bricks and mortar” outlets in the same jurisdiction. But even so, as travelers to the United States will be well aware, many items (particularly clothing, cosmetics, footwear, CDs, books, and electronic equipment) are substantially cheaper in American shops than they are in shops here.

There are at least four reasons for this.

First, and most obviously, American retailers pay their staff a lot less than their Australian counterparts. Non-supervisory staff working for American retailers earn about $13.30 an hour (taking the Australian and US dollars as being roughly at parity), while the equivalent figure for Australian retail employees is around $24 per hour - a difference of almost 80 per cent. Australian retailers offset this to some extent by employing relatively fewer staff (which is one reason why customers in Australian stores often find it difficult to attract the attention of sales personnel). However, since (according to ABS figures) employee wages and salaries account for only 10-12 per cent of the value of retail sales, this difference in employee costs by no means explains all of the price differences between Australian and American stores.

Second, Australian retailers typically incur higher occupancy costs than their American counterparts. Comparisons in this area are difficult, due to the absence of readily available and consistent data, but independent estimates prepared by independent retail consultant Michael Baker for the Shopping Council of Australia in 2009 suggest that whereas tenants in regional shopping centres in the US were paying around 13-13½ per cent of turnover in occupancy costs, in Australia they were paying over 17 per cent.

That’s partly because, particularly in the more recently developed cities in the west and south of the US, American shopping centres tend to be located on the fringes of major urban areas, rather than in middle-distance suburbs such as Chadstone (in Melbourne) or Chatswood (in Sydney). “Big box” retailers like Wal-Mart and Home Depot, which began to emerge in the late 1980s, are also typically located on urban fringes (even in the north east), simply because that’s the only place these retailers could find enough land for the required scale of operation.

American neighbourhood shopping centre tenants pay around 7¾ per cent of turnover in occupancy costs, compared with close to 11 per cent in Australia. One reason for this difference is that neighbourhood centres in the US are often open-air and fairly basic in their construction and design (and thus have lower utility and common area charges), whereas Australian neighbourhood shopping centres are usually fully enclosed.

Third, Australian retailers are typically less efficient than their American counterparts in managing their inventories. Although stock turnover rates vary significantly across the retail sectors of both countries (according to the types of goods being sold), on average Australian retailers hold about stocks equivalent to about 4.7 weeks’ worth of sales, whereas American retailers hold stocks equivalent to 4 weeks’ sales, on average. That’s a difference of almost 18 per cent, and it will be reflected in higher holding costs (storage, insurance and interest) which in turn contribute to higher prices for Australian shoppers. Of course, Australia’s more sparsely distributed population (7.2 per cent of the US spread over roughly the same land area, excluding Alaska) necessitates at least some retailers holding higher stock levels and incurring higher transport costs than their US counterparts.

Fourth, Australian retailers typically have higher gross margins than their American counterparts. From the national accounts, the “gross operating surplus” (roughly speaking, profits before depreciation, amortisation, interest and tax) of American retailers represented 20.9 per cent of their “gross valued added” in 2009, while for Australian retailers in 2009-10 the equivalent figure was 27.5 per cent. Curiously, that doesn’t translate into higher accounting profit margins: according to ABS figures, Australian retailers’ pre-tax profits represented 3.6 per cent of sales in 2009-10, while the corresponding figure for US retailers was 4.3 per cent: the apparent inconsistency may be attributable to Australian retailers having higher interest costs, including as a result of slower inventory turnover or higher levels of gearing, than their American counterparts.

None of these differences necessarily supports Australian retailers’ push for GST to be imposed on purchases by Australian consumers from offshore websites. Leaving aside the practicability of doing so, the imposition of GST on these purchases would not, in most cases, narrow the differential vis-à-vis Australian in-store prices by enough to dissuade Australian shoppers from buying things from offshore websites; and in any event it wouldn’t address some of the other factors which have encouraged more and more Australians to shop this way.

For decades, Australian manufacturers made the same complaint as retailers have been making in recent weeks - that is, that they faced “unfair competition” from those overseas who had the “advantages” of lower labour and other costs, which in turn threatened Australian jobs.

Thanks in part to the relentless efforts of the predecessors of the Productivity Commission, and a few lone voices in the newspapers and in Parliament, Australians eventually came to see these complaints for what they were - a demand that Australian consumers should be forced to pay higher prices for a narrower range of inferior products. And although the dismantling of the tariff walls around most sectors of Australian manufacturing (long after other Western economies had removed theirs) did for a time accelerate the decline in the proportion of Australian workers employed in manufacturing, the proportion of Australians with a job has almost never been higher than it is today.

It would be very much to the detriment of Australian consumers, and of the Australian economy as a whole, if Australian retailers were to succeed where Australian manufacturers ultimately failed. Fortunately, there’s very little indication to date that they will.