Aussie retailers wrong-headed about online tax

Astonished by the call for taxing online sales from overseas suppliers, I wrote a letter to Richard Goyder (the CEO of Wesfarmers, which operates Harris Technology), Gerry Harvey and Dick Smith (see copy of the letter below) in which I used a personal experience to illustrate that it is Australian retail models, not taxation, which drive online sales.

Specifically, I referred to the kind of ‘piss-poor’ retail model that offers only overpriced but still second-best electronic goods, that fails to understand customer needs and wants, and that delivers no value-add for the extra overhead cost of shop-fronts and staff.

Harvey was quoted again today suggesting that Australian consumers should pay a little more at local retailers because it would save jobs and benefit the nation. He should have massaged that message a little more. High staff costs for people who, in my example, could tell me nothing about the kind of technology I was looking for, is a legacy of a union-protected labour market that will not survive international competition at all, regardless of taxing online retailers. If the staff at Dick Smith, Harris Technology and Harvey Norman were stumped by the simple job of advising on PVR (digital TV recording), let alone stocking or being able to order the appropriate electronics, they represent little more than a massive cost for taking my cash without adding any value at all to the transaction. Why would I, and thousands like me, not seek to leverage the hours we are forced to spend researching our own needs by sourcing the best price online. It seems obvious to me that doing that from the comfort of my own desk is infinitely more productive and satisfying than trudging from one store to another, watching the same blank faces and getting the same lack of advice from sales assistants.

That problem will in no way be alleviated by levying an extra tax on online retailers because it is part of a much broader problem for Australian retailers like those mentioned above: the days of milking supply chains for profit are numbered. Gerry Harvey, Dick Smith and Wesfarmers have chosen at some stage not to manufacture certain types of goods because it’s cheaper or easier to import them. That was a sound choice when they could capitalise on their ability to source goods and buy in volume, which was the only way to do it … once upon a time.

Gerry Harvey should adapt his business model, not seek rent from the state.

There is no longer any reason why customers would accept being dictated to by the inventories of Australian retailers who have gotten away with being contemptuous of their customers, complacently relying on the fact that most buyers didn’t have much choice but to buy what was on offer, at whatever price was on the ticket.

I recollect that Gerry Harvey’s response to the entry of Kogan into the consumer electronics market (see, for example, The Sydney Morning Herald in 2010) was something along the lines that Kogan wouldn’t last because it was second-rate gear and consumers wanted the personal touch of talking to knowledgeable sales staff. Trouble is that the staff aren’t knowledgeable, and mark-ups for ‘reputable brands’ are much harder to defend because perfectly good generic electronic parts can be very effectively put together to make most contemporary consumer electronics cheaper and just as reliably as in expensive but outdated manufacturing plants of former industrial powerhouses like Japan and Europe. In other words, consumers will not pay to maintain high-paying jobs anywhere if the cost to them doesn’t offer a better value proposition.

Another news story, about Australian iStore customers paying more for music and videos for the iPhones and iPads than their American counterparts, makes the point even more compellingly. Why should there be mark-ups on music and videos that offer nothing extra to consumers who can see the same goods being offered cheaper elsewhere. In fact, for what reason, other than the threat of legal action, should consumers subsidize the incredibly affluent lifestyles of music and film promoters, executives, producers, etc, when the product can and is being shared at no cost at all, albeit illegally. Instead of arguing the case of piracy, would the rational response not have been to embrace the internet supply chain proactively by making titles available online at reasonable rates reflecting the absence of massive overheads and the lack of value represented by millionaire promoters and executives, or even blue collar sales staff; were that the case, I’m willing to bet the incidence of piracy would be much lower than it is now. Think about it: if you could pay a buck for an online song rather than being forced to go to the high street store to buy the whole album for $30, why would you pirate the thing?

Just so, Messers Goyder, Harvey and Smith are stuck in a paradigm that no longer exists: that consumers should subsidize their mark-ups for overheads and profit that add absolutely no value at all to the consumer. The problem in that paradigm isn’t necessarily greed, it’s that the exclusivity of the relationship the retailers once had with suppliers doesn’t exist anymore and cannot be artificially preserved.

Even if consumers were inclined to shoulder some of the cost of maintaining Australian jobs and retail storefronts, my point to the CEOs was that this proposition becomes difficult to make if not even at the level of personal service is there a skerrick of extra value to be had.

It would be difficult for any of the CEOs to argue that they have not profited enormously from the old arrangements and supply chains. It becomes very difficult to sympathise now with rent-seeking behaviour designed to institutionalise and fence off from change those cosy arrangements.

Not entirely surprisingly, the only replies I have received have been mail failure messages bouncing from a variety of corporate mail servers. I had to try a whole bunch of email addresses by best guess to try and somehow get through, even if only by a process fo capturing stray mail. That’s because customer feedback, like service, is kept at arm’s length by each of the companies concerned. No email addresses are offered at all. To offer feedback you are instructed to use online email forms going to unspecified addresses, probably to be vetted and culled by sub-management staff. That too is a business model of the past. In the internet age I fully expect to be able to contact the management of any retailer I plan to do business with. The predictable riposte that senior managers are far too busy to answer each email is indicative of the same dated thinking that undermines their profits: if these guys can’t even manage their personal communications (through assistants or personally) what hope do they really have of maintaining fading profitability in businesses that are increasingly working via the same dynamics as email?

This last point is eerily reminiscent of the reply I got from various politicians I emailed during the 2010 election: sorry, but the Hon so and so is too busy electioneering to reply to you personally! One has to wonder whether there is any time at which it is more critical to ensure every email is responded to with at least the appearance of a personal touch than during an election? Was that not the lesson to be drawn from Barack Obama’s extraordinarily successful election campaign?

That parallel suggests a common denominator. It is a generational failure in contemporary leadership to recognise and respond to, let alone embrace, the new communications channels, which are also the new supply and value chains, and which will be the new polling stations of future elections.

 

retail-letter-january-2011

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