By MoneyMorning.com.au
According to a National Australia Bank survey, Australia’s retailers raked in $216 billion last year.
Online shopping made up just $10 billion of that amount.
And only $2.5 billion, or just 1.2%, of all retail spending by Australians went to international websites.
But importantly, overseas buying accounts for 25% of all online retail sales.
If you’re the one who opens the Visa bill at home, then you know online shopping is growing.
NAB estimates web shopping is growing at 30% a year…compared to 3% for traditional “bricks-and-mortar” retailers.
The thing is, retailers are spooked.
They liked the industry as it was.
And they don’t want to change.
Online shopping has been common in the US for over a decade. Yet hardly any Australian company comes close to developing a way for Aussie’s to web shop at their favourite stores.
In 2000, one of the few companies to set up a web site for shopping was David Jones [ASX: DJS], but they shut it down not long after the dotcom crash. The site had cost the company $28 million, and management couldn’t see any future in online retailing anyway!
And now our fashion shops are playing catch up. But instead of setting the trend like American retailers, Aussie retailers are following. Not because they wanted to, but because Aussie customers forced them to.
But it’s not just the retailers whinging about online shopping ‘ruining’ the retail sector. Local distributors are bleating too. Generally, a distributor – also known as a middleman – secures the rights to a certain brand, and sells the brand to retailers. The retailers then sell the goods to customers like you.
So you can see why these ‘distributors’ don’t like it when you buy from an overseas retailer. Like the Aussie retailers, the distributors miss out too.
Why Price Fixing is the Wrong Solution
Yet one distributor is fighting back.
Their solution? Price fixing!
Last week The Age wrote:
‘Australian consumers will be forced to pay substantially more for their favourite fashion brands as a growing number of local importers reach agreement with international brands to stop selling their clothes to Australians on overseas websites or to lift their web price.’
There, that’ll fit it!
The distributor, International Fashion Group, says, ‘It’s the only way we can compete on price with these overseas websites and try to prevent more and more retailers from closing their doors.’
Actually, price fixing will do the exact opposite.
If anything the distributor has just guaranteed fewer sales in the future. And it could mean the end of the traditional retail industry.
First, what is price fixing?
Wikipedia says it best:
‘Price fixing is an agreement between participants on the same side in a market to buy or sell a product, service or commodity only at a fixed price, or maintain the market conditions. The defining characteristic of price fixing is any agreement regarding price, whether expressed or implied.’
The impact on consumers?
No longer can you choose to shop online and pay $100 for a pair of True Religion designer jeans (a US brand). Because of our location, the brand won’t ship the cheaper jeans to you. You can only buy these jeans from an Australian retailer, at the Australian price. In this case, AU$250….for one pair of jeans.
You see, price fixing isn’t the solution to ‘saving’ Australia’s retail industry.
The set price assumes the consumer will gladly pay $250 for the goods. But just because they were willing to fork out $100 for one pair of jeans, doesn’t mean they’ll pay more than twice the price. The middleman is trying force the consumer to pay the requested price.
Think about it this way…when bananas went from $2 per kilo to $14 per kilo did you buy the same amount of bananas? No. You either bought less, or you bought something else…apples, watermelon or grapefruit.
The same goes for jeans. Instead of buying True Religion jeans, consumers will buy jeans not effected by the price fixing – like Pepe Jeans London, for example. And they’ll buy them from overseas.
However, by setting a price for the jeans, the distributor also hurts the retailers who actually flog the stuff.
Think David Jones, Myer, plus other chain stores and small independent boutiques. These shops will feel the pain of price fixing first.
And these stores can do absolutely nothing to effect the price. Nothing.
Rather than come up with a new way to attract customers, the middleman is desperately trying to remove the competition.
Think about it. By setting a price for these jeans in Australia, the distributor doesn’t have to worry about other businesses offering the same product for a lower price.
But more importantly, there’s nothing to force the price down. To make a profit, all retailers must charge roughly the same for the product. And the middleman doesn’t have to worry about internet sales threatening company profits anymore.
Well, for a little while. Because the price fixing will only work for a short time.
Remember, when America banned alcohol in the 1920′s under Prohibition, it didn’t stop people drinking!
Consumers are smart. It doesn’t take them long to find a way to buy what they want.
And so local retail sales will continue to slow. That means more bad news for local retailers and the distributors…even with price fixing. After all, why would consumers pay more for a product than they have to?
As shops find they can’t move the stock, they’re less likely to order more.
No retailer buys goods it can’t sell.
Consumers have moved to international websites for a reason – they’re simply not willing to pay the price demanded by retailers.
Claiming a set price will save the retail industry is wrong. Removing competition for their product will encourage consumers to look for other products.
Forcing consumers to pay more for goods is a quick way for a retailer to put itself out of business.
Rather than being innovative and trying to complete with the web, local retailers and distributors are being lazy.
If retailers and distributors resort to price fixing to ‘protect’ the industry, they have no one but themselves to blame when their shop doors close for good.
Shae Smith
Editor, Money Weekend
The Most Important Story This Week…
The Australian Petroleum Production and Exploration Association (APPEA) annual conference was on this week. Many key players in oil and gas were there, such as the Saudi Arabian oil minister plus industry chiefs. Our own regular Money Morning editor Dr. Alex Cowie travelled to Adelaide to hear them speak. One of the strongest themes at the conference was the potential of natural gas to turn Australia into a global energy powerhouse as the world shifts from oil and coal to this key fuel.
This is something regular Money Morning editors have emphasised in recent months. “Shale gas” is one new source of supply. This has been inaccessible until now. New technology has made it feasible. Today, shale gas stocks are one sector of the market that might be able to defy the global debt crisis and return investors massive gains. Of course, it all depends when you get in – better sooner, rather than later, as Alex makes clear in Get in Early on Shale Gas.
Other Recent Highlights…
Kris Sayce on Why This is the Best Time to Buy Small-Cap Stocks Since March 2009: “We’ll be honest. This falling stock market has us licking our lips. The S&P/ASX 200 has dropped 6.2% in two weeks. And yesterday the index had its first 100-point fall since 3 October last year. The ASX Emerging Companies index has done even worse. It has dropped 17.1% in seven weeks. That’s bad news if you hold small-cap shares, but great news if you want to buy beaten-down stocks on the cheap.”
Dr. Alex Cowie on APPEA – Day One at the Oil & Gas Show: Sand Dunes, Scuba Diving and Camels: “Today it’s Asia that’s ‘gotta have gas’. 17 LNG receiving terminals are being built across Asia, and 18 more are planned for construction before 2020. Asia is the greatest source of LNG demand, though globally demand is expected to increase around 5% a year for the rest of this decade. Where’s it all going to come from?”
Tim Price on How Central Banks Are Delivering A Financial Repression: “Imagine you are one of two people playing Monopoly. While you follow the rules religiously, the other player, who also happens to be the banker, does not… Oh, and he hates to lose. Rather than concede defeat, he is perfectly willing to set fire to the table. Imagine no longer. This is the state of the financial markets. You are playing against the world’s central banks.”
Dr. Kent Moors on Oil and the Death of Greece : “The only way oil prices are coming down is by the advance of pressures outside (exogenous to, as the analysts say) the oil market itself. This is what happened in 2008. The rise in crude and the corresponding spike in the cost of oil products like gasoline, diesel, and heating oil retreated only when the full weight of the subprime mortgage-induced credit freeze hit… Yet this time there are three important differences.”
Why Price Fixing Will Be the End of the Retail Industry
Tradervox (Dublin) – Large speculators in the market are showing concerns that the euro will decline against the dollar as the region prepares for a possible Greece exit. The net shorts or bearish bet rose 143,984 to 173,869 last week. Analysts are saying that the market is reacting to the reality of contagion into Spain which will continue as long as negativity about Greece continues. Signs have already emerged after Spain’s 10-year bonds increased to 6.5 percent which is close to 7 percent which led Greece Portugal and Ireland to seek international bailout.
