Productivity Commission urges loosen red tape to give retailers breathing space

Madeleine Heffernan
January 2, 2015
inShare
Governments should loosen regulations to help the retail sector where one quarter of businesses run at a loss and many struggle to get to grips with online shopping, the Productivity Commission argues.
In a study of the $23 billion a month sector, requested by Treasurer Joe Hockey, the commission says retailers in Australia “continue to operate under several regulatory regimes – such as those relating to trading hours, and planning and zoning – that unnecessarily inflate their costs and restrict their ability to innovate”.
“However, this study also highlights that many of the cost pressures facing retailers are market driven and, therefore, require commercial responses,” commissioner Patricia Scott says.
The report says the retail sector “appears to be managing rising cost pressures effectively”, citing relatively stable profit margins of 4.9 per cent, investment and employment growth in recent years, and cost-cutting such as a shift to casual staff.
However, it says the “capacity of retail businesses to respond to cost pressures through cost-cutting and other strategies appears mixed”.
Food retailing has much higher average profit margins (6.3 per cent) than retailers of clothing, footwear, household furnishings and discretionary goods (4.8 per cent).
The report finds that almost 27 per cent of retail businesses make a loss, and the industry has high exit levels. Of the retail businesses operating in June 2009, 41 per cent had left the industry four years later.
The report, released late last year and called Relative Costs of Doing Business in Australia, studies operating costs incurred by retailers, including labour costs, rent and other occupancy costs, and expenses such as marketing, packaging and administration.
It finds that deregulating trading hours would likely provide jobs, boost convenience for shoppers, increase economic activity and lower retailers’ cost of doing business.
South Australia, Western Australia and Queensland have the most restrictive trading hours, and within each of these jurisdictions there are widespread inconsistencies, the report states.
It also calls for the rest of Australia to follow Victoria’s lead of simplifying planning and zoning schemes for retail development, and notes that labour and occupancy costs tend to be the single largest costs of doing business.
The report finds that labour and intermediate input prices appear to have risen in line with inflation but faster than retail prices. It also finds that rising input costs have been partly offset by productivity gains over the past five years.
However, with the Australian dollar sliding about 13 per cent since the start of September, and Reserve Bank governor Glenn Stevens saying he’d like it to fall to a six-year low of US75¢, the Productivity Commission’s comments on the dollar might concern policymakers.
“To some extent, overall profitability has been protected by the lower cost of some goods, reflecting both sourcing strategies by retailers and the appreciation of the Australian dollar,” the report says.
Retail contributes about 5 per cent of gross domestic product and about 10.6 per cent of the nation’s jobs, the report finds.
The sector’s 133,000 businesses are almost entirely small businesses, at 95 per cent.
“The retail sector is operating in an increasingly dynamic and globalised environment, competing on different platforms and across borders,” the report finds. “This has delivered better outcomes for consumers and, combined with shifts in consumer spending, has created a challenging trading environment for many retailers.”
The report estimates online sales account for 6 per cent of total sales, lower than the 8 per cent in the US and 13 per cent in Britain.
It states: “While Australian consumers are enthusiastic online shoppers, Australian retailers do not appear to be using online retailing to its full potential.”
The report also finds that “labour costs and rent as a share of revenue appear higher in Australia relative to the United Kingdom and the United States”.
The government has tasked the Productivity Commission with reviewing industrial relations laws which will set off a debate about penalty rates; an important issue to retailers.
This year, Ian Harper will release his review of competition policy and there will also be a four-yearly review of Australia’s industrial awards. Employers have signalled a push to scrap more expensive Sunday rates in favour of flat weekend pay.
“For some retail categories, such as supermarkets, there are no discernible differences in cost structures between Australian retailers and those operating in broadly comparable markets overseas. For other retail categories, such as clothing and footwear, differences are more apparent.”
Read more: