Costs of doing business: retail trade industry

• The Australian retail sector comprises more than 133 000 businesses contributing around 5 per cent of GDP and 9 per cent of total hours worked.
• The industry is diverse in terms of firm size, product range, business models and formats, and cost structures. Around 95 per cent of all retail businesses are small businesses. The retail sector is operating in an increasingly dynamic and globalised environment, competing on different platforms and across borders. This has delivered better outcomes for consumers and, combined with shifts in consumer spending, has created a challenging trading environment for many retailers.
• The cost of doing retail business is largely driven by geography, markets and commercial decisions. As such, many of the cost pressures facing retailers are market driven and require commercial responses.
  • That said, there are some costs that are heavily influenced by government regulations such as those affecting trading hours, the supply of retail space, workplace relations, transportation and delivery of goods, utility charges and liquor licensing. These cost pressures are accentuated in an environment where retailing is more competitive.
• As was the case in 2011 when the Commission undertook an extensive inquiry into the economic structure and performance of the Australian retail industry, retailers continue to operate under several regulatory regimes that unnecessarily inflate their costs and restrict their ability to innovate. With the exception of Victoria, reforms since then have been piecemeal, and incomplete across most jurisdictions. Major restrictions that still need to be addressed are:
  • trading hours regulations that restrict the industry's ability to adapt and compete with online competitors, and provide the convenience that consumers expect
  • planning and zoning regulations that are complex, excessively prescriptive, and often anticompetitive.
• Several input prices have increased to add further cost pressures, with prices for major inputs such as labour and occupancy rising faster than final retail prices.
  • Notwithstanding the increase in these input costs, cost structures and retail profits have remained relatively stable at a broad industry level. 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 rise in input costs has also been partly offset by productivity gains in the retail sector.
• While some of the larger retailers monitor costs domestically and compare those to their competitors here and overseas, this information is very tightly held given its commercial sensitivity. There are limited publicly available data to support an international comparison of costs across the wide spectrum of businesses operating in what is a very diverse sector.
• At an industry level, labour costs and rent as a share of revenue appear higher in Australia relative to the United Kingdom and the United States. 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.

While Australian consumers are enthusiastic online shoppers, Australian retailers do not appear to be using online retailing to its full potential.

Retailing and dairy manufacturing input costs and policy implications

Please note: This is a joint media release with the Costs of Business: Dairy Product Manufacturing case study.

The Productivity Commission released today two reports into input costs and their policy implications, they are: Relative Cost of Doing Business in Australia: Dairy Product Manufacturing; and Relative Costs of Doing Business in Australia: Retail Trade.

Dairy Product Manufacturing

In the case of dairy product manufacturing, the Commission found that costs in this industry are largely driven by market factors and the commercial decisions of business rather than government regulation or intervention, although there are some areas where corrective action by governments could be warranted. The functioning of electricity markets, for example, could be improved by reforms to pricing.

Following interest from a number of submitters, the Commission has also looked further at economies of scale in dairy manufacturing, and the Fonterra experience in New Zealand.

"The Fonterra experience in New Zealand does not readily translate to the present-day Australian dairy industry environment, and would not seem to justify regulatory intervention by governments," Chairman Peter Harris said.

The report found that competitive pressure for export markets is fierce and poised to increase further once EU milk production quotas are lifted in 2015. However, there is considerable evidence that dairy manufacturers and farmers are responding effectively to these challenges.

Retail Trade

In the case of retail trade, the Commission found that regulatory restrictions, such as those on trading hours and planning and zoning, unnecessarily inflate retailers' cost of doing business.

Labour and occupancy costs comprise the majority of retailers' cost of doing business, although cost structures vary considerably across retail trade subsectors and between individual businesses. Despite larger increases in input prices than in output prices in recent years, cost structures and retail profit have remained relatively stable at a broad industry level. To some extent overall profitability has been protected by the lower cost of some goods reflecting both retailers' sourcing strategies and the appreciation of the Australian dollar. The rise in input costs has also been partly offset by productivity gains in the retail sector.

"While retailers' costs are largely market driven and require commercial responses, they are also inflated by red tape," Commissioner Patricia Scott said.

"Restrictions on bricks and mortar retailers' trading hours are increasingly out of step with consumer expectations and the rapid growth of online retailing. While these restrictions aim to protect smaller retailers, removing trading hours restrictions does not appear to have a material impact of the structure of the retail sector. Retaining restrictions also ignores the potential for more than offsetting gains for retailers through lowering costs and increasing their ability to compete with online retailers, and greater choice and convenience for consumers."

The Commission also found that planning and zoning regulations are complex, excessively prescriptive and often anticompetitive.

"With the exception of Victoria, progress by governments to address costly anticompetitive provisions has generally been slow and patchy," said Commissioner Patricia Scott.

• Preliminaries
  • Cover, Copyright and publication detail, Foreword, Terms of reference, Contents, Acknowledgments and Abbreviations
• Overview
• Findings
• Chapter 1 Introduction and scope
  • 1.1 What the Commission has been asked to do
  • 1.2 Scope of the study
  • 1.3 The Commission's approach
  • 1.4 Conduct of the study
  • 1.5 Structure of the report
• Chapter 2 Snapshot of the industry
  • 2.1 Retail in Australia
  • 2.2 Retail plays an important role in the economy
  • 2.3 Performance of the retail industry
  • 2.4 The industry is evolving
• Chapter 3 Retail cost structures
  • 3.1 Retail cost structures
  • 3.2 Retail cost of doing business over time
  • 3.3 The main cost drivers
  • 3.4 How retailers are responding to rising input prices
• Chapter 4 Cross-country comparisons
  • 4.1 Cost comparisons
  • 4.2 Labour costs
  • 4.3 Occupancy costs
  • 4.4 Developments in online retailing
• Chapter 5 Trading hours
  • 5.1 Issues
  • 5.2 Progress since 2011
  • 5.3 The effects of restrictions
  • 5.4 Impediments to reform
• Chapter 6 Planning, zoning and retail tenancy leases
  • 6.1 Introduction
  • 6.2 Planning and zoning
  • 6.3 Retail tenancy leases
• Chapter 7 Labour cost issues in the retail industry
  • 7.1 Introduction
  • 7.2 Wage setting and outcomes
  • 7.3 Penalty rates
  • 7.4 Other matters
• Chapter 8 Other costs and regulatory burdens
  • 8.1 Introduction
  • 8.2 Excessive regulation and compliance costs
  • 8.3 Broader cost pressures
  • 8.4 Other concerns
• Appendix A Public Consultation
• References