Why Price Fixing Will Be the End of the Retail Industry.
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.
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.
This article is contributed by Money Morning. Click Here to Subscribe to their free newsletter.
