The retail dilemma

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This weekend I faced an ethical dilemma which I suspect is becoming more common for Australian consumers. I needed a new set of bicycle panniers. I had briefly looked on the Internet but I wanted a set that would fit my current rack. So, finding myself near a bicycle shop ,I went in to have a look at the selection.

There was a great choice, a very helpful sales assistant, and exactly what I needed. But then I faced the dilemma. Would I buy the panniers or walk away claiming that I would “think about it”? Now I knew what panniers I wanted, I also knew that I could buy them on the Internet at about 50% of the Australian price. The store and the sales assistant would get nothing but I would save my hard earned money.

I looked at the sales assistant. I’m sure he knew what I was thinking. And yes, I’m a wimp, so I bought the panniers at the store.

When I got home I checked on the Internet. I could have saved about 50%.

Australian retail outlets are trying to work out how to deal with this dilemma. I do not have the answer. There are calls for the government to ‘do something’. But what can they do? Providing tax concessions to Australian retailers who face internet competition will simply undermine the GST and will have a 10% effect – not the 50% internet saving at current exchange rates. Trying to put up import barriers to prevent overseas competition via the internet will harm consumers and prop up an inefficient ‘bricks and mortar’ retail model.

Some stores have tried a ‘fitting fee’ approach. If you try and do not buy, then you pay a fee. But stores cannot distinguish between real bricks-and-mortar shoppers who are comparing alternatives and potential on-line shoppers. So a ‘fitting fee’ discourages real shoppers who will just strike that store off their list and look elsewhere to compare products before buying.

I do not know the answer. However retailers will need to work out how to deal with the problem of customers who try and then do not buy (or rather buy over the Internet) as this is a growing area for consumer purchases.

20 Responses to "The retail dilemma"
  1. Australian retailers are (generally) abysmally crap at offering their own online retailing experience.

     I see no reason why an Australian business can’t obtain wholesale goods from the same sources (and, probably, the same prices) as overseas businesses, and offer them to Australians online.

    Granted, Harvey Norman and Myer probably can’t do that, because they have overheads associated with big shops. But why can’t a backyard entrepreneur sell panniers to Australians just like the overseas ones you googled?

    My online-vs-offline experience follows a different workflow to yours.  I start by googling to find what I want, then I visit a local retailer and ask them to pricematch the online price (including shipping – gotta be fair!).  Surprisingly enough, often they do!  But if they don’t, I weigh up the price premium I’m prepared to pay for instant gratification (vs mail-order) and ask them how close they can go.  Once again, many of them can come to the party.
     

    Somtimes I end up buying online, many times I don’t. But I don’t feel any kind of dilemma in the way you’ve described above when I make the trade.

      – mark 

  2. As a very raw first thought, is some kind of resale price maintenance system the optimal response from manufacturers (of products where consumers benefit from trying them on/looking at them instore)? 

  3. Oh, and as for, “When I got home I checked on the Internet…”

    I do it in the store, in front of the sales agent on my phone. At least they can see what they’re competing with 🙂

      – mark 

  4. Stephen, Why is retailing in Australia so expensive? The GST accounts for a bit and what are often 5-6% tariffs another bit but my experience is comparable to yours – 50% plus differences in pricing are common. 

    My casual impression moreover is that many retailers are struggling and not making huge margins.

    One thing that strikes me in Australia is that premise rentals are high reflecting high capital costs.  Wages are higher than many of our competitor countries but not that high – the service and range of goods provided by Australian retailers is not great. “We don’t have it in stock but can get it in for you” is a frequent refrain. 

    I bought top range Leica binoculars a few years back in an Asian city for $1300. The same binoculars in Australia were $3500. I checked tariffs, taxes etc and could not explain the reasons for the higher prices here. Its always puzzled me.

  5. Vertical control? I.e. Canon owned skeleton stores showcasing Canon cameras, then they don’t care if you go online to buy one after after?
    Why can’t you require someone to buy a $x store voucher in exchange for letting them try out the products, etc? I know some snowboarding stores do this. Perhaps it will take a while for the shift in social norms to occur but I wouldn’t blackball a store which offered that deal.

  6. The bleeding obvious solution – that no-one in Australia is willing to say for ideological reasons – is to relax the regulations (particularly with regards to IR) that make our goods so damn expensive and internationally uncompetative in the first place. 

  7. I worked in a couple of Melbourne bike shops for about 6 years while at school and Uni. And yes, it’s a major problem for bike shops especially, as both a good bike salesperson will offer real value (fitting, matching the bike to the person, etc.), and Australian wholesale prices are so high (more or less the same as Chain Reaction). 

    It kind of makes sense for the online retailers like Chain Reaction Cycles to maintain a list of “private shopping assistants” in major cities—people who have worked in the industry a while— to provide the same service that bike shops currently do. Then there’d be no need for bike shops at all.  Maybe this is where we’ll see the industry move. 

  8. I think an awful lot of Australian distributors are ripoff merchants and that’s the biggest factor on those huge price differentials.  Often it is because the distributor is actually part of the manufacturer, and a small affluent market is easy to rip off for name brand stuff (ie your brand value has created a local monopoly).  Were I a retail bike shop I’d import direct, if necessary from online retailers

    The biggest evidence for the ripoffs is just how hard said distributors have fought to prevent parallel importing in a range of goods.  It’s a bit like the pokies campaign or the plain cig packaging campaign – the more strongly the change is resisted, the more evidence that is that the policy will in fact work.

  9. Free-riding is only a problem if you’re at the wrong end of it.  Years ago when I studies RTP under Prof Forsyth the ‘issue’ was couched in terms of going to a large store and getting all the detailed info (wasting someone’s time) and then going to a smaller store with what were lower prices (like your bike shop) and buying the item for considerably less.  Now the shoe is on the other foot for ALL bricks and mortar shopfronts…the answer is simple: you do your best and if it isn’t good enough you go out of business (unless the govt bails you out). Over the weekend I spent about $1000 on goods over the internet from international websites. I didn’t even bother doing any prior legwork.  The overall discount worked out to about 50% (even including extortionate shipping costs!) – if its the wrong size, etc. I can just send it back. Given time, business will figure out how to compete or do the next best thing – the success of OrotonGroup is a classic example.  Cheers!

  10. A couple of extra thoughts.

    I am not sure why retail costs are so high here for a range of goods. It could be international price discrimination – but competition and parallel imports should undermine that. It could be input costs (labour and retail space) but this is an empirical question.
    On parallel imports and resale-price maintenance, both of these came across my desk when at the ACCC. RPM in particular was driven by internet concerns (but is illegal). Attempts to stop parallel imports seemed to relate more to international price discrimination by key manufacturers. However, clearly parallel imports of books, etc is hurting retailers – hence the recent tax campaign to reduce the GST in particular areas (or try to apply it to internet purchases under $1000)
    On the solution – I agree that a new model will likely develop. It may be that internet retailers will set up ‘trial’ outlets. Or manufacturers may use licensing to get around RPM laws (some whitegoods manufacturers already do this to prevent interstore discounting). Time (and bankruptcy) will tell. Perhaps not a great time to own shares in retail shopping centre developers?

  11. “Perhaps not a great time to own shares in retail shopping centre developers?”

    No doubt about that, but surely the logical conclusion of the above post is (a) bricks and mortar stores will go out of business insofar as they sell stuff but (b) if consumers get value out of the consulting services currently provided for free by stores, there will be a market for bricks and mortar stores that provide *only* that consulting service, ie services for your ‘fitting fee.’ Such stores could ‘fit’ or consult on a big variety of products since they wouldn’t need to worry about actually stocking items (or many items) – they could charge you for their time and direct you to the relevant online store, or even order for you in store at the best price, giving you the best value and charging for the consumer experience. I can see a market for this kind of store right now.

  12. I wonder how much of it is simply inefficient pricing being charged by domestic retailers. Yes, rent does increase fixed costs substantially, but if they are trying to increase profits by increasing prices in an elastic market, they are going to encourage consumers to look for alternatives. As shocking as it may seem, perhaps retailers would find profits increasing if they focussed on moving more units than higher margins. 

  13. Adam, that’s not an equilibrium. If a retailer could increase profits by selling at lower price and more units they would’ve done so, then everyone else would follow and you’re back to square one.

    Retailing isn’t a problem for vertically integrated firms, e.g. Apple and a lot of the luxury brands. So long as they control distribution they control the margins as well. I speculate the retail market without the upstream component are in a period of flux where the small retailers will die out and the rest will be aggregated in a couple of big online firms (because of economies of scale) to become basically online utilities in the vein of amazon.com and asos.com.

  14. DavidN, I think Adam is saying that the retailers have misjudged the slope of their individual demand curve – they think their sales are less price sensitive than they actually are.  Whether he’s right or not, the fact that they’re not pricing at the profit maximising equilibrium is precisely his claim.

  15. derrida derider, you and Adam might be correct but assuming we are starting from the same premise (that retailing is a less than perfect competitive market, retailers are homogenous, and constant marginal cost), it could very well be all retailers are pricing to high but you would have to assume they are all pricing too high (i.e. they’re all stupid).

    Suppose one retailer drops their price which increases sales/profit above normal in the short run. Let’s assume other retailers are strategic so they respond by dropping prices as well. Then there can only be one of two equilibriums. If (1) initial market price > max. joint profit price then at the new equilibrium all firms increase profit; (2) initial market price <= max. joint profit price then at the new equilibrium all firms make less profit then initially.

    I assume derrida derider, you and Adam are saying (1) but I think that is a highly unlikely.

    If we assume there are economies of scale which I think is probably the case then individual retailers can increase long run profit by dropping prices/increasing sales but that requires aggregation in the market i.e. some firms need to merge or go out of business.

    This is pure speculation but I think their are new economies of scale because the retailing market has changed. It use to be that in order to maximise profit you need to have geographic depth but now with internet retailing you don’t need as much physical presence anymore so a few strategically located big stores, efficient supply chain combined with an internet presence is all that is needed to have same effectiveness.

  16. The simple solution is the online retailers will have a small physical presence in the capital cities for these purposes – fitting, exchanges, expert advice etc.  People can then buy in the store or online.  

    Alternatively, physical stores can approach good web outlets to go into partnership.  The physical store gets a kick-back from the online store for being their ‘face’ in that city and doing the leg work of customer service.

    The brick’n’click model has widely been discussed, as well as by DavidN in this thread.

    I have a few thoughts on current changes in retailing here
    http://www.macrobusiness.com.au/2011/09/the-creative-destruction-of-retail/
     

  17. Surely it’s a simple choice between two packages – one of just the panniers, and one of the panniers and the fitting service.  Given that you knew the probable difference in cost beforehand, and you decided the fitting service was of value, to knowingly use this service without intending to pay for it would fall under what I would consider theft.  So the dilemma, such as it is, is whether or not you want to consume resources provided by the shop without paying for them.
    Comparing two bricks and mortar shops, both of whcih offer the fitting service is to me somewhat different – the key difference being that if you don’t buy at the shop which did the fitting, at least you did not have the fitting knowing you would not be buying there.

  18. Having just about finished my Christmas shopping with well over half done online and prepared my Christmas ‘wish list’ for family with links to online stores a couple of things have interested me: 

    – Anybody selling anything, which requires some form of fitting/physical inspection will probably be able to keep a brick retailer model for a little while yet
    – It’s worth shopping around for different online stores. booko.com.au makes this very easy for books. I’ve purchased from about 5 different book sellers in the past week and haven’t purchased from amazon in years. Three different online kitchenware retailers were each better priced on different items. 
    – The above suggests that massive aggregators won’t always work – specialty retailers will probably be a better model 
    – The brick and click model with the physical face seems to be working for quite a few stores where there in a niche market and only have one or two stores in capital cities (photography and coffee machines are two examples I’ve used of late – purchased online and then picked up in person)  

    I’m no expert on the retail-supply chain pricing issues, but I wonder whether Australia’s relatively higher prices are simply because Australia are willing to pay more and so retailers and property developers have built a pricing/location/rent model based on that willingness to pay?

      In the mean time I’m happy to just keep doing all my shopping via ipad while sitting in bed….beats the crowds that’s for sure…

  19. It’s a pity I missed this post because this is a major obsession of mine. I shop almost entirely online for books and bike gear. The price difference is so extreme that I will often take a chance buying online even if I’m not sure of the parts or products. I have stopped browsing and trying things on in bike shops since if I have no intention of buying there, it just seems wrong to use them. I did try for a while to compare prices but soon discovered the bike shops can’t even buy wholesale for the price I can buy it online with shipping included. This scenario would seem impossible if markets were efficient and free. For instance, the information about how ALDI works was available long before they arrived in Australian, yet nothing like it was tried. Woolworths and Coles are almost identical in their operations and have secured space in all the convenient locations, operating a cosy uncompetitive duopoly for which until recently busy people had little alternative to. Their are parts of the retail sector that are close enough to  being competitive with online shopping, such as specialty I.T retailers. They run lean operations and offer no customer service apart from taking your money or excepting returns on faulty products. They cater to customers who know what they want already and have done their research online. This proves that it’s not the GST, labour costs or rentals. It does however prove that it is uncompetitive behaviour, collision in retail space control, a lack of innovation in the retail sector created by decades of protection and a large percentage of the population who are happy to pay for the massive margins wholesaler and distributor rent-seekers are getting. We get the retail sector we deserve.   Another feature of this problem is the failure of Australian business to run usable, up-to-date websites. I recently tried to buy a spare part for my 15 year old Toyota from a wrecker. It was a widely available part yet many wreckers don’t have any useful information online and don’t respond when you fill in request forms. The wrecker I did go to had moved locations without updating their website. So this would indicate that on the whole the web hasn’t arrived yet for most shoppers and retail businesses.

  20. On a slightly different topic, I came across an Australian website selling designer European homewares at a fraction of the price of all other Australian websites and retail stores. I emailed the online store and they told me that they buy in bulk from retailers in Europe who give them huge discounts on bulk orders essentially parallel importing the products and bypassing the third party Australian exclusive distributor. I can’t image they would have consent from the parent of this brand in Europe otherwise they would be buying wholesale from them. If I was the Australian distributor, I would not be happy having someone doing this. I would have thought the Australian exclusive distributor would be protected by IP laws and try and stop this business undercutting prices and bypassing them  essentially making the exclusive right not worth much at all…. Does anyone know anything about what protection the distributor has or in this day and age, does the distibutor just have to suck it up and accept they are going to lose business from parallel importing and let this online store just go about it’s business…

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