Both store-centric retailers and goverments need to accept that consumers are pushing sales online. Get used to it, he says

Both store-centric retailers and goverments need to accept that consumers are pushing sales online. Get used to it, he says

By Nathan Field*

On a recent US holiday, my wife and I found ourselves hunting for an Apple power cable in a Best Buy store (think of an aircraft hangar-sized Dick Smith).

When a sales assistant led us to the right section, we balked at the US$85 ($108) price tag, since we only needed the cable for a few weeks.

The assistant then whispered a solution - as long as we kept the box and the receipt, we could use the cable for the duration of our road trip, then take it back to any Best Buy store for a full refund.

Perfect, we said, and hurried to join the long checkout queue.

But after a few minutes of slow progress, we realised we'd joined the returns line, chock-full of people doing exactly what we were planning to do in three weeks' time.

The checkouts were on the other side of the store and they were virtually empty.

The experience drove home just how tough it is for traditional retailers to compete in the internet age.

It's often said that stores like Best Buy are turning into show rooms for Amazon but it's even worse than that.

Customers can not only sample a product in-store, they can take it home, make sure it works to their satisfaction, then claim the refund and buy it cheaper online.

No wonder Best Buy's share price has fallen 33 per cent over the past year.

And it's not just Best Buy finding things tough - electronics retailers around the world have been suffering from the rise of online competition.

The previous number two in the US, Circuit City, went bust in 2009, Dixons in the UK has been furiously rationalising its network, and earlier this year, Woolworths announced plans to close up to 100 Dick Smith stores in Australia and New Zealand.

There's not much sympathy out there for retailers like Best Buy.

Consensus opinion seems to be that they're out of touch with changing consumer needs, much like other big-box casualties such as Borders and Virgin Megastores.

Having well-stocked locations and knowledgeable staff are no longer the competitive advantages they once were.

The new generation of customers expects to milk those services for free and the retailer who invariably rings up the sale will be the one with the best price.

Best Buy argues, with some validity, that Amazon has an unfair price advantage because it doesn't collect sales tax in many US states.

Amazon has been running around striking deals with these states, using jobs as a bargaining chip in order to preserve its tax exemptions.

But once the sales tax arbitrage is over, it's inevitable that some of Amazon's price advantage will disappear, especially with shipping costs on the rise.

So will a level playing ground revive Best Buy's flagging fortunes? Not necessarily.

Amazon's competitive advantage isn't totally based on avoiding tax.

It also has convenience and economies of scale in its favour, not to mention a remarkably patient shareholder base that allows management to pursue top-line growth at the expense of profits.

To compete with a thin margin beast like Amazon, Best Buy needs to think outside the box.

It's certainly trying - closing down large stores, boosting its online offering, rewarding its best customers - but judging by the ugly share price action the market doesn't think it's moving fast enough.

New Zealand retailers are facing similar challenges, and like Best Buy, they're pointing the finger at the politicians.

They argue that because consumers don't pay GST on imported online goods under $400, the system isn't fair and equitable.

However, lowering the threshold to include every online purchase is likely to be both fiddly and costly.

And even if a new collection system could be implemented effectively, it wouldn't stop the march of online retail.

Arguments about the unfairness of online competition are taking place the world over. It seems like a losing battle.

Ultimately, store-centric retailers are going to have to deal with the fact that consumers, not governments, are pushing sales online.

It's a bitter pill to swallow for those who've invested in a physical footprint, but crying foul isn't likely to win any customers back. Accepting that the retail landscape has changed is the only way forward.

----------------------------------------------------

Nathan Field is a senior equity analyst at Gareth Morgan Investments. The views in this column are his own.
This column was first published in the NZ Herald. It is used here with permission.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

14 Comments

Comment Filter

Highlight new comments in the last hr(s).

nup

no, just need to keep the Government out of it

No, best thing that has happened in retailing.There is nothing you cant buy online........and its cheaper 

No, best thing that has happened in retailing.There is nothing you cant buy online........and its cheaper 

Buying on line should be cheaper in the same way that  mail order through catalogues used to be.  It isnt as much fun for most people ( shopping is still the major recreation in the Western world ) , you cant be quite sure what you are getting and the gratification is delayed for days or weeks depending on where you get it from.
In addition on line retailers employ fairly unskilled labour ( packers ) and rent warehouses instead of high street space. Their costs are lower. It isnt exactly cost free to get someone to a web site but probably cheaper in promotion cost than getting them to a store.
In the end the chips will lie where they fall and consumers will vote with their feet and their wallets. Retailers will toughen up on returns if they believe lots of customers are just trying stuff out before they buy on line ( I would never have conceived of anyone doing that, its close to theft ) and insist customers demonstrate a fault and then only provide a replacement.
What we cant allow is for the playing field to be tipped towards on line by exempting overseas retailers from GST. One of the side affects of the GST increase may have been to push the size of the benefit beyond a tipping point that will severely affect the tax base. It is probably one of the reasons  GST revenue is down.
It may be fiddly to collect GST on every transaction but it will have to happen. Almost all purchases are on some form of card which generates an electronic record. Cant be too hard to make the card companies add 15% and pay it to the Government.

The New Zealand tax base is in terminal decline so something will have to happen eventually.
1. GST- going up to 15% was really dumb. GST is not a consumption tax, it is a transaction tax. Taxing transactions is really stupid if you want people to transact- which we do- that is how economies work. Keep the rate low enough and maybe people will undertake transactions in such a way as to pay it. Keep raising it and people will avoid it as much as they can.
2. PAYE is not just your personal income tax it is also kind of a tax on emplying people. Afterall as an emplyer I am the one who has to hand it over to the government. So what do I do. I contract out of that role- temps, offshore, outsourcing.
3. Corporate Tax- What happens when everyone starts acting like a corporate - offshores income, drives down taxes being paid moves more and more income into capital gains- not taxed. There are a million ways and they will start to drill down to SMEs more and more.
So where will the money come from?
It will have to come from spreading the rack off of tax more thinly but over more things.
PAYE will have to come down- but maintain or rebuild its progressive nature
GST will have to come down to 10%- basically it will compete with the courier cost of delivery from offshore- although I am sure that corporates are going to do an Amazon and fulfil onshore but claim the revenue offshore thus the consumer avoids the GST and the corporate avoid the corporate tax.
Financial Transactions will have to be taxed- what is so special about financial transactions anyway- needs to a  little bit per transaction- not too much- all taxes create distortions- the idea is to keep them at a level that does not upset things too much.
Tax Land- It will happen- why- because it cannot be offshored, you can find it, you can take it if tax not paid
Taxing work but not inherited wealth is a bad end for New Zealand- it is what many people came here to avoid and to challenge.  The British do it and look what is happening to them.
 

GST was SOLD to us as a consumption tax - and if we say it enough, maybe we will believe it. But in my view it is better understod if you call it a transaction tax. It is not a bad thing to look at it in these terms, not right or wrong. It is just that if you do view it as a transaction tax it says what it is and is more easiliy understood. It taxes transactions in New Zealand. It does not tax consumption in New Zealand. A simple example. I buy a book for a Kindle on Amazon offshore and I consume the book i New Zealand but it is not captured by GST because the transaction did not happen here. Hence it is a Transaction tax not a Consumption tax.
These things are happening now so it is not really about me being right or wrong , more about being able to see what is happening now.
Offshoring will increase- redusing our tax take from PAYE
GST- consumption is offshoring- reducing tax take
Companies are creating structures that onshores costs but offshores profits- reducing tax take
Financial transaction taxes - will come
Land tax will come- because more and more of the land will be onshored re costs and offshored re profits.
GST is a dangerous tax- rates keep going up- death by a thousnad cuts. It is a tax on transactions - on doing stuff in NZ within the existing legal environment.
Consultants are offshoring- accountants are doing it now- sending work to Sri Lanka and India etc. So PAYE is reduced.
Yes Land tax is a money grab- that is what tax is- it is a money grab- governments take what they can get and what they can get away with. All I am saying is that the taxes that used to work for Governments are less effective and others will be found.
My other point is that the current taxes are distorting because they are allowed to get too high as revenue is hidden/transfered.
Keep raising the existing taxes are much worse will happen.
Already NZders cannot compete with offshore buyers
 
 
 
 

Currency changing is currently taxed by rent seeking the banks at a very heavy rate- maybe we would be better off if the government did it??

GST is not necessarily the driver of purchasing items online offshore - but price certainly is.
 
I recently had occasion to purchase a new two speed record turntable for IMU calibration purposes.
 
In New Zealand three different vendors of the item I wished to buy all offered it at NZD ~749.00.  Ring pricing? - I have no idea.
 
Checked Amazon in the States. Same item  USD 219.00 + USD 100.00 courier delivery. NZD cost ~389.00 after Paypal charges etc.  Landed in NZ four days after order was placed, from New Jersey. GST exempt under current regulations.

And if 15% GST was added on, still would get roughly $300 off the $749 cost.
The equation would change from:
Should I spend $389 online or $749 locally to
 
Should I spend $449 ish online  or $749 locally
 
Yah. Adding GST to that transaction would certainly push you back to the local retailers....Not.

I agree entirely that it is the end price that matters. To the extent that GST is the difference it does not seem quite cricket. When it is just price gouging onshore then consumers should certainly buy direct from offshore.
That is the beauty of the net in that it does lead to greater efficiencies as it forces the whole supply chain to be as low cost as possible. If it is cheaper to hold stock for the world in one place and courier everything one unit at a time than send whole container loads by ship to NZ then that is what should happen. With something specialised like the turn table the single unit shipment is probably more efficient. With something in wide demand like the ABs world cup jerseys you would have to think bulk supply should be cheaper.
 
With regard to Plan B's point about local fulfillment and offshore charging, I think that is probably already happening. Google effectively do that with their advertsing revenues and it wont take long for most businesses who are importing to figure out they can either undercut or add 15% of retail to their bottom line.
 
I do hope the Government will do something about this in the budget. If they dont their revenue forecasts will be pipe dreams.

Google Ad words etc have taken a huge amount of NZ advertsiing spend.
Amazon has taken a huge amount of NZ Book Sales offshore- this will only increase as more and more books are electronic only
Itunes has taken huge amounts of music sales offshore
Clothes sales are increasingly going offshore
Consultants such as accountants are moving more work offshore
More and more of our large companies and brands are owned offshore using tax deductable debt instead of local equity.
This is one of the reasons our tax base is under sustained attack. None of this will ever come back- in fact it is one way traffic- globalisation will mean that there will probably be 2-3 suppliers of Music, Movies, Books, - they will have 80% of the market etc for the whole world.
Mre and more things will move the same way. It is an amzing change.
 
 

There's a new Warehouse Red Sheds store being built not far from where I live in Auckland (Royal Oak) when there are already two fairly close (Balmoral Road and Newmarket). Doesn't seem like a very sensible business strategy in the internet age.

Plab B is correct to say that more and more local purchases are currently outside the scope of NZ tax but that is not inevitable. It is a choice the Government makes because it believes the cost of collecting tax on lots of small transactions is too great compared with the revenue.  They are wrong.
That thinking is rooted in the past where they were contemplating a few bits and pieces being imported by a few individuals. It will increasingly become the norm.
It would be the easiest thing in the world to make the card companies collect the GST on any transaction where the proceeds finish up overseas. They will find a way to do it quickly enough if they are responsible for paying it in the first instance.
Any transactions where the purchaser feels the GST is not payable would be subject to a refund.
The tax take would be substantial, even if it only applied to goods bought in from overseas where the total is below the $400 threshold. There is no logic in that.