Retailers’ mark-ups under threat from online – SMH

Posted on May 24, 2011 by

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As a shopper, have you ever pondered what sort of mark-up the retailer has slapped on to the pair of Levi jeans or Adidas runners that you’re about to try on?

Turns out consumers reckon a 35 per cent mark-up by the shop would be fair in order to make a profit, according to a survey out today by the Australia Institute.

See list of mark-ups here

For many goods, though, the retailer’s take is often much higher than you think.

“In reality, the average mark-up for items such as clothes and shoes is 142 per cent, and around 40 per cent for popular online items like DVDs and music,” said Richard Denniss, executive director of the Australia Institute.

The boom in online retailing is well known, with the rise of the Australian dollar over the past year often cited as the main culprit as shoppers find cheaper goods accessible on overseas websites. Less understood, though, is how Australia’s high-cost retail sector is going to accelerate the flight to online shopping.

According the institute’s report, The Rise and Rise of Online Retail, a tin of Heinz baked beans costs 59 pence in Sainsbury’s in London, but $1.88 – equivalent to 1.23 pounds – in a Woolworth’s in Perth.

A pair of Camper Peu leather casual shoes runs for $US170 in the New York Camper store, compared with $290 – or $US305 – in Melbourne, the report said.

Those price differences aren’t necessarily price gouging, the report finds, but the result of Australia’s high rental prices and staff costs. The conclusion, though, is that those costs aren’t shared by online rivals, so the shift to internet shopping is only likely to increase.

“The advantage of online retailing is both the ability of retailers to avoid most of these costs combined with the highly competitive online environment driving down profit margins,” the report said. “That is, many customers are reluctant to leave one shop in search of lower prices elsewhere, but those same consumers are happy to click on a different link in the pursuit of even modest savings.”

Perceptions

Industry observers say consumers’ perceptions of the price gap and retail might be exaggerated by a misunderstanding of the difference between mark-ups and profit margins. Mark-ups, which are the difference between wholesale and retail prices, are almost always larger than the profit margin – the percentage of profit made on a particular item.

Even so, traditional retailers do have absorb – and pass on – additional costs of display, staffing and retail rents that upstart online retailers can minimise. Even price adjustments to account for a stronger dollar making imports cheaper are more costly for “bricks and mortar” outlets to make than simply adjusting the website price.

“The fact is, traditional retail is a very expensive way of delivering products to customers and just as digital cameras have decimated photo development labs, so too will online retail transform the way Australians shop,” Dr Denniss said.

The Australia Institute inferred the whole-retail price difference, or mark-up, by using industry data, Australian Bureau of Statistics national accounts data, and firm specific data.

“This data sheds light on the widely held misunderstanding that the major cost of purchases is related to the cost of manufacturing it,” the report said.

“In fact, the major costs of most retail products are related to the costs of shipping, warehousing, displaying, advertising and sales staff and retail rents.”

While the transformation of the industry may cost jobs, concern over employment was not a big issue with the respondents. About 85 per cent of the survey of 1411 respondents said saving money was their main motivation for shopping online with only 50 per cent saying such actions hurt local jobs.

Property costs

The report also identified the issue of the high price of real estate in Australia – echoing the residential property market.

“The highly concentrated ownership structure of retail property in Australia has resulted in a significant portion of the high prices charged by Australian retailers being acquired as rent by the owners of the retail properties,” the report said.

For example, Sydney-based Leasing Information Services recently said the total occupancy cost of a small Australian fashion retailer was between 17 and 25 per cent of gross sales, while the cost for fashion retailers in the US was about 7.6 per cent, citing data from the US-based non-profit Urban Land Institute.

Whatever the reasons behind the higher prices for goods sold in Australia, the momentum of web-based sales has only accelerated over the past year, stoked by the strong Australian dollar.

Online sales search giant eBay today said it was making it simpler for Australian consumers to find US and British-based sellers of products that are difficult to find in Australia, by giving them increased prominence in searches.

“We believe that making it easier for consumers to access eBay’s global product selection will improve their shopping experience and ultimately benefit local businesses selling on eBay.com.au by retaining Australian customers who might otherwise look elsewhere,” said eBay vice-president Deborah Sharkey.

The online retail industry is also attracting big local investors. Billionaire James Packer yesterday announced his company, Consolidated Press Holdings, would join New York-based Tiger Global Management and two other groups to pump $80 million into the daily bargain shopping site CatchOfTheDay.com.au and group buying site Scoopon.com.au.

Seek co-founder Andrew Bassat and founder of Gannet Capital, Glenn Poswell are also partners in the investment, which valued CatchOfTheDay at $200 million.

Read more: http://www.smh.com.au/business/retailers-markups-under-threat-from-online-20110524-1f1g7.html#ixzz1NF8vKUZ0

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