Profiting from poverty

The new federal government has been remarkably silent on the state of the economy since winning office. I suspect most Australian business leaders are now simply relieved that the relentless media reports of “economic crisis” have ceased, and are thankful that the quotes are now being turned back, both economically and nautically.

In this void of economic discussion, the Productivity Commission has released important research into the impact of ageing on the Australian economy and workforce. The Productivity Commission is projecting that labour productivity growth is likely to average 1.5% from FY2013, and that real disposable income growth is likely to be 1.1% per annum, rather than the 2.7% Australia has managed on average over the last 20 years.

Aust Productivity commission report into aging 2013
Australian Productivity Commission report into aging 2013

The reasons are related to population demographics, and the fact that while Australia’s population is growing due to our current high immigration levels, it is not growing anywhere near fast enough to slow down the rapid ageing of our population. Health and welfare cost increases are being projected to require an additional 6% of GDP over the next 50 years, purely as a result this demographic shift.

At the recent annual dinner of the Australian Chamber of Commerce and Industry, Tony Abbott outlined his government’s immediate business priorities, describing his paid maternity leave initiative and 24 x 7 private childcare as key reforms for improving workplace productivity and overcoming the shrinking workforce.

Tony Abbott opened his speech with his economic vision, saying that “You cannot have strong communities without strong economies to sustain them and you can’t have a strong economy without profitable private businesses.” He later claimed that “Almost everything this government does is directed towards making doing business easier – because that leads to more jobs, higher wages and greater prosperity.”

In terms of the scale of the workforce supply challenge that Abbott is claiming to address, the Productivity Commission report indicates that in 2012 approximately 14% of Australians are 65+ years old. In 2050, 20% of the population is projected to be 65+.

According to ABS employment figures for August 2013, the average number of hours worked each week by Australians was 40 hours for males and 31 hours for females. These hours are almost identical to the figures from 1990, and have been steady every year in between. It is worth remembering that modern formal child care arrangements and funding were introduced in 2000, and appear to have had no noticeable effect on hours worked for either females or males.

While the new federal government’s economic policy trajectory is now starting to move beyond three word soundbites and marketing fluff, it is becoming clearer that deflation and economic stagnation are starting to seriously undermine the economic policy foundations of “small government” trickledown economics in other countries.

Japan has faced many years of deflation and economic stagnation while dealing with the social problems caused by a rapidly aging workforce. In many ways, Japan is already experiencing the dire economic scenarios projected by the productivity commission for a rapidly aging Australia.

According to OECD research, the average GDP produced per hour worked in 2012 was $40 USD for Japan, $53 USD for Australia, and $62 USD for the US. To put that into context, Germany achieved $58 USD and France $60 USD.

The economic pain in Japan has finally generated a willingness to address structural economic issues, returning ultra-conservative Shinzo Abe as prime minister to carry out sweeping economic reforms. Those reforms have included large rises in the minimum wage, arm twisting businesses to pay their employees much higher wages instead of hoarding profits, and using quantitative easing and other measures to achieve a huge devaluation of the Yen.

Abe expressed the “conservative” shift in economic policy quite bluntly, saying that “I don’t buy the concept of corporations against individuals. Many people work at companies to make a living. If revenues rise at corporations, they can share it by raising wages”.

The fundamental premise behind Japan’s conservative government policies is simple. Japanese businesses will not hire people or invest when consumer demand is not high enough to generate a return. Higher levels of consumer spending create higher revenues for businesses, and generate more tax revenue to pay down debt and fund government services.

Japan’s situation is particularly interesting because their highly educated workforce has lived with an incredibly low minimum wage for decades, equivalent to roughly $8 AUD per hour. Earlier in 2013, even Thailand increased their minimum wage to roughly $10.50 AUD per hour. The Japanese minimum wage is so low that citizens can earn significantly more than the minimum wage by simply not working.

While workforce poverty is nothing new, it is starting to become embarrassing for a number of G20 nations. It is now becoming quite clear that low US minimum wages have led to sharply increased demand for US government welfare, and that many of the largest US corporations are the direct beneficiaries of that welfare expense.

In a recent Berkeley University research study, it was estimated that roughly 73% of American welfare recipients are members of “working families” whose household income is simply not high enough to cover their basic life needs.

Berkeley University estimates that the US government provides $7b each year in welfare assistance to families of workers in the US fast food industry, because their wages are too low to meet their most basic needs. This is effectively an industry wide wage subsidy to the highly profitable fast food sector, as more than half the families of US fast food industry workers (working 40+ hours per week) currently receive direct government welfare to provide for their most basic needs.

The health impacts of US “food stamp” programs have also been dramatic, with cheap junk food often the most affordable option for welfare recipients, which has been linked to dramatic increases in obesity and diabetes rates amongst working families on the minimum wage.

Bloomberg - US Food Stamp enrollments
Bloomberg – US Food Stamp enrollments

A number of the largest junk and processed food manufacturers are also aggressive lobbyists for the expansion of the US “food stamp” program. Kraft has acknowledged that roughly 12% of their revenue comes from US “food stamps”. Yum foods, who operate KFC and Pizza Hut, have unsuccessfully lobbied for many years to be approved outlets for food stamp spending.

The net effect of these long running US policies has been a shift in costs, from private sector wages to direct government welfare programs, and ultimately to government health programs. Despite the well established nature of these arrangements, they are now starting to generate highly negative social media coverage, and impact on the image of some major US corporations.

Walmart is estimated to receive 18% of all US food stamp spending, which equates to roughly $14b per year, with the average Walmart employee estimated to earn $18k per year – a little more than the US poverty line. One Walmart store recently attracted negative publicity when it was discovered that their employees earn so little that they were unable to afford food for Thanksgiving, and were begging for charity food donations from their colleagues and customers.

McDonalds also recently faced social media ridicule when their HR department advised an employee struggling to pay bills to enrol in government welfare programs and find a second full time job.

Consumer spending makes up roughly 66% of US GDP, and is currently growing at an anaemic 1.5% per annum. Perhaps it shouldn’t be terribly surprising that the US federal government is attempting to lift the minimum US wage to $10 USD per hour, justifying the move based on projected welfare savings and increased consumer spending.

If anything, the last 20 years of government policy in Japan and the US have been the golden years for trickledown economics amongst political parties and business lobbyists, and have enabled the economic analysis of the effect of low minimum wages on national economic performance.

Australian business leaders should be focusing on improving business productivity, rather than simply measuring wages. Our workforce is rapidly aging, and retention and retraining of employees should be a critical priority for many businesses. The lessons from the decades of low minimum wages in Japan and the US are only now becoming clear, with corporate dependence on welfare spending emerging as a very serious political issue.

Death of the retail salesman

2013 has been another tough year of transition for many retailers, with major Australian retailers such as Billabong, Lisa Ho, and Payless Shoes all paying a high price for poor management decisions. The rising volume and value of e-commerce transactions has started to impact the retail property landscape, and promises structural change and pain for many retail property owners.

Shopping is clearly an essential part of modern existence, but then so is putting out the bins for council recycling. Necessity clearly isn’t enough to generate retail enthusiasm and profitable repeat business in a retail landscape overcrowded with options. So retailers stuff our letter boxes and inboxes with discount offers, putting considerable effort into convincing us to merely visit their virtual and physical stores.

The slow motion train wreck of the 2013 election campaign has already been widely blamed for poor retail spending. As you might expect, the National Retail Association and the Australian Retailers Association both jumped on the latest ABS retail figures to claim that confidence and retail sales were already showing signs of improvement due to the change to a stable, business friendly federal government.

ABS Retail Turnover Aug 2013
ABS Retail Turnover Aug 2013

These attempts by retail lobbyists to link poor retail performance with election campaigns certainly generate a lot of media reporting, but fall apart under scrutiny.

Australian Bureau of Statistics retail sales figures have shown that retail spending has been trending sideways now for most of 2013, after solid growth in 2011 and 2012. August 2013 figures show very flat retail spending across most product categories.

Australian’s were inundated in 2011 and 2012 with almost non-stop media speculation of the imminent demise of the Federal minority government. Australia has effectively endured a three year long election campaign. Strong ABS retail figures for 2011 and 2012 contradict the theory that constant media reporting of government instability and negative electioneering have a huge impact on retail spending.

An economic analysis by Goldman Sachs published in 2013 looked at the impact of Australian federal elections, and found that election campaigns actually lift retail spending, with a decline usually occurring immediately after an election.

The election campaign with the clearest post election boost on retail spending was the 2007 election, where Kevin Rudd deliberately provided cash handouts to Australian families, in an attempt to pump prime the economy in the midst of the global financial crisis.

Goldman Sachs - Effect of Election Campaigns on Retail and Consumer Confidence
Goldman Sachs – Effect of Election Campaigns on Australian Retail and Consumer Confidence

In case you were wondering whether it matters which political parties are involved, in October 2007 when John Howard set the election date, retail lobbyists warned that sales of household goods would dry up, or at best be delayed during the election period. With the luxury of hindsight, we can now see that the ABS figures for November 2007 household goods retail spending were strong both before and after the election.

Politicians and election campaigns are clearly not the core issue facing struggling Australian retailers. Many of the key problems facing Australian retailers are self inflicted, and related to a lack of innovation.

Inside Retail recently rated Big W, The Iconic, Sportsgirl, and Deals Direct as the top Australian e-commerce sites, and eBay and Amazon as the top international sites servicing Australian customers. Woolworths proudly announced in their recent corporate results that Big W is Australia’s largest domestic online retailer, with 42% growth in online sales in FY2013.

Most Australian retailers are however still just operating on a small scale online, using a modern version of catalogue and mail-order retailing.  It appears that we are however finally experiencing a period where major Australian retailers are implementing serious e-commerce capabilities.

Woolworths is projecting that online sales for Big W will reach $1b in FY2014, or roughly 22% of revenue for the division. This target is ambitious given their previous performance online, and shows enormous optimism. It is comparable to the online revenue benchmarks being achieved by top performing major bricks and mortar retailers in the US, such as Neiman Marcus. As a point of comparison, JB Hi-fi, Specialty Fashion Group, and David Jones all achieved online sales of less than 4% of their overall revenue in FY2013.

In terms of the transition to e-commerce revenue streams, major US bricks and mortar retailers are typically three to five years ahead of major Australian retailers, and have already substantially re-engineered their businesses to place e-commerce at the centre of their customer offering. There is widespread deployment of “click to collect” sales models, in-store purchasing of out of stock items, and even same day delivery in major urban areas.

In the US and China in 2012 and 2013, Kantar Retail pricing studies have shown that in-store prices for some product categories are already considerably lower than online prices. Bricks and mortar retailers are already taking advantage of the many opportunities they have to sell additional high margin products to a person who is in-store, allowing them to reduce prices below levels achievable online. In some cases retailers are already systematically undercutting their own online prices for their in-store offerings.

Mobile phone technologies are now also offering major new opportunities for e-commerce to occur in real-time wherever a customer might be. PayPal has been attempting to shoe-horn their way into shopping centres for some time now, and has recently continued that push with an interesting technology called Beacon. Beacon relies on a PayPal app being installed on a person’s phone, which then automatically communicates the shopper’s details to the retail point of sales computer system when a person enters a store.

PayPal’s new concept obviously creates the potential for creepy new invasions of personal privacy, while also offering new sophisticated customer service opportunities for businesses. The concept allows for customers to automatically “check-in and pay” by simply walking into the store. The pitch to consumers is “No cash, no cards, no signatures required”. It could perhaps just as easily be “Buy stuff without dealing with pesky staff”.

Samsung POS display
Samsung Australian POS display – source: Current.com.au

Not every in-store innovation is quite so intrusive or high tech. Samsung recently received a number of Australian industry awards for their in-store point of sale marketing.

Rather than relying on stunts or complex technology, Samsung showcased product ranges in dedicated displays, with strongly themed and relevant multi-media explaining the “story”.

According to Samsung, this lifted average sale price, and reduced the need for discounting. When a store is busy and customers can’t find sales staff, “it’s the dynamic point of sale material that does the silent selling”.

Retailers are clearly not the only businesses that are facing a bumpy transition to a more e-commerce focused world. But retail leaders have traditionally achieved business growth via opening new stores, while running very labour intensive operations. The future returns and viability of these traditional retail strategies are far from clear.

The Internet and powerful mobile phone applications have already had major impacts on suburban and inner-city lifestyles. Customers might not always be right, but they need to feel they are the centre of retail attention. Retail leaders should re-build their offerings around the changing lifestyles of their customers, and focus on embedding innovation into the core of their businesses.