Economic Implications of Increasing Foreign Retailers in Australia

April 12, 2018
Editor(s): Deeksha Kapoor
Writer(s): Shirley Tang, Thomas Yu, Dennis Berner

Globalization, a phenomenon that has engulfed the entire world hasn’t left Australia untouched by its presence. It has significantly shaped and continues to reshape the Australian economy. By virtue of its controversial existence, it has often been a source of discussion, analysis and hot debate in the public eye. While it continues to essentially increase the interconnectedness and interdependence between countries and has led to a variety of benefits for us as consumers by giving us cheaper prices, a wider selection of international products, it has also resulted in one of the most troubling economic issues of our generation- the rapid increase of foreign retailers in Australia. This, in turn, has resulted in a variety of social and economic concerns and has become a point of heated debate amongst politicians and businessmen alike.

 

How do foreign retailers threaten domestic suppliers?

In recent years, momentous household brands like Pumpkin Patch, Masters, and Dick Smith have had it particularly rough, having to merge with other companies or even liquidate in some circumstances. While this can be attributed to poor business decisions and generic internal errors, it cannot be regarded as an insignificant side effect of more and more foreign retailers collaborating to open stores in Australia. Carefully analysis shows that there are three main issues that arise when such stores are on the rise.

The first problem with foreign businesses opening in Australia comes down to standard economics and the idea that in a market with two identical goods, people will always prefer the cheaper one. So, when a massive international retail chain opens in a small Australian town, the local Aussie businesses are going to have a hard time competing with the substantially lower prices of the international chain, resulting in fewer customers for the local business. All this in totality leads to the business becoming unprofitable and eventually shutting down.

The second problem is delivery, as consumers would nearly always prefer the quickest delivery businesses that can provide such a service are held in higher regard than businesses that cannot. As international retailers usually have the greater capital to spend, they can more easily invest in improving the delivery aspect of the business, giving them the ability to offer faster delivery services compared to local businesses, which will also lead to less consumers shopping at the now less efficient local businesses, potentially leading them to close.

The third and final problem is the issue of supply. International firms have access to international suppliers, allowing them to provide a wider range of similar products. This makes them more able to specifically tailored to the demands of consumers than merely offering basic goods. This offers them a competitive advantage over local firm offerings wherein local firms simply cannot match. Moreover, with more and more large businesses moving towards online stores, customers tend to gravitate towards these stores out of sheer convenience from being able to shop in their own home, causing them to shy away from the physical local retailers that cannot afford to open online stores.

Why can’t domestic retailers compete – why do these problems exist?

Analysing the reason behind why local businesses simply can’t match the prices of the foreign businesses essentially comes down to standard economics. To see this, one must look at the cost of production for any good in a market where there is both a local and a foreign retailer.  Due to the production in Australia being predominantly import based on the local firm, to create the product, the firm must import materials from overseas. This results in a substantial additional cost being added onto production in the form of the tariff, forcing the local business to increase the selling price of the good to be able to turn it into a profit. However, for the foreign firm, as they are already internationally based, they are inclined to produce the good overseas and can avoid incurring additional costs such as tariffs, allowing them to sell the good at a cheaper price to the Australian public while still maintaining a profit.

 

While this is a problem on its own, this issue only continues to escalate because local firms continue to lose customers. They start earning less income which ultimately leads them to be compelled to create even higher prices, ultimately losing consumers to the point where they must liquidate the firm. An example of this would be the retail chains Harvey Norman (local) and Amazon (foreign). After Amazon opened a warehouse in Australia, the large-scale brand could offer similar and in some instances identical products to Harvey Norman, and almost immediately, Harvey Norman saw a fall in annual visits to their website to about 2.7 Million, while Amazon’s website saw an opening of 3.8 Million visitors. Acknowledging future uncertainty, it is safe to say that the rising amounts of foreign retailers in Australia will result in some significant difficulties for businesses like Harvey Norman in times to come.

 

What happens when local firms cannot compete?

While a problem is generally seen as a ‘bad’ thing, it is important to see the specific factors that make it ‘bad’. In the case of rising foreign retailers, there are two major points of the issue which can be denoted as ‘cons’.

The first con is simply the idea that when a business shuts down people will be removed from their jobs and unemployment will rise. As previously discussed, when local firms are unable to compete, they will be forced to shut down, and all the people working at those firms will suddenly find themselves unemployed. However, local firms usually do not simply exhaust and close. They attempt to find ways to cut production costs to stay competitive and one of the easiest way to execute this is to cut wages or lay off workers entirely. An example of this is seen with Myer. For instance, to compete with foreign brands in the same market, found themselves laying off local employees and outsourcing the jobs overseas in order to be able to cut costs and decrease the selling price of their good. This sounds awful and rather is. Unemployment leads to a larger drain on the welfare system and generally decreases the living standards of a substantial proportion of the population.

The second disadvantage involves the concept of markets, specifically, the idea that it is important for a country to be somewhat self-sufficient. Essentially, if we as consumers only purchase products from overseas or from foreign retailers, local firms in those sectors will stagnate and will eventually disappear completely. While in the short term from a consumer perspective this seems irrelevant as we essentially get the same products for less money, it is, in fact, a major issue because if looked at in the long-term, in times of national crisis – or even in the event of another cold war, sanctions could be imposed on Australia that prevents trading with the foreign businesses that previously offered the cheap products. Once these businesses are taken out of the equation, consumers will suddenly find it very difficult to procure all the products, leading to the economy stagnating and possibly creating an economic crisis in the country.

Despite these issues, there is one major benefit that society gains from more foreign retailers and this benefit is substantial to make people consider the problems to be acceptable. This benefit is the conception that people will be potentially able to buy products for a cheaper price. Ultimately if things are cheaper, people will be able to buy more of them, leading to a rise in societal welfare, and generally increasing the living standards of nearly the entire Australian population. Despite this obvious benefit, however, it is important to remember the dangers that foreign retailers create and as such should still be treated as an overall problem.

How can Australian market handle the situation better?

There has been an ever-growing concern about the threat of the escalating number of foreign retailers in Australia on domestic producers.  The concern now spans across multiple industries and public sectors including construction, automobile, manufacturing and even agriculture where a gradual dominance by producers outside of Australia is becoming more prominent and is significant. One such instance is Australia’s heavy reliance on the World’s two largest online retail giants Amazon and Alibaba.

In response to the doubtful nature of Australian producers’ capacity to sustain their competitiveness and the concern for local suppliers who have a comparative disadvantage in producing many of the products pertaining to the above-mentioned industries, there has been calls to impose import tariffs and quotas to put a cap on the amount of imports Australia should permit. This is intended to ensure our domestic producers remain in the market at a competitive level and still be allowed to attain considerable gains in the form of their producer surplus.

However, for Australian consumers, import tariffs and quota which seek to push the market equilibrium towards a closed economy or Autarky state, and dramatically cut down their consumer surplus. In fact, the reduction in consumer surplus is expected to be of larger magnitude than the potential increase in producer surplus. Furthermore, producers are deemed to be producing more than the optimal quantity should they choose to be producing at the price that is above the cost of importing. Therefore, this brings into question whether government interference with market forces through means of the imposition of import tariffs and quotas (to protect the interests of domestic producers) will actually result in the society being better off as a whole.

The solution as to whether to limit the expansion of foreign retailers and entities and their competition for consumers with Australian producers may not be a clear-cut and definite one. Often protectionism is seen as stifling economic development yet after witnessing a number of Aussie retailers being forced out of business, the nation is leaning towards a greater tendency to react in the best interest of local producers.

Looking Ahead

The manner in which economies and corporations operate have seen dramatic shifts in the last decades.  On one hand, globalization has pushed companies to be more innovative with their business processes – leading to lower prices for consumers. It has also given countries a key to a vast network of international products and services that otherwise would not have available. On the other hand, globalization has forced many established brands such as Dick Smith, Pumpkin Patch and Masters out of the local market through intense price competition. The closure of these businesses has wide implications on domestic unemployment levels, causing a trickle effect on government policy decisions. Australian firms cannot compete in price, delivery mode and supply with established e-Commerce powerhouses, namely Alibaba and Amazon. Instead, local firms are forced to seek relief in the form of tariffs and quotas to remain relevant in the industry. An over-reliance on such reliefs would lead to keeping a comparatively lower consumer to producer surplus. The trade-off of globalization is opaque. With substantial potential ramifications, the Australian government faces sizeable challenges in guiding the country through the era of globalization.

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ, its Partners and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

Meet our authors:

Deeksha Kapoor
Editor

Deeksha is currently pursuing a Master of Management (Human Resources) at the University of Melbourne. She has a keen interest human resource management, economics and public policies.

Shirley Tang
Writer
Thomas Yu
Writer

Thomas is currently studying a Bachelor of Commerce (Finance and Management Major). He is interested in the world of finance and technology.

Dennis Berner
Writer

Dennis is in his second year of a Bachelor of Commerce at Melbourne University. He is majoring in Finance and Economics and has a passion for both disciplines.