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Farmers good, big retailers bad - could that really be true?

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Gittins: Local vs imported goods

When you get down to it, most consumers opt for lower prices over patriotism. So an increase in imports is our choice. Ross Gittins explains.

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As you shop, think about all the costs involved in getting a product to the shelves.

WHEN you buy something in a supermarket or a department store, how much of the price that you pay is the store's mark-up? And of that mark-up, how much covers the store's costs and how much is clear profit? Everyone has their own answers to these questions. But I suspect most of those answers are based on vague impressions and long-held prejudices rather than hard evidence.

When I was growing up, we were always hearing about the depredations of ''middlemen''. The poor farmers got terribly low prices for their meat and other produce, but by the time that produce went through many hands to reach us in the city, the prices were sky-high.

<em>Illustration: Simon Letch</em>

Illustration: Simon Letch

These days, we hear continually about the evil practices of the two big supermarket chains. They're busy screwing the life out of dairy farmers and other suppliers, just so they can use cheap milk and bread to lure us into their stores.

This may sound like a good thing for consumers beset by an ever-rising cost of living, but don't be fooled, we're told. The wicked retailers may be undercharging for a few staples, but they make up for it by overcharging for everything else.

Then there are all the people discovering from the internet just how much lower prices are in other countries. More proof we're being ripped off.

In the hands of the media, it's a morality tale. The farmers and manufacturers are the good guys getting squeezed; the big retailers and other middlemen are the bad guys raking it in and doing us down.

It would be good to measure all these impressions against some hard statistical facts - facts supplied by an article in the latest issue of the Reserve Bank's Bulletin, on which I'll be drawing heavily.

Part of the problem is our lack of imagination. Many of us have only a vague idea of the role played by the businesses that operate between primary and secondary producers and you and me.

Most retail goods - including food and non-alcoholic drinks, clothing, footwear, electrical equipment, furniture and home appliances, and motor vehicles, but not ''meals out'' or takeaways - are produced in factories, whether locally or overseas.

The basic cost of producing those goods includes the cost of transporting them to wholesalers' warehouses, plus import duty where still applicable. Wholesalers incur costs in storing goods and transporting them around the country to retailers, plus normal administrative costs. Retailers incur costs of rent, storage, display, finance and other costs.

Naturally, both wholesalers and retailers employ many workers to help them carry out their role, not of making goods, but of distributing them into hands of consumers across the nation. Indeed, the work of this ''retail supply chain'' accounts for about 7 per cent of the final value of all goods and services sold in Australia (gross domestic product) and about 10 per cent of total employment. So one worker in 10 is employed as a supposedly unproductive ''middleman''.

On average, the manufactured cost of the goods we buy accounts for about half the retail prices we pay. About 40 per cent of the prices we pay covers the costs incurred by wholesalers and retailers, with wage costs accounting for a bit less than 20 per cent and other costs for a bit more than 20 per cent.

That means the wholesalers' and retailers' net profits account for only about 10 per cent of the prices we pay, with about three-quarters of that going to the retailers.

Of course, these overall averages differ for different products. Whereas the gross profit margin (that is, before allowing for expenses) averages 50 per cent, it's closer to 60 per cent for clothing and footwear, a bit over 50 per cent for electrical equipment, a bit under 50 for furniture and appliances, about 40 per cent for food and drink, and just 25 per cent for motor vehicles.

Gross margins also vary according to the size of retail outlets and the speed at which stock turns over. Margins are higher in boutique stores than department stores, and higher in small convenience stores than big supermarkets, where the profit-making emphasis is on rapid turnover rather than high margins.

The Reserve Bank's detailed examination covered the figures for the nine years to 2007-08, though other checks suggest they have not changed much since then. It found the production prices of locally manufactured goods rose quite strongly over the period. As well, the wage rates and other costs paid by wholesalers and retailers rose by more than 3 per cent a year.

Even so, the final prices of retail goods rose by only about 1 per cent a year. So much for the notion that retailers have been getting greedier.

But how have they managed to turn costs rising by 3 per cent or so a year into retail prices rising by 1 per cent and do so without suffering any squeeze in their net profit margins?

Because, though business people are always assuring us there's nothing they can do but pass higher costs on to us, in truth there's a lot they can do.

One thing they've done is increasingly substitute cheaper imported goods for ever-more-expensive locally made goods. If that worries you, have a look at my little video on the website or iPad app.

The other thing they've done is raise the productivity of their labour, with the volume of their sales rising a lot faster than the total hours of the workers they employ. They've invested in labour-saving equipment.

And note this: why have they been working so hard to limit their price rises? Because of the power of market forces - in this case, customers who don't like paying more.

Ross Gittins is a senior columnist.

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218 comments

  • Heard the story of the Humble Pumpkin Ross? One major retailer was flogging the gourd at $3.98c a Kilo in Rockhampton yesterday, a good size Kent weighs about 6kg = almost $24 a pop. Not bad Bikkies when the singular grower, producer, packager and transporter is the $1.20 kg price taker and not the price setter.

    Commenter
    Geronimo
    Location
    Yippee Yi Yo
    Date and time
    July 11, 2012, 7:46AM
    • So the grower takes it off of the ground, cleans it, packages it, loads it on his truck and drops it off at the back door of the supermarket where a staff member meets him and then places it on the display? And he can't choose the price to sell it for because the supermarket decides it and there is absolutely nowhere else to sell pumpkins? It is precisely this lack of imagination that Ross is trying to highlight. Did you read the article?

      Commenter
      Simmy
      Date and time
      July 11, 2012, 8:30AM
    • Yes, the major supermarkets are not always good at providing a low price. They invented the concept of "loss leaders", but if there's a product where they have a local monopoly, they charge like a wounded bull. I shop for fruit and veges at a local greengrocer and sometimes compare the supermarket prices with them. I find that, although the supermarket stuff usually has better presentation, it's also usually dearer - sometimes amazingly so.

      And, of course, there is the fact that the major supermarkets squeeze their suppliers. Many examples have been discussed recently, so I won't mention them. One of the prime methods of squeezing them, though, is through the pressure of imports. I try to avoid buying food imported from Asia, because I'm not confident of how pesticide and herbicide use is managed, let alone hygiene conditions on the floor of processing factories.

      Finally, I'd like to point out that, under capitalism, competition and monopoly are not in contradiction. Competition produces monopoly, since the result of competition is to drive the less successful operators out of the field. Regulation may put a stop to it at oligopoly levels in some fields, but the result is a set of conglomerates which expand sideways into other markets. In the last 20 years, globalisation has opened many markets to global rather than merely national competition, but the process of monopolisation doesn't cease. Instead, it now works at a global level.

      Commenter
      Greg Platt
      Location
      Brunswick
      Date and time
      July 11, 2012, 8:42AM
    • Ross seems to have missed the significant point that when you buy online from an overseas retailer, the goods would have seemingly already passed through the hands of all of these "middlemen", and incurred all of the costs he describes. Often they have travelled from their place of manufacture in Asia, to the US or Europe, from where they are dispatched back to us half way around the world again. In addition to all the wholesale and retail costs, you add on an (often considerable) charge to have it shipped to your house (considerably more expensive than freighting a consignment of such goods directly from the manufacturer, into the country), and the goods are still often 30, 50, 60% cheaper.
      Sure, go ahead, add the GST if you like but they will STILL be cheaper! I think most of us are not really complaining sooo much abut the price, but more about what you get for that extra cost which, in Australia would appear to be: rude or incompetent or totally disinterested sales staff; frequent stock-outs; lack of product range; insufficient sales staff; and inadequate after-sales service.

      Commenter
      Alx
      Date and time
      July 11, 2012, 9:20AM
    • Greg Platt, you need to read the first chapter of a basic economics textbook. Competition and monopoly are in contradiction.

      Commenter
      Brettr
      Date and time
      July 11, 2012, 1:04PM
  • What middle men? The big two buy direct where ever possible.

    Commenter
    Beetle007
    Date and time
    July 11, 2012, 7:49AM
    • They are the middlemen....they get it from the supplier to us :/ working with these big two over the past 5 years has shown me the scope of the "behind the scenes" side of these businesses. Multimillion dollar rents for distribution centres scattered around every capital, contracts with freight and logistics services, wages just to name a few added costs.

      how often is fruit on the side of the road cheaper? or better quality? I thank god for the clout of these big chains and their negotiating strategies - afterall, noone would be in business if they were not making ANY money.

      Commenter
      Be
      Location
      sydney
      Date and time
      July 11, 2012, 8:34AM
    • As a supplier to supermarkets & other large retailers over nearly 40 years the margin expectations have increased enormously. Back in the mid to late 70's the supermarkets would place a 20% to 30% margin on their goods. When a product was on special they would look at 12% to 15%.....even lower on very fast moving products like baked beans etc. Now they want a minimum of 50% GP plus trading terms of another 10% to 20% and when they have a special it is up to the supplier to take the pain. So now we have a situation where the large retailers make 60% to 70% gross on their stock with the suppliers making 20% to 30% gross. After cost of business supplier are lucky to come out with 5% net. The rules are "We make a profit, we dont care about your brand or how much you promote it. You can't make a profit & if you do we will copy the product & put it under our own label". This is why suppliers & manufacturers are going out of business.....nothing to do with whoever is in government. The ACCC is a toothless tiger. It will be an interesting world in 20 more years.........I doubt whether brands will exist.

      Commenter
      Been There
      Date and time
      July 11, 2012, 8:52AM
    • @ Been There. I agree with you. It is up to ACCC and it is up to suppliers to come forward to the ACCC. It's almost astounding how ACCC has let two big conglomerates hijack such a big part of the economy.

      Commenter
      Cynical Observer
      Location
      Sydney
      Date and time
      July 11, 2012, 9:36AM
    • It's called a duopsony and it's just as dangerous as the duopoly at the other end.

      Commenter
      Mrs P
      Location
      Melbourne
      Date and time
      July 11, 2012, 10:07AM

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