Retail as a dying business model

Over the past few years Australia has seen a massive increase in online shopping in comparison to retail spending, with online sales now accounting for 6.8% of total sales in Australia and growing at a rate five times faster than traditional shopping. The results of this can be seen in the record-high retail closures – Dick Smith, Masters, Pumpkin Patch and others going under in 2016 alone. This has been attributed to the fact that with increasing property prices it has become too expensive for a physical store that is paying for employees and rent to compete with the relatively cheap cost of establishing a website and storing goods in a warehouse that only needs to be scanned and shipped before they are on their way to their destination. For example, JB Hi-Fi’s current cheapest 4K TV is a 40’’ Hisense model that costs $698 and has poor reviews – to contrast, Kogan’s (a brand that began and is currently maintained as mostly online-only) cheapest model is a 43’’ Kogan Brand model that costs $429 and has average reviews. JB Hi Fi could never close the $300 price gap due to the fact that wages are expensive (JB Hi Fi pays an average wage of $20 an hour to their part-time workers) and rent is of course also expensive to hold the huge floor space that JB Hi-Fi is known for. Whether JB Hi-Fi will go the same way as other electronics retailers is yet to be seen (they did post a $150 million dollar profit in 2016 so they’re probably going to be ok), but having products that cost around double the price of your competitors while also paying costs that the competition isn’t has not traditionally been a very successful business model. There is no reason for any retail business in 2017 to bother with a  physical storefront as the cost for a new business outweighs the benefit.

Of course if the trend of employees being obsolete continues (it takes far fewer people to manage a warehouse than a store), what does this mean for employment as a whole? Retail is the second highest industry in terms of employment in Australia behind healthcare, and if online retailers continue to grow at the rate they are currently growing at retail would become a mostly obsolete industry within around fifteen to twenty years. It is estimated that within twenty years it will be technically possible to automate between 1/3 to ¼ of all jobs in the Western world. This would leave millions of people unemployed, and retail is not the only industry that is seeing electronics take the role of people. Manufacturing companies in Australia are being beaten by both cheaper wages in third-world countries and the rise of automatic production. Electronic checkouts are gaining ground in industries ranging from supermarkets to fast-food restaurants to theaters as whilst they have a high cost currently they are still cheaper than paying multiple people $16 an hour. The question is, what does this mean for the people made redundant by rapidly-developing technology? Whilst high-end jobs that require a human touch will still exist, as well as tradespeople and other jobs that require reasonable assessment of situations, the fact is that an entire economy cannot exist around these sorts of jobs.

One solution could be a universal income – unconditional welfare for the unemployed that a person could actually live on rather than just scrape by on. This is currently being trialled by Finland, and was suggested by Democrat Senator Bernie Sanders over the course of the 2016 election. The idea of a universal income is inherently controversial because it is essentially free money to poor people. For Australia to pay the rate being trialled by Finland, the welfare bill would increase to 20% of the government’s spending, and as there are no results for to suggest that it has a positive effect on the lives of those who accept it there is no incentive for an Australian politician to waste time trying to implement it because it would not pass and Australia does not yet have the unemployment that other developed countries are experiencing. However if current trends continue this will not be the case for much longer.

https://www.theguardian.com/society/2017/feb/19/basic-income-finland-low-wages-fewer-jobs

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7 Comments

  1. Rather than provide the unemployed population an income, a better trade off could be paid community work? For example, providing a higher rate of unemployment income to individuals participating in government organised projects like cleanups and environmental awareness campaigns. This way, the government will still receive a return on the money they spend towards the unemployed.

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  2. Fantastic article Mitch, it raises a lot of interesting questions. The Year 10 Curriculum has actually changed recently to reflect exactly what you are talking about here – the obsolescence of the workforce. The crazy automation taking over so many industries (not just retail but accounting, lawyers, bankers and farmers) means that we are improving productivity, but at the possible cost of employment for a growing population. Has Australia (and other developed countries) shot themselves in the foot by offering such good working conditions that businesses are desperate to install machines to replace people? Or was this an inevitable shift in the allocation of resources, the result of a relentless development of technology? Where will the workers go when their jobs are no longer offered?

    Side note – check out the automation in the Amazon warehouse, but note that they still hire people! https://www.youtube.com/watch?v=cLVCGEmkJs0

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  3. I agree with your opinion. E-commerce is one of the leading trend for business model. From the decades, more and more companies choose to operate their business through internet in order to save operation costs. This leads to companies save production costs. It would improve the productive efficiency. This can help the businesses to manage their production with market demand. It will also improve allocative efficiency.

    Liked by 1 person

  4. I don’t think physical retail stores will completely be replaced as there are still benefits to shopping in person that shopping online can never provide. Yet the increase of of technology replacing workers is a real problem, business may be able to save on production and therefore produce more and improve the economy but if there are people that have no income it would ultimately cause major problems including increased crime and lowered living standards. Maybe a solution is to eventually automate everything and humans would just be able to not work and reap the benefits of the hardworking machines 🙂

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    1. That’s true! Physical retail stores and services also reflects the image of the business. It’d also mean more people will spend more time looking at screens than going outside 😦

      Liked by 1 person

  5. It may seem like a good idea to replace online stores with traditional brick and mortar stores, but with those you can see first hand the product you are buying. This is something online stores cannot replicate, so I think traditional stores will be around to stay for awhile.

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