The uneven effects of the high AUD
The Australian dollar has stabilised at near parity with the USD. This gives some benefit to traditional retailers, whose goods become cheaper, but overseas online retailers get a much bigger advantage because all their costs are now in a weaker currency; local retailers still face AUD costs like rent and wages. Many Australian business will be forced to react; some will turn this situation to great advantage. The internet and the AUD give as well as take.
(based on an article published on tim-richardson.net October 2010)
The simple points are:
- Exporters and local manufacturers are under pressure from the expensive AUD; importers should benefit.
- Exporters and local manufacturers are under pressure where there is an substitute or competing offer.
- Australian consumers will find their AUD goes further. But what effect will this currency appreciation have on online vs traditional retailing? I think the effect will be quite strong.
An imported product sold in a traditional retail outlet has a lot more AUD input cost than a product an Australian consumer buys online from an Australian website (lower overheads), and almost no AUD input if bought from an overseas website.
A product sourced in shelf-ready packaging from China that costs $1 ex-factory will end up on your supermarket shelf for about $5, typically.
Consider that nearly all of the $4 difference is Australian dollar costs: GST, wages, rent, domestic transport, advertising and covering interest and shareholder payments: these are big chunks of costs for the Australian retailer and importer (this is also why the loss of manufacturing jobs in Australian is not as devastating to the economy as it may seem: there is a lot of Australian added-value regardless of where something is made). The 80% of the cost price denominated in AUD won't change much because the AUD gets stronger. Possibly the inflation pressures which are linked to the same fundamentals behind the high AUD will even make these costs worse (for example, very high employment in Australian may push wages up). If this product can be sourced overseas, the high component of AUD costs starts to make traditional Australian retail look like an Australian manufacturer.
Another factor favouring overseas online retail is GST. A consumer doesn't pay GST when importing items for personal use below the $900 threshold. Shipping costs are cancelled by avoided GST for many items above around $250.
A Hong Kong-based retailer of consumer electronics also has to pay rent, wages etc, but not in AUD. Nearly all of its costs are in HKD, USD or CNY (and HKD and CNY are basically fixed to the USD anyway). So these overheads become less in AUD. The stronger AUD affects nearly the whole price, so the cost price advantage over Australian traditional retail will only grow.
What can Australian business do? Well, one easy thing is to start converting as many costs as possible into foreign currency, by using internet outsourcing' possibly that's likely to only help a little but if it supports cheaper marketing and brand building, it could be more useful than it seems at first glance. Mostly, Australian businesses will need to see if they have to step up online efforts. Some business models are going to have indigestion at the thought of cannibalising from franchisees. Other will have more flexibility to understand what parts of their business are no longer adding value in customer's eyes; those parts should be jettisoned or replaced with something competitive as soon as possible. And the internet gives as well as takes: it opens up many new ways of doing business and communicating with customers and suppliers.