The Australia Tax Part II: Exchange Rates

So in the previous write-up, I did a little holistic overview of the issue of Australians paying significantly more for the same products compared to our peers elsewhere. I personally think this is a debate well worth taking up, and this article will show part of the reason why.

The Australian Dollar has always been a relatively volatile currency. Using data from OzForex, and a little analysis in Excel, here's the graph I obtained for the Australian Dollar's exchange rate versus the US Dollar starting from Jan 1990 to Sep 2013:

Things are actually a lot simpler than they look. The blue line tracks the monthly averaged exchange rates, the red line takes yearly averages. The orange dotted line is the average over the entire 285 months, and the black lines are averages over 5-year periods.

There is significant volatility in the exchange rate, so this rules out any quick price adjustments. And here's where the 5-year averages are important. If the averages from the first 3 five-year periods are ignored (we are well past 2003 now), it's obvious that the AUD averages around 80-odd US cents over the 2004-2009 period. And from 2010 to date, it averages at parity with the Greenback. 

Prices for a number of products in Australia, especially those made by US-based companies still seem to be reflective of the lows our Dollar hit in the early 2000s. It seems that some brands still seem to take the worst-case rates rather than longer term averages.  And since majority of currency exchange contracts can be negotiated on a lock-in, forward-looking basis, this hardly seems excusable.

The other major source of products for the luxury sector is Europe. The Euro was instituted in 1999, and I have compiled a graph of the EUR vs the AUD here:

The AUD remained rather stable against the Euro still the late 2000s. From 2010 onwards, it really has shot up, and has remained high owing to a number of economic and geo-political causes. 

Lastly, lets have a look at the British Pound vs the AUD:

The Aussie Dollar shows a very similar pattern against the British Pound as it does against the Euro.

I am not going to dwell on why this whole pattern is exhibited; the technicalities of how and why exchange rates move is irrelevant here. The question then is: have prices in Australia reflected the fact that for the last 5-odd years, our Dollar has clocked in much higher value than its historical average would be? The distance between the orange dotted line and black lines for the 2010-onwards period is significant for every single currency. So have the Australian retailers adjusted for this, and passed some of this on to the consumer?

Yes and No. While prices for a number of brands have retreated towards more sane levels, many brands still seem reluctant to adjust prices outright. Anecdotal evidence based on my personal observation points to other methods: Gift-with-purchase (GWP) offers, bundles and packages have become a lot more common since the Aussie Dollar became dearer. This is one way of increasing the value the customer gets for his dollar while paying the same. 

Some brands, however, keep stubbornly high prices (Chanel for example). Chanel's female perfume range sells in Australia for over twice the US-market price. Even if the exchange rate against the Pound is used, a 150ml bottle of Eau Premiere should be about AU$175. The Australian price at retail is AU$70 more than that. However, the exchange rate over the 15-odd years before that would give a price of about AU$250. So they do have an excuse here.

Estee Lauder's entire lineup has a price premium in Australia of around 50% over their UK/USA pricing, sometimes even clocking in at twice the price here. Their subsidiary brands like La Mer (USD250 to AUD 365 for their "Oil Absorbing Lotion" as a singular example), Clinique (converting USD to AUD at about 2 to 1, and GBP to AUD at about 2.5 to 1), Tom Ford (converting Pounds at about 2:1) and Donna Karan to name a few are still almost obscenely overpriced here.

Singling out more and more brands is very possible, as almost every brand seems to see Australians as "soft-touches" who can be charged higher prices. However, there's hardly a need to list them. Almost every brand, in one way or the other is guilty. Cue L'Oreal's new "Shine Caresse" lip colours costing US$10 in The States, and AU$25 in Australia. Or YSL's "Cinema" costing GBP81 in the UK and AU$195 in Australia for 90ml. Brands from LVMH are similar.

There is another problem: newer product releases from the L'Oreal group (and to an extent other brands as well) seem to have better pricing. The older products seem to be stuck at the prices from the early 2000s; there is a distinct reluctance to lower sticker prices in this segment of the market, which also leads to situations where some products have much higher price premiums in Australia than others. Even if taking into account costs of freight to Australia, I think UK prices make for a decent comparison because they include 20% tax (VAT) compared to 10% for us (GST).

So this does settle one issue quite clearly: For the most part, we in Australia do pay a sizeable price premium compared to other countries if the exchange rate is the only factor taken into account. I have taken due care of not using instantaneous exchange rates; I have used the 5-year averages instead. Some of the prices we pay could be excusable at 80 US cents for every dollar, but not even close for parity.

For products that originate from Europe, it is very possible that the currently high position of the Aussie Dollar is simply seen as an aberration rather than a long-term issue. If that is the case, European brands do have an argument, but US-based ones don't.

There's another view here: Could it be that USA pays lower prices than the rest of the world? I observed pricing for some brands unusually low in the USA compared to other regions (some Chanel products for example). But that argument holds little water considering the GCC countries pay similar prices to USA too.

All-in-all, as far as the exchange rates go, we in Australia might have been paying a moderate premium pre-2005, but post-2010 we are simply overpaying. In this case, I think as far as the nominal prices for products go, the consumers do have a very valid point.

Acknowledgement: Monthly and annual currency average exchange rates sourced from OzForex. I have no commercial affiliation with OzForex or its associates.

The Australia Tax Part I: A Debate Worth Having?

"Australia Tax" is a phrase used frequently to describe the price gulf that exists between identical products sold in Australia compared to other countries, particularly USA, Canada, UK and the Eurozone. I am no stranger to products being priced through the stratosphere, but there is something rather different about the Australian price differential: it is consistent, and exists across practically every segment of retail. The price premium we pay in Australia for identical products over UK, USA and the Eurozone is large enough make one think.

In this series of articles, I will try and make sense of the "Australia Tax". Luxury brands are by no means the only offenders, but they do seem to have the widest gaps between Australian and overseas pricing. And to compound issues, luxury brands often present the consumer with the problem of difficult to circumvent price boundaries.

Some companies are particularly bad offenders when it comes to price discrimination (Hello Estee Lauder Group, YvesSaintLaurent, Giorgio Armani, Elizabeth Arden, Dior and Chanel). Granted, the Australian Dollar is a volatile currency and product prices are set to take into account the worst-case scenario, but in this debate who has the right of way,the customer or the seller/distributor? I will take a look in this series at the different points of view around the issue, both from the customers' and retailers' perspectives.

I will use data from factual external sources to support arguments from both sides in this series; I intend to cover the different facets of this issue such as exchange rates, taxes, price parity etc. There's a few points to consider, and I will try and cover as many bases as possible without getting overly technical.

In this first part of the series, I take a holistic look at the issue, and consider if this debate is something worthwhile in the first place. As you will find out while reading, it very well seems to be. However, the deeper I looked into this issue, the more I realised that there is always more than one side to a story.

From the customers' perspective, the argument centres on one issue: majority of high-end brands simply have too much of a price premium in Australia. And before I get apologists throwing nonsensical excuses at me like the Chanel salespeople at one well-known department store, that "luxury brands are inherently pricey" or "we use high quality ingredients that cost a lot", let me make it clear: I am considering prices for identical products across different countries, and these excuses go right out the window for the same reason. High material costs are possible, but I don't believe your raw materials suddenly double in price for Australia-bound products, and neither does Chanel become the equivalent of Garnier in the USA when selling perfume for less than half of what we pay. 

From the sellers' side, their claims are a combination of factors leading to higher prices: high wages (indeed we have one of the world's highest minimum wages), high rents at desirable locations, high costs of freight owing to relatively small market size and isolated location, and so on. Ultimately, these costs are passed on to the customers, and that manifests as high prices for the customer at the tail end of the chain.

An oft-used complaint from customers is that prices havent moved with exchange rates; using data from OzForex, I had a look at the exchange rates of the Australian Dollar vs the US Dollar over the last 23-odd years (1990 onwards). As it seems, the retailers may have some semblance of an argument, although not strong enough to sway things entirely in their favour.

As a customer, the general idea is simple. If a product can be found cheaper elsewhere, it's a go. Online retail may be cheaper due to whatever reasons as there may be, it's not the customers' concern. If the pricing set by the vendor is seen as too high and is easy enough to bypass, a savvy customer will do it. And therein lies the rub with luxury goods: their limited distribution, and with some brands, the iron-fisted controls over the supply chain (e.g. Chanel) mean it can be incredibly hard to source products from other regions easily.

At the expense of sounding sexist, but the tendency to price-hunt, especially among the female cohort (by a distance the larger of the target audiences for most skincare/fragrance/cosmetic companies) doesn't appear to be as strong as that in males. I am seeking more concrete data to back it up, but anecdotal evidence does point to it in a few places. On a popular Australian forum for skincare and beauty products, a number of members seemed convinced that an online retailer selling products cheaper than Australian street retail was "dodgy", the fact that the prices were on par with USA notwithstanding. And there lies another problem: if the majority of consumers are not aware that a product is overpriced in Australia, why does the seller care to make prices more realistic?

There's also the age-old debate of "charge whatever the customer is willing to pay". It centres on the issue of purchase power. If customers in Australia can afford to pay more than their US counterparts, and are willing to do so, there is no incentive for the seller to price goods lower than what the customer' comfort threshold is. It is also sometimes a trade-off between margins and volume. The USA, for example is a much larger market, and retailers over there can make up for smaller profits on individual products by simply selling more.

And adding to what is now looking like a cocktail, there's manufacturing locations. Many brands have localised manufacturing facilities for certain regions, which can mean some countries get the same product a lot cheaper than others.

As is obvious by now, there's a number of different issues at play, and all have some part in determining what a product scan at the checkout for. In the next part of the series, I will look at exchange rates.