The Australia Tax Part V: Putting it all together

In the final article in this series, I'll put together all the information looked at thus far.

In the first article, I used a few case-in-point examples to opine that we do pay substantial price premiums in Australia for a number of products.

In the second article, I looked at exchange rates. It is obvious (though that data is a bit out of date now; the Australian dollar has retreated substantially of late) that the Australian Dollar is a very volatile currency, and retailers may try to build a worst-case scenario into their pricing to avoid having to adjust prices repeatedly.

Then there's the issue of wages. A key issue here is that wages in Australia are high even by developed-country standards, and that they always need to be paid in local currency. So the high cost of labour for Australian-based staff (especially relevant to department stores) will always add a premium to the price. And this premium will be in Australian dollars regardless of how the imported cost of a product changes. This can severely limit the margins by which retailers can adjust their pricing.

Next, I looked at real estate. Using data from CBRE in that article, it is easy to conclude that rents in Australia are very high. 

Lastly, the issue of whether the Australian consumer can actually pay more. In most cases, and having some knowledge of economics (being a qualified accountant myself), this can be a key issue in determining pricing for local markets for a number of products. 

There's a couple of key measures used for the 'average' income. The median income is a good one (I'm not going into the technicalities of why and how). Australian Bureau of Statistics in this publication has the average income at $58,817 per year (scaled from $1128 per week by a factor of 52.143). 

Median income is harder to come by, but this article in ABC RadioNational says it's about $55,000 or thereabouts. They peg the mean average at AU$75,000.

Whichever way we look at it, it's obvious that Australians earn quite a fair bit. According to NATSEM, the average Australian household has a median disposable income of $43,100 in US Dollar equalised terms. More extensive comparison of household incomes is very difficult because of the differences in exchange rates and purchase parity.

Which essentially means this in laymen's terms: we earn a substantial amount of money.

So all-in-all, a volatile exchange rate, high wages, high rents, and the consumer having more disposable income make for a recipe where we end up with more load on out credit cards when buying things. But more income means we don't necessarily have trouble keeping up with it.

Does this mean I endorse or condone high pricing beyond what can be reasonably explained by all these factors? No. And a lot of products are still priced at levels where even all these factors combined dont account for the entire difference in price.

The Australia Tax III: Costs of Doing Business

Carrying on from the last two articles in this series, I think it is now reasonably established that we do pay a premium in Australia when it comes to prices on skincare and fragrance products. Also, the exchange rates don't really keep up with price movements, and post-2005 increases in the exchange rates of the Australian Dollar haven't really shown through in entirety at the sticker-price level. However, products launched post-2010, especially by some brands do seem to have better pricing down under than what would be historically expected.

This brings us to the next part of the issue: Are there other factors at play which limit the amount of ammunition that a retailer can have in their arsenal to pass on price reductions from exchange rates? 

There's something common across the board when it comes to luxury brands: they all rely on high levels of interaction between sales staff and the customer. You don't just walk into a Chanel Boutique and chuck things into a shopping basket like you would at Priceline. Even picking up something that you know well about would involve interacting with the sales staff at some level. It does get a little cumbersome at times not being able to simply pick up a bottle of Pureté Idéale and being on your merry way, but that's besides the point.

So here's the catch: the product itself can have its price changed to reflect exchange rates, but the costs of actually selling it, which would include paying all the lovely sales assistants, and renting the shop-floor space in all the prime locations department stores generally occupy, don't change with exchange rates. They need to be paid in local salaries regardless.

I will look at real estate and rent in another article. This time lets focus on what gets paid to the sales staff.

While most companies are quite secretive about what they pay their staff, I think a comparison of the minimum, median and average wages across a number of countries will help this comparison (Median/Mean wage are more useful for another section I'll cover later though). Australia is consistently known to have one of the highest minimum wages in the world. Here's a quick look at minimum wages for a number of countries (equalised where possible by comparing 21+ age group):

Minimum Hourly wages from various countries compiled from official sources. The blue bars show the wages in native currencies, while the overlapping pink bars show the same amounts in US Dollar equivalent.

To illustrate the relative scale, I have expressed them in current (1-Nov-2013) US-Dollar terms as well. Because these wages need to be paid exclusively in local terms, there's nothing exchange rates do to reduce these. And since this is a substantial component of the price of the product, it can explain to a point why exchange rates have limited effect on the end-user price.

There is something that really stands out: Australia has the highest minimum wage by a distance. And not surprisingly, the difference of wages is greatest between the countries Australia tends to have a large price gulf with. We have probably the highest price differential with the USA of all countries which have a minimum wage, and our minimum wage is more than twice theirs. We also have a gap of almost 50% over the UK wage, and nearly the 25% more than French and Kiwi ones.

Singapore doesnt even have regulated minimum wage (the politics of it is not of concern here).Which is potentially another good indicator of why prices over there are a fair bit cheaper than Australia (proximity to the manufacturing hubs Taiwan, Malaysia and Hong Kong is perhaps another reason).

So yes, the answer to the question is clear-cut. Part of the reason we are paying higher prices in Australia is the fact that we get paid more. While this is not quite the same chicken-or-egg conundrum that median/mean wages will pose, it does clarify the fact that the human service element of the product price in Australia is substantially higher than other comparable countries.

So the next time you notice prices in Australia and try to compare them to the US website, perhaps the realisation needs to set in that the lovely ladies who man (so to speak) the counters here are paid much more than the ones across the Pacific, and in general, we in Australia are paid more than our trans-Pacific friends.

Since the end-user price of something is the sum total of various costs over the chain, the labour cost component in Australia is fairly high, in fact it might very well be the highest in the developed world. And this reflects at every step of the process, not the just the sales assistants or checkout operators. The products get handled at customs by public servants who get paid a fair dime, then transported by people who get paid a pretty penny, and then stacked in warehouses by staff who get paid in the same proportion more than their counterparts from other countries, and so on. So it's easy to visualise how our high wages can quickly add up the costs of a product over the value chain.

But does that mean Australian retailers actually make less money? That's for another article.

Sources:

USA: Dept of Labor

UK: gov.uk

Australia: FWA

New Zealand: Department of Labour

Japan: Ministry of Health, Labor and Welfare

France: EuroStat
Singapore: Ministry of Manpower