Competition is a fine thing

My co-Samizdatista Brian Micklethwait has some comments on the fact that British retailers had a bad Christmas, and that people did not really get spending until the last few days, when shops had pre-Christmas sales and dropped their prices heavily. I think the real story is actually this one. Britain’s high street stores have horrible cost structures, which they have been able to get away with because they have traditionally faced relatively little competition. For this, as for almost everything, I blame planning laws. Large shopping malls – particularly large out of town shopping malls – barely exist in Britain, as their growth has been hindered by government on supposed aesthetic grounds, and to “prevent the ruin of our high streets”. Of course, the people who pay for this are consumers through high prices. Retailers charge high prices and pay high rents. Landlords pay high mortgages rates, and economic value is generally destroyed.

In the past few years, parallel retail channels (not just the internet, but that is the biggest one) have sprung up without the high cost structures and with much lower prices. Most people would actually prefer to shop in a store at Christmas time, as this makes it much easier to take goods back later and/or get customer service, but they will not do so if goods are dramatically more expensive. So, they hold off buying, playing a game of chicken, and eventually prices drop a couple of days before Christmas (however the internet retail sector has boomed right through the Christmas season). Economic theory is pretty clear that in a perfectly competitive market, retail prices approach marginal costs. In vaguer terms, the more competitive a market, the more prices relate to costs. The British retail market is certainly not a perfectly competitive market, but it is closer to one than it was a decade ago.

Inevitably, with collapsing margins come situations where shops can no longer afford to pay their rent. One would expect this to lead to either a fall in rental yields and ultimately retail real estate values, or a change in use of a lot of retail space from retail to residential or to offices, given that London’s residential real estate market is booming. A further possibility is of course an improvement in customer service, as bricks and mortar retailers attempt to provide additional value for higher prices. However, another possibility is that it leads to even stronger planning laws aimed at preventing this and further trying to “save our high streets”.

Interestingly enough, the stores that are suffering the most are probably not the quirky independent stores that the Evening Standard loves to champion as much as the less well run high street chains: shops that sell boring, goods that can be easily sold in bigger shops or over the internet. People like Dixons and Woolworths. Well run businesses, most notably Tesco, do fine of course.

Actually, come to think of it, the Dixons name has vanished from the High Street, as the stores have all been rebranded Currys, except for the airport stores, which are still Dixons. The answer to why this is is quite an interesting one. DSG International (aka Dixons Group) hit an interesting problem, which other retailers have also encountered when setting up internet businesses. One would think that an electrical retailer with high street stores would have certain advantages setting up an internet retailer. Because people have heard of them they are more likely to trust that they will still exist tomorrow. They can use the bricks and mortar stores to handle returns and after sales service.

The trouble with this in the electronics business in Britain is that internet retail prices are dramatically lower than high street prices. Customers who see a price on the internet from a brand retailer expect to be able to get the same price in a store of that same retailer. If they cannot do so, they feel cheated. Therefore Dixons was between a rock and a hard place. Either they made their internet prices so uncompetitive that they would not sell anything online, or they annoyed the customers of their bricks and mortar stores by refusing to offer them the same prices they offered online. The solution was to use the Currys brand (which they had long used for their out of town retail park stores) for their high street stores as well, and to use the Dixons brand merely for online retail. And for airport stores, as nobody expects prices in airport stores to be the same as elsewhere. On the website, they leave subtle signs that they are the same customer to reassure online customers that they can be trusted, but hopefully not enough to make potential bricks and mortar customers think that they are being cheated by not getting the same prices.

As another example: consider these three websites. One. Two. Three. They are all the same company, which is a big presence in the British High street. The first website is branded the same as the high street retailer, and offers more or less the same prices it does. The second website is clearly but less obviously connected to it, and offers lower prices. The third is less obviously connected to it still, and offers lower prices still. It is really quite clever.