Is it true: are we always better off with lower prices?
Sadly, we live in a country where the overwhelming belief is that people are almost always better off with lower prices. It’s short-term ideology that fails to recognise the long-term damage suffered by Australian businesses when they simply cannot match the prices offered by better-resourced and more competitive foreign businesses. And it’s ideology again that suggests these businesses should be left to fail.
The result of course is that local businesses do go broke or are bought out by foreign businesses. And as we have seen with Ford and Holden, selling out to foreign enterprises does not secure jobs nor does it guarantee ongoing ‘investment’. We should think of this is we sell off our land, our farms and our infrastructure.
Under present policy and ideological settings, whether our local businesses fail or are bought out, we might see lower employment unless we simply open our arms wide to selling all our businesses and becoming serfs to foreign landlords.
Broad expectations of always-low prices are a cancer. They’re like a suntan, they look good initially but as you stay exposed for years and years, they turn ugly and unpalatable.
When jobs are lost, through corporate bankruptcy or foreign capital allocation decisions, it will be completely necessary for the Australian mass unemployed to require those same low prices that our legislation has been so clever to enshrine.
The chains of habit of course are too light to be felt until they are too heavy to be broken.
On 5 December 2014, an announcement was made by the Australian Competition and Consumer Commission (ACCC) that was significant for a number of reasons. The ACCC granted conditional authorisation to Tooltechnic Systems (Aust) Pty Ltd to set minimum retail prices on Festool power tools until 31 December 2018.
It was the very first time an application for authorisation to set minimum retail prices, a practice known as resale price maintenance, under the Competition and Consumer Act 2010 (the Act) had been granted.
And while that encouraging announcement was met with some relief by your author, the statements that followed do reveal a continuing belief that lower prices for consumers remain the overwhelming and beneficial goal.
To wit;
“The ACCC considers that on balance the likely public benefit resulting from the expected increase in retail services will outweigh the clear…detriment resulting from some customers facing a higher retail price for Festool products.”
“The ACCC accepts that resale price maintenance can, in certain circumstances…promote efficiency and generate benefits to the public.”
Is it not true that a business surviving may provide a benefit to the public? It is certainly a benefit to the staff who remain employed there. And it must also follow that it is a benefit to their children and perhaps even to their ageing parents.
And this from the ACCC: “With only a very small share of the market, Tooltechnic needs to judge whether higher service levels will outweigh lower prices in attracting sales.”
We reckon the best businesses to own are those with a competitive advantage. And the most valuable competitive advantage is the ability to raise prices. It seems the ACCC believes a more successful business is one that has greater sales on lower margins.
Lower margins make businesses vulnerable to competitors reducing prices. If the ACCC believes that a superior way to attracting sales is merely to lower prices, aren’t we saying good-bye to local quality and hello to foreign junk?
If prices are always lowered, while wages are always increased, is it not true that a business will eventually be unable to generate a profit?
It’s not wildly popular to tell people to stop tanning, to stop drinking fizzy drinks, to eat less sugar or less fat. It’s equally unpopular to tell people that lower prices aren’t better for you. But a lie doesn’t become true the more it is told – I don’t care what Lenin said.
The one bright light in the announcement however was this;
“Given the highly differentiated nature of Festool products, the ACCC considers that resale price maintenance is likely to … encourage Festool retailers to offer better services to attract customers.”
A company can do more in terms of service, employment and expansion when its margins are higher. This thought should, I believe, be the framework through which the ACCC reconsiders the long-term impact of an always-lower price ideology.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
xiao fang xu
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“It’s short-term ideology that fails to recognise the long-term damage suffered by Australian businesses when they simply cannot match the prices offered by better-resourced and more competitive foreign businesses. And it’s ideology again that suggests these businesses should be left to fail.”
Question to this is : Why Australian businesses cannot match the prices offered by foreign businesses ????
Maybe this is part of the answer :
In June 2014 there were 1,908,200 public sector employees. There were 246,400 employees in Commonwealth government, 1,472,900 in state government and 188,900 in local government.
In 2013-14, the total cash wages and salaries for the public sector was $139,061.3 million.
http://www.abs.gov.au/ausstats/abs@.nsf/mf/6248.0.55.002/
Employment increased to 11,589,000 from a revised September 2014 estimate.
http://www.abs.gov.au/ausstats/abs@.nsf/mf/6202.0
Australian population 23 million and approximately 9.5 million workers in private sector supporting them.
And this :
The 2014‑15 Budget includes $146 billion of welfare spending, or 35 per cent of Budget expenditure.
The Commonwealth government spends $10 billion every year to employ around 70,000 people to collect taxes and give them back to us via the welfare state.
Andrew Baker
Centre for Independent Studies
27 March 2013
In 2010–11, Australia’s welfare state, which includes health, education and income support payments, accounted for approximately $316 billion in government expenditure and 65% of total government expenditure.
By way of comparison, Australia’s three levels of government received $358 billion in tax revenue in 2010–11, of which $138 billion was received through income tax payments. • Of the $316 billion spending on the welfare state, approximately half, or $158 billion, can be attributed to tax-welfare churn.
Tax-welfare churn, the process of levying taxes on people and then returning those taxes to the same people in the form of income support payments and welfare services, simultaneously or over the course of an individual’s lifetime, continues to be a problem in Australia.
Churn imposes a number of social and economic costs such as high taxes, administration costs, inefficiency, rent-seeking, paternalism, and welfare dependency.
Roger Montgomery
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I personally found tyour combination of facts illuminating. Australia has either clearly lost its way…or been led astray.
Steve Baron
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Geez Roger, not hard to guess which party you will be standing for at the next election. Not sure I will vote for you even if I could!
I suspect the rebalancing of the Australian economy might be a rather difficult time given your above perspective. Australia no longer seems competitive to me, just about everything is way too expensive and you are suggesting price should be higher?
If a business wants to keep its prices higher the public have to perceive a benefit for paying those higher prices. If a business cannot show their product/service is worth the extra cost then it is the business who has failed–not the government, not the customer and not anyone else.
I suspect what Australia needs is a good dose of inflation to eat away at the extremely high wages here.
The party’s over from the resources boom and people need to pull their heads in a bit.
Roger Montgomery
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You should have read the Australian at the weekend Steve and you would have seen your guess was wrong. The references made by the ACCC quite specifically refer to the quality being required to justify the price. You are in fact saying the same thing.
Andy Dong
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When facing with money pressure, the general public almost always choose the cheaper price, which will drive down the local business profit margin. Subsequently, local business have to cut job and pay to survive and adversely impact those in the workforce. This is a vicious cycle and inevitable in the face of lack of innovation, investment and competitive advantage (as roger pointed out).
Decades of support from Chinese appetite for resource has masked the grossly uncompetitive nature of Australian businesses and a high currency doesn’t help either.
Head winds for Australian economy is no longer cyclical as it appears. The fundamental issue is a structural one.
Unfortunately, it is just the beginning and has ramification for investment in the future.
Andrew Legget
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Great article Roger.
I have been looking at the composition of the ASX for a while and have asked myself many a time, “where is the current quality and where is the future quality going to come from?”
I fear that anything of any value in Australia will see the benefits sent overseas leaving us with some companies digging up rocks for dimininshing prices and any entrepreneur starting up a business will struggle to find financing and go offshore.
I think this is a multifaceted problem and will need a collective shift in perception for it to be changed.
Firstly i think the governments need to be more proactive in encouraging new businesses to start up in Australia through innovative tax reform as well as reversing the illogical removal of a science ministry. When we have apparently cut funding to the CSIRO to a point where a person predicted to win a nobel prize may need to stop his work there is an issue there. Lets also shift our focus to FINALLY (we are already too late so the sooner we start the better) diversifying our economy into some growing value enhancing areas that we can possibly gain some type of advantage in.
I am also not convinced that companies see dividend payouts as the last resort when no value enhancing projects exist and see it as the chief value enhancing activity. We need them to be more focused on reinvestment to build better companies. Maybe even try and take over some foreign companies for once rather than simply put up the for sale sign to our overseas friends.
All round we need Australia to have a higher tolerance for risk. More VC and Private equity perhaps willing to invest in new local businesses.
FInally, lets stop this whole we are doing it tough thing that the governments keep trotting out. Australia thinks they are doing it tough as people keep telling us we are. As a result, we will tend to try and save money any possible way we can resulting in a perpetual spiral where companies keep cutting their prices as we expect them to be lower.
chris winn
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I could not be happier to see these views put forward by the ACCC,
this a fact of life too many Australians fail to recognize and the sooner we see a high profile move to enlighten the general public that they are destroying the Australian way by supporting cheap imports and selling Australia off for the sake of the illusion of a better life.