The Future of Retail is Not a Lazy Levy
Amazon, Day 1 and the Pigouvian Problem
Traditional retailers are calling loudly for a levy on online sellers — a so-called Amazon Tax. Many of these retailers should instead be hanging their heads in shame and hoping their Boards don’t fire them, or indeed that the shareholders don’t remove the Board.
The last 20 years have seen sweeping changes in consumer habits and technology but shockingly little change from traditional retailers. Amazon has grown relentlessly into a giant, but it hasn’t happened overnight. There isn’t a retailer on the high street who hasn’t had time to react. Most have chosen not to react enough or not at all and, instead, are now wringing their hands and begging for a bailout. Amazon wasn’t profitable for years as it invested billions in the facilities and capabilities needed for future success, while retailers focused Titanic-like on short term profits, conveniently ignoring the strategic icebergs that were clear for all to see.
The blame game against successful multi-channel retailers and “online”, exemplified by Amazon, has to stop; it’s ridiculously simplistic and retail executives should know better. But it’s an easy narrative to push and utterly self-serving. Why admit you were too tardy or too greedy to invest in modernisation when you can blame the Seattle bogeyman?
Let’s be clear, I’m not opposed to taxing online transactions as a source of Government revenue. But handing it to incompetent retailers who have failed to move with the times? Propping up failed and failing business models based on a sentimental attachment to an out-dated ideal of what a high street should look like? We can and must do better.
We need a serious debate about the future of retail before we implement a temporary crutch for outmoded retail models. For the record, I’m firmly in favour of updated taxation regimes that ensure online retailers and multinationals generally pay their fair share. But they mustn’t pay the share of failing retailers who have ignored consumer trends and the need to invest. I’m also supportive of efforts to ensure that workers in online warehouses and operating deliveries are treated fairly.
Planes, Ships and Automobiles
The loss of jobs in physical retail is a huge concern, but is the solution to tax another sector and simply hand the money over? Looking back, would it have made sense for car sellers to give money to keep blacksmiths open as people stopped using horses? Did we take money from airlines and give it to Cruise liners because although people prefer to fly transatlantic in 7 hours instead of an ocean voyage of 4 days, we “like” the idea of ships ploughing the waves, and we need to keep sailors employed? Is that really so different from taking money from Amazon and giving it to high streets who have failed/refused to adjust to the world of online?
Cui Bono?
It’s especially absurd for Tesco to call for a levy on Amazon. Amazon is not currently a competitor of any importance for Tesco — the same Tesco who years ago dismissed the threat from the German discounters only to see half of their customers now visit the discounters monthly. So should they be levied too because they have competed harder than Tesco? Tesco reported over £1bn profit last year but are supporting a reduction in business rates and imposition of an online tax, while admitting they have enough money to give back £585 million in Covid reliefs?
The retail lobby warning to the UK Government that a “failure to safeguard the high street could …slow the sector’s recovery” reeks of entitlement — maybe the sector isn’t entitled to recover? Maybe it contributed to its own downfall and needs not to recover but to reinvent?
Retail Needs Help But Not Charity
Bad retail doesn’t deserve a handout for its own incompetence. It’s a powerful lobby and the success of the consumer economy is of course vital. But let’s make sure that any levy is sensibly designed and not a crutch. Again for clarity, I’m not opposed to the concept of an online levy, just the motivation and implementation. It needs to be a big-picture policy decision, not a call for blood by out-manoeuvred competitors. And crucially, where does the money go?
I’d happily pay a 1% or 2% levy on my Amazon purchases if it were guaranteed to be spent on worthy investments to genuinely help create a sustainable retail sector that’s fit for the future, creates quality jobs and offers experiential and efficient services to customers on vibrant, multi-purpose high streets. But I object to handouts to lazy operators, like the retailer whose website refused to sell items to me before Christmas because they had “reached their quota for online sales” and to “try again tomorrow”?!
It’s not the fault of the retail staff that consumers have changed to a more convenient method. It’s not the fault of the retail staff that their executives have pocketed bonuses instead of investing in the future of the operations. We need retail jobs and we need physical stores. But we need to reinvent retail to address the realities of modern shopping and logistics.
The days of binary physical and online retail are gone. Platforms such as Shopify or Squarespace offer any small retailer an online presence in minutes. There’s no excuse for inaction by anyone who wants to offer their services online, which increasingly is where customers want to shop.
What Even Is An Online Retailer?
A binary split between ‘online’ and ‘physical’ retail is less and less useful
A complication for any online tax is in defining what is an online operation? Is Stitch Fix unfair to apparel retailers because it uses algorithmic stylists to recommend clothes? Should Primark, who have refused to invest in online, get a handout from firms who have invested billions in building online businesses that appeal to customers? If I’m selling on Shopify, Etsy or Ebay instead of on the high street, should I be subsidising physical retail?
What if Amazon takes over empty retail stores and sells products (Amazon already operates a small network of over 50 physical stores in the US) thereby avoiding the Online Tax? Or is it ok if Amazon operates a click and collect service in those high street locations — should those transactions be taxed as online or are they physical retail?
Better Taxes for a New Retail Reality
It’s not Amazon’s fault that business rates for physical retail are badly designed. And it’s understandable that those collecting business rates don’t want to lose that income. But the rates regime for retail in the UK and Ireland clearly needs to be reformed. Yet simply cutting the rates bill won’t suddenly make customers go shopping in stores again. Physical retailers need to reinvent their role.
Just as many multi-channel retailers have internally obsolete incentive and attribution mechanisms, how we tax physical retail and how we tax online retail are no longer fit for purpose, no longer appropriate for a modern omni-channel retail reality.
The Pigouvian Problem vs Day 1 Thinking
Economists have a name for the proposed levy — a Pigouvian tax is a tax on any market activity that generates negative externalities. The tax is intended to correct an undesirable or inefficient market outcome. In this case, the negative externality of the move to online is the decline of physical retail. Simply taxing the activity is not a solution — many of today’s physical retailers won’t survive, even with a reduction in rates and a subsidy from online. Moving money from online to failed, old-school retailers won’t work. A Lazy Levy might temporarily save some ailing stores, prolonging the agony. The future of retail does not lie in repeating the mistakes of the last 20 years — the future lies in out-performing Amazon, finding new roles for experiential physical retail and responding to customer preferences. Every year, in his shareholder letter, Jeff Bezos thanks his shareholders for their support and reminds all Amazon employees to act like a start-up, to treat every day like it’s Day 1 for the business — full of new opportunities, new challenges and a compulsion to obsess over customers. Taking 1% of Amazon’s income won’t slow it down — matching its Day 1 mentality will.
Check out my best selling book “When Humans Stop Shopping” to learn more about Retail Innovation.
