(April 6, 2018) What’s enlightened about turning a blind eye to government policies that destroy traditional retail?
This article, by Lawrence Solomon, was first published by the Financial Post
Manufacturing towns aren’t the only part of the U.S. that have been devastated by perverse economic policies; urban areas dependent on retail have also been hit. President Donald Trump’s attack on Amazon may begin to reverse the unintended harm caused by online retail, leveling the playing field and saving many cities, suburbs and towns from being further hollowed out.
Conservative pundits have roundly criticized Trump for his anti-Amazon tweets, characterizing them as anti-free-market, and as antediluvian attacks against a wildly popular e-commerce industry that has lowered consumer costs and increased convenience. But what’s free market about a company, and an industry, profiting at taxpayer expense? What’s enlightened about turning a blind eye to government policies that destroy traditional retail, from mom and pop shops to icons such as Macy’s, J.C. Penny and Sears?
Online retail in general and Amazon in particular receive outsized subsidies through the United States Postal Service, according to “The Free Shipping Tax,” a Citi Research analysis that states, “by charging below market rates on parcel volume (mainly e-commerce) the USPS has essentially turned free shipping into a future tax payers’ burden.”
The taxpayer won’t be alone in facing unwelcome news, however. The subsidized shipping changed buying habits, spawning an unrealistic expectation of free shipping that today permeates internet shopping. This “unsustainable pricing,” Citi believes, is doomed to fail.
How unsustainable is it? Citi calculates that the U.S. Post Office’s (USPS) “average parcel rates would need to increase ~50 per cent initially to break even.” To cover its losses on parcel delivery, the post office has been gouging its first-class mail customers, where it has a monopoly, and defaulting on payments to its retirees’ health benefits fund. With the Trump administration now in power, government patience toward an USPS that hasn’t made a profit in over a decade is likely to end, forcing it to abandon its below-market pricing of parcel delivery and giving private competitors a payday of US$15 billion to US$19 billion in extra business. None of this comes as a surprise to FedEx or UPS, who in recent years have been aggressively expanding their capacity investments to capture the business freed up when the postal parcel business inevitably crashes.
Apart from the USPS, the biggest loser when all this comes to pass will be its biggest customer, Amazon, which relies on USPS for 40 per cent of its deliveries. If USPS loses all its subsidies and immediately introduces market-based pricing of parcel delivery, Citi sees the potential for a dramatic hit to Amazon’s profitability, at least in the short term — in the worst case, Amazon’s “North America CSOI (consolidated segment operating income) would be cut by 44-49 per cent and overall CSOI would fall by 19-23 per cent.” CSOI, an accounting term used in the internet world, is Amazon’s chief metric for assessing profit.
As bad as this market-oriented reform would be for Amazon’s bottom line, it would be far worse for other online retailers who wouldn’t have Amazon’s depth and ability to adapt. Those that survive would likely pass on the costs of shipping to their customers, ending one of online retail’s biggest selling points to cost-conscious consumers. Compounding the hit that online retail faces is the possibility that it will lose what’s left of another major gift that governments bestowed on online retailers — the ability to avoid charging customers sales taxes when shipping to different jurisdictions. That tax holiday, perhaps more than any other government giveaway, kick-started internet shopping more than two decades ago, resulting in the ruin of brick-and-mortar retail today.
“There was a time when we wanted the United States, as a matter of policy, to protect nascent Internet businesses by keeping down the tax burden,” National Economic Council Director Larry Kudlow said this week. “But that time is long gone.” The U.S. Supreme Court will soon hear a case that may decide whether to end some US$10 billion in exemptions from sales taxes that online retailers enjoy. If the court doesn’t eliminate that subsidy, the Trump administration vows to.
Citi says it can’t predict how much consumer habits will change when what it calls “economic reality” hits — whether the end of free shipping and the start of price hikes that eliminate internet shopping’s price advantage will change the public’s buying preferences. But Citi does warn the hikes could “could provide a shock — depending on implementation speed — and may eventually lead to customer behavior changes related to eCommerce delivery.”
By then, it may be too late for consumers to return to many of their familiar bricks-and-mortar stores. Last year alone in the U.S., 50 chains filed for bankruptcy and dozens of major retailers shuttered some 9,000 stores. The carnage, far worse than seen during the recession, is continuing this year, when another 25 major chains will file for bankruptcy and another 12,000 stores will close their doors. Within five years, predicts Credit Suisse, 25 per cent of America’s shopping malls could have closed, largely because online competitors have put them out of business.
One of the greatest virtues of free markets is the provision of choice to customers. The story of Amazon and online retail has ultimately been one of denying consumers choice. To restore that choice, so that the consumer marketplace doesn’t distort the merits of shopping online over bricks and mortar, the expiry date for the government subsidies to Amazon et al. needs to pass.
Lawrence Solomon is executive director of Urban Renaissance Institute, a division of Energy Probe Research Foundation.