Wednesday, 13 February 2013

Protectionism in the High Street

Retailers in Jersey are calling on landlords to be more reasonable with the rent they charge on the high street. Women's clothing shop 'Esprit' has told Channel Television it is closing its  King Street store because of a 20% hike in rent. The shop owners currently  pay £73,000 per year but the landlord told them they would have to pay £89,000 per year to renew the lease. Electrical retailer Barry Jenkins says he is not surprised to see the shop  pull out of the high street. Mr Jenkins has owned Fotosound in King Street  for 37 years and says business has changed dramatically in that time.

Increased competition from the internet and falling numbers of shoppers have made rent less affordable. He said: "When we entered into these lease agreements many years ago, they could almost be afforded because trading was good. But now it's not so good. Tourist numbers are half what they were, we now have to charge 5% sales tax to the customer and you've got competition from online retailers so actually these rents now, these leases are really not fit for purpose."

Bill Sarre from commercial property consultants CBRE says rents are negotiable and that on the whole landlords are not being greedy. Mr Sarre admits that in the future some landlords will need to live in the 'real world' when it comes to rental prices, or else risk having vacant
properties. (1)

I was looking at a few recent leases, and while Sandpiper had a lease of £161, 580 per annum for Units 3,4 and 5 Liberty Warf, the situation was very different in King Street where Top Man signed a lease for £225,000 per annum. You need a lot of sales to generate that kind of income.

Another pressure on the High Street is the way in which we shop. It is not just the cheaper cost of shopping online; there is also the convenience, and often the greater choice. The High Street has to compete with out of town warehousing, so that even if, as David Warr suggested, GST was imposed, many prices would still be cheaper online. But habits of shopping are changing.

Mothercare has been closing shops since 2011, and adopting a different business model. More than 20% of the sales are generated online, and as leases come up for renewal, the least profitable are not be renewed. As Richard Fletcher notes in The Telegraph:

"The economics of high street shops no longer works for Mothercare, or a host of other retailers. We may still be a nation of shoppers - but how we shop and where we shop is changing rapidly." (2)

Where Mothercare is staying, they are looking towards deals on leases or a switch to switch to turnover-related rents. It is a fact that the economics of smaller shopping centres - and Jersey's is no different - no longer work. Landlords have yet to recognise that and reduce rents. But there is no sign of any major expose of leases in the High Street in Jersey; and even Mr Warr said little about the need to address what is arguably crucial. Any imposition of GST on all incoming goods would effectively help to protect the high rentals paid to the landlords by retail outlets. As any public criticism of landlords will certainly not help private negotiations on leases, it is unlikely that the Chamber of Commerce will be addressing that with statistics any time in the near future. Will there be questions about whether retailers think leases are excessive or have little scope for market downturn in the next Chamber survey? I suspect not, although I would like to be proven wrong.

Another practice which has been increasing is "Showrooming". These are shoppers who visit bookshops and stationers and then decide to compare online costs and make their purchases online. They have seen the product, but they want a better price. The recent comments by correspondence to the JEP on Facebook and their online pages shows that a number of people have found online products to be around a third less than the price in the High Street. This is again not surprising, as the overheads, and in particular the rent, is so much higher, so the charge for goods sold has to recoup that if the shop is to be viable.

In the late 18th and early 19th century, there was an ongoing political debate about whether the import of corn should be protected by tariff barriers, or open to free trade. William Thornton was one of those looking at how the economics of protectionism played out with rentals:

"Thornton proposed that the rent paid for a plot of land was the outcome of a bargain between the landlord and the farmer. He further argued that, in any given season, both will attempt to 'calculate how much the value of the produce of the land is likely to exceed the expenses of cultivation, together with the usual profit on those expenses' . The difference is expressed as rent. The final rental charge that the farmer paid to the landlord was determined by the relative bargaining strength of each party." (3)

He noted that pressure would be put on the local market by the repeal of the Corn Laws, and said that "it is clear that, unless this reduction were counterbalanced by a diminution of the expenses of cultivation, a corresponding reduction would take place in rents generally; and that some poor land, being unable to pay any rent at all, would be thrown out of cultivation."

The empty shops in the high street bear witness to a comparative economic situation. Although we no longer live in a largely rural society, the retail outlets are being "thrown out of cultivation". Protectionist policy protects landlords from market forces, and it is questionable whether that should be government policy. It introduces a dependency on protected markets, and in Jersey would need considerable cost to implement; essentially to charge GST on all imports would not be cost effective.

Abboushi Suhail, looking at protectionist policies, argues that they are ultimately not of benefit to society:

"These efficiency losses are the result of production distortions, reduced consumption, and the many side effects on consumers' purchasing power, industrial customers, and the added bureaucratic and government expenditures to monitor and enforce the policies. It is fair to summarize and say that while protection measures may benefit domestic producers and perhaps some affiliated other parties, in the end, the society pays the price in many ways. Evidence from these and other studies clearly show that the costs of trade protectionism exceed the benefits. While domestic producers and possibly their workers may gain for a while, consumers and society lose. Inefficiencies inflict the entire economy and hamper growth, investment, employment, and ultimately even government revenues. In other words, protectionism produces a dependency effect that the beneficiaries find difficult to dispense with." (4)

And that's precisely what GST on almost all imports - the remedy suggested by local trader David Warr - would cost - in particular the "added bureaucratic and government expenditures to monitor and enforce the policies". That's not what Mr Warr has thought through.

I can see where he is coming from, though. All commercial exports to the UK need VAT, and there is no longer any low value consignment relief. This is expedited by Jersey Post allowing pre-payment of VAT charges on packages to be sent, and that ensures they get there speedily and are not delayed on arrival awaiting collection of VAT. The monies collected by Jersey Post are remitted to UK Customs.

But in Jersey, that's easy to implement. To ensure all suppliers of goods to the Island have GST prepaid on them is manifestly impossible. We are the small minnow in the lake, and the postal services all across the length and breadth of the UK are simply too disparate to accommodate us with a similar scheme; they have a large enough market to not need to concern themselves with the administrative costs of one small Island. So unfair as it may seem, such a mirror scheme is not remotely feasible, and GST is collected on goods as they come into the Island if over the threshold; the administrative burden is and will remain local.

It is also true questionable whether increasing the cost of imported goods below the "de minimis" limit would have an appreciable effect on consumer spending in the high street. As wages are increasing only very slowly, if at all, costs of utilities is rising, the likelihood is simply that rather than spend online, people would simply reduce spending. It is only in a buoyant economy that a protectionist policy would have any chance of success, and that is not the situation in which we find ourselves.

When shops which have closed or are under administration are also considered, recent casualties in Jersey such as Jessops, HMV and Blockbuster are also UK high street chains. Jersey is also vulnerable when UK stores face financial problems, even if the Jersey store is performing well. There is very little that can be done to mitigate this, but including the failing companies in the Jersey high street as part of a move to bring in GST on imports, as if that would benefit those companies, is clearly nonsensical.
And finally, it is a protectionist policy which Mr Warr is advocating with respected to imported goods, seeking to increase the cost to the consumer of buying online as opposed to buying from retail outlets that have also imported the goods. I think can be a case made for protecting a local market where it is manufactured or supplied locally - local milk for example, which protects the Jersey cow. But this is not about protecting a local supply, it is about protecting a different channel for importation of goods, and it is hard to see how any special merit can be placed on that.

(3) William Thomas Thornton's 'The True Consequences of the Repeal of the Corn Laws' with an Introduction and Annotations.  Mark Donoghue,-History of Economics Review, 2010
(4) Protectionism Revisited - Background, Outcomes, and Analysis, Abboushi Suhail, Competition Forum, 2008

1 comment:

Tom Gruchy said...

A few Island Plans back there was a policy to regenerate St Helier by releasing up to 500 units of residential accommodation above shops. These units tended to be leftovers from a previous age when the shopkeeper lived over the retail space and accessed it via a common staircase.
Fire regs and security put an end to that but presumably much of this under-used space survives so rents are even more distorted because the buildings are so ill-used.

On the other hand St Helier is now full of sub-standard office accommodation of which much is empty or under used too.
Much of this was never purpose made and even recent build structures are considered obsolete.

The Ozouf dream to move the commercial heart of St Helier to the Waterfront is all part of the current plan to ensure the demise of a traditional way of life.
The Co-op battle in York Street, the empty hotel that was the Midland Bank, the proposal to build a new Town Hall and so on are all parts of the problem which is more complex than just rents that are too high...