Farmers good, big retailers bad - could that really be true?

WHEN you buy something in a supermarket or a department store, how much of the price that you pay is the store's mark-up? And of that mark-up, how much covers the store's costs and how much is clear profit? Everyone has their own answers to these questions. But I suspect most of those answers are based on vague impressions and long-held prejudices rather than hard evidence.

When I was growing up, we were always hearing about the depredations of ''middlemen''. The poor farmers got terribly low prices for their meat and other produce, but by the time that produce went through many hands to reach us in the city, the prices were sky-high.

These days, we hear continually about the evil practices of the two big supermarket chains. They're busy screwing the life out of dairy farmers and other suppliers, just so they can use cheap milk and bread to lure us into their stores.

This may sound like a good thing for consumers beset by an ever-rising cost of living, but don't be fooled, we're told. The wicked retailers may be undercharging for a few staples, but they make up for it by overcharging for everything else.

Then there are all the people discovering from the internet just how much lower prices are in other countries. More proof we're being ripped off.

In the hands of the media, it's a morality tale. The farmers and manufacturers are the good guys getting squeezed; the big retailers and other middlemen are the bad guys raking it in and doing us down.

It would be good to measure all these impressions against some hard statistical facts - facts supplied by an article in the latest issue of the Reserve Bank's Bulletin, on which I'll be drawing heavily.

Part of the problem is our lack of imagination. Many of us have only a vague idea of the role played by the businesses that operate between primary and secondary producers and you and me.

Most retail goods - including food and non-alcoholic drinks, clothing, footwear, electrical equipment, furniture and home appliances, and motor vehicles, but not ''meals out'' or takeaways - are produced in factories, whether locally or overseas.

The basic cost of producing those goods includes the cost of transporting them to wholesalers' warehouses, plus import duty where still applicable. Wholesalers incur costs in storing goods and transporting them around the country to retailers, plus normal administrative costs. Retailers incur costs of rent, storage, display, finance and other costs.

Naturally, both wholesalers and retailers employ many workers to help them carry out their role, not of making goods, but of distributing them into hands of consumers across the nation. Indeed, the work of this ''retail supply chain'' accounts for about 7 per cent of the final value of all goods and services sold in Australia (gross domestic product) and about 10 per cent of total employment. So one worker in 10 is employed as a supposedly unproductive ''middleman''.

On average, the manufactured cost of the goods we buy accounts for about half the retail prices we pay. About 40 per cent of the prices we pay covers the costs incurred by wholesalers and retailers, with wage costs accounting for a bit less than 20 per cent and other costs for a bit more than 20 per cent.

That means the wholesalers' and retailers' net profits account for only about 10 per cent of the prices we pay, with about three-quarters of that going to the retailers.

Of course, these overall averages differ for different products. Whereas the gross profit margin (that is, before allowing for expenses) averages 50 per cent, it's closer to 60 per cent for clothing and footwear, a bit over 50 per cent for electrical equipment, a bit under 50 for furniture and appliances, about 40 per cent for food and drink, and just 25 per cent for motor vehicles.

Gross margins also vary according to the size of retail outlets and the speed at which stock turns over. Margins are higher in boutique stores than department stores, and higher in small convenience stores than big supermarkets, where the profit-making emphasis is on rapid turnover rather than high margins.

The Reserve Bank's detailed examination covered the figures for the nine years to 2007-08, though other checks suggest they have not changed much since then. It found the production prices of locally manufactured goods rose quite strongly over the period. As well, the wage rates and other costs paid by wholesalers and retailers rose by more than 3 per cent a year.

Even so, the final prices of retail goods rose by only about 1 per cent a year. So much for the notion that retailers have been getting greedier.

But how have they managed to turn costs rising by 3 per cent or so a year into retail prices rising by 1 per cent and do so without suffering any squeeze in their net profit margins?

Because, though business people are always assuring us there's nothing they can do but pass higher costs on to us, in truth there's a lot they can do.

One thing they've done is increasingly substitute cheaper imported goods for ever-more-expensive locally made goods. If that worries you, have a look at my little video on the website or iPad app.

The other thing they've done is raise the productivity of their labour, with the volume of their sales rising a lot faster than the total hours of the workers they employ. They've invested in labour-saving equipment.

And note this: why have they been working so hard to limit their price rises? Because of the power of market forces - in this case, customers who don't like paying more.

Ross Gittins is The Sydney Morning Herald's Economics Editor


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