The many sides to retail productivity growth

You’ve Got Mail is an underrated classic. It has many late-nineties “LOL internet” touches which make it look dated, but that’s irrelevant. Meg Ryan and Tom Hanks meet each other and then experience human emotions, which is also irrelevant. What the movie is really about is productivity growth, and our ambivalence toward it.

Meg Ryan runs a small bookstore that she inherited from her mother.[1] Her staff are like family, and she knows all her regular customers and takes joy in being involved in their lives as she recommends books for them. Then one day a book superstore, run by Tom Hanks, moves into the next block. It’s huge, characterless, and focused on the market above anything else (“We sell cheap books”). Loyal friends express outrage, but money talks, and our hero loses everything.[2]

The book superstore is all about productivity. When the business lobby talks about “improving productivity”, they mean finding ways to get people to work longer hours for less pay, a deceptive piece of nonsense that leaves people suspicious of the whole concept. But what productivity really means is generating more output with the same inputs (the same hours worked, and the same capital equipment). That’s possible because of innovation and new technology.

An animation loop of the AOL mail icon
#innovation #future #tech #terrific

Since the 1990s, the retail sector has had some of the strongest productivity growth in the economy, after decades (centuries?) of virtually no growth at all. This chart is for Australia, but the story is similar across the OECD.[3] The dashed line covers a period where only a two-decade average is available.

The level of Australian retail productivity

That growth was made possible by computerised inventory, just-in-time logistics, electronic checkouts, and big-box store design. It’s caused the average price of stuff to fall, which by definition has made everyone’s real wages go up. That’s the kind of improvement in the material standard of living that we should be excited about, because it might help us get out of the current stagnation. On the other hand, retail trade might once have been an important part of a community’s daily life, and is now replaced by anonymous, monumental-scale, corporate homogeneity.[4]

Perhaps one way to resolve this tension in big-box retail is to improve the conditions for people who work there. For example, take Bunnings, an Australian hardware chain. It’s built a reputation for low prices, and its huge stores are sparsely staffed. But Jason Murphy has revealed how much that reputation is based on clever tricks (see here and here). Whenever I visit Bunnings now, I remember Murphy’s reporting, and feel torn between resentment and admiration for how effectively they suck money out of their customers.

That bulk of that money is going to shareholders and management.[5] If Bunnings chose—or rather, if Bunnings were compelled to choose due to industrial action—then they could redirect some of it into higher wages and better conditions. I would guess that hardware and DIY is an area where having knowledgeable and experienced staff can really help. Working at Bunnings could become a well-paid job with an attractive career path.

Unfortunately, workers at Bunnings are represented by the SDA, one of Australia’s worst unions. It has a cosy relationship with management, a timid approach to industrial disputes, and focuses most of its energy on opposing gay marriage and abortion. So in this hypothetical, I guess we have to assume that Bunnings workers figure out how to organise themselves without the SDA interfering.

Some people on the centre left have been proposing that we return to industry-wide wage bargains instead of enterprise-level ones, as a way to correct the balance of power in industrial relations and tilt it back towards workers a bit. That’s an interesting idea, but I think this example might show why it’s dicey. Bunnings’ margins are much fatter than other retail chains, so an industry-wide average wage would leave money on the table, and/or make other retail stores unviable. Meanwhile, the career structure you’d want at a hardware chain might not translate easily into other areas.

Productivity growth in retail has benefited everybody, but it’s also created a lot of shit jobs. If we can figure out how to turn them into great jobs, then we’ll be a little step closer to utopia. For now, Utopia is only $A12.50 on Booko.

Cover image: the Zhongshuge bookstore in Hangzhou, by XL-MUSE architects.

1. When I dismissed Set It Up as ‘low stakes’ on Twitter, Monash economist Zac Gross incredulously asked if there were such a thing as a high stakes romantic comedy. This is a perfect example. The main question of the movie is, can Meg Ryan find happiness in a way that honours her dead mother’s memory?

2. As consolation, she finds a soulmate via an epistolary romance, which is a foregone conclusion since both sides of the correspondence are written by Nora Ephron. Still, this is a good countercase to the worst and laziest trope in romantic comedy, where two people meet and then their “falling in love” entirely consists of a montage of them talking and laughing while music plays, leaving us completely unaware of why they like each other or why we should care.

3. I’ve spliced together the ABS’s current retail sector MFP series (5260.0.55.t1) with their earlier ‘experimental estimates’ (from 2010/11), which strictly speaking aren’t comparable but seem close enough for me. The 1970–89 data is from a research paper cited in the RBA’s RDP 1995-05 by Phil Lowe. Many thanks to Stephanie Parsons for expert advice on navigating this confusing area.

4. You’ve Got Mail depicts retail as being mainly about “grudge purchases”, where people love to complain about them but make their actual decisions on cost alone. For a fascinating analysis of how grudge goods work, see Why we’re closing Walnut by Nick Kim.

5. My accounting skills aren’t good enough to figure out the exact capital/labour share from the parent conglomerate’s last annual report (pdf), but the return on capital employed is an eyebrow-raising 49% (see p.27).