How the Corporations are ruining the rural and regional economies of Queensland? By Don E Gilbert ? Feburary 2003

Brief Introduction: 2024 I have always proffered that a good paper or article should largely withstand the passage of time. All my Professional Papers are as relevant as when I first wrote them as far back as 1993, but here is an article I have just found that I wrote almost 22 years ago which, is still largely relevant today as it was then.

It says one thing, Australia struggles to change. And many things are still the same, and some are worse. Our political class is way way out of control to the detriment of the State and the Country.

I also wrote this when I was pretty much a tenant advocate that I have been brought to Queensland by the RAQ / ARA. My colleague and I Malcolm became such an effective "research team" they had to split us up.

Not long after that still under Malcolm's guidance I shifted to providing absolutely neutral advice but applying Market Rent / Market Value principles in my work.

From this very disciplined approach we took I developed our SaaS GEM Lease Analytics? which quickly and accurately evaluates a reasonable rent for ONE Retail Shop.

[This article looks at factors detrimental to regional and rural economies. It is not aimed at any organisation or group]

Sydney and Melbourne are awash with money. Our economy has enjoyed sustained growth for over 10 years. While most of the developed world is spluttering or is static, we have continued to grow.

Some growth has been genuine, a lot is funded by debt ie credit card and other borrowings[1], possibly some freeing up of the economy by introduction of the GST (VAT), but a lot has been at the expense of small business capital (and the rural sector). A simple transfer of wealth to the corporations.

Given Australia is peripheral in terms of location as far as economies go, when our luck runs out, the benefits of a balanced economy will not be there; that is the benefits of viable big and small businesses operating in competition with one another vs monopolies and oligopolies trying to invigorate a static economy.

Strengths & weaknesses of big & small businesses (and the need for one another in balance)

DG ? February 2003

Strengths & weaknesses of big & small businesses (and the need for one another in balance)

·???????? Flexible decision making vs Rigid decision making

·???????? Local focus vs National/International focus

·???????? Client centered vs Market centred

·???????? Creative vs Commercialise innovations with appeal

·???????? Labour intensive vs Capital intensive

·???????? Appropriate technology vs Advance technology

·???????? Subcontract vs Vertical integration

·???????? Stable informal labour relations vs more Volatile labour relations

·???????? Facilitators of growth and structural adjustment vs Multipliers and accelerators of growth and structural adjustment

·???????? Ability to grow strongly after recession vs Consolidators of existing growth trends

DG ? February 2003

Clearly an economy benefits from large & small firms in balance. The responsibility is with the ACCC who administers the Trade Practices Act to ensure the balance is maintained.

Some areas impacting on regional & rural economies

These points must be considered in terms of: strengths (and weaknesses) that large & small firms offer; the obligations of directors to deliver l o n g - t e r m value to shareholders; Government instrumentalities to deliver to tax - and rate payers and their implied Duty of Care.

Supermarket monopolies (oligopolies)

The latest estimates are that the combined market share of Coles and Woolworths is around 83% in Australia. By comparison the two top grocers in the UK have 46% of the market share (any one group may not have more than 25%) and the top four have 75%. Market share is also considered on a regional basis, which is critical to consider in Australia (the economy is very spread out).

?In 2000 the top 5 companies in the USA had 42% of the market share, in Germany 43.7%, in 1998 the top 3 in Japan had 17.5% and the top 6 in Canada had 65% for comparison purposes.

Now consider a rural town with one major supermarket, that extracts $40 – 60 Mill PA to Sydney or Melbourne, that leaves a paltry percentage of its take in junior wages (and sometimes rent) in that local economy, vs 3 or 4 independents competing against one another (or a smaller major and two independents), that pay 16%[2] of its sales on average in wages, with the probability that the profit component will also remain in the town.

The target rate for supermarket sales per FTE (full time employee) from 1996/97 to 2002/03 has increased from $325 to $395 K PA. Gross profit targets are also higher up from 19 to 21% with many achieving up to 23% and higher as the butcher, the baker and greengrocer have been incorporated into supermarkets whose monies also do not contribute to that “local economy”. This ignores the petrol station and liquor outlets they are buying as separate businesses.

Given the monies retained in a local community are likely to circulate 4 or 5 times before leaving that area viz multiplier affect, is the regional and rural economy better or worse off, with smaller independents or one of the oligopolies?

This is elementary economics and the politicians are thumbing their noses at its importance.

Aggressive institutional Lessors

Likewise aggressive institutional Lessors are contributing to the demise of regional and rural towns by:

1.????? Hopelessly overcharging rents; and

2.???? Contributing to the overdevelopment of retail floor space.

?The result is a misallocation of capital by both Lessors and Lessees to do the same thing; to distribute goods and services to consumers. We are hopelessly inefficient because we have too much retail floor space, because rents are too high!

?To confirm these points, one must refer to last months QRTSA Retailer that clearly shows the actual rents Lessees are paying vs suggested occupancy costs as a percent of sales in regional shopping centres. For many categories they are inflated by 100%, which comes straight off a businesses bottom line.

One must appreciate if your business is paying $100 K vs a suggested benchmark rent of $50 K, the equivalent affect is $200 to $250 K less circulating in that regional economy again the multiplier affect. Also the smaller high street property owned by a local family is earning no or a very diminished level of rent and significant capital value has been transferred to the shopping centre.

Local Government

It is astounding to observe just how unsophisticated Local Governments are approving new and extended shopping centres, even small neighbourhood centres when clearly existing businesses cannot be supported by a given community. Brisbane City Council is hopeless in this regard. They appear to have no policies or plans. How the hell can one invest in a business and plan for the future, when poor planning policies outside ones reasonable sphere of control can ruin a business overnight?

In Noosa Shire, there is an application in for a 27,000 M2 centre capable of drawing $89 Mill from existing businesses if it were to trade at average levels. The Toowoomba Council approved Grand Plaza of 45,000 M2, Logan Hyperdome was extended to 92,900 M2 of retail space in 97/98, well ahead of population projections. We all know the heartache Robina caused and now Helensvale is a new centre being developed on the Gold Coast.

What are the genuine economic and commercial reasons to support this gross waste of capital? What benchmarks are there for overall retail development? How big must the community be? Are Business Impact Assessments being done on existing businesses before granting approvals?

The damages component is easy to measure, the loss of capital value on existing businesses and centres before and after the development. It now time that the responsibility for excessive development, and the gross waste of capital duplicated and triplicated be placed firmly and fairly on those in decision-making positions. Appropriate rents negotiated at market rental value, would see the supply of floor space adjust. There would be no incentive to develop more (in fact there would be a sharp decline or reallocation to a more suitable use than retail).

Franchise fees

High franchise (and advertising) fees is another source of depletion of regional and rural liquidity to major centres (and overseas). A combination of high rent charges, franchise fees and or reduction of the critical mass of a business due to excessive development have wrecked many good businesses, is ruining many others, and may have a negative impact on the value of a shopping centre.

?A franchise fee is not a right; it is a reward for the benefit the franchise system gives to the franchisees. It is not a reward for super-profit for no or little effort.

Other sources

?Another source ruinous to regional and rural communities are the closure of bank branches (even operating at breaking-even, and with no salaries paid into the local economy), overcharging penalty interest, the withdrawal of state and federal services, contraction of Telstra all not injecting money and services into remote areas.

Then there is a National Competition Commission dictating electricity and dairy reform resulting in farm gate prices to primary producers being below the cost of production! Has the price of your milk or electricity fallen? Also rewarding the state if they bring about often-illogical reform. Is the corporitasion of farms resulting in land clearing beyond what a farmer, whose roots are close to the land would permit, than a city based accountant, demanding yield rather than concern for the environment? And when all the top-soil has blown away and or the water has eroded the rest, that multinational corporation can declare its Australian operation bankrupt and move on! Their social responsibility (or lack thereof) to the communities in which they operate in have no boundaries.

Update December 2024 Banking and Finance

Today of course we can ass in Banking and Finance as our multi=million dollar financial corporations certainly lend money into rural communities; then do not want to do business there; or want to charge us for the priviledged of withdrawing our own money from our own bank accounts, as they have charged fees simply to have an account and used out money to lend out to others!

?Conclusions

?We see endless bleating and hype by state and federal governments. There have been countless inquiries about monopolisation of the grocery industry. In 1975 the majors had 40% of the market in Australia, 1985 it was 60%, 1997 78%, 2002 83% and now becoming retail conglomerates.

?There are now requirements to comply with red tape disclosure documents for leases and Financial & Legal Advice Certificates all warning the aspiring entrepreneur to “beware” about this and that. But there is nothing to address the hard facts outlined above.

?The press writes feel good articles about buying franchises, we hear retail sales are higher every year, but never that the profits are lower, or that retail sales now include gambling and GST. We never see an article about 1,000’s of business failures AND WHY THEY ARE FAILING AND WHAT IS BEING DONE TO FIX THE PROBLEMS?

We must:

·???????? Fix the retail shop leases legislation.

·???????? Fix the oligopolies in the grocery industry. Imagine a foreign company buying 43% of our grocery market share in a hostile takeover bid because management is incompetent and is “justified” because it is in the “shareholders interests”. Is it in the “national” interest? Now think how it might be possible to bid for 43% of the market share if owned by 1000 independents – it is not possible, it is also in the national interest that this wealth is spread around.

·???????? Sell down market share of the grocery industry to 25% max each within 2 years eg. At a PE multiple of say 2 or 3 or the price independents buy and sell businesses for.

·???????? Appropriate and within reason, franchise fees and occupancy costs for different business categories at various sales levels to reward each stakeholder appropriately for capital inputs, bearing in mind property is a sunk cost, and there should be no reward for inappropriate or reckless outlays as appears to be the case.

·???????? Rather than sell our power industries to American and Chinese superfunds, buy them ourselves!

·???????? Legislate that the last bank that has closed in a rural town to reopen, even if it operates at “break-even” viz. What of the social responsibility of big business as the country’s corporate citizens?

·???????? Get real economists in Canberra.

·???????? Have policies to address the country’s balance of payments such as import replacement schemes, incubators etc for value adding.

·???????? Lastly but not least, a healthy and responsible attitude for business and commerce to work hand in glove with our environment (tomorrows future).

?

These initiatives would then see proper allocation of capital to where it is needed. Reward for effort would see confidence rather than fear return to the small business sector. SME’s (small to medium enterprises) see local opportunities, they have local focus. It will reverse the movement of people from the cities back to local areas if there is reward for effort. The press must be able to report the truth, as it is happening, not as the media masters tell us what they want us to hear.

These issues are dear to every would-be entrepreneur, but without governments stepping in this country’s real potential will never be recognised.

Next month “The Outgoings Code of Conduct” and after that some more practical leasing issues and updates on progress (if any) being made on the review of the Retail Shop Leases Act.

Don E Gilbert

? February 2003

[1] Governments are using monetary policy, no longer to manage the economy, rather to manipulate the stock markets here and overseas?

[2] Ref PRACDEV Key Indicators for Mixed Business and Supermarket profiles 2002/03.