A Q&A with Professors Mark Harrison and Michael Waterson, Economics, and Dr Scott Dacko, Warwick Business School

Published February 2014

“I predict the Internet will soon go spectacularly supernova and in 1996 catastrophically collapse.”

Robert Metcalfe, December 1995 issue of InfoWorld (Source: digitaltrends.com)

As predictions go, Metcalfe’s is a spectacular failure and is listed, amongst many others, as such in a number of ‘compendiums of bad predictions’. Following the recent closure of retailers Jessops, Comet, Woolworths and the potential closure of HMV, many members of the ‘commentariat’ are just as confidently predicting the end of the high street and traditional town centres but are these sardonic soothsayers likely to be the Metcalfes of tomorrow?

We talk to Professors Mark Harrison and Michael Waterson and Dr Scott Dacko and discover a more optimistic appraisal for precincts and high streets – if they are prepared to change their focus.

Have the most recent group of retailers (HMV, Jessops, Comet and Woolworths) entering administration gone out of business for the same reasons?

Professor Mark Harrison, Department of Economics: It’s hard to say specifically. However, productivity growth in retail has been a major part of British economic growth in recent decades and the shift to internet retail is a natural extension of this. What is happening on the high street is that we are losing activities like groceries, furniture, and electronic goods, where there are significant economies from scale and centralization.

Professor Michael Waterson, Department of Economics: I would say that all of these retailers sell relatively high value things that can be tightly specified enough to be homogeneous. In other words, once I decide to buy a particular television or a particular CD I can buy it from a number of locations. Retailers on the high street spend time and money developing consumers’ ideas on these products but must capture a sufficient proportion of the consumers to whom they demonstrate in order to make it worth their while. Alternatively if it is quite difficult for the consumer to receive the product from an online retailer, or to get it returned to them if it goes wrong, then the consumer may be persuaded to buy from the high street. John Lewis is able to solve this problem, because they offer a very good, trusted service that people in sufficient numbers are willing to pay for.

Increasingly, businesses will have to provide a seamless online and offline experience for the shopper

I think there are several issues to consider. One is the type of good. Internet suppliers are not much into washing machines, because they don’t really satisfy some key criteria I have set out above: getting them delivered and sending them back. They are not much into groceries, particularly perishables. CDs are, in one sense ideal, since they go through the letter box and they don’t break down. On the other hand, people may want to listen to them. I noticed this morning that actually, music producers are very keen to see a high street presence in some form, because they do want demonstration facilities to exist and we can expect some chain, shrunk maybe, to survive. A key and interesting example here is the Apple stores, which seem to be all about demonstration, not sales. Canon also reportedly provided significant support to Jessops, for the same reason. Manufacturers do value demonstration facilities.

Dr Scott Dacko, Warwick Business School: These dying companies have not been sufficiently adept with their marketing strategies. For one thing, many have not had a sufficient online impact, which is increasingly vital. HMV tried to diversify into live music and electronics, but such actions tried to compensate for rather than address the core problem of lost sales to online retailers. There will be others too who, similarly, will not get their combined brick-and-mortar and online retail marketing strategy right.

Online companies have lower costs and a well-developed system for providing customers with what they need. The second source of competition are the stores offering a wide range of markedly lower priced, very good value items and with the tough economic conditions, more and more consumers are migrating to them. We have seen Sainsbury’s and Tesco struggle as Aldi and Lidl have gained ground in the food market. The strong results from Primark fit into this category. And then, too, there is part migration by some mainstream consumers to the high end of the market, as they periodically look to enjoy higher quality goods and superior in-store shopping experiences. This is how Waitrose is doing so well.

Given the news last year that Amazon avoided corporation tax, does the demise of traditional (and corporate tax-paying) retailers represent a potential drop in revenue for the Exchequer?

Professor Mark Harrison: Possibly in the short term. But corporation tax is not a particularly efficient way of raising revenue so I am not much moved by this. What I mean is that corporation tax is known to be more growth-restricting than taxes on other things. Lots of people think that corporation tax falls on very rich people, and support it for that reason. Actually corporation tax falls on everybody through higher prices, lower employment, and lower growth. People who want to tax high incomes should tax them when they are received, through personal taxation.

Professor Michael Waterson: Corporation tax is not a reason, so far as I can see. You only pay corporation tax if you make profits. On the other hand, VAT is an issue, because it relates directly to the price, so sending goods from a low VAT location does carry a natural advantage (e.g. CDs and the Channel Islands).

Q3: Is there a future for the high street?

Professor Mark Harrison: The future of the high street will depend on those branches of retail where intimacy is desired and personal service cannot be eliminated: eating, drinking, health and fitness, cosmetics and pampering, niche products, fashions and so forth.

Dr Scott Dacko: Increasingly, businesses will have to provide a seamless online and offline experience for the shopper. They also need to make sure people have a reason to go into their shops by offering unique value. That could be exceptionally strong value such as from 99p stores or Iceland or in providing the most delightful of shopping experiences.

But I also think over the very long-term a number of shops will increasingly become like hubs or depots where it is convenient for people to pick up orders placed online, and clearly we are seeing that ‘click and collect’ is growing in use.

Images: HMV by yoppy (via Flickr).

Amazon Packaging by Nic Taylor (via Flickr).