Tax and Fiscal Policy

The answer to the high street downturn is innovation – not taxes

You probably bought something online last week – maybe an express delivery dress for Saturday night, or even your weekly food shop. Why? Because it’s convenient, cheap, and provides us with a lot of choice.

It’s no wonder that online shopping in Britain is up 16.8 per cent year-on-year growth during the first half of 2018.

Contrast this with the sustained downturn in high street retail across the UK, and it might seem like online-only retailers like Amazon and Asos are sucking the life from brick-and-mortar stores. Amazon is experiencing record-smashing profits, while M&S will close an estimated 100 stores between now and 2022, and House of Fraser has gone into administration.
What can be done to support high street stores, as they face growing competition online?

Chancellor Philip Hammond has one proposal, backed last week by Scottish Conservative leader Ruth Davidson: an “Amazon tax” on online giants, to “rebalance the playing field”.

The chancellor argues that our shopping habits are changing and causing the high street to suffer. The response is to slap a tax on the booming business wrought by online retailers.

Not so fast. While the relationship between online retail growth and high street success is likely inverse (as people switch from the high street to the internet), that is no reason to clamp down on successful online retailers. Increasing their tax burden would punish the businesses of the future, while doing nothing to prop up the businesses of yesterday.

The most likely result of an Amazon tax would be higher prices for consumers online, but this wouldn’t drive consumers back to the high street.

The benefits of online shopping (convenience, a wide variety of choices, the ability to read reviews and compare prices), would remain hard to beat. Sure, if you’re on Oxford Street in central London you can dip in and out of competitors’ stores and do a bit of comparison-shopping, but that is not a viable option for most people. Consumers would suffer, while high street retailers would still fail to benefit.

The actual solution to boosting the performance of high street brands is adapting to this new landscape, not fighting it.

Take Morrisons. After experiencing years of poor performance culminating in nearly £800m in losses in 2015, the company launched an ambitious turnaround program. This involved a multifaceted strategy: cutting prices, expanding its brand, and streamlining management roles. However, the key to the recovery was venturing into wholesale territory, cutting a deal with none other than Amazon.

Morrisons looked at Amazon’s success and saw an opportunity. The company began supplying Amazon with produce, that the online giant then sold through its Amazon Fresh and Amazon Pantry sites.
Both companies saw a mutual benefit. Amazon increased its market share of grocery sales, and Morrisons created a booming wholesale division.

The result? Morrisons is in its third consecutive year of growth and is the fastest growing of the big four supermarkets.

The mutual benefits that can be achieved through the partnerships between online retail giants and high street stores should be incentive enough for high street companies to bridge the gap between the old and the new, and seek to innovate their business model. We don’t need extra taxes to play these companies off against one another.

In fact, if the government is to intervene, its first move should be to decrease the tax burden on high street stores, giving them ample opportunity to compete. But pitting the success of one model against the other, while hiking taxes on business and consumers, will make the wide world of shopping much worse off.

Online retail should be the new frontier for the high street, not the final nail in the coffin.

This article was first published in City AM.

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Development Officer

Morgan is Development Officer at the Institute of Economic Affairs. She graduated from the University of Tampa in 2016 with a double major in Government and World Affairs and Economics. While at UT she was an active member in many organisations including the Adam Smith Society, President’s Leadership Fellows, and Alpha Chi Omega. After graduating, she moved to London and achieved a Distinction in her Master’s degree in International Political Economy at King’s College London. Prior to starting with the development department, Morgan worked as an IEA operations intern.

2 thoughts on “The answer to the high street downturn is innovation – not taxes”

  1. Posted 22/08/2018 at 13:30 | Permalink

    The more the consumer is taxed, the less the less they have to spend in total, so they will allocate a greater proportion of this total to the cheapest shopping method, which is online shopping. This also applies to minimum alcohol pricing. If the supermarket price is increased and the drinker wants to consume the same amount of alcohol, they will buy a greater proportion of it from the supermarket. It will not benefit pubs.

  2. Posted 22/08/2018 at 13:50 | Permalink

    Further to my previous comment. The phenomenon I figured out myself in relation to minimum alcohol pricing was, as I’m sure you and your readers are well aware, independently discovered by (according to WP), Simon Gray in 1815 and the economist Sir Robert Giffen around 1890.

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