What do Bunnings, gold and Aussie productivity growth have in common?
I’m not exactly sure either. But by the end of today’s essay, we might both have a better idea.
Let’s start with Bunnings. It’s facing an uphill battle to replicate the success of its home improvement business in the UK. It wrote down the value of its offshore foray by $1 billion at the half-year results, as well as revealing a half year loss of $165 million.
Bunnings is owned by Wesfarmers [ASX:WES] the company that, up until it’s debt-heavy purchase of Coles supermarkets on the cusp of the financial crisis, could do no wrong.
Bunnings is of course a dominant player in its sector in Australia. So dominant, in fact, the company thought they could replicate this competitive advantage in the UK and Ireland. But so far, not so good.
The Financial Review reports that new boss Rob Scott, who is undertaking a strategic review of the business, says some of the problems are self-inflicted.
‘Mr Scott has not ruled out pulling the plug on Bunnings’ $1 billion investment in the UK and Ireland after admitting the retailer suffered “self-inflicted” wounds by removing popular products from Homebase stores and sacking local staff following its $705 million acquisition of the UK’s second-largest home improvement chain.’
Certainly it’s not management providing a competitive advantage. Sacking the locals right after the acquisition? That’s stupidity.
Perhaps being number one for so many years in your home country, and seeing off a competitor in Woolworth’s failed Masters hardware stores, produced a lack of humility.
I’m sure that’s part of it. The other part is that Australia, probably because of geography and population, simply doesn’t create competitive large industries. Bunnings is an undisputed leader in its field. Coles and Woolies have immense pricing power and use it on suppliers to try and win market share. The banks are an oligopoly. We have two big insurers in IAG and Suncorp.
The problem is that when these players try and invest their capital in overseas markets, they invariably fail. The relatively easy duopoly/oligopoly market conditions experienced at home simply don’t prepare management for tougher foreign markets.
Maybe it’s not just different competitive conditions. Maybe it’s the hubris that comes from being successful when you clearly don’t know the underlying cause of your own success. That is, a cosy market structure.
The failure of corporate Australia to successfully export and generate a return on capital is glaring. It suggests we’re not ‘fit’ in a corporate sense. We’re not productive in fostering competition and output.
Weak Aussie productivity growth still a problem
This could be one of the reasons why productivity growth is persistently low here. A recent IMF report says one of the reasons why wages growth is weak around the world — including in Australia — is that productivity growth remains poor.
This has been an issue for years and it will continue to be for many more to come. That’s because successive governments haven’t done anything to promote productivity growth. Decent tax reform would help. But with politics in its current state, that’s not going to happen.
If a country increases its productivity, it can afford to give employees a pay rise, and that will happen without a pick-up in inflation. That means employees get a REAL wage rise, not just a nominal one.
But right now in Australia, we’re getting low nominal wage growth and increased costs in about everything. That means many Australians are experiencing a reduction in REAL wages.
The solution to increase nominal wages — according to the geniuses at the IMF — is to maintain accommodative policies in order to get unemployment levels below full employment. That would then reduce labour market slack and put pressure on inflation.
As the Financial Review reports:
‘In Australia, where unemployment has been stuck around 5.5 per cent for much of the past year, that level is just below 5 per cent, according to the Reserve Bank. In the lead up to the 2008 financial crisis – when inflation was accelerating – the jobless rate was around 4 per cent.
‘“Wage growth is…unlikely to pick up until [labour market] slack diminishes meaningfully – an outcome that requires continued accommodative policies to boost aggregate demand,” the report’s authors said.’
So, pretty much create an inflationary wage rise, which would push nominal wages up along with inflation, which means no REAL wage rise? Oh well, I guess it’s better than the current situation of a real wage decline.
Can you see what’s happening here? The IMF is basically telling governments around the world to keep monetary and fiscal policy loose for as long as it takes to get labour markets below full employment levels. In their own words, with my emphasis:
‘But the fund’s analysts – who also call for renewed efforts to boost skill levels and education – suggest jobless rates may need to fall below levels normally considered “full employment” before shortages of workers stoke wages growth.’
Inflation is coming. It may not hit next month, this year, or even the next. But it’s coming. Because policymakers around the world will keep their foot on the pedal until they get it.
Which brings me to gold. When the market realises that governments and central banks will put up with higher than expected levels of inflation, it will start moving ‘insurance capital’ into the precious metal.
Perhaps that’s why gold has been steadily building towards a major breakout over the past few months? More on that tomorrow…
Editor, Crisis & Opportunity