• Summary
• Downloads
• Explanatory Notes
• Related Information
• Past Releases

CHAPTER 3: CONCEPTS, SOURCES AND METHODS

3.1 This chapter describes the retail trade margins concept as well as the data sources and methods employed to construct PPIs for the output of the retail trade industry.

THE RETAIL TRADE MARGINS CONCEPT

3.2 The SNA describes wholesale and retail margins as follows:

“Although wholesalers and retailers actually buy and sell goods, the goods purchased are not treated as part of their intermediate consumption when they are resold with only minimal processing such as grading, cleaning, packaging, etc. Wholesalers and retailers are treated as supplying services to their customers by storing and displaying a selection of goods in convenient locations and making them easily available for customers to buy. Their output is measured by the total value of the trade margins realized on the goods they purchase for resale. A trade margin is defined as the difference between the actual or imputed price realised on a good purchased for resale and the price that would have to be paid by the distributor to replace the good at the time it is sold or otherwise disposed of. The margins realised on some goods may be negative if their prices have to be marked down. They must also be negative on goods that are never sold because, for example, they go to waste or are stolen.

"The standard formula for measuring output has to be modified for wholesalers or retailers by deducting from the value of the goods sold or otherwise used the value of the goods that would need to be purchased to replace them. The latter includes the additional goods needed to make good recurrent losses due to normal wastage, theft or accidental damage. In practice, the output of a wholesaler or retailer is given by the following identity:

the value of output = the value of sales,

plus the value of goods purchased for resale and used for intermediate consumption, compensation of employees, etc.,

minus the value of goods purchased for resale,

plus the value of additions to inventories of goods for resale,

minus the value of goods withdrawn from inventories of
goods for resale,

minus the value of recurrent losses due to normal rates of
wastage, theft or accidental damage.” (Endnote 16)

3.3 Or put more simply, Output = Sales – Cost of Goods Sold.


MEASURING PRICE CHANGE

3.4 A price index is a measure of the proportionate, or percentage, changes in a set of prices over time. In constructing a price index to be used to deflate observed transactions the objective is to measure pure price change which abstracts from any change in the quality of the products that are priced. This is referred to as pricing to constant quality. The starting point is to measure price change for specific individual products to constant quality and then to weight these measures together in terms of their relative economic importance with respect to one another to arrive at an aggregate or summary measure of price change. These objectives present a number of practical challenges when producing RTPIs.


PRICING BASIS FOR THE COMPILATION OF A RTPI (Endnote 17)

3.5 The unobservable retail trade margins price is derived as the difference between the price at which the product is sold and the current replacement cost, to the retailer, of the product sold.

3.6 While collecting information on the prices at which products are sold is relatively straightforward, the collection of information on the replacement cost of goods sold is less so, as in concept they should be valued at their replacement cost at the time of sale. This is difficult to achieve in practice. Although most businesses are able to report the cost of goods sold, the pricing basis is almost universally based on the purchase price rather than the current replacement cost. The extent to which a measure based on purchase price will deviate from the conceptually preferred measure will depend on the length of time goods are held in inventory and the rate at which their purchase price changes.

3.7 Typically, price indexes are based on prices for a sample of very narrowly specified products (e.g. 1 kilogram of Granny Smith apples). The use of narrowly specified products is not necessary for the purpose of measuring retail trade margin prices. In a typical price index the selection of narrowly defined products for pricing is designed to achieve the objective of pricing to constant quality. The quality of the products produced or purchased can be seen to be embodied in their physical characteristics, so preserving these characteristics over time serves to ensure that measures of price change are based on comparisons of like with like. The argument for following this approach is less compelling when the objective of the RTPIs is to measure the price of the distribution service. While there must exist a retail trade margin for each product (positive or negative), it is less clear that the distribution service itself can be meaningfully disaggregated to this level. The view of the ABS is that the quality of the distribution service is more closely related to the range of similar products provided for sale. In other words, the distribution service associated with the provision of fresh fruit and vegetables as a whole is a more meaningful concept than the distribution service associated with Granny Smith apples. This view would also appear to align better with the pricing practices of businesses which tend to set selling prices of individual products with the objective of maximising a retail trade margin across a range of products.

3.8 This 'range of products' view underpins the RTPIs developed by the ABS. Accordingly, these indexes are based on sales and cost of goods sold data collected for categories of products rather than for specific products. The problem then becomes how to define the various 'product categories'. If the level of product aggregation is too broad, the price measure is likely to be overly influenced by any shifts in sales between products that have naturally different retail trade margins. For example, the measured retail trade margin for a product grouping that includes both dairy products and fresh fruit and vegetables is likely to vary depending on the relative value of sales of dairy products compared to fresh fruit and vegetables – that is, the measured aggregate retail trade margin price could vary from period to period due to changes in the relative volume of sales rather than any change in individual retail trade margins. An index displaying this characteristic is referred to in the price index literature as suffering from compositional shift. The challenge is to clearly define product categories in terms of product coverage while minimising the risk of compositional shift. The ABS has selected the Supply and Use Product Classification (SUPC), used in compiling the S–U tables which underpin the annual Australian National Accounts, for this purpose. The product groups are not specific to the retail trade industry, but represent product groups across the broader economy.

3.9 Therefore, aggregate retail margins data for the product groups represented by each SUPC are collected from retailers. These aggregate data reflect the price of the retailer’s service.


PRICING TO A CONSTANT QUALITY (Endnote 18)

3.10 The quality of the distribution service provided by a retailer is difficult to measure. Any attempt to measure the distribution service needs to consider characteristics such as outlet opening hours, numbers of checkouts, floor space, general ambience, temperament of staff, ease of parking, range of products on offer, proximity to other stores etc. While these characteristics may not lend themselves to ready measurement, it is clear that they are linked to the specific outlet providing the products. Therefore, although it may not be possible to make explicit adjustments for any changes in the quality of the service, steps can be taken to minimise or control for quality change.

3.11 Given that the quality of the service can be considered to be unique to each outlet, it follows that the measurement of retail trade margins prices is best done at the outlet level. In the case of multi–location businesses, aggregated data for products represented by selected SUPCs are requested for the selected outlets in each state and territory in which the business operates.

3.12 To assist in identifying any changes in outlet specific quality characteristics, the ABS maintains a close relationship with all data providers. When a quality change is identified at an outlet then the results for that outlet are adjusted to accommodate for the change in quality. Such adjustment includes the imputation of retail trade margins for that outlet from other similar outlets in the sample.


DATA SOURCES AND COLLECTION

3.13 The ABS assessed the availability and suitability of various data sources for the production of RTPIs. This included a search for administrative data as well as utilising data currently collected by the ABS from retail trade businesses. It was determined that the detailed data required to produce the RTPIs was not available and that a separate data collection would need to be implemented. A Retail Trade Margins Survey (RTMS) was then developed.


3.14 The data items collected are:

• Business level total Sales and COGS, by state/territory of operation, for product groups as classified by SUPC;
• For each business, outlet level total Sales and COGS, for each of a selection of outlets within each state/territory of operation, for product groups as classified by SUPC.