FEATURE ARTICLE: RETAIL INDUSTRY PRODUCTIVITY OUTPACES MARKET SECTOR PRODUCTIVITY

INTRODUCTION

Over the past two decades the Retail industry has outperformed the market sector in productivity growth. The strong multifactor productivity (MFP) result reflects developments in how businesses are operating within the industry. Increased competition and advancements in technology have played a key role in this industry transformation. This article provides an overview of the Retail industry, with a focus on factors that drive the industry output and productivity growth over the past two decades.

MULTIFACTOR PRODUCTIVITY OF THE RETAIL INDUSTRY

Since 1995-96, the Retail industry has been one of the key drivers of aggregate productivity growth, averaging MFP growth of 1.5%, exceeding the market sector MFP growth of 0.9% per year. The growth in MFP accelerates for the Retail industry from the mid 2000’s (see Figure 1).

PRODUCTIVITY CONTRIBUTIONS TO OUTPUT GROWTH IN THE RETAIL INDUSTRY

Analysis of productivity over growth cycles (peak to peak) enables clearer evaluation on industry performance by removing possible year to year impacts and showing the underlying growth patterns. The productivity growth cycles for Retail (see Figure 2) show that output growth peaked in the 1996-97 to 2003-04 cycle. Output growth, while positive for all growth cycles has slowed in recent years. Contributions to output growth from capital services rose steadily in the first three growth cycles, to contribute more than half of output growth in the 2003-04 to 2009-10 growth cycle.

Since 1995-96, growth in MFP and capital services have been the main drivers of gross value added growth. Contribution of MFP growth indicates changes to operating practices with a significant degree of technical progress occurring in the industry that improves the overall efficiency. Key developments include changes to opening hours, increased online retailing and the adoption of less labour intensive technology, such as self-serve checkouts, automated ordering and shelf-ready packaging at brick-and-mortar stores. The steady build-up in capital services, associated with the decline in hours worked may reflect efforts to augment labour with more capital, in order to utilise labour more efficiently.

Automation and digitally enabled retailing have diverted the industry from labour intensive practices. Solid growth has also occurred in the industry in terms of labour productivity, driven by the strength in technological advancement (i.e. high MFP growth) and increases in the amount of capital per worker (capital deepening). The three growth cycles spanning the 1991-92 to 2009-10 period suggest that automation and digitally enabled retailing have shifted the dynamic by diverting labour services away from tasks that can be automated (like self serve checkouts).

The composition shifted significantly in the last growth cycle, 2009-10 to 2016-17. In particular, capital services contribution to output growth, that had been strong prior to 2009-10, slowed to 0.8 percentage points. The strong MFP contribution in the latest cycle may suggest retailers are reaping benefits of earlier investments or reflect a more cautionary approach by retailers in response to subdued domestic retail conditions and uncertainty in international markets. Nonetheless, the consistent growth in MFP across the cycles, suggests that operational transformation within the retail industry has been successful. That is, retailers continued to generate more output (in real terms) for each unit of labour and capital input.