R.I. HOLIDAY SHOPPING:
THE NEW PLAYERS

The Providence Journal, Editorial Page, December, 1999

This year, the prevailing economic climate during this Christmas season is the best it has been this decade. The national economy is roaring ahead, continually surpassing growth expectations. New England's economic performance no longer lags the nation's. Rhode Island's recovery has become far more broadly based, with a number of individual economic indicators showing continued strength. And Rhode Island has been on a roll: It has out-performed the nation in retail sales growth for the last two Christmases.

Recent retail expansion in Rhode Island had been extraordinary, even before the holiday season began. The most visible illustration of this, the Providence Place mall, opened at a very opportune time, as the economy was moving ahead nicely and retail sales in this state have been growing at double-digit rates for all but one month since June. In fact, sales here have been growing faster than available data indicate, since those data are based on retail sales subject to the sales tax, which excludes clothing.

While it might appear that retail sales can't continue to grow at current rates, that might not be the case. Providence Place will keep some Rhode Islanders from shopping in Massachusetts. This re-directed retail traffic bodes well for our sustaining retail growth comparable to the rates we have witnessed of late. I expect the dollar value of retail sales in Rhode Island this holiday season to again be very strong, growing by about 7 percent from last Christmas's level.

While this figure is very impressive, I seriously doubt that many retail establishments will be all that happy.

Consider how the profitability of individual stores will be affected by our current economic climate. On the cost side, labor shortages have made the recently raised minimum wage irrelevant. My best guess is that the "de-facto" minimum wage is somewhere around $6.25 -- $6.50 an hour. (The official Rhode Island minimum wage is $5.65.) In fact, some stores are having so much difficulty finding capable employees that they have offered signing bonuses and other incentives. All of this tends to raise costs.

On the revenue side, there is a great deal of competition for individual stores, not only from other "brick and mortar" establishments, but from the Internet as well. The sheer amount of traditional brick and mortar retail competition that has emerged here as the result of such new stores as Staples, Office Depot, Best Buy and Target, and, let's not forget the addition of Providence Place, noticeably diminishes the ability of many stores to raise prices or charge the prices that would make this a truly satisfying season for them.

Indeed, there will be a loss of sales at individual stores that results from an ever-rising number of brick and mortar establishments battling it out during this holiday season.

Will the Internet play a very significant role? While it is true that Internet sales pale by comparison to sales by brick and mortar establishments, they are more significant than most people realize. Everyone I have heard discussing the role of the Internet views consumers as either purchasing at a local store or on the Internet. The Internet is thus seen as merely an alternative to traditional shopping, creating a shopping-choice dichotomy. This overlooks that the Internet is also an exceptional data and information source that lets consumers comparison-shop for "commodity items" without having to leave their homes.

How many people go to a store, check out the features and price of a standardized item, and then go home and buy it online for a lower price? This has been occurring more and more frequently. Or, using the Internet, you might discover that a wider range of similar items than you were originally aware of exists, causing you to comparison-shop when you might have been content with an item at a specific store.

Keep in mind that based on current growth rates for Internet sales nationally, in just a few years these will represent about 5 percent of retail sales. There is one other reason why Internet sales are more important in Rhode Island than most people seem to realize -- our 7 percent sales tax rate.

We are always told that the relatively high rate for our sales tax is not really a problem since many items are excluded from this tax. But, unknown to many Internet shoppers, whenever they purchase an item online, they incur a sales tax liability even if the vendor doesn't collect it. This refers to Rhode Island's Use Tax, an item on our state income-tax form. So, for persons unaware of our Use Tax, it is very easy for an item's shipping costs to be less than the 7 percent sales tax liability they would have to pay at a brick and mortar store in Rhode Island. They tend to view such a purchase as a double gain: a lower price and the ability to pay less than the sales tax for this state.

I'm not saying that in the near future everything will be bought on the Internet and malls will be empty. What I am saying is that for such "commodity" (standard) items as books, electronic goods, computer hardware and software, some clothing, and personal-care items, any item or items with a combined price of as little as $150 will have lower shipping costs (often around $10) than the Rhode Island sales tax from in-state purchases. For books, shipping cost is usually $3 plus 95 cents for each book ordered, lowering "break even" with the sales tax to purchases of as little as $56.

How irresistible will this temptation for persons to use the Internet be this holiday season? It's too early to tell. But this dimension of retail sales, along with its ability to inform consumers of the wide range of choices available, must be considered. So, the impact of the Internet here is greater than what has been assumed. Not only does it have the direct effect that everyone is aware of, it produces an important indirect effect as well -- information on the existence of choices.

So, retail sales in Rhode Island during this holiday season should again exceed expectations. But, labor shortages, which raise costs, and the sheer volume of added retail competition from both the Internet and brick and mortar establishments, will hamper revenues. Retailers in general won't be all that happy, but shoppers will be delighted.

Beyond this holiday season, the success of Rhode Island's ever-expanding number of retail establishments will be determined by the national and regional economies, the extent to which our stores can keep Rhode Islanders purchasing in state, the offsets caused by the increased number of the competing retail establishments now in this state, and the rate at which Internet sales grow.

by Leonard Lardaro