View from City Road: Why it's better doing business in Britain

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The Independent Online
What do you buy when you go to the States? Compact discs, contact lens solution and clothes figure on most people's shopping lists. You might also eat well while you are there and pack your bags full of toys for the kids back home.

Anyone who has been to the US recently will tell you it is cheaper than here. McKinsey & Company, the management consultant, has produced a report which says the average price gap is 32 per cent.

Staggering though that is, it is not the full story. Most holidaymakers will not have noticed the best bargains. According to McKinsey these are to be found in the do-it-yourself, or hardware, sector. Prices of paint, screws and wood are 77 per cent higher here than in the US.

Why are British prices so much higher? One of the biggest differences is land prices. Whereas British food retailers have to pay pounds 10m for a superstore site in the South-east, their counterparts need spend only a fraction of that in the US.

Labour costs are also higher and productivity lower in the UK. And there are import duties and sales taxes to take into account. McKinsey has taken the 10-year average exchange rate of dollars 1.60 throughout.

But a nagging doubt remains. Are British consumers getting a raw deal? The answer depends on what sector you look at.

Take food. McKinsey found that the initial mark-up, reflected in gross margins, was much the same in America and Britain, but that UK retailers made much higher returns on capital. This is because their lower operating costs and the advantage of negative working capital - UK food retailers sell their stock before they pay their suppliers - outweigh the effect of higher capital costs (land and buildings).

In other words, British food retailers make more profits not because they impose larger mark-ups but because they use their capital more efficiently. They also start with more expensive goods.

The same is not true of do-it- youself. In this business, the UK-US price gap is enormous but the British retailers still do not make huge sums of money. This suggests that American retailers would be far better off looking at the British do-it-yourself market than at food retailing if they are considering expanding here.

Food retailers cannot afford to relax, however. McKinsey confirms that shoppers are becoming ever more price conscious, which means there is room for the discounters such as Netto, Kwik Save and Aldi.

But price consciousness does not spell the end of the established supermarket groups. David Sainsbury was right when he said yesterday that there were too many old stores and not enough new ones.

British retailers are better off opening stores at home than in the US. As many have found to their cost, the States is far too competitive.