Digital taxation, and what it means for small retailers

The chancellor’s Budget announcements will have certainly set a few pulses racing in the independent retail sector, for several reasons. Among the measures likely to have piqued the interests of British retailers were a property rates reduction for small businesses, a £675m ‘future high street’ investment plan, and a proposal that bore a striking resemblance to the Chancellor’s widely-feared levy on online sales.

An online sales tax – a blanket 2% levy on all online sales, which had been dubbed the ‘Amazon Tax’ – had been mooted by the chancellor to tackle the dominance of the likes of Amazon and revitalise a flagging high street. Backed by a number of traditional retail giants like Tesco and the Shaftesbury group, the move would have sparked considerable outrage among the growing sector of multichannel and online-only independent retailers who rely on digital retail and distribution to reach a frequently disparate customer base just to stay competitive.

Thankfully, the chancellor resisted the calls from larger retailers for a needlessly punitive measure. In its place, however, came the digital services tax, a 2% levy placed on the digital revenue generated by search engines, social media platforms and – you guessed it – online retailers.

Sound familiar? You’d be forgiven for thinking so. The new tax, slated to be introduced in 2020, sees the same rate (2%) placed on the same business sector (online retailers) for ostensibly the same reason (to curtail the supremacy of Amazon and save the British high street). The saving grace for independents, however, lies in the caveats imposed upon the proposal – the levy will only apply to UK-generated revenues made by profitable businesses with a global turnover in excess of £500m. This effectively excludes all but the largest digital multinationals and conglomerates, placing the intended focus of the proposals firmly on American tech firms.

Whilst small retailers can breathe a sigh of relief and will obviously benefit from the package of measures designed to support small retailers, they ultimately fail to solve the underlying problems that the government had perhaps hoped for.

The retail playing field

It’s no secret that the traditional retail sector has been struggling as of late, with a string of high street behemoths – House of Fraser, John Lewis, most recently Debenhams – reporting severe difficulties in the face of a challenging retail climate. In contrast, the popularity of online retail is growing, with a record 18.2% of all consumer spending in retail made digitally according to the latest ONS figures. The decline has been severe enough to prompt multiple national newspaper campaigns – the Daily Mail, the Express, the Star – all launched with a rallying cry to ‘Save Our High Streets’ lest they disappear for good. As such, the association between online retail and the death of the British high street is one that will be eminently fresh in the minds of the UK public on a daily basis.

The intention of revitalising Britain’s town centres is unquestionably honourable. However, the fact is that digital taxation won’t do anything to turn customers away from online retail and into the high street. Instead we need to look at the success of digital to understand the real threat to traditional retail.

People don’t shop online to spite bricks-and-mortar stores, but rather because it is convenient for them and relevant to their needs. The government is rightly seeking to improve traditional retail convenience by improving local planning and transport to make in-store shopping a more pleasurable experience and cutting the burden of rate taxation – although one would hazard a guess that the amount being generated is but a drop in the ocean. However, the consumers shopping experience isn’t as simple as a choice between online and in-store, but almost always a combination of both. Traditional retail needs to succeed online as much as in-store since this is where the purchase decision most often begins, and this is the real battleground where issues are being fought.

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The control of the data oligarchs

The success of online retail has been driven by the overwhelmingly powerful presence and fulfilment capability of big players such as Amazon, together with the advent of digital technologies which provide a much more personalised experience that is increasingly reactive to consumer needs. This helps online retailers to serve their customers any time, any place and anywhere. The technology is driven by the use of customer data to create an ever-more intuitive, personalised shopping experience, and it is here where the tech giants are cornering the market.

The ubiquitous, monopolistic nature of the Amazon, Google and Facebooks of this world means that the wealth of the customer data they control gives them an unassailable advantage when it comes to identifying customer demand, reaching and anticipating the needs of those customers. The more consumers who use those platforms, the more data they acquire which their technology then uses to create a more effective marketing experience for consumers. They are able to outcompete any single retailer in reaching their intended audience and delivering a personalised experience. In almost all established markets, the vast majority of online transactions are conducted because of an interaction on Amazon, Google or Facebook-owned platforms.

For small retailers, access to the market is controlled by these data oligarchs through their search platforms, social media platforms or marketplaces. For both new and established brands to reach their audience online, a huge price must be consistently paid to have a conversation with their own customers. If you don’t pay, that audience is available to your nearest competitor. It’s no surprise therefore that the vast majority of advertising and digital marketing spend is invested in Amazon, Google and Facebook. New entrants to the market have no choice but to pay up or lose access.

The ability of traditional retailers to truly compete in a multi-channel world is directly impacted on their ability to access their marketplace and scale their business cost effectively. They cannot hope to compete in the long-term unless the data oligopoly is broken.

Unfortunately, the government’s proposed response only highlights their lack of understanding of the true nature of the digital marketplace. Taxation is a blunt weapon which serves only short-term relief and does not resolve the problem.

For society, the implications are even greater. As consumers, we enjoy the luxury of convenience that Amazon fulfilment and a single, all-knowing search provider gives us. However, in doing so, choice is restricted to a small selection of the highest paying brands on search engines or digital marketplaces. This limits our ability to seek out true diversity of choice and recognise the innovation that exists within our own communities and on the high street. Instead, the way we interact and socialise with the stores and brands around us gets lost in the matrix of an ecommerce space controlled by the oligarchs.

So how do small businesses protect themselves?

It is essential that all key stakeholders – public and private – seek to enable fair and competitive access to the market. A stable economic model depends on enabling healthy competition to flourish. Having only two dominant players in search, a single social media giant and dominant retail marketplace isn’t enough to democratise access for small retailers. We need to break the oligarchs’ stranglehold over market access and give small retailers room to compete on a level playing field. This can be achieved by putting measures in place that allow access to the data behind the technology, giving small retailers access to their audience and customer base and allowing them to compete fairly for customer loyalty.

Aside from breaking up the data monopoly, small retailers also need to find a competitive alternative to the Amazon marketplace and the irresistible pull of its fulfilment capabilities. This could be achieved by establishing a co-operative model to compete with Amazon’s dominance, though such a proposal would require collaboration between smaller and larger brands across the board, as well as government support.

But ultimately all brands need to protect themselves from the ever-increasing cost of acquiring and retaining customer relationships. They must own those relationships by controlling their own customer data, operating their own personalisation technology and focusing on developing customer loyalty organically through direct channels such as email, rather than conducting customer relationships on the websites and marketplaces of the tech giants. In doing so, brands not only leak valuable interaction data to competitors, but end up handing over the keys to their most valuable asset to the digital data barons.

It is important, of course, to welcome measures that will genuinely lead to the rebirth of the British high street. But a digital levy, in whatever form, simply won’t do that and is instead far more likely to harm the British retail sector, leading to the collapse of smaller brands who need all the help they can get. If the chancellor truly wants to level the playing field, he should target the individual corporations who are able to game the system and avoid paying their fair share of existing taxes by breaking up the data monopoly that drives their dominance.

Mark Ash, CEO at marketing automation suite Pure360

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