Small Business in Australia
2.1
Small businesses are defined as those businesses which have less than 20 employees. According to ABS data, small businesses make up 94 per cent of Australian businesses with at least one employee. The majority of small businesses (61 per cent) are sole traders with no employees, while firms with 5-19 employees comprise 9 per cent of all Australian businesses.
2.2
The large majority (96 per cent) of retailers in Australia are small businesses. Other industries represented by small businesses include agriculture, construction and professional services. The Australian Industry Group notes that food and beverages, metal products, machinery and equipment constitute the main economic base for small businesses in Australia.
Australia’s Retail Industry
2.3
The Australian retail industry accounts for 4.3 per cent of gross domestic product and approximately 6 per cent of businesses (over 130,000). It also employs 10 per cent of the national workforce (around 1.2 million people), making it the second largest employer in Australia. In 2017, food retailing, including cafes, restaurants and takeaway food services comprised over half of retail trade turnover. Household goods contributed the next highest turnover, followed by clothing, footwear and personal accessories.
2.4
Online retail still makes up a small proportion of total retail employment (less than 1.2 per cent) and an estimated 6.4 per cent of retail turnover. However, both turnover and employment in online retail have been growing rapidly. Employment in non-store retailing, which includes direct selling and internet selling, has increased by 8 per cent a year over the last decade. In comparison, growth in overall retail employment (in-store and non-store) over the past decade has been just 0.4 per cent a year.
2.5
Estimates suggest that online retail turnover has grown 142 per cent since 2013 (an average of 9.2 per cent a year), at almost 9 times the growth rate of the retail industry as a whole. Domestic retailers still receive 80 per cent of online spending by Australian consumers.
2.6
The retail industry traditionally involves low skilled jobs and has a high proportion of part-time employment and female employees, with a lower than average employee age. Disruption to the Australian retail industry has increased in recent decades, with the lowering of geographic barriers and the arrival of international entrants such as Aldi, Costco, Zara and Uniqlo. However, the Department of Industry, Innovation and Science (DIIS) notes, however, that ‘the emergence of global internet-based competition is proving to be more disruptive, not only [due to] increased international competition but also from the introduction of new business models that retailers need to contend with.’
Small Retail Businesses
2.7
The National Australia Bank (NAB) found that SME online retailers were responsible for around 36 per cent of online retail sales in the 12 months ending September 2017. According to the NAB data, the three largest categories of online spending for small businesses were: ‘homeware and appliances’; ‘personal and recreational’; and ‘fashion’.
Challenges and Pressures
2.8
Submissions to the Committee outlined a number of factors that impact the competitiveness of small retailers. Such factors are not unique to these businesses; however the burden on small enterprises is often relatively larger, due to their lower revenues. As previously noted, small enterprises are predominantly retail businesses.
2.9
The cost of wages and rents in Australia were also considered to be increasing the pressure on small businesses competing with international merchants. The Australian Retailers Association noted that Australia has roughly the third-highest retail rents in the world and much higher labour costs than the majority of other countries. Retail wages in both the UK and US are lower than those paid in Australia.
2.10
Other regulatory barriers include restrictions on trading hours, taxation and compliance cost pressures, mandatory transaction costs introduced by ‘tap-and-go’ technology, and vulnerability to fraud and cyber-crime. Further, small businesses are likely to feel the impact of low levels of innovation, skills shortages, cost pressures associated with modernising technology, and logistics and supply chain inefficiencies.
2.11
These local pressures are compounded by challenges presented by a global shift towards online trading. The DIIS notes that ‘small traditional retailers selling homogenous products which can be obtained more cheaply online are likely to face significant competitive pressure.’
2.12
SME retailers also face increased competition for visibility in the online space and will need to adapt to new marketing models in order to compete. New marketing strategies can be ‘costly to develop and implement’.
2.13
Notwithstanding these apparent challenges, it is also ‘important to recognise that global internet-based businesses have created a range of opportunities for new and existing small businesses to grow’. These opportunities are further examined in Chapter 3.
Innovation in Australian Business
2.14
The Australian Innovation System Report 2017 describes innovation as the ‘most important driver of long-term productivity growth and material living standards.’ Businesses that innovate are 40 per cent more likely to increase their profits. In the 12 months to November 2017, 48 per cent of all employing firms in Australia have attempted to develop or introduce an innovation. Among these, the most represented industries were manufacturing, retail, and the arts and recreation services.
2.15
The CSIRO’s Data61 research group (Data61) notes that Australia’s investment in innovation is lagging behind other countries. Concerns were also raised about the ASX 250 investing less in R&D than the Fortune 500 or other large companies in the US.
2.16
However, the Australian Industry Group submitted that ‘Business performance is much more closely linked to collaboration on innovation than to spending on innovation.’ The group states:
Collaboration within existing supply chains is relatively common. But it is much rarer for businesses to make a strategic decision to engage in collaborative arrangements and search widely both domestically and internationally for the best partners.
2.17
A 2015 study of 7000 Australian SMEs found that collaboration on innovation had increased annual productivity growth by 4.1 percentage points. However, Australia ranks low on most OECD collaboration measures.
2.18
Data61 has recognised the value of business collaboration and has established a precinct in Brisbane for this purpose. Here, Data61 is co-located with a number of small start-up companies, including companies that Data61 considers to have ‘high-growth-potential’. Government initiatives to increase the competitiveness of Australian businesses are discussed further in Chapter 5.
2.19
Innovation is also facilitated through other collaborative mechanisms such as partnerships between industry and universities. However, there is believed to be limited awareness among SMEs of opportunities to collaborate with research organisations.
2.20
An increased uptake of digital tools by consumers can also provide further opportunities for Australian businesses to innovate. The DIIS notes that: ‘innovative digital service providers are likely to benefit from the growth in the use of online platforms.’ As an example, the DIIS highlighted Airtasker, a digital marketplace for people and businesses to outsource tasks, which has recently announced an international expansion.
2.21
One of Australia’s most successful software companies, Atlassian, was recently valued at $US10 billion and had over 100 000 customers worldwide. Data61 considers that a key question is how to ‘create a digitally enabled start-up ecosystem’ to replicate this kind of success and support innovation.
E-commerce in Australia
Use of Digital Platforms
2.22
Digital platforms can be defined as ‘an online market place, connecting buyers and sellers’. A report commissioned by eBay and produced by Deloitte Access Economics (Deloitte) has found that over 1 million Australians are offering goods or services on digital platforms such as eBay, Airbnb, Airtasker, hipages and Uber. The value of online retail in Australia has been rising steadily from $17.6 billion per year in 2015 to $23.4 billion in 2017.
2.23
Deloitte acknowledged that the rise of digital platforms has ‘posed new economic and legal questions for the Australian economy’. These platforms, which in addition to trading goods can be used to trade space, time or money, are discussed further in Chapter 3.
2.24
Online platforms can also be used for outsourcing elements of production and service delivery. For example, firms can use digital platforms to post a task or problem that needs solving. Suppliers can then bid for this work, providing firms with access to knowledge and skills from around the world. These practices have contributed to the rise of the ‘gig’ economy, whose impacts are further examined in Chapter 4.
2.25
The ‘sharing’ economy is another key product of market digitalisation. This is an economic system which ‘uses digital platforms to bring together owners of assets with those who want to consume them’. Car sharing, bike sharing and home sharing services such as Airbnb have built their companies by using this economic model. In its 2016 report on digital disruption, the Productivity Commission found that:
Digital platforms allow households and non-market organisations, such as research facilities, to engage more in the market economy by ‘sharing’ access to their under-utilised assets.
2.26
The Digital Industry Group (DIGI) submitted that online platforms ‘can also be used to help workers and business owners build new skills’. For example, YouTube videos can be used to learn a new language or take a course on machine learning.
2.27
Other innovations such as distributed ledger technology platforms can enhance the security of online transactions. Data61 noted the need for businesses to keep abreast of such emerging technologies and the impact they could have, particularly on small businesses.
Benefits for Consumers
2.28
The expansion of e-commerce in Australia, particularly through digital platforms, has generated a number of benefits for Australian consumers. Deloitte estimated that the consumer benefits are worth $9.5 billion to the Australian economy.
2.29
Digital platforms lower transaction costs by ‘bringing together a larger range of offerings in the one place’ and facilitating sales that might otherwise not have occurred, for example due to geographical limitations. In addition, enabling buyers to compare options in one digital location promotes competition between suppliers.
2.30
Not only are benefits observed in terms of price, but the quality of goods and services may also be indirectly optimised through peer review systems available on digital platforms. These have increased customer access to information on the quality of products and suppliers, leading to improved ‘market discipline on poor performers’. Platforms also assist users in their decision-making through tools such as filters by product type, price and location.
2.31
Like in non-digital marketplaces, the benefits provided by digital platforms are typically dependent on the number of users (buyers and sellers) of these platforms. That is, growth in use is likely to increase options and availability, and provide better value overall for those involved. This is known as a ‘network effect’ and is observed for enterprises such as Uber and Airbnb.
Key Elements of the Digital Economy
Artificial intelligence and Automation
2.32
Artificial intelligence is a technology whereby ‘computing software examines numerous previous examples of different scenarios and ‘learns’ patterns to enable it to recognise likely future scenarios.’ Artificial intelligence and automation (including robotics) increase opportunities for tasks to be performed with reduced human input or labour.
2.33
Machine learning is a subset of artificial intelligence. The DIGI advised that machine learning software is available for free from Google, ‘so that people can take that software, change it and build on it to create new opportunities’. Areas where machine learning can assist include ‘time-consuming, repetitive tasks’ or ‘forecasting or analysis models’.
Big Data
2.34
Artificial intelligence is often reliant on ‘big data’, for example for its uses in predictive analytics. ‘Big data’ is characterised as data which is ‘large-scale, complex and rapidly collected’.
2.35
A survey by the Australian Industry Group in 2015 found that ‘only 7 per cent of Australian businesses made significant use of big data.’ In its recent report on data availability and use, the Productivity Commission (PC) stated that big data, as a ‘form of capital’, is currently ‘underutilised’. However, the PC predicted that in the future, firms will be more ‘able to engage in active management of their data assets’, with better access to big data analytics. The PC also outlined the commercial benefits of using big data:
Broadly speaking, data can create commercial value by facilitating innovation, and by increasing efficiency and productivity within businesses. It enables firms to create new products and services, enhance existing ones, and introduce entirely new business models.
2.36
In light of this, big data can provide significant advantages to businesses that are able to capture, manipulate and use it. The DIIS noted that:
Amazon’s ownership of data on consumers and suppliers also provides it with a competitive advantage. Australian competitors will need to become more sophisticated in their use of data and networks to compete.
2.37
The rise in the use of big data has corresponded with the development of cloud storage. This is a remote form of data storage which users can access on demand. An Australian Industry Group survey found that 42 per cent of all participating businesses used cloud storage.
Cybersecurity
2.38
Like other internet-based technologies, cloud computing must be controlled to ensure the data and digital infrastructure are protected. Cybersecurity is a growing concern for businesses not only in Australia but around the world. The Australian Cyber Security Growth Network (ACSGN) states:
Malicious cyber activity is a growing challenge for organisations worldwide. It ranges from straightforward online fraud—such as scams using email, websites or chat rooms—to sophisticated cyber espionage and calculated cybercrime, used by adversaries to steal secrets and other information stored in a digital format on systems and networks.
2.39
Noting the heightened threat to small businesses in particular, the Australian Booksellers Association submitted:
With the expansion of the digital economy also comes the potential for the expansion of the digital criminal economy. Cyber security is paramount to small businesses conducting good and safe business with consumers and suppliers.
2.40
In a similar vein, the ACSGN observed:
Cyber adversaries are constantly contriving new ways to exploit vulnerable systems and networks, thus forcing organisations—from banks to energy companies, from government agencies to charities—to strengthen their cyber defences.
2.41
ACSGN identifies investment in research and development, and education as two factors in strengthening cyber security. The Australian education sector has recognised this need, with an announcement made in January 2018 that a standardised curriculum for cybersecurity training will be implemented across the TAFE sector.
Committee View
2.42
The Committee recognises that digital technology is advancing at a rapid speed and its development will have a significant impact on the Australian economy. These changes require Australia to keep pace with the rest of the world and exploit recent and emerging technological developments. Given the significant contribution of small businesses to Australia’s economy, it will be particularly important to ensure these businesses are supported to engage in the digital economy. The Committee also acknowledges that the retail sector is one of Australia’s largest industries and it is likely to be among those most affected by increased internet competition.
2.43
The Committee notes the evidence suggesting that Australia needs to do more to support innovation, including greater investment in innovation and incentives to encourage businesses to engage in collaborative innovation. This will be assisted by the greater adoption by businesses of big data and cybersecurity technologies. There will also be opportunities to achieve efficiencies and optimise outcomes by taking advantage of artificial intelligence and automation.