How Old Navy Could Have Avoided a Plus-Size Mess
A two-step pricing process can help avoid costly markdown debacles.
How Old Navy Could Have Avoided a Plus-Size MessJosh Stunkel
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Hal Weitzman: The battle between bricks-and-mortar retailers and online retailers has been raging for 20 years.
Along the way, there’ve been some high-profile casualties: records stores, bookshops, and travel agents, to name but three.
So how can traditional retailers hold their ground and how will proposals for a new online sales tax affect internet commerce?
Welcome to The Big Question, the monthly video series from Capital Ideas at Chicago Booth. I’m Hal Weitzman, and with me to discuss the issue are three Chicago Booth faculty who combine academic rigor with real-world experience.
Chad Syverson is the J. Baum Harris Professor of Economics at Chicago Booth. He’s also a research associate at the National Bureau of Economic Research. A former mechanical engineer, he’s also worked as a consultant to traditional retail chains.
Jean-Pierre Dubé is the Sigmund E. Edelstone Professor of Marketing and Robert King Steel Faculty Fellow at Chicago Booth. He’s also a research associate at the National Bureau of Economic Research. An expert on pricing and internet marketing, he has consulted for Yahoo’s research department.
And Chris Nosko is an assistant professor of marketing at Chicago Booth. He recently spent a year working in eBay’s research labs on projects about pricing, online advertising, and consumer behavior.
Panel, welcome to The Big Question.
Chad Syverson, let me start with you. Give us a sense of what are the relative sizes of the online retail sector and the traditional retail world.
Chad Syverson: Online seems to be somewhere between 5 and 10 percent of total retail sales, depending on the source you look at. It’s been growing faster, of course, over the past decade by quite a bit then has the regular offline sector.
Hal Weitzman: So do you have a sense of when we’ll get to a kind of tipping point where there’s more online sales than traditional sales?
Chad Syverson: Well, if you assume that both the offline and online sectors grow at the rate they’ve been growing over the past decade, which is a pretty bold assumption to think that online is gonna keep growing that fast, but if it does, it’ll probably account for . . . or online will probably be about the same size as offline retail somewhere between 2025 and 2030.
Hal Weitzman: Jean-Pierre Dubé, are traditional retailers right to be so concerned about online commerce?
Jean-Pierre Dubé: Well, I think that the online sector has been growing fast. It’s been growing at approximately 25 percent per year for the last few years, but the threat of online retailing is probably grossly exaggerated. Simple statistic: only 15 percent of Walmart customers use credit cards right now, which means the vast majority of Walmart customers aren’t even using a medium that would allow them to purchase online in the first place. Walmart also has been doing all sorts of things to try and integrate its internet strategy with its physical stores, which suggests that we remember that part of the growth of online retail is just the traditional retail sector bringing in a new channel as part of their overall multichannel strategy.
Hal Weitzman: And that raises the interesting point about some of the ways that traditional retailers have tried to combat this growth. On the one hand, they wanna join the party. On the other hand, they have some interest in holding things back.
Chad Syverson, you’ve done some consulting with traditional retailers. Tell us some of the things that they’re doing to face this challenge.
Chad Syverson: In part, it’s a pure channel extension, where they just wanna offer a completely different and new way for their customers to obtain merchandise without having to go to their stores. There’s been some attempt to create a sort of hybrid, where you might go online, place an order, and then you would actually physically pick up the order at the nearest bricks-and-mortar location.
It’s pretty early to know whether that stuff is gonna work or not. I don’t think there are any obvious, you know, big marquee success stories yet that sort of point the way that’s an obvious direction to go in.
Hal Weitzman: So are we gonna see a lot of experimentation in the next few years?
Chad Syverson: Yeah, I think they’re gonna be trying out many different things.
Hal Weitzman: But the aim being to use the internet to drive shoppers to the physical stores.
Chad Syverson: In a lot of cases, yes, although I think a lot of retailers, you know, if their revenue comes online instead of offline, they’ll take it. I mean, it’s really in the end a bottom-line game. And so, if they have to move the business online, they’ll do it. Some retailers are explicitly trying to do this. Sears Holdings, for example, has been very aggressive, at least in terms of their, you know, what they say they’re looking at and doing strategically to try to move to a much more online-driven model than their traditional bricks-and-mortar stores.
Hal Weitzman: And Chris Nosko, you come from a more of an internet retailing background. How does, in that world, how do they view what the traditional retailers have been doing to combat the challenge?
Chris Nosko: Well, I think the first thing you have to do is ask the question of: Where is it that local brick-and-mortar retail stores really have an advantage? And I think there are at least two reasons. The first is same-day delivery, or the idea that you can go to a store and pick things up directly. I think consumers really value that.
I think the second is about being able to experience the product and try it out ahead of time and sort of participate in a local sort of shopping experience. And on both dimensions, I think you’re seeing internet retailers come back strongly to kind of create their own offerings to combat those things. So you see things like Amazon opening distribution centers in states like California and New York so that they can ship products on the same day, and you can order something on Amazon and get it two days later. And I think that is something bricks-and-mortar stores should be extremely worried about.
And on the other hand, I think you start to see this experience translating onto internet commerce as well. So I think there’s Apple’s example of being able to order a bunch of products, try them on at home, and ship back what you don’t like. I think that’s, again, situations where online retailers have been responding to bricks and mortars and the advantages that they have relative to online retail.
Hal Weitzman: Jean-Pierre Dubé?
Jean-Pierre Dubé: One of the things we’ve got to ask ourselves here is whether or not there’s really a threat and whether or not the retail stores are really facing some sort of new severe threat.
So for starters, what’s the new observation? It’s that people are coming into a store, picking up their mobile phone, and then they leave. So all of a sudden, the conclusion is people are using their mobile phones in ways that they weren’t before, and that’s somehow threatening the business. But what we really need to look at is what fraction of people used to walk into the stores and leave empty-handed and has that actually really changed?
So there was actually some recent research done by the Consumer Electronics Association that also claims that the threats are exaggerated. And what they found is, No. 1, that very few people—only a small fraction of people—actually leave the store to buy something at an online vendor. So for places like Best Buy and Walmart, the lost sale may be on the order of 5 percent. So 5 percent of people are leaving the store to buy elsewhere.
In fact, there’s some other research that shows that there’s a 14 percent higher conversion rate for people in a store who actually pull out a mobile phone and use a mobile app. So in fact, what we might wanna argue is that the mobile app is actually a new opportunity.
I mean, the fact is, what we don’t understand here is that the fact that I leave with a mobile app may not be very different from searching at another store.
So I’m searching online for other prices. Traditionally, I would have just gone and driven to the next closest store to figure out what they’re selling there.
So this starts raising the question, OK, well, if there isn’t much of a threat, or if the threat isn’t as big as was originally believed, then why is it that we should be scared? After all, traditional retailers offer many things that an online retailer cannot.
The conversion rate for a shopper is 12 percent higher if they interact with a live associate. So interacting with an actual human-being salesperson actually raises the probability that you’re gonna buy something by 12 percent. That’s something you can’t replicate very easily with an online retailer.
We know that there are things that are frustrating in stores, like checkout counters and waiting times. Places like Walmart are working on fixing that. They’re using technology now so that you can use a mobile app in the store—this is not to search online—but a mobile app in the store, so you can start scanning your products into your shopping basket as you go. So you use the screen, scan the item, and put it into your cart, and then when you get to the checkout counter, instead of having to line up and have someone scan all your items, you just scan this item over a bar that they have sitting in a small stand, and it automatically processes your transaction and leaves.
So I mean, there are things you can do online to enhance . . . or sorry, in the physical store to enhance the experience, but I still think that at the end of the day, there are things that have always been in traditional retail that will make it a strong medium.
Hal Weitzman: Chris Nosko.
Chris Nosko: There’s a lot embedded in what JP said. And then that makes me think that maybe the right question isn’t so much about which is gonna win out in the end, but more along the lines of, where is consumer welfare growing? And I think, you know, people coming into a store being better informed, having already seen reviews online, is kind of a welfare gain. Also, prices being lower, potentially in Best Buy now, because they know they’re competing with online retailers, is a gain overall for consumers. And so you do see these other effects potentially that are going into this.
There I strongly disagree. There I think one of the biggest, one of the threats in fact to consumer well-being is the fact that many large retailers, terrified of the online threat and showrooming, think that the only way to combat the internet is to lower their prices and do price matching. And let’s be honest, I mean, selling costs for an Amazon.com are gonna be a lot lower than for a traditional retailer. You don’t have live associates, you know. You don’t have all of this labor intervention to make a sale. Everything is automated. So the marginal cost of a sale is much lower, which means that Amazon can get away with lower prices than a traditional store. On top of that, Amazon’s fixed costs are much lower, which means Amazon can survive on much lower revenues than a traditional store. They don’t need to make as much money, so to speak, to be a profitable enterprise. So I think that low prices are a mistake.
The worst part of it . . . so for starters, low prices are a mistake for a store as a response because this is a battle they can’t win.
The worst part about low prices, and this comes to your welfare claim, is that as stores like Best Buy and others start cutting their prices, their ability to deliver the critical thing that a retailer’s supposed to do, which is point-of-purchase marketing, is gonna be squished. It’s gonna be, this is gonna be more and more difficult. And if I was a manufacturer right now, a Sony, a Samsung, or otherwise, I’d be really worried that as prices continue to get pushed down, that the important role of an intermediary, which is to help a customer find the branded good, understand what they’re getting for the branded good, is gonna be eliminated.
It’s kind of ironic, but you know, 20 years ago, this was the same concern that small mom-and-pop shops were worried about when large box stores like Best Buy started to emerge. And that was: Are we still gonna see that point-of-purchase push that helps goods get that premium price that they’re supposed to?
Hal Weitzman: Chad Syverson, are traditional retailers wrong to try to compete on price?
Chad Syverson: I’m not sure whether it’s right or wrong, I just don’t . . .
They might not have any choice. I guess I’m not quite sure. JP seems to want it both, say it can work in both directions, that on one hand, they shouldn’t be concerned. This is just like comparison shopping in the old days where they used to go to another store instead. But what are they comparison shopping against? It used to be another store with the same sort of overhead, the same sort of higher marginal costs, sales technology. Now, as you pointed out, the other store is Amazon or another online retailer who’s got a much lower cost structure.
And so, first of all, the price that you’re comparing to is gonna . . . there’s more likely to be a price differential. And second of all, it’s not very hard to take advantage of it. You don’t need to get in your car, drive over there, and buy something else. You can type it right into your phone.
So it seems like, you know, yes, it is comparison shopping, but it’s comparison shopping with a much more aggressive competitor.
And then, as far as the response, I agree with your point that manufacturers should be worried because it’s pretty well-founded that many products are sold along with these bundled services. And that enhances people’s value from the product and therefore raises their willingness to pay for it.
But if the channel works so that all that is, you know, sort of rung out in competition among the retailers, that could be a problem for the manufacturer.
But what choice do they have in some cases? You know, you think about those traditional mom-and-pop retailers who were worried about the new cost structure of the big-box retailers, and by and large, in many industries, they lost. I mean, they are just gone.
I don’t know what the manufacturers did about that, whether they feel there’s still enough service being delivered by the big-box retailers or not. But, you know, I can see that happening onefold over again now with the internet.
Hal Weitzman: Jean-Pierre Dubé.
Jean-Pierre Dubé: Rather than cutting prices to match online stores, traditional retailers should be focusing on the things they can do better. I mentioned earlier that they have live sales support, and that this is something that can improve the conversion of a customer into a sale.
There are other things you can do with the online environment that can complement the overall experience and enhance the likelihood of buying a product.
For example, there are new apps, mobile apps that are being created and tested by chains like Macy’s, Walmart, and others to help customers navigate the stores and find what they’re looking for.
Trying to find what you’re looking for on an Amazon.com is difficult. Let’s imagine that you want a digital camera. You put into the search engine on Amazon “digital camera,” you know, 2,500 things pop up. Unless you know exactly what you’re looking for, like right down to the item, it’s not easy to peruse all of the products.
On the other hand, you go into a traditional retailer, they’ve already prescreened all these products and presorted. They’ll ask you a few questions and they’ll narrow your search down to four or five items that you can then try, look at, test. In fact, in stores like Office Depot now, they’re starting to train their personnel to use tablets. These tablets have point-of-finger access to product information. They can even geolocate an item in the store. An item that’s out of stock can be immediately located in another store. There’s that issue about instant gratification. There are many things that a traditional store can do.
However, there’s one catch to all this. And this is where the showrooming threat is. What prevents the customer after consuming all of these amenities, from in spite of all that, then going to Amazon.com and saving 5 percent.
That’s the tricky one. So there’s been a couple of things that stores have done. One thing they’ve done: they’ve been trying to play on people’s social norms. If you have a checkout assistant, not at the checkout counter, but right in the aisle who’s assisting you with the tablet, like I just described, who can then say, allow me to put this item into your shopping cart for you electronically. This makes it a lot more embarrassing for someone to then try and sneak out of the store and buy elsewhere. There are things you can do that aren’t gonna be all that imposing, but might actually exploit a social norm, where the person kind of realizes: I just consumed all this free service.
There’s one other thing I think that traditional stores can do, and that is pick their battles. There are certain kinds of products that may be inevitably gonna be easier to buy online. Like you take something like diapers, for example. Amazon just opened an enormous . . . They just bought a diapers, a small startup and have started a huge diaper section. It’s gonna be really hard to compete on prices for something like diapers. Most parents know what they want.
So there are things, I guess we could call these traffic generators, right?
So the traditional retailers should be probably matching prices on these traffic generators, where all of this complimentary service is gonna be of little value. However, once you get the person in the store, you’ll lure them in with that traffic generator. You can start then cross-selling. That, by the way, is another one of the commercial advantages of a traditional store over an online retailer, there’s a lot more cross-selling in the traditional environment than we see on the internet.
Hal Weitzman: So you’re suggesting that traditional retailers can compete by . . . on price on particular products, these commoditized products that you talk about.
Jean-Pierre Dubé: Yeah, you pick your battle, pick your battle.
And the good news is, because of the cross-selling opportunity at an actual store where you have a live sales agent, you can make your money on these other products.
Hal Weitzman: And that actually brings into focus another issue, which is the limits of internet commerce. In some areas, you know, it’s been very successful; in other areas, it’s failed.
And you’ve done some research on, for example, the real-estate market, where there were great expectations that, you know, real-estate brokers would just, that job would disappear, and it hasn’t. The internet has really not been able to win over that market. So where are the kind of, where are the limits?
Chad Syverson: I think that’s a great question. So if you compare, you know, I think the logic you talked about with real-estate agents came naturally out of what people saw happen to stock brokers’ fees and, say, travel agencies, which were, you know, this phenomenon called disintermediation, where the internet actually takes the place of the middle person who used to handle your transaction.
Why that didn’t happen with real estate in particular, I think there’s something special about residential real estate, and that is, you need two agents to cooperate in most transactions. And so it’s hard to be the agent who does things differently, the new way,
the lower-cost, internet-driven model can be . . . You can go ahead and strike off on your own and try it. But you’ve got to get all the other agents who bring their clients around to see your houses—if you’re on the sell side—and they’ve got to agree to your business model too. And that just hasn’t happened.
There was a big antitrust case about particular rules about how houses can be listed on multiple listing services, things like this, but there’s still a lot of sort of informal barriers there that the technology, you know . . . this is really about getting people in an industry to agree to a new way of doing business. It’s not a pure technological issue. And in markets like that, you know, things can slow down the rate at which the internet takes over.
Hal Weitzman: Chris Nosko, you worked for eBay. And eBay has been selling cars online for many years—used cars only because new cars in the United States cannot be sold online. So what are your thoughts on some of the . . . where the limits are of internet commerce?
Chris Nosko: I’m constantly surprised at some of the goods that are sold on the internet. Cars is a perfect example. And actually, I think it’s not quite right . . . I mean, dealers will sell new cars through eBay, through the eBay channel. So you know, I think manufacturers can’t sell directly to consumers, but dealers can sell new cars to consumers, and you see a bunch of that on eBay.
So I don’t know that I’m comfortable answering that question, to be honest, because you see products that you would think consumers would want to experience at a very real level being purchased online. And that just is very shocking to me. I wouldn’t have thought that would have been a market that would have worked, but it seems to be working out very well.
Hal Weitzman: And presumably, that does suggest that some of the add-on services that you talked about, all that extra added value will need to become more and more important for traditional retailers to stay in the game.
Jean-Pierre Dubé: Perhaps, but I also wanna qualify some of the comments made by my colleagues here, that there are also some areas that haven’t yet really successfully gone online, not just real estate. And I think a lot of this also has to do with culture, that there’s a buying culture. So for example, one of the big opportunities for manufacturers with the internet, dealing with their trade partners, and conversely, one opportunity for firms that are dealing with their suppliers was the ability to automate all of the process of replenishing in the supply chain.
And there’s been plenty of examples of firms that have rushed onto the internet to build these vertical buy sites to help make the supply chain more efficient. And what they’d find was that, you know, small buyers would use their buy sites as a catalog. And they’d go through it and look at the items and they’d still pick up the phone and wanna do a live order.
Why? Because the buying agent at the whatever firm likes the illusion of negotiating a deal. And even if you didn’t actually give them a discount off of what was posted on your buy site. It’s that culture, like, my job is to buy. I represent my company. I’m supposed to, you know, manage a budget and, you know, part of me feeling like I’m doing my job. It’s like my raison d’etre is to do this. And if I just rely on software, like, it’s kind of like asking the question: What’s the point of me being here?
I think there’s a little bit of that in the real-estate sector as well, right. We’re used to dealing with agents. It’s probably the case this could be a fully automated process, but people like the illusion of wheeling and dealing.
Hal Weitzman: And the bargain mentality that you talked about was incredibly important when people were talking about what happened at JCPenney.
JCPenney, which went to this fair-pricing model, and it seemed to be a failure in part because shoppers liked the idea that they would go into the store and get a bargain that nobody else had seen. That they had something exclusive. And, even if you find a coupon on the internet, anybody can access that coupon. So there’s something about being in store and getting that bargain that’s important, isn’t it, Chad Syverson?
Chad Syverson: There probably is some element of psychology there. There’s no doubt, I mean, I think JCPenney in particular had trained its shoppers into enjoying that mode of shopping, and they didn’t appreciate it when it changed.
So I’m not sure. It’s not sort of the traditional service that we often think of when we think about what bricks-and-mortar retailers offer. But I think it really is a factor in certain markets.
Hal Weitzman: Jean-Pierre Dubé, the traditional retailers have been trying to make their online stores seamless with the bricks-and-mortar stores, but it hasn’t always been successful. There’s often been problems with things like buying a product online, trying to take it back in store, but it hasn’t always worked. So how are they doing on that front?
Jean-Pierre Dubé: Well, for starters, you just nailed one of the biggest opportunities for traditional retailers that I feel has been really underexploited. And that is to understand the dual role of your physical store as both a retail outlet and as a warehouse. So Walmart started figuring this out a few years ago. They’ve been doing a lot of testing, and Walmart suddenly devised a new strategy, where, no.1, they would use local retail stores to help them facilitate online orders, to make sure they had stuff not only in stock, but also to get it shipped in minimal time and at a relatively low cost to them, to the order.
But the other thing they’ve learned is about the complementarity between online and offline, was that when people came to pick up an order they purchased online in the physical store, they typically browsed around the store and bought more stuff. And Walmart then devised a new strategy, where they would offer people free shipping if the item was shipped to the closest store, which is actually not really much of a freebie if the item was already in that store. But from the consumer’s point of view, instead of paying, you know, $10 to get the item shipped from Amazon, I can get it shipped to the nearest store, I drive there, whatever that cost is to me, and then I’m gonna browse around and buy more stuff. So this actually grows the basket.
Again, this comes back to what I said earlier about the physical store being an opportunity to cross-sell. You mentioned the issue of returns. That actually seems like another real advantage for the traditional retailer because if I don’t like what I buy, I can return it in the store. And this has been the strategy for a lot of apparel retailers.
You know, if I, when Ralph Lauren was experimenting with his website, that’s one of the things they pointed out, was that if the item doesn’t fit, you can return it to a physical store. This was also true with Gap, when Gap was experimenting with its maternity store.
In fact, it raises another great opportunity of having both channels. Gap, the retail chain Gap, used the internet as a test site for what has now become one of its new big growth areas, which is maternity wear. So if you rewind about a decade ago, you couldn’t buy Gap maternity clothes in the Gap store. However, if you went back to Gap.com, they opened a maternity center, and as they started collecting data and realizing the growth potential here, they could also track where people’s credit-card zip codes were from and they gradually started rolling out maternity very selectively in zip codes where they were seeing a lot of orders.
And so now you can see how the internet complements the physical store. I can run a relatively low-cost product test using the internet. And then as I start to collect data on this, I can gradually, selectively roll the insights out into my physical stores.
Now, one other detail about the returns policy, which I found somewhat ironic, was you’d mentioned how returning in the physical store would be an opportunity for a physical store. Best Buy just announced that they’re gonna reduce its return policy from 30 to 15 days, which seems kind of backwards in light of what you just said.
Hal Weitzman: Interesting, and Chad Syverson, let’s talk about this marketplace-fairness proposal that’s currently in Congress, on course to pass the Senate. And this would essentially slap sales tax on online retailers. There’s some research from our Chicago Booth professor Austan Goolsbee that has suggested that that would really cut online sales by about a quarter.
I mean, what effect will this have on online retailers? Amazon has turned around on this issue. Why did they turn around? What effect will it have on the retail landscape?
Chad Syverson: Well, first let me address Austan’s study. That was done really when internet retail was just taking off. And so you might think that that is gonna pick up a more sensitive set of purchase responses than we might see today, where a much broader set of the population is already shopping online. But regardless of how large a response people are going to see with respect to sales taxes, I think one basic argument is, look, why are we subsidizing one channel over another? Maybe you could’ve made the case that, you know, back in the late ’90s or early 2000s, there’s, you know, some . . . you got to let the infant industry grow a little bit, get its feet before you, you know, squash it. And so therefore, OK, give it a little leg up, but I’m not sure you can make that case anymore.
And then just on a more practical level, state legislatures have already decided to tax these transactions. I mean, legally you’re supposed to pay use tax on these purchases, so.
Hal Weitzman: That depends on the buyer declaring that he or she has actually made a purchase online in their tax return.
Chad Syverson: Yeah, so the issue there is, this is a very inefficient way to collect this tax. So if you’re gonna say, look, if legislatures have decided these things should be taxed, we might as well collect the tax in the most efficient way possible. And it’s a lot easier to do that on the seller side than to ask every single buyer to record all their transactions that they make online over the year and then send in their check to the state at the end of the year.
Hal Weitzman: And what about this issue of Amazon, because that’s sort of been critical. People have said, if Amazon hadn’t come around to the idea, then it would never have been in Congress in the first place. Chris Nosko?
Chris Nosko: Yeah, I mean, I think it’s . . .one of the things that’s been interesting about research over the last 10 or 12 years is we had this notion that on the internet, brands wouldn’t matter and that consumers really would be, you know, shopping all over the place and just searching for the lowest price. And that just doesn’t seem to be what’s happening at all.
Brand preferences seem to matter a lot on the internet. And I think for a company like Amazon that has a strong brand preference, you would have to ask the question, how many people are really gonna substitute to offline commerce rather than buy on Amazon?
So in some ways we’ve been thinking about this overall, and I think for a company like Amazon, that effect might be very different than for smaller retailers or people with less-established brands on the internet. And so I think that makes a lot of sense in Amazon’s case, especially when you contrast that with the plus side for them, which is they can now open distribution centers in these various states, which is one of the reasons that they seem to have switched.
Hal Weitzman: So up until now, if they haven’t had the distribution center, they’ve not needed to pay the sales tax.
Chris Nosko: Exactly, exactly.
Hal Weitzman: Chad.
Chad Syverson: It probably doesn’t hurt Amazon either that, in terms of proportionate costs, this is gonna be more expensive for small online retailers than large online retailers like them. So in some sense, it gives them a little bit of protection from encroachment by smaller online channels.
Hal Weitzman: JP Dubé, this proposal has been backed by the White House, but it faces an uphill challenge in the House of Representatives. But I mean, is it fair? Does it really level the playing field?
Jean-Pierre Dubé: Well, that’s a good question. I mean, you mentioned a moment ago that Amazon seems to support it now. So you know, it seems that there is some backing from even internet players, but let’s be honest, Amazon was also a staunch opponent to online taxation until very recently. And what’s changed very recently is that Amazon wants to start offering same-day delivery, and that they’re in the process of setting up distribution centers in just about every state, which means they would no longer be exempt from these online taxes anyhow.
The other thing we should also acknowledge is that this is a battle that Amazon and other large retailers on the internet have probably figured out they’re gonna lose anyhow. So what has Amazon done? They’ve negotiated terms with several of the state governments, which means that they will eventually pay taxes, but in exchange for their support and their assistance consulting with those governments to help them figure out how to collect these taxes. They’re given a moratorium until 2016 or ’17. So they bought themselves some time. So I think it might be a little bit overstated to say that this is support. It’s somewhat self-serving.
Is it unfair? I mean, it depends how we look at this. Only 1.6 percent of customers right now across the 45 states with the use tax actually pay the use tax. So it’s not like people are actually paying this. We’re gonna be enforcing this for online retail only. It’s very difficult to enforce this in any other setting.
Small businesses, to the extent that they’re exempted or not—I know there’s some debate about whether or not there should be an exemption for businesses making less than a million a year in revenues—but the fact remains, this is a very complicated thing to organize. You’re imposing a cost, a preparation cost of a sort that never existed before. I’ve always as a business had to collect my taxes for my current state. But if we start thinking about all of the different states rules and even down at the cities, there could be in the thousands of different taxes that you need to account for and then need to submit.
And this, you know, maybe this can all be automated easily. The states claim they have software for this, but let’s see it first. It sounds to me like something that will impose a big hassle and an inconvenience, if not a real dollar cost onto small business.
Well, never underestimate the efficiency of the government when it comes to collecting taxes.
Well, on that note, my thanks to our panel, Chad Syverson, Jean-Pierre Dubé, and Chris Nosko.
For more research, analysis, and commentary, visit us online at chicagobooth.edu/capideas.
And join us again next time for another The Big Question.
Goodbye.
(light piano music)
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