Embedded rents

Continuing my occasional series, from The Daily Mail:

Retailer WH Smith has reported a two per cent sales increase in the first quarter of this year due to the success of its shops in airports, train stations and motorway services.

Sales across the newsagent's 750 outlets at transport hubs rose eight percent, including a two per cent boost from the weak pound on revenues at overseas stores.

This offset falling sales on the high street as same-store sales fell four per cent from March 1 to June 10, leaving like-for-like sales flat.

Which is the general trend - at airports, stations and so on you have a captive audience and can charge higher prices. The more mobile people are, the more potential customers you have. The selling price of consumer goods generally is fairly flat wherever you buy them, and the mail order internet companies are gently pushing down the base line price of normal consumer goods.

This applies to consumer goods that can be transported but not for services/goods consumed on the spot...

The wife and I watched Supershoppers on the telly yesterday.

It started with a good sequence on cinema ticket pricing, which illustrated all this. Cinemas charge more for films when they are first released than when they are near the end of their run; they charge more in the evening and at weekends and less during the week; they charge more in higher income areas than in low income areas (there's even a measurable difference between Richmond and Putney!); and finally, they charge more in the centre of large cities, so in London Leicester Square was nearly twice as much as in the Manchester Trafford Centre, which in turn was nearly twice as much as in Bristol.

The knock-on of this is that rents are correspondingly higher in areas where cinemas can charge large premiums. The higher rents don't lead to higher ticket prices; it's the other way round.

Embedded rents.

Common sense and simple observation tell us that:

a) Goods in shops cost pretty much the same across any country;
b) Rents diverge wildly; the additional rent you pay in a high wage area soaks up most of the higher wages in that area.
c) There is an intermediate category; services (consumed at point of purchase), which are more expensive in high wage areas, but the differential is not as big as for pure rents. Part of what you are paying for is 'space', the cinema seat, the dentist's chair, the table at the bar etc; which I refer to as 'embedded rent'.

An American Home-Owner-Ist organisation called "The Tax Foundation" does some excellent statistics. They link through to The Bureau Of Economic Analysis.

Scroll down to page 9 and you will see that:

a) The price of 'goods' hardly varies across the country (lowest 94.1, highest 108.3)
b) Rents vary wildly (lowest 62.9, highest 158.7)
c) Services is somewhere in between (lowest 91.1, highest 115.9).

The co-efficient of correlation between (a) and (b) is 0.88, i.e. about 88% of the variation in the cost of goods can be explained by variations in rents. The co-efficient of correlation between (b) and (c) is 0.83, i.e. about 83% of the higher cost of services can be explained by the higher rents. And the causation could just as well be the other way round...

But either way, the influence which higher (or lower) rents has on the price of goods and services is small (one-fifth and one-third respectively). So for example, if rents are 10% higher, goods are only 2% more expensive and services are only 3% more expensive.
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Which debunks, yet again, the silly KLN that a tax on the rental value of land would be passed on to consumers as higher prices. Higher rents themselves do not push up the price of goods and services (excl. the embedded rent element), and as the tax is paid out of the rent, the total rent cost does not change.

By and large, it is the number of units which can be shifted from any location which dictate the rent, even if the gross profit per unit is exactly the same in all cases.

Reader's Letter Of The Day

From this evening's Evening Standard (page 45, 15 October 2013):

AS a non-resident, Sir Richard Branson is not [liable to] UK income tax, and as far as I am aware his main UK business interest, Virgin Atlantic, pays the correct amount of corporation tax.

But there is one area where Virgin Atlantic is sorely under taxed. The airline's five percent share of Heathrow landing and take-off slots is now worth £100 million, although they were originally given away free by the government in the Eighties.

The value of these slots is dictated by Heathrow's location and enforced scarcity. Much of the true cost of air transport is borne by residents under the flight paths, and without publicly funded transport links, Heathrow would be a less attractive destination.

A tax on the slots' value would be fair compensation for public costs, and a good source of revenue, as unlike air passenger duty they would have no impact on ticket prices.

Mark Wadsworth

Hilarious Juxtaposition Of The Day

Spotted by BobE at The Guardian: