As Europe Changes, America’s Productivity Edge in Retail, Wholesale Will Erode

Companies in America’s fast-growing retail and wholesale trade sector have been the major drivers of U.S. productivity growth since 1995, and the transformation of U.S. retailing is a major reason the U.S. maintains a substantial productivity lead over Europe.

A comprehensive study by The Conference Board, released today, shows that more than 50% of America’s productivity growth lead over Europe is due to gains in retail and wholesale trade.

The transformation of U.S. retailing from a low-tech industry to a sophisticated high-technology market force has been a major factor in the acceleration of U.S. productivity growth. Retail and wholesale trade firms have reaped significant productivity gains by relying on scale and scope, with massive centralized chains and increasingly large stores growing rapidly. New information and communication technologies and the organizational changes they support have produced new and better information about customers, faster, cheaper, and timelier information flows to and from business units, and smaller inventories.

But despite its slower start, Europe has enormous potential to reduce the productivity gap in these sectors. Many European firms are applying the new technologies efficiently, operational regulations are easing within many countries, and competitive incentives for change are increasing as obstacles to cross-border operations diminish.

The Conference Board study reveals that labor productivity growth among U.S. retail firms jumped to 7.4% between 1995 and 2002, up from 2.6% between 1980 and 1995. Wholesale trade firms showed productivity growth of 8.5% since 1995, compared with 4.1% from 1995 to 2002.

European productivity growth stalled in these sectors, with firms in Belgium, France, Germany, Italy and Spain posting extremely slow gains as productivity growth decelerated in both retail and wholesale trade in each of these countries in the 1995-2002 period. Only in Spain did productivity growth improve, from -0.5% in 1990-95 to 0.5% between 1995 and 2002. The Conference Board study shows that among these countries productivity growth in retail trade ranged from 0.2% in Belgium to 1.6% in France, compared to 7.4% in the U.S. between 1995 and 2002. The figures for wholesale trade show slightly bigger gaps, with the U.S. recording an 8.5% growth rate compared to Germany and Belgium showing 1.6% and Italy showing -0.1% growth. But as this new study argues, some of Europe’s slow productivity growth of the late 1990s may be due to the much-needed adjustments still underway.

Innovation Driving U.S. Gains

“The marriage of new technologies and organizational change is at the heart of America’s growing productivity lead over Europe,” says Dr. Robert McGuckin, Director of Economic Research at The Conference Board and one of the authors of the report. “European firms have not changed as rapidly as U.S. companies, and the regulatory climate in Europe, especially its constrictions on land use, has been a major burden.”

Authoring the new study with Dr. McGuckin are Dr. Bart van Ark, consulting director for The Conference Board’s international economic research program, and Matthew Spiegelman, former Conference Board economist now with Morgan Stanley.

While change is underway in Europe, the pace of organizational transformation and technological adoption has been much slower compared to the U.S. Specifically, five factors explain Europe’s lag:

* A head start: While retailers on both sides of the Atlantic have followed suit in adopting innovations like barcodes, U.S. retailers had a substantial head start over European firms in making the changes required to successfully exploit these technologies.

* Regulatory obstacles: Europe’s regulatory environment has slowed trade productivity growth through two channels – regulation within individual countries restricts competition and differences in regulation across countries inhibit smooth cross-border operations in retail and wholesale trade and the associated gains from scale. One example: although France actually has more hypermarkets per person than the U.S., the establishment of new stores has been highly regulated. This has made it difficult for foreign hypermarkets to move into the French market and compete with local firms. Local zoning regulations have been a major roadblock.

* Scale: Since information and communication technology in these trade sectors is a technology of centralized management, information processing, and analysis, reduced opportunity for cross-border scale has lowered the incentive for investment in Europe relative to the U.S.

* Slower complementary change: Europe’s trucking industry was deregulated only in the mid-1990s, meaning many of the shipping adjustments being made in the U.S. are less far along in Europe.

* Culture and change: Differences in language and culture make it more difficult to streamline operations across Europe, but this may become less of a factor as Europe’s economic and cultural integration proceeds.

“Operational regulations have been eased in many countries, and competitive incentives for change are increasing. Some of the slow productivity growth of the late ‘90s may be due to the actual adjustments being made,” says van Ark.

European retailers and wholesalers have been investing in information and communications technologies at similar rates to U.S. firms in recent years. But the IT share of overall investment is still considerably lower than in the U.S. As many European countries quickly increase their IT infrastructures, they will be in a better position to exploit the efficiencies of the new retail business models.

Europe’s transformation has the potential to move at a very fast pace as companies have learned from the U.S. experience, concludes McGuckin. The growing markets of the new EU members and declining cross-border barriers to business operations indicate Europe should catch-up with the U.S. in the retail and wholesale trade sectors sometime in the near future.

About The Conference Board

The Conference Board is the leading global business knowledge network for the world’s largest corporations. The Conference Board is dedicated to helping companies improve performance and strengthening the role of business in society. More than 2,000 companies in 60 countries are members of The Conference Board, which produces the Consumer Confidence Index, the Help-Wanted Index and Business Cycle Indicators for nine countries worldwide.

About The Authors

Robert H. McGuckin is Director of Economic Research at The Conference Board, and an expert on productivity, industrial organization, economic indicators and statistics. Formerly, Dr. McGuckin was chief of the Center for Economic Studies at the U.S. Bureau of the Census, where he guided development of the Longitudinal Research Database, produced significant research on productivity growth, and headed a broad research program in statistics and economics.

Bart van Ark is a Consulting Director for The Conference Board’s international economic research program and a recognized expert on international comparisons of productivity and living standards. Dr. van Ark is Professor of Economics at the University of Groningen (The Netherlands), where he plays a key role in the International Comparisons of Output Productivity project. His work focuses on Europe, North America and Asia.

Matthew Spiegelman is a former economist at The Conference Board, where he conducted research on international trends in productivity and business performance, specializing in technology, innovation, and emerging markets. He is presently with Morgan and Stanley, but he co-authored this report while working at The Conference Board.

Source: The Retail Revolution: Can Europe Match U.S. Productivity Performance?

Report #1358-05, The Conference Board