11/07/2012 - 10:46

Hot Perth runs risk of paying a high price

11/07/2012 - 10:46


Save articles for future reference.

Investors show the way on curbing executive pay rises and holding companies accountable.

Investors show the way on curbing executive pay rises and holding companies accountable.

Pricing yourself out of business is a curious phenomenon normally confined to companies that overcharge for their services and eventually disappear, justifiably so.

But, what happens when people and places overcharge, which is what we’re watching with chief executives, and Western Australia itself?

Over-priced CEOs can certainly disappear, and are starting to, as seen in the fall of Bob Diamond, the larger-than-life (and very expensive) chief executive of Britain’s Barclays Bank, and the remarkable attack on executive salaries by Rio Tinto chairman Jan du Plessis.

Mr Diamond did more than cost Barclays his mega-million-dollar salary, allowances and bonuses. He also cost the bank its credibility and perhaps its credit rating as ratings agencies assess the damage done by the interest rate-fixing scandal, which has rocked the banking world.

Mr du Plessis would have sent a shudder through the senior ranks of Rio Tinto, including some of the fat cats in the company’s Perth office, when he warned that “the spiral in executive remuneration that we have seen in the past two decades simply cannot continue”.

His comments will also resonate with shareholders in two other mining companies, Xstrata and Glencore, where a very generous package of retention bonuses and salary rates has the potential to scuttle a mega-billion-dollar merger.

What’s happened in the worlds of banking and mining is that too much easy success has encouraged the lazy habit of solving a problem by tossing money at it, a game that eventually comes to an end when the money runs out, or the rightful owners of the money realise what’s happening.

In Perth today, a similar situation is developing, with the hospitality industry guilty of precisely the same mistake – overcharging and then complaining about missing customers.

So far, the complaints have been about the dying interstate and international tourism industry, with potential visitors being advised to give WA a wide berth because of the price-gouging habits of hotels, restaurants and tour operators.

Far easier, cheaper and better, say travel advisers, is to go somewhere else which offers better value for money.

Perth, as anyone who has travelled recently has observed, is now more expensive than New York, London or Paris – without the stellar attractions on offer in those globally important cities.  

Over time, even the locals will wake to the nasty trick being pulled on them by the hospitality industry, which is doing nothing more than play the same game played by CEOs – charge what the market will bear, until the market can bear no more.

Simple credibility tests demonstrate that Perth’s cost structure has become significantly distorted.

Coffee at $5, and more, a cup is a prime example of a price mark-up measured in the thousands of per cent, not just hundreds. 

Bottled water at $3 a small container for contents, which probably cost 3c, is another appalling example of how consumers are being ripped off. Hotel rooms, which cost $200 a night in Sydney, somehow get uplifted to $600 in Perth.

Breaking the spiral of rising costs will not be easy but it will happen, just as it is starting to happen in the banking world and will also happen in the mining world where people like Mr du Plessis are on the case.

The trick for anyone in Perth hospitality is to not be there when the customer revolt spreads from interstate and international tourists, to the locals when they wake up to the price gouging and withdraw their patronage.

For anyone who thinks that can’t happen take a look at the rising tide of shareholder activism where the owners of companies (the shareholders) are voting down pay rises for directors and salaried executives.

Consumers will take time to react but the more people talk about the ridiculous price explosion in Perth, the closer comes the revolution, which will see the hospitality sector asking the most disturbing question in any business – whatever happened to the customers?

St Barbara call 

Speaking of consumer and shareholder activism, it is surprising that so few shareholders in St Barbara Mines are yet to object to the terms being offered by their directors in the proposed merger with Allied Gold.

When the deal was announced two weeks ago there was a collective gasp by older (and wiser) observers of business who wondered how anyone could propose a deal priced at a 90 per cent premium to the ruling rate, which is the price St Barbara management has negotiated.

As if paying close to double for a merger partner is not bad enough, there was insult added to the injury by the rightful owners of St Barbara being refused a say in the matter at a shareholders meeting.

Allied shareholders, the group being paid generously, will get a say, and are hardly likely to say no. St Barbara shareholders, the people paying, are being denied a say, which, without being too technical, is just plain wrong.

Hopefully, someone at the Australian Securities and Investments Commission is taking a look at the St Barbara-Allied merger because it appears to be structured in a way that favours some investors over others.

The favoured few are the 30 per cent said to have shares in both companies and are therefore happy to see the two businesses come together.

What ASIC ought to be asking is what about the 70 per cent of St Barbara shareholders who are not benefiting from the generous terms of the deal. 

Brown outs?

Fiddling with markets is never wise, as Barclays and the Bank of England are discovering with the London interest rate scandal.

In Australia, the market being fiddled is electricity, where governments (state and federal) keep changing the rules on price, tax and subsidies, to the point where no-one is quite sure what’s the real cost of generating an essential household and industrial input.

The moveable feast which is the carbon tax has all coal and gas-burning power station operators uncertain how to manage their business, while moveable subsidies are making it just as difficult in the renewables sector.

In time, those uncertainties will lead to something Australian cities have not seen for generations, “brown outs” caused by a lack of investment, which is, in turn, caused by too much government fiddling. 


“More will mean worse.”
Kingsley Amis



Subscription Options