Oral evidence: The Digital Economy, HC 571Tuesday 8 March 2016

Oral evidence, 8 March 2016.

Chair

Thank you for coming. We are really grateful. We are looking at the digital economy and very interested in how the digital economy is changing retail, so we are very interested in what you have to say with regards to that. For the purposes of the record, who are you and which organisation do you represent?

Helen Dickinson

My name is Helen Dickinson. I am the Chief Executive of the British Retail Consortium. We are the only trade association that covers the entirety of the retail industry, from large retailers to small ones, selling all sorts of products: anything that you might buy in your shops, either digitally or physically, day-to-day across all channels, whether that is online, in stores, out of town, high streets or—more likely these days—a combination of all of the above.

Paul Misener

My name is Paul Misener, Mr Chairman. Thank you for inviting me to testify and offer evidence this morning. I really appreciate it. I am the Vice-President of Global Public Policy for Amazon.com, where I have held this role for 16 years now.

Helen Dickinson

Has Amazon been going for 16 years?

Paul Misener

Yes, I know. I really am delighted to be here. Thank you very much and thank you for the inquiry. The digital economy is extremely important to our millions of customers here in the UK, so I look forward to your questions.

Chair

Thank you very much. Retail has changed enormously in the past decade or so. The digital revolution is pushing further change—transformation if not revolution. How do you anticipate that digital is changing retail and how will it look in the future?

Helen Dickinson

The first thing is we need to recognise the UK is at the forefront of e-commerce on the global stage. Online retail sales, as a proportion of the total in the UK, are about 15%, and the pounds per head that equals is higher than pretty much any other market. The UK is leading the way from a digital, e-commerce business-to-consumer point of view. That has caused a reinvention, which is proving successful, with some challenges, in some of the high streets across the country, so I am sure we will talk about that in a bit more detail as we go through. It is also meaning that there are now fewer people working in the industry than there were about 10 years ago: there are about 190,000 fewer people working in retail today. We have an industry that is investing hugely in digital technology as well as price deflation, so we have had nearly three years of continuous falls in prices. Taking those together and then looking forward as to what the impact might be, we see there will be fewer people working in retail in the future. We see that pace of change accelerating over the next couple of years. The aspiration is obviously to move from a broader base of people working in the industry to fewer but better jobs in the future.

Chair

That is essentially what your report published a week or two ago says. You say 900,000 fewer jobs in retail. That seems an enormous amount.

Helen Dickinson

It does seem an enormous amount. We made some assumptions, and we can all challenge as to whether they are exactly right or whether it will be over 10 years, which is what we were saying. It might be shorter; it might be longer. The key point we were raising in the report is that there is some good news associated with that: the industry will become more efficient. Also there are some risks and challenges associated with it, particularly with respect to more deprived areas across the country, more vulnerable people in the workforce and for smaller versus larger businesses.

Chair

Does the customer get a better deal as a result of the digital revolution?

Helen Dickinson

If you look across the last 30 or 40 years of UK retailing, we have seen a shift in where the power lies: from suppliers who had the products that everybody wanted, to retailers who needed to find space to be able to sell. Now that power has shifted firmly into the hands of consumers, because they have got much more visibility through the internet around price, around availability, around competition, and that has firmly put the power into the hands of the consumers. One of the high-profile CEOs I think said, “The customer was always in charge and now they are the superpower”, which is a nice little quote.

Chair

We might come on to that a little bit later on. Paul, how is retail changing? You, obviously, as a firm have changed it quite considerably, as well.

Paul Misener

It is changing in a good way towards consumers, as Ms Dickinson has indicated. She was right to point out the Office for National Statistics figure of about 13% to 15% of retail here in the UK being online. It is important to clarify that that includes the online sales of multi-channel sellers. Many of her members sell not only on the high street but also online. That 13% figure is important but it includes sales by the multi-channel sellers online. I have seen figures as high as 15% for the UK. This number is particularly interesting. First of all it indicates that something in the order of 85% or 87% of retail sales in the UK are offline—a very significant proportion. This very much contrasts with some of the predictions that I have seen over the years. When I joined Amazon in late 1999/early 2000, there were predictions at the time that within five years online commerce was going to be something of the order of 30%, even as high as 50%, of retail. Here we are; it is not five years later and we are not saying it is a third or a fifth, but 15 years later it is a seventh. That in itself is remarkable. Another thing Ms Dickinson said is really important here, and that is the UK’s leading role in this. I am not sure it is clear, but that 13% is the highest in the world. The United States is aspiring to double digits; in the US we are somewhere of the order of 9% or 10%; Germany is around 8% I believe, and the EU average is lower than that. The UK is to be congratulated for policies that do encourage e-commerce. You are doing very well. On the question about growth, as well, I have seen statistics also I guess from the Office for National Statistics that suggest that growth is of the order of 10% a year. To be clear, that growth is not going from 13% to 23%. It means it went last year from somewhere north of 11% to 13%, and that kind of growth is about right. Again, that is something to be proud of here in the UK. The statistics are supportive of the growth here.

Chair

Could you help me understand Amazon’s business model? Are you a technology company, are you a retailer, are you both or are those terms obsolete?

Paul Misener

We are a customer company. I know it sounds a bit like marketing, but the reality is we focus on our customers. What do they want? We try to anticipate what innovations would be important to them and what services would be good to them. It is part of our DNA. We have been doing this for 20 years. We will have meetings internally where we have a table and an empty chair and say, “What would the customer think as we are talking about the kinds of services that we want to provide her?” It is that important to us. That said, obviously we are heavily technology based. We began as a retail firm. Maybe this would be instructive, Mr Chairman. When we began we were a pure retailer. We would buy stuff wholesale, put it in a warehouse and sell it off at retail. The only novelty is all the sales occurred online as opposed to a shopfront. From that point, however, we have morphed into becoming a business that now provides support to other start-ups. I have to say that one of the most exciting things about my relatively long career at Amazon is that I have seen it go from being a start to helping start-ups. Much of what we do is take the technologies that we have developed for our retail business and now make them available to other users. Probably the principle example of this is allowing third-party sellers to sell through our website. When we first posited this notion a decade or a decade and a half ago, it was viewed as crazy. Why would you allow a third-party competitor to your retail business to come on to your website and sell right alongside you?

Chair

This is Amazon Marketplace?

Paul Misener

Yes, it is now. If I may, Mr Chairman, it went through this bad stage where we called it zShops. The concept in zShops was where third parties were allowed a segregated corner of our website essentially where they could offer their wares. It was an innovation. It was thought to be crazy at the time because it introduced competition right on our website, but customers hated it. Nobody used it. It was a bad innovation. Then we thought, “Well, let us take that”, and we just meld them together now such that everyone is selling right alongside each other. It is like a high street store that has a bunch of shelves with wares on it and allowing other sellers to come in and put the same wares on the same shelves right next to them—they could be for a lower price. This is great for sellers; it is great consumers.

Chair

It is great for Amazon. This is a great business idea. You do not have to hold any stock; you do not pay for things like packaging and posting. Yet you still take a cut. What is not to like about that?

Paul Misener

That is a fairly small part of our business. 47% of the units sold through Amazon are not sold by Amazon the retailer. Many of those units are sold through our website by third parties that put them in our warehouses so we can provide the fulfilment services for them: the picking and the packing and the shipping and all of that musty stuff. It is another part of our business that we developed for our retail business that we now make available to third parties.

Chair

Do you see yourselves as a low-margin business?

Paul Misener

Demonstrably we are. We are in the retail for the first part, so the core of our business is retail.

Chair

Scale is very important with regard to that. You want to pile them high and sell them cheap, probably more on a scale that has been unrivalled in human history, but that is where you will make your money.

Paul Misener

We price to maximise customer trust. We want our customers, when they come to our website, to know they are going to get a low price. The way they get it is either through our retailer business or through the sellers who are selling alongside us, who often undersell us. That is why 47% of the units sold through Amazon the website are not sold by Amazon the retailer.

Chair

Do you worry about competition in that you might be stifling competition?

Paul Misener

Not at all.

Chair

The reason I ask is I read a couple of years ago this fantastic book, The Everything Store by Brad Stone, and there is a review of it in the London Review of Books. Allow me just to make this quote from the review, and this is about Amazon’s business model: “With lower prices you’ll get more customers; with more customers you can push suppliers to lower their prices, which will let you lower your prices even further, thereby attracting more customers; repeat until your competitors are dust”. Is that a fair summary?

Paul Misener

No. No. It is an interesting viewpoint of things, but it is simply not the way we operate. First of all, as I mentioned, retail is a low-margin business by definition. It historically has been: it is high turnover, low margin. Also, we are reinvesting heavily. In the UK in the past five years, we have invested £4.5 billion in new facilities and innovation and R and D—and I can tell you all about that. The new facilities are something to keep up with customer demand. We have to keep up. The innovation—we can talk about that—is also very important to us as a company to provide new services to our customers.

Chair

My final question before I open it up to colleagues is about the use of data and essentially whether Amazon is changing into a data collection company. This is a serious question; it is not meant to be flippant in any way. Are you trying to take over from Google?

Paul Misener

No. I do not even think they are our competitors.

Chair

The reason I ask is that for people like Amazon Prime subscribers you will be the go-to choice for shopping options without having to resort to Google. The collection of data that you will have is enormously valuable. What do you want to do with that?

Paul Misener

We have used consumer information from the very beginning to personalise the shopping experience at Amazon. We want each customer to come to the website and be able view it as their personal store. Protecting that customer data, keeping it close and using it responsibly is paramount to the company, because if we do not do that we have lost customer trust, and that is the most valuable asset we have.

Michelle Thomson

Good morning, Paul. Thank you for coming to the session. Following on first of all in terms of retail versus digital, I understand you have recently opened your first bookstore in Seattle, and Re/code in the US claim that you have planned another 300 to 400. I suppose my question is, in essence, what appeal do bricks and mortar stores have to an online digital company such as Amazon? Is that part of your future plans for world domination?

Paul Misener

No, it is not part of those plans. The opening of a physical bookstore took some people by surprise. It is just a natural growth of wanting to serve our customers. We just felt that was a way to do it better. The hope is if that works, we could serve our customers that way in other areas as well. We did not view that as such a big deal. I appreciate why, from the outside, it is viewed as a momentous change, but it is just an outgrowth of our willingness to try to serve our customers.

Michelle Thomson

Do you anticipate doing that in the UK as well, then, presumably?

Paul Misener

I have got nothing to announce. I cannot say; I cannot speculate on that, but let us see what happens. Let us see if our customers like it. Hopefully they will like the experience in our physical store there in Seattle. After all, innovation is about something you hope your customers will like. I told you about zShops; that was an example of an innovation our customers hated. It failed; it was a flop. We try to figure out innovations they will like. If they like them, we will continue with them; if not, we will disband it like we did zShops.

Michelle Thomson

Following on from that, I guess that goes back to the point the Chair made about whether you are retail or digital. It is almost like retailisation, with your recent link up with Morrisons. Do you see further plans for moving into expensive retail outlets as a mechanism of getting greater reach?

Paul Misener

We have many partners, as you can appreciate, globally. The arrangement with Morrisons is to begin carrying some of their brands—their branded products—on our website. We are very happy to add to the selection of products we have on our website by working with Morrisons to bring their branded products online.

Michelle Thomson

One more thing on that, going back to the digitisation: are drones something you would like to trial for delivery in the UK? I do not know what your plans are as compared with the US for drones.

Paul Misener

This is an example of investment and innovation right here in the UK. We have, in the Cambridge area, a development centre specifically around these aerial drones. For those of you who may not be aware of this, these are automated vehicles that are lightweight and could make lightweight deliveries to customers in local areas. Much of that innovation is taking place right in Cambridge. We also have in the area some testing going on. It is one of a couple of development centres in the world working on aerial drones, and we hope to bring that Prime Air service to customers sometime in the near future.

Michelle Thomson

Just following on from that, do you see any dichotomy then in governments such as the Scottish Government—I come from Scotland—giving Amazon grants to create jobs while, at the same time, you are funnelling the savings into making jobs obsolete?

Paul Misener

There are certain circumstances where localities will want to make available some incentives to bring in jobs and investment. The incentives we received in Scotland were ones available to any company that would come in and make jobs and investment available in the country, especially in that region. That is only a tiny fraction of the investment we are making in the UK. As I mentioned, over the past five years there has been something like £4.6 billion of investment here.

Helen Dickinson

Picking up the question asked there, it is not a case of bricks versus clicks. When we think of retail now, it is absolutely that the channels are completely blurred, certainly from a customer point of view. If you think about how any of us as shoppers shop these days, we are as likely to go into a store and buy something as we are to do some research online and then go into a store, or to buy something online and either have it delivered or click and collect. Over the last couple of the years, retailers—particularly more traditional retailers—have been dealing with the idea that it is one versus the other in really thinking about where they put their investment and how they structure their business such that they are facing into the customer across those different channels in one way. That is the whole investment equation, and the mix of physical and digital is really important as we look forward. There absolutely will continue to be physical stores and high streets that include stores on them, but they will be different from what we have seen in the past. We raised business rates in our report in that those that operate in physical property talk a lot about it being a disincentive to making more of that investment at local level.

Richard Fuller

One of the themes that we have looked at in this inquiry is the challenge for existing legislation and regulation in different sectors where there has been some digital transformation, for example in digital music issues of copyright protection. We talked to taxis and Uber, and that is about protecting or not protecting the rights of certain types of producers, or Airbnb and the hotel industry with consumer rights when they go into certain buildings that have regulations and those that do not. I guess, just picking up on what Ms Dickinson has just said, one of the issues where there may be a disparity between the two parts of your industry is business rates. If I can, I am going to ask you a few questions, and as you have been in the industry for 16 years, Paul, I am not going to try to catch you out on anything. I looked at your website—Amazon’s corporate website—and you list your locations in Europe. In the UK you have fulfilment centres, customer service centres and corporate offices. Where are your shops?

Paul Misener

Our shops? As you undoubtedly are aware, we do not have storefronts typically, with the exception of the one we have launched in Seattle. We pay business rates for our office space, wherever it is, say in London, Cambridge or Edinburgh. We also pay business rates on the huge facilities that we have distributed around the country. Look, there are a variety of business models, as you can appreciate; Ms Dickinson has talked about how there is this mix there. We will always pay what is owed.

Richard Fuller

And you do, but let me just go through a specific couple of examples, because we are lucky enough to have a distribution centre for Amazon quite near my constituency, Marston Gate Distribution Centre, which is 67,000 square metres and pays £52.50 per square metre in business rates. In Bedford we are also fortunate to have a Waterstones book shop, which is at 11 to 13 Silver Street, Bedford. I hope anyone in Bedford today will go look and purchase a book there. Their adjusted business rates are £850 per square metre. That is 16 times what you pay per square metre at Marston Gate. Is that disparity sustainable?

Paul Misener

This is a challenge and choice for policymakers to make.

Richard Fuller

What would be your advice? You have been in the industry for 16 years. There is nobody—nobody—in this room who understands the tensions between existing retail and online retail better than you. Please, what is your advice?

Paul Misener

My advice would be to take a long hard look at it. You have a very hard job. The policy choices that face you are very difficult. We will pay whatever you come up with in these business rates. The challenge that you face is not binary; it is not one kind of business model versus another. There is a real challenge: what about the companies that are bricks and clicks. What about those that have some facilities in downtown Seattle and other distribution centres elsewhere? It is a real challenge; I acknowledge that. I confess I do not have the answer. We will pay whatever you end up requiring.

Richard Fuller

I appreciate that, but it is often said one of the reasons large global technology companies get a bad rap from people is that you do not pay what you are due; you do pay exactly what you are due. You and other companies do. Maybe you could help advise, but that is 16 times disparity between high street and distribution centres. My instinct is that disparity is too strong even in a mixed environment. There is the long-awaited rates review—and heaven knows how ambitious the Chancellor will be in a couple of weeks’ time—but perhaps some narrowing of that might be in order. Do you have any particular resistance to that?

Paul Misener

It might be. I will acknowledge that it might be in order. There are a lot of advantages, obviously, to being on the high street as opposed to in a remote area. Whether they are appropriately balanced right now, I do not know. I really do not. I acknowledge that is worthy of a review.

Helen Dickinson

My perspective on this is it is less about how the cards are shuffled within the retail industry and much more to do with the fact that property taxes have become too big a proportion of the total of business taxation. If I look across the retail industry as a whole and do not differentiate between channels, we can see that the industry is about 5% of the economy, so 5% of GVA. It pays about 10% of business taxation, across all the main taxes including business rates. It pays about 25% of business rates. Our recommendation to Mr Osborne, as he looks forward as part of his budget, is that the solution to business rates lies in looking at what he is going to do around the business tax roadmap and how all taxes fit together, not looking, particularly within retail, at how you shuffle the cards within the industry, because most business now operate across different channels. We need to reduce the burden—to your Waterstones example, which sits on prime retail space—so that burden is spread across a bigger proportion of business taxation.

Richard Fuller

That is very interesting, and I was not anticipating that response, because I thought you would talk about differences and the unfairness between different sectors of retail. Just to be clear, your point of view is that, when it comes to rates, we are past those concerns—the fact I am bricks and mortar and Amazon get an unfair deal because they are just online. That is the argument of days gone by, and now you are together in the view that it is about the burden of property taxes on retail that is important.

Helen Dickinson

Indeed, and the other part of it: property tax as a proportion of business taxation, and the other aspect is international tax, so the work of the OECD and how international businesses in the 21st century should be taxed when they can operate across different borders. There are still some within the industry who might talk about this bricks-versus-clicks unfairness, but those two issues are the root of where that comes from. That is why our position is about reducing the burden on property tax such that it removes the disincentive from operating in physical space.

Chair

Before I bring Chris in, can I just follow up on that? We took evidence with regard to the steel industry in terms of making sure there is a level playing field regarding the rateable value of new plant and machinery on business rates. If you were in Mr Osborne’s shoes, with the budget about to be published in 10 days’ time, and you want to reduce business property taxes, where would you then increase taxes in order to make sure that it could be revenue neutral, as he wants it to be?

Helen Dickinson

I would look across the totality of his forecasts that sit within all the income that comes into the Treasury. I completely recognise that there is a need to balance books, but what I am really clear about is that the answer does not sit within property tax and how we spread it among us. I do not have an answer to your question. I just think that we need to look across different industries and how all of it fits together—whether it is corporation tax, national insurance or other property taxes.

Chair

One final question from me before I bring Chris in. There are other aspects of taxation, air passenger duty for example, where representatives sometimes say, “If you lowered the rates, you would increase the tax take because it would incentivise increased activity”. Have you any evidence as the BRC in respect of if you reduced business property taxation, particularly in retail, the tax take would increase?

Helen Dickinson

We have considered it, but the challenge with business rates is that, even if a property is empty, they are still subject to some small release and still have to pay business rates. From a Treasury point of view, that is great news. We have not been able to work out what exactly the secondary effects are, because we were given a very strong steer by the Treasury that when they do their modelling they are not taking those into account when they are assessing the OBR forecasts. It is a bit of a no-brainer if you have got an empty property versus one that is employing people and generating local economic benefit—I am sure you have all seen it in your local constituencies.

Chris White

Following on from Michelle’s question about your new building in Seattle, you said, “Let us see if our customers like it”. I am going to make a prediction here that they will like it, because we have had bookshops and the general public have liked them. We have fewer book shops now because of some of your business model, which is incredibly effective. There is a sort of personal question I would like to ask you: how do you feel about local bookshops closing down as an effect of your business model? There is also a more general question with respect to how you developed a relationship with Morrisons and the effect that will also have on our high streets. How do you envision our high streets looking in five or 10 years’ time? Very different? The same? Better?

Paul Misener

Thank you for the questions. As far as the bookshops go, many of us old-time original Amazonians, the first generation of us who came in, are very bookish people. I happen to be an electrical engineer/computer scientist turned lawyer; I love my books. I have got a collection of at least 2,500.

Chris White

That sounds like a distribution centre.

Chair

It is a fulfilment centre.

Paul Misener

I am not selling. We are bookish people: we love our books; we love book shops. We have done what we can to help them sell through us to reach markets well beyond where they could reach currently. Much of the demise of the small bookshop occurred before Amazon was a factor; it occurred largely because of big box retailing. Since then we have endeavoured to help bookshops in a way the big boxes have not. They cannot; they are not set up to—we are. Many of the tens of thousands of third party sellers who sell through our website that are based in the UK are bookshops. We are giving them a reach that they did not have before and a reach that others have not given them. You asked me about Morrisons as well. Again, that deal was to carry some of Morrison’s branded products on our website, and we view that as a good thing: it increases the selection available to our customers, which is always good, and they are a very well respected brand. We wanted to bring that to them. Where do I see the high street? It has always been a mix. Again, if you think about it, when I started—when I made the leap to go to this little start-up called Amazon—the predictions were that within five years it would be something of the order of 30% or 50% of retail; it has not happened. We are still at 13% and that is the highest in the world. I anticipate—I hope—it grows over time, but for the foreseeable future it is going to be a mix of things. It is going to be a mix within certain companies that do both things, and then there will be some that are purely online and some that are purely offline.

Helen Dickinson

On the high street end of the question, if you look across the country we will see fewer physical shops, which takes you back to the business rates equation, because unless something is done to remove those disincentives, that will partially determine how many fewer. We will also see a difference in terms of experience, in terms of what those physical shops will be doing, because of the fact that their channels are much more blurred. We will see more retailers offering what people in the industry call “theatre”: having a reason to draw people in that is much less about a functional exchange of a transaction and more about the leisure and pleasure of shopping as an activity, so less retail, more leisure. We are talking a lot within the Future High Streets Forum, which is a joint Government-industry initiative with Marcus Jones in DCLG, about how you facilitate the restructuring that needs to happen at local level, whether it is conversion to housing, bringing more people in, or whether it is a stronger night-time economy. I see high streets absolutely playing a critical part in the future, but they will, as they have done over the last 50 years, look different from today, so we are in a process of reinvention. It has some challenges associated with it, particularly in some of the more deprived areas of the country, because that is where we will see the impact hit hardest and the most significantly, and from a policymaking point of view we need to address that.

Chair

I am very interested in your point about reinvention and innovation and making sure that the high streets will look different. In your experience, which areas—towns, cities—are doing this well? Can you cite any areas of good practice?

Helen Dickinson

Certainly there was a competition at the end of the last, a Great British High Street competition. That is the second year it has been held. There were over 200 entries into that competition, and the biggest learning is that the critical success factor at a local level around those that do it well and those that are struggling is about the quality and the involvement of partnerships. That could be formally through a bid or an informal group of people who are doing something locally—ideally with the involvement of the local authority—and have an idea about how they can draw people in and create some of that theatre, a destination, and reasons for people to shop locally. It is about the quality of local partnerships.

Chair

Is there a correlation between the ability of partners and high streets to respond and the relative economic deprivation in that area as well? There may not be enough money to invest in the theatre that you were suggesting.

Helen Dickinson

Yes, there is, to a degree. There is still plenty of untapped potential in high streets where those sorts of partnerships, groups of people, do not necessarily exist or do not have the right involvement.

Chair

Do you think, in general, online retailers are innovating better and more successfully than people who are just in the high street? I know it is not an either/or these days, but what is your sense about that difference between online and high streets in respect of innovation?

Helen Dickinson

There is an issue to do with perhaps smaller businesses that operate at high-street level. Again, that comes back to some of the work that the forum is undertaking. There are going to be some pilots for something called the Digital Hub, whereby the idea is to have a physical presence of some expertise in local areas that businesses in that area can tap into to raise their capability on what digital means at a local level.

Chair

Paul, you mentioned innovation. Amazon is very much an innovative company. Could you tell us a little bit about what you have been doing and what you plan to do in the future?

Paul Misener

I would be happy to. We would like to think of ourselves as an innovative company. We want to innovate very much on behalf of our customers: to offer new services and products to them. One of the areas in which we have also taken a learning that we developed in the context of our core retail business is in cloud computing. I am not sure you are all familiar with this term or this service. It allows businesses to use computing only as they need it, sort of like a utility. For start-ups this is radically important, because to be a start in the digital economy almost by definition you need computing power: you need software; you need to be offering information kinds of services in the digital economy. 10 or 15 years ago the only way to have done that for a start-up would have been to use your early capital, go out and buy computing hardware, buy software, run on it and probably pay a couple of programmers to run it for you. That is all capital investment before you have done anything to help out your own business—your novel idea. Cloud computing services now make available that kind of computing capacity—storage, analysis, analytics, computation—as a service, so you only pay for what you need and you do not pay for what you do not need. Today, our cloud computing business, which is one of many, is called Amazon Web Services. It provides computing services to fairly large companies such as Shell Oil and Netflix. You may be familiar with the cab calling service Hailo. Hailo runs its entire infrastructure on Amazon Web Services’ cloud business. That way, especially when they were in the very start-up phase, they did not need to spend capital on computing, because they could just rent it from us, and they could have from others. That kind of innovation, again, is really exciting for somebody who saw Amazon as a start-up and now is in a position to help out start-ups like Hailo.

Chair

In terms of innovation, thinking a couple of years ago about Kindle, is the accusation that that restricts choice a valid one? I have to have a Kindle in order to have an e-book or whatever, and that means I will not be able to transfer and have that portability. In many respects you are almost restricting choice and competition there. Is that fair?

Paul Misener

No, it is not, because we offer our customers interoperability—I think that is typically the phrase used—where it matters most. We recognise that our customers have a variety of devices. I have an iPhone, I have many iPads, I have several Kindles, as I mentioned. We wanted to make sure that, if you purchase a Kindle book, it is available on every single one of those devices. One of the features of the format that we use—the Amazon Kindle format—is that it allows you to move from one device to another seamlessly without having to go back and try to figure out where you are in a book. You can start reading at night at the bedside put the book down, and the next morning on the tube you can read it on your iPhone. It picks up exactly where you left off.

Chair

I just use a train ticket as a bookmark.

Paul Misener

Not that book. That kind of innovation in the format is super important. We would not want to see that kind of feature lost. Providing it across the devices really recognises the reality of today: that not everybody has a Kindle or that is not their only device; they multiple devices on which they want to read.

Chair

The digital economy is changing commerce very rapidly, and both of you have already mentioned how Britain is the leading e-commerce nation on Earth. What are the barriers to making sure we can realise even further potential? What should we be addressing in Committee in terms of the things that are holding us back?

Helen Dickinson

We have talked about business rates, because I see e-commerce and physical as being part of the customer-facing solution. Skills are another big topic that we could potentially go into. I did not take the name of the lady that was talking about the apprenticeship levy. We want to ensure that the apprenticeship levy becomes part of the solution around what the skills that will be needed within retail in the future look like. That—which is the same point the lady was making—is fundamentally about the flexibility over where the money can be spent, because retailers do a lot of innovation and need to ensure that the training they undertake is most valuable to them. We know, from a third party point of view, that is not necessarily available at the moment. Business rates and skills would be the two biggest barriers.

Chair

Is that true for Amazon as well, Paul? Do you find it difficult to recruit talent?

Paul Misener

It depends where, but we have found, however, that the training aspect of our role at Amazon is extremely important. We train our employees to be able to do their jobs, and so certainly if they come in with technical skills it is very helpful, even at the entry level. We also have introduced a programme called Career Choice, whereby we will pay up to 95% of the tuition for our hourly paid workers in our fulfilment centres to go off and get a certificate or an associate’s degree in any high demand occupation, even if it is irrelevant to Amazon. It gives the workforce a chance to say, “Look, if I want a different career, I can train for it, just so long as it is in a high-demand occupation”. Although we are not funding training in philosophy, for example, we are in nursing, even though nursing is not a part of what Amazon employs. I do believe the very first person who went through—I am not certain of this—our Career Choice programme, getting that tuition paid by Amazon, now is a nurse working somewhere else. It is a view to ensuring that the necessary skills are available in society more broadly.

Chair

Are you happy with the working conditions in your fulfilment centres?

Paul Misener

Yes, absolutely.

Chair

I may be out of date here, but the book The Everything Store talks about a points system, where if you are late for work you have half a point. If you call in sick, there will be a point. After six points, you are automatically fired. That does not happen in the UK, does it?

Paul Misener

We have a system of evaluating our performance like any other company does. Ms Milling has the Rugeley facility in her constituency and she has visited it a couple of times. I would invite the entire Committee or members of the Committee to come see. Come talk to the workforce; come see what it looks like. If anything, it is really cool. Even for somebody who has been there for so long, the nerd in me just loves the place because of the cool automation, how it all works and just the scale of it all. If you were to come and visit either with or without me, just to go in and see and talk to the people and see what they think of the conditions there, you will get a much more clear perspective. It is an open invitation.

Chair

Thank you. That is very kind.

Richard Fuller

That might be fun. You definitely have to come, though. If we go to your facilities in the UK, what proportion of Amazon employees are employed and what proportion are agency workers?

Paul Misener

It matters seasonally. Our workforce has to vary. Retail generally has to do this for seasonality, including around Mother’s Day—it is true.

Richard Fuller

I do not think you should have said that.

Chair

Please do not mention Mother’s Day, Paul, certainly not to Chris.

Paul Misener

I don’t want to know. Currently we have 12,000 permanent employees in the UK. That will rise to, we think, at least 14,500 by the end of this year. Within the past week or so we announced a new facility that is going in in Leicestershire. I hope I am not spilling the beans on this, but within the next few days we will be announcing another facility in the North West. Those two facilities together will account for something like 1,500 new jobs. Those are permanent jobs. At present we have of the order of several thousand temp workers.

Richard Fuller

Several thousand could be?

Paul Misener

Around 4,000 or 5,000. I can get the precise number for you, but it is of the order of 4,000 or 5,000 temp workers. We are still coming off of Q4, which is when we hire the most temps. That is where we get many of our permanent workers; the temp workers who want to stay on are what we call “converted”, and then come on as permanent workers thereafter. That is partly how we grow the workforce.

Chair

On the living wage, this is another Government policy that has been announced and will be pursued over the next five years. One of the three sectors where it is expected to have the biggest impact on employment is the retail sector. Could you just share with the Committee your thoughts about the living wage and any positives or concerns that you have about it?

Helen Dickinson

The industry is supportive of the living wage in principle. There is no doubt from a retail point of view more needs to be done around low pay. I do not know if you have seen our report, but that highlights that the incidence—so the proportion—of people on low pay within retail has been rising over the last decade or so. There is absolute support in the first instance. The question is how the economics of it will pan out over the next few years. We have done some work to assess what the cost of that might look like, and you have got to make various assumptions: we are looking at between £1 billion and £3 billion a year. If you combine that with the increases that we expect to see if business rates do not change, plus the cost of the apprenticeship levy, which is another add on, that adds up to about £14 billion over the next five years, which is equivalent to about 20% of retail industry profitability. The question is around how unevenly that will land across different parts of the economy. That is what we were highlighting in the report: more vulnerable people, more deprived areas and smaller business. It comes back to business rates again. It comes back to the independence of the Low Pay Commission around making sure they are independent to look at the trajectory over the next five years to 2020 and how that will impact on a regional level. The third thing is about the apprenticeship levy.

Richard Fuller

Mr Misener, for Amazon, with your agency workers, do you have protocols in place to ensure that your agency workers obviously are paying their employees consistent with the national minimum wage and would do that for the living wage?

Paul Misener

Yes, of course, and in fact for our permanent employees we—

Richard Fuller

No, for your agency workers.

Paul Misener

I understand. I said “and” for our permanent employees we raised the entry-level wage to £7.20 a good six months in advance. It is really important to recognise, however, that the vast majority of the employees at Amazon are not at an entry level wage. It is at £7.20 now, but they very quickly move up; within a couple of years it is another 10% on top of that and so on. The percentage of employees that we have at entry-level wage is pretty small.

Richard Fuller

It might be interesting to see for Amazon what proportion of your employee base is paid now what the living wage will be in 2020, more than £9 an hour, if you have that information. We have seen in other sections a number of companies have moved ahead already—Lidl and others—about saying, “We are going to pay the living wage”. They are moving to it now. If Amazon were to be able to demonstrate it is doing the same thing, that would send a very powerful message.

Paul Misener

I would hope that we are not also just focused on the wage, because we provide our employees comprehensive benefits, including private health insurance, a pension plan and even stock. Our permanent employees get stock, and over the past five years or so that stock is valued at something like £1,000, so the additional benefits we give our employees are not insignificant.

Paul Blomfield

You present a very benign impression of your operations: encouraging competition, happy to see people undercutting you. You will know that is not a view shared by booksellers and book publishers. The Booksellers Association surveyed publishers, and 42% said in the last two years you had attempted to prevent them from offering a better deal to anyone other than Amazon. How does that fit in with the impression you have tried to give us of your business?

Paul Misener

I am not sure exactly about the statistics that you cite. We work with publishers.

Paul Blomfield

It is not true, then? You do not try to tie publishers into deals where they will not undercut through any other seller.

Paul Misener

We have MFN clauses with respect to e-books and e-books alone. Those MFN clauses cover pricing and other characteristics—release dates and those sorts of things. It is largely because of the opportunities for, frankly, collective action on their part. You may have seen yesterday the US Supreme Court refused to hear the Apple appeal. This is an appeal of a settlement that was reached a couple of years ago with the American Department of Justice in which Apple agreed to pay $450 million because of the accusation that they had colluded with major publishers to keep e-book prices high. E-books are different from physical books.

Paul Blomfield

Can we just concentrate on physical books, then? Are you saying that you do not try to force publishers to not offer a better deal to anybody other than Amazon for some physical books?

Paul Misener

I will have to get back to you on those specific accusations being made there. I am sorry I do not know about that.

Paul Blomfield

You cannot say that you do not do it.

Paul Misener

I am saying I do not know the answer to your question specifically. I am saying, though—I will say—that we have endeavoured to keep prices low for our customers all along. There are often negotiations. One of the very prominent deals or negotiations that you may have seen was with respect to Hachette. There was a ton of controversy about the business arrangements between our company and theirs. It was eventually resolved. We find ourselves working with publishers all the time, and we find that we agree on more things than on which we disagree, but of course there is sometimes going to be business term negotiations. In the context we recognise, like our customers do, an electronic book simply ought to cost less than a physical book. There is not the paper, ink, storage or shipping—all those things that go into a physical book. It ought just to cost less. We really have had some fairly high-profile negotiations with some publishers over the last few years with respect to e-books.

Paul Blomfield

Yes. We will get back to some physical books. I wonder if you could explain to me what you thought your CEO, Jeff Bezos, meant when he said, “Amazon should approach these small publishers the way a cheetah would pursue a sickly gazelle”.

Paul Misener

Wow.

Paul Blomfield

What does that say about your business? What did he mean by that?

Paul Misener

I am not even sure that quote is real. I do not know it, I am sorry.

Paul Blomfield

It is certainly real; I can provide you with the origin of it. You know this company inside out; you have worked in it all this time. What do you think he was thinking?

Paul Misener

Again, I am not about to acknowledge that that is something he said, but let me tell you how we think about working with our publishers. The publishers are going to be around for a long time. They provide a great service. We work with them, and for the foreseeable future they will be partners in business with us. We also have started self-publishing options for authors to be able to avert the gatekeeping function that publishers of necessity have. Publishers, of course, have to make choices about upfront investments. When a publisher takes on an author, the publisher has to say, “We believe that this author’s works will sell, because we are going to put up an upfront investment into editing, typesetting, printing and then distributing lots of books”. All those things are expensive upfront costs. As a result, of necessity they have to act as a gatekeeper. We have started self-publishing options for authors just to avoid that very necessary gatekeeping function. We see these as symbiotic relationships where we are continuing to work with the publishers but also allowing authors to have self-publishing options available.

Paul Blomfield

Do you encourage showrooming, which is obviously a concern of booksellers?

Paul Misener

Yes. No, we do not.

Paul Blomfield

Why did you develop the Firefly app, which enables customers to pick up a barcode and then link directly to your online sales function?

Paul Misener

We were not the only ones who had that functionality available, but I understand that concern. I have used the Firefly app to rebuy things that I already have. I have things in my house; I can just scan the barcode and, boom, I can repurchase it. That is one application of it. We recognise that high street sellers have an advantage over us because of the immediacy of the purchase. That has always been the case, but people have been price comparing for a long time and the web has made it much easier. I have mentioned before that we allow third party sellers to come on our very website and undersell us. There is the result that 47% of units sold through our site are not sold by our retail business. We actively encourage people to price compare. There are also price comparison sites off of Amazon; they are called shop-comp sites. They are shopping comparison sites, which crawl the web for the best prices. This is the kind of thing that simply did not exist pre-web. Pre-web, if you were fortunate enough to have a few buying choices in your town, you had to go to each one. If you had five shops, you had to go to at least five of them to find the lowest price, maybe six, because you had to go back to the one with the lowest price. That kind of price comparison online is far easier and it disciplines all sellers online, including our retail business.

Chair

May I, on behalf of the Committee, thank you both? That has been very informative and I can certainly say I have enjoyed it. That is going to help us produce recommendations for our digital economy inquiry, so thank you very much again for your time. We really appreciate it. Thank you. Oral evidence: The Digital Economy, HC 571