'Country pricing' a cause of Canada-U.S. price gaps
Manufacturers can't justify the major markups for Canadians, expert says
Manufacturers claim that Canadian prices are higher due to labour and transportation costs, tariffs, the smaller Canadian market and other issues. (Mark Blinch/Reuters)
Canadians are paying far more than Americans for the same products because of a systemic and unjustifiable markup scheme by many manufacturers, a retail expert says.
A Marketplace report on Canada-U.S. price gaps found Canadians paying higher prices — more than double in some cases — for the same retail goods because of an industry phenomenon called "country pricing."
"Multi-national brands, they have two different price lists … (one) for retailers in Canada, and (one) for retailers in the United States," says Diane Brisebois, president of the Retail Council of Canada. "And I can guarantee you that the price lists for retailers in Canada [have] prices that are between 10 to 50 per cent higher than the prices in the United States."
In some cases, the final sale price is much more.
Marketplace's investigation found a bottle of Bayer Aspirin, which costs $5.96 at a U.S. Wal-Mart sells for $13.86 at a Canadian one, a 132 per cent difference.
Prices are local, and on the day of the investigation, the Canadian dollar was trading at 99.3 cents US.
The Senate finance committee's Wednesday report on the price gap contained other pronounced examples. Automobile tires cost 32 per cent more in Canada, and a bottle of ibuprofen cost 70 per cent more than the U.S. price.
Edmonton resident Christine Maligec was shocked to find the playpen she bought from Toys "R" Us cost $129.99 in the U.S., but jumped to $249.99 in Canada.
"I can understand paying a little bit more, but nearly twice as much?" she said. "And our dollar is nearly at par — what's going on with that?"
Explanations 'a bloody lie'
Manufacturers claim that Canadian prices are higher due to labour and transportation costs, tariffs, the smaller Canadian market and other issues.
Bayer responded to Marketplace's story with an email pointing to similar factors causing higher prices in Canada.
"These dynamics are influenced by a variety of factors such as local economic conditions, cost of goods, differences in product formulation and local regulatory packaging and distribution costs," it read in part. " A direct comparison of Canadian and U.S. prices is not appropriate."
Brisebois says those issues should only cause slight price increases, but such high double- and triple-digit markups are indefensible.
"I don't care what the manufacturer says," she told Marketplace host Tom Harrington, "You cannot justify 30 per cent, 50 per cent, 100 per cent more in Canada than in the United States. It may cost a bit more to do business in one country versus another, but we're talking about five to 10 per cent.
"I don't believe in that crap," she added. "I think it's a bloody lie, and I think retailers are saying enough is enough."
It's difficult for many retailers to fight back effectively, because the manufacturers can essentially hold them hostage.
"We have small retailers who have been complaining to their manufacturers that they're charging them too much in Canada," Brisebois said. "And the manufacturers are saying, 'You don't like my price, then don't carry my line.' They're threatening retailers."
In her testimony to the Senate committee, Brisebois elaborated on the issue.
"If I am a sporting goods retailer in this country, and I do not carry Reebok or Nike, chances are that I will not have too much retail traffic in my store," she said. "That explains why they also have the ability to tell a Canadian retailer … how much they will sell a product for if the retailer wants it in their store."
The markups hurt retailers too, since many shoppers are choosing to take their business across the border.
A May 2012 report from Bank of Montreal estimated that cross-border shopping is costing the Canadian economy approximately $20 billion per year, and Brisebois says the government is losing another $8 billion to $10 billion in tax revenue.
It's not just foreign manufacturers exploiting Canadians. Brisebois says even Canadian manufacturers are guilty of country pricing.
"We have Canadian manufacturers who are selling to Canadian retailers at a higher price than they are to U.S. retailers," she explained. "And the product is made here. It doesn't make sense."
Accustomed to overcharging
One reason that Canadians pay so much more is simply that they're accustomed to it.
"[Manufacturers] say… the market can bear it," Brisebois said. "[Canadians] had more money or they were used to paying a higher price."
Brisebois says that attitude springs from times when the Canadian dollar was typically closer to 60 cents US and cross-border shopping was less popular. Prices were naturally higher in Canada, but Canadians came to expect those prices, so they never pushed back even as the dollar neared parity.
During the recent Senate probe, multiple witnesses — including Bank of Canada governor Mark Carney — said the problem of "charging what the market will bear" is due to a lack of competition.
The Senate report concluded that "increasing competition in Canada is crucial to eliminating price discrepancies between the two countries."
The report also calls for a "comprehensive review of Canadian tariffs," and possible increases on duty-free shipping limits.
Brisebois applauded the Senate findings and hopes that changes are coming.
"The government must now act in its upcoming budget to implement many of the recommendations of this report and be a part of the solution," she said.
"Retailers continue to do their job in delivering value to consumers. It is now time for our government to assist in leveling the playing field for our businesses in Canada."
Rigged marketplace at the heart of U.S.-Canada price gap
Behold your government at work.
Nearly two years after Finance Minister Jim Flaherty urged the Senate to get to the bottom of the often-vast gap between what Canadians and Americans pay for the same consumer products, the official answer is that it’s a conundrum.
And don’t grab for an Aspirin to ease your headache. A bottle of pain reliever could cost you twice as much as in the U.S., as last week’s much-anticipated report by the Senate committee on national finance pointed out.
Maybe you want to get away from it all in a Canadian-made Chevy Camaro? The list price on that is nearly $5,000 more on this side of the border than in the U.S.
Across all products, the average Canadian retail price premium was 11 per cent when the committee began its work in 2011, according to a Bank of Canada estimate.
“There is no one answer,” acknowledged committee chairman Joseph Day as he released the report last week. “The government doesn’t determine prices. The marketplace determines prices.”
Senator Day is only partly right. Crucial parts of the economy remain protected by decades-old government policies, many with obsolete economic rationales in the 21st century.
The federal government intentionally shields telecom services, such as Internet and telephone; airlines; banking, and the dairy and poultry industries from the full weight of foreign competition.
Stealthily, these policies cost Canadians thousands of dollars a year and sap the economy’s productivity.
Prices in these special industries are set in the marketplace, but it’s a rigged marketplace.
The committee sidestepped these awkward questions.
And the Conservative government continues to vigorously defend its consumer-unfriendly policies in trade negotiations, without clearly justifying to Canadians why they’re still necessary in 2013.
The committee’s unsatisfying conclusion – that there is no easy solution to high prices – is the product of six months of hearings, 54 witnesses, a dozen written submissions and tens of thousands of dollars in expenses.
The committee’s equally unsatisfying prescription – including lowering tariffs and harmonizing product safety standards – doesn’t get to the heart of the matter.
It’s about competition, and there is significantly less of it in Canada, across a broad range of consumer products and services.
Consumers, and small businesses, pay dearly for this dearth of choice. And that’s unlikely to change, even if the government acts on all of the report’s recommendations.
During the committee’s hearings, Bank of Canada Governor Mark Carney bluntly told senators that the retail industry is significantly more concentrated in Canada than in the United States. The top four retailers in Canada control nearly one-third of the market, compared to only 11 per cent in the United States. That’s huge market power at the top.
That suggests local governments may be failing to create a healthy competitive environment for developers, leaving too much land and retail space in the hands of the few. The committee chose not to go there.
Why, one might ask, would governments ignore policies that could have a powerful effect on consumer prices? That was, after all, central to the committee’s mandate.
Senators heard from 65 witnesses, in person and in writing. Only two groups spoke on behalf of consumers – the Consumers Association of Canada and the Public Interest Advocacy Centre.
The consumer voice is far too timid in the Canadian political system. Too often major policy debates, including trade agreements, are played out as battles between industry groups.
A case in point is the pending Canada-European Union free trade deal. Canadian negotiators are trading off the interests of auto makers and cattle ranchers against the desires of dairy farmers. One group loses, another wins.
Or consider bank customers. Last year, Mr. Flaherty announced a controversial plan to overhaul the regime that lets consumers seek compensation through an outside arbitrator when they believe they have been wronged. Ottawa is bowing to industry pressure by allowing individual banks to hire their own private dispute resolution company, bypassing the quasi-independent Ombudsman for Banking Services and Investments now used by most banks.
Politicians may express outrage about the plight of consumers. But their actions suggest otherwise.
It’s tough for consumers to be heard when they’re sitting at the kids’ table.
Tariffs are the hidden hand behind U.S.-Canada price gap
On the list of things consumers like to rant about, the price gap between Canada and the United States ranks high up, in the company of banking fees and pump prices that flare before holidays.
This week’s Senate report on cross-border price discrepancies was, in and of itself, Rick Mercer material, with its hodgepodge of culprits and vaguely worded recommendations. Canadians looking for someone to blame were left hanging.
Apparently, there aren’t that many manufacturers that are gorging on Canadians, only consumers who are so intent on buying a brand – and an image – they are consenting victims of higher prices. Nor are there many rapacious retailers, senators concluded, only businesses with lower bargaining power that are passing along high acquisition costs.
What can be done? Canada’s geography, which stretches transportation costs like a never-ending highway, will never change.
About the only thing that could soften the Canadian price disadvantage would be a long and hard review of the tariffs that are slapped on at the border for a range of goods so wide you could extend them from British Columbia to Newfoundland.
Canadians pay little attention to tariffs, understandably so. Unlike sales taxes, they are invisible at the cash register. And the topic is about as entertaining as reading a phone book. But Canada’s 8,192 tariffs categories – each with 18 tariff treatments! – are in dire need of tidying. And if Canadians don’t take Ottawa to task, then they can only blame themselves for the Canada-U.S. price gap.
Tariffs or taxes on imports are designed to protect Canadian industries from foreign competition. But some of these industries are long gone. For example, while Montreal manufacturer Gildan now makes its cotton T-shirts in Honduras, Nicaragua and in the Dominican Republic, imported cotton T-shirts are still hit with an insane 18-per-cent tariff.
After an internal study on a sample of 15,700 products, Canadian Tire Corp. Ltd. found out that four out of five of the goods subject to duty that it imports face a higher tariff in Canada than in the United States. This difference translated into $8.4-million in extra costs in 2011 – costs that are amplified with sales taxes once the retailer passes them on to consumers.
“We’ve been looking at our tariff situation carefully, particularly with respect to consumer goods in Canada, to see what we could do,” Finance Minister Jim Flaherty said just before the Senate report’s release.
Actually, the government is looking into increasing tariffs for products coming from 72 different countries. Ottawa just undertook a review of the preferential tariff regime it implemented in the 1970s to help poor countries increase their exports and revenues. While it makes perfect sense to take out Brazil, China and Russia, now economic powerhouses, from the list of countries with preferential treatment, hitting countries like Peru, Tunisia or Thailand with stiffer tariffs appears unnecessarily harsh. Only Canadian consumers will hurt in the end.
There are vested interests against reducing tariffs – and the Finance Department is among them, as Mr. Flaherty recognizes himself. Customs tariffs generated $3.6-billion in revenues in 2010-2011. This is not an inconsiderable amount for a government aiming to balance its books while feeling the pinch of discounted oil revenues.
Some of Canada’s tariffs protect powerful industries, and even sacred cows. News that Ottawa is ready to increase the quantity of cheese that enters the country tariff-free in order to secure better access for Canada’s beef and pork in Europe sent shock waves through the dairy industry this week.
Canadian consumers have been subsidizing the dairy industry since the 1970s through supply management, a complex system that relies on high tariffs to ensure rich and stable revenues to dairy farmers, whose fortunes have skyrocketed. The average dairy farm holds production quotas valued at a minimum of $2-million, according to a 2009 Conference Board of Canada study.
For imports exceeding the allowed limits, there is a 299-per-cent tariff on butter, a 246-per-cent tariff on cheese, and a 241-per-cent tariff on milk. All are plainly prohibitive.
Of course, most Canadians won’t cross the border into the U.S. just to save 59 cents on average on a one-litre carton of whole milk. But they are going there in droves, and I suspect there are more shopping sprees than day hikes in New York’s Adirondacks.
In 2011, an average of 3.4 million Canadians drove to the U.S. by car every month – that is more than 40 million trips on the year. And since then, the limit on duty-free shopping was raised to $200 from $50 for a stay of 24 hours or more.
Douglas Porter, chief economist at BMO Nesbitt Burns, estimates that cross-border shopping now drains more than $20-billion from the Canadian economy on an annual basis. Even if this figure is difficult to pinpoint, the cost in lost sales, lost jobs and lost fiscal revenues is no less real. Which is why Ottawa should truly mind the gap.
-Regular gas at a Shell station in Burnaby cost $1.36 per litre on Tuesday, but went for the equivalent of $1 per litre at a Tesoro station in Bellingham.
-The price disparity between a Safeway in downtown Vancouver and a Haggen grocery store in Bellingham reveals why: Roughly $3 vs. $2 for a two-litre carton of milk, $10 vs. $8 for 454 grams of chicken breasts, $3 vs. $2 for the same weight in broccoli and an incredible $18 vs. $6 for 900 grams of cheddar cheese, taxes not included.
-A 750-ml bottle of Black Velvet Canadian Whiskey costs less than $14 at a Bellingham liquor store, but nearly $25 at a B.C. Liquor store in downtown Vancouver, taxes included. Cross-border customers could shell out $10 for a bottle of Columbia Crest Chardonnay and just over $8 for a six-pack of Budweiser cans in Bellingham, instead of about $16 and $13 north of the 49th parallel for the exact same products, respectively.
-A hardcover copy of Fifty Shades of Grey costs about $16 before tax at a Bellingham Barnes & Noble, but $32 at a Vancouver Chapters.
Edited by key2thecup, 12 February 2013 - 10:16 PM.