Proceedings of the Standing Senate Committee on
National Finance
Issue 6 - Evidence - October 25, 2011
OTTAWA, Tuesday, October 25, 2011
The Standing Senate Committee on National Finance met this day at 9:30 a.m. to study the potential reasons for price discrepancies in respect of certain goods between Canada and the United States, given the value of the Canadian dollar and the effect of cross border shopping on the Canadian economy.
Senator Joseph A. Day (Chair) in the chair.
[English]
The Chair: I call this meeting of the Standing Senate Committee on National Finance to order.
[Translation]
This morning, we will continue our special study on the potential reasons for price discrepancies in respect of certain goods between Canada and the United States.
[English]
Colleagues, I am pleased to welcome Mr. Ian Gordon, President of Convergence Management Consultants Ltd. He has done extensive research in the area of retail shelf price differences in Canada and the United States, and we look forward to hearing from him this morning.
Mr. Gordon, I understand you have some introductory remarks. They have been circulated so we can follow along and then we will proceed with a question and answer period. We have two panels this morning, this being the first one, so we have one hour slotted for this particular panel. The floor is yours.
Ian Gordon, President, Convergence Management Consultants Ltd., as an individual: Honourable senators, thank you for the opportunity to appear before you to discuss this most important matter. In the early 1990s, I was the client partner, lead author and project director of a series of projects that examined essentially the same issue. In the following presentation, I will summarize what was learned 20 years ago, what has changed in the interim, review whether previous findings are still valid and suggest what might be considered as a way forward.
By way of background, I am a management consultant with 25 years' experience helping clients develop fact-based insights and respond to strategic issues. Prior to founding Convergence Management Consultants Ltd. 15 years ago, I was a senior partner with the consulting practice of Ernst & Young, responsible for strategy, marketing and research.
I have written two books on competition and competitive strategy, and articles on retailing, online shopping, chain stores and distribution channels. I have also lectured in distribution channels' courses to M.B.A. students.
The studies done in the 1990s examined retail price differences and distribution channel competitiveness, not just retail competitiveness. We found it was a case of death by 1,000 pinpricks, that there were very many issues that impacted prices and each needed attention.
The studies considered 49 consumer non-durables, semi-durables and durables and new and used automobiles and car parts, as well as underlying considerations such as labour costs, real estate costs, taxation, transportation and technology. The studies found that most of the reason for retail price differences traced to manufacturers, who accounted for 37 per cent of the total retail shelf price difference for all the goods considered in the non-automotive category. Retailers accounted for just 9 per cent here. Channel companies other than retailers accounted for 27 per cent, and the remaining 27 per cent was accounted for by transportation tariffs and duties and other costs.
Manufacturers were particularly material for many supply managed and other grocery products, as well as a variety of specific products like hammers, ceiling tiles, children's boots, ranges, refrigerators and mountain bikes. Retailers were more important for shingles, table saws, sheets, shoes, coats, shirts, sweat pants and bread. Tariffs and freight were important for imported consumer electronics, children's dolls, girl's jeans and boy's casual pants, among the cases we looked at.
The country of product origin affected retail shelf prices. The Canadian subsidiary or importer was the main reason that products made outside of Canada had the highest aggregate distribution channel market. That is the whole channel, not just the retailer.
Some manufacturers priced up their products for sale into Canada because they had higher margin expectations here. Canadian distribution channel companies had a lesser scale than in the U.S, which affected unit costs, operating efficiency and bargaining power with their suppliers.
Other costs, such as tariffs and transportation, added materially to retail shelf price differences. For example, there were tariff discrepancies for products such as footwear made in emerging markets. Transportation costs were also higher and packaging, labelling and other compliance costs added to product costs in Canada.
In summary, there were four main interrelated reasons that retail shelf prices were different in Canada compared to the U.S. The first is scale; Canadian wholesalers and retailers had a smaller scale compared to their U.S. counterparts. Second, the structure of the Canadian distribution channel included an extra participant, an importer or subsidiary operation, compared to many U.S. distribution channel structures.
Third was the input price to the channel. Prices charged by manufacturers for goods destined to be sold in Canada were frequently higher than in the United States. The fourth and final reason was the cost of doing business. Factors such as occupancy costs — principally rents — and corporate taxes were higher in Canada at the time.
Would a similar assignment done today reach these same conclusions? I will consider a few important changes that affect aspects of the previous work. This necessarily has to be qualitative, as quantitative data would not be available to inform us at this time.
As hard as it is to recall such an era, the Internet was not commercialized in the early 1990s. Today the border is not just a physical one; for online shopping purposes by PC or smart phone, the border is virtual. Internet shopping is important because it invites cross-border comparisons, sets a floor on Canadian consumer prices and imposes a value on local.
For example, these branded glasses were bought from my local optical store for $475. These unbranded ones were bought online in the U.S. for $10, including shipping.
Senator Nancy Ruth: With lenses?
Mr. Gordon: And coatings. The branded ones were a little more. I can see fine with both, of course, and the question I ask myself is whether locally bought glasses are worth an extra $465.
U.S. retailers were already important 20 years ago because Canadians went to the U.S. to buy from them. Now more U.S. retailers are here and big box and chain retailing has proliferated. The importance of chain and big box retailers like Walmart, Costco, Home Depot, Lowe's, Canadian Tire, Rona, Best Buy, Future Shop, Chapters, Indigo and now Target is hard to overstate. Over the past 20 years, there have been changes in the structure of Canadian distribution channels, but some structural differences remain — like factory outlets, for example. Consumer semi- durables sold in Canada are now more likely to be made in Asian and other non-North American markets than was the case previously. China reportedly may sell 10 per cent of all its exports globally through Walmart.
The recent counter directions for real estate prices and labour inputs in the U.S. and Canada likely increase upward pressure on Canadian retail prices, while NAFTA and business tax reductions have the reverse result. Some input costs such as energy have also changed materially since the prior work.
It appears from the foregoing that lesser scale and channel structure differences are not as important as they were previously and may not merit close examination as issues in this study. Prices charged by manufacturers are likely still important, especially for retailers without scale to create bargaining power. It may be less important if continental retailers are the main focus of this work.
The cost of doing business in Canada remains an important area for consideration, perhaps even more so than before. Then there is the issue of retailers' pricing decisions and processes, which merits attention.
The data developed previously is insufficient to inform some important questions in today's context. The first is, have relative Canadian mark-ups compared to mark-ups in the United States narrowed, remained the same or expanded since the prior work? Second, have the factors that underpin the cost of business changed more in Canada than in the U.S. in aggregate over the past 20 years?
Third, do continental retailers expect a higher margin from their Canadian operations than they seek from the U.S, perhaps to offset their U.S. results? Fourth, are products sold by continental retailers on both sides of the border identical to one another or are they differentiated?
Fifth, what are the adjustment processes — strategies, processes and frequencies — with which retailers and others change their prices when exchange rates and other costs change? Sixth, why do price adjustments in retail appear to go up quickly and down slowly, if at all, when input costs change?
Seventh, do manufacturers still charge more for goods to be sold in Canada than for products intended for the United States? Finally, how have changes in real estate prices affected retail occupancy costs?
At a high level, current data is needed to inform the following issues: the absolute level of prices for like goods sold through like distribution channels in comparable Canadian and U.S. border areas; attribution of causality for price differences to categories of stakeholders; adjustment strategies, processes and timing that companies use to manage their prices, especially for continental retailers; the underlying factors that impact price level differences and adjustment issues; and possibly the value of local retailing, where online prices might serve as a floor for comparison services.
As for the previous studies, the sectors that merit priority focus here might include new and used automobiles, automotive parts and tires, apparel, appliances, bedding and linen, consumer electrics, hardware and tools, lumber and building products, sporting goods and toys. In addition, the study could possibly include books, furniture, home furnishings, eyeglasses and possibly air travel. This time, grocery and food products might be excluded from review.
Given the importance and growth of chain stores, it would seem appropriate to focus much attention here, especially on the continental retailers and power centres with operations both in Canada and United States.
In terms of areas of cost, the following might merit examination: transportation costs, including air, auto carriers, reefers, flat decks, LTL, small packages and related costs, especially gasoline; compliance costs like packaging and labelling; non-tariff barriers like service and warranty exclusions in automotive and others; occupancy costs, including possible subsidization of anchor tenants by smaller retailers at rental rates that were previously $5 to $10 per square foot higher in Canada; labour costs, even though that was not as important previously; and provincial, state and local taxes. The prior work found the aggregate difference was up to 15.6 per cent previously. Tax regulations impacting the depreciation of key assets can also be reviewed.
I expect there will not be a single solution to this important issue but rather a series of targeted initiatives that collectively seek to remove frictions — which add to channel costs — and create conditions which could motivate changes in pricing strategies and mechanisms. Thank you for this opportunity. I welcome questions you might have.
The Chair: Thank you for posing a number of interesting questions for us. I have two points of clarification. You talked about provincial, state and local taxes. The aggregate difference was up to 15.6 per cent?
Mr. Gordon: Yes.
The Chair: Higher in Canada?
Mr. Gordon: Yes. That particular example was comparing Quebec and New Hampshire. It is region specific.
The Chair: That was the 1992 study by Ernst & Young that you were the lead on.
Mr. Gordon: Yes.
The Chair: It was a very thorough study. Do you know of any other studies by Ernst & Young or any other group that is more up to date than this one?
Mr. Gordon: I would like to be able to say yes, but I am not aware of any.
The Chair: One of your comments about halfway down page 5 says, "At a high level, current data is needed to inform the following issues." Can you explain "attribution of causality for price differences to categories of stakeholders"? What does that mean?
Mr. Gordon: We have talked about four main categories of issues: scale, structure, input costs, and cost of doing business. If you imagine a matrix with those four down one side and each sector across the top, there will be different dials to turn with each sector. It would seem that one would want to understand how the value builds for a variety of products by sector and see which stakeholder is primarily responsible for the pricing differences. That is what I mean by attribution of causality. It may not be just stakeholders, but other issues as well. Principally, I was thinking of attribution of causality to stakeholders, because that was the starting point. It may be a retailer issue, wholesaler issue or manufacturer issue.
The Chair: Thank you. That explains it. There may be more questions in follow-up to that.
Senator Gerstein: Thank you for appearing before us, Mr. Gordon. I must start by saying how delighted we are that you are here. I think they know, however I might indicate to the committee that Mr. Gordon sent a note to the chair and the deputy chair — before the committee was moving forward with the study — with the article he published for Ivey Business Journal.
You gave an example of the price of your glasses. We have heard stories of Abercrombie & Fitch, J. Crew, and examples at Costco on the U.S. and Canadian sides. That takes me to the title of your article. The title is "Why Aren't Canadian Retail Prices Coming Down? The Strong Canadian Dollar and the Challenge for Retail Prices."
In your article, you say that one can speculate, but the facts are not in. Mr. Gordon, you have raised all the right questions. You are helpful to this committee in terms of the types of things we should be looking at. However, I will ask you for a moment to take off your academic hat and put on your consumer hat. I would like you to speculate as a consumer. Why do you think Canadian prices are not coming down? What is your view? You may not have all of the information and data you would like to back it up, so to speak. Off the top of your head, what do you think is happening?
Mr. Gordon: As a consultant, I do not usually do that.
Senator Gerstein: I know that, but you do not always get to be in front of a Senate committee.
Mr. Gordon: That is all the more reason to be careful with my words.
Informed as I am by the work from 20 years ago, as a consumer I would speculate that the reason prices are not coming down principally traces to two main issues. One would be the manufacturer prices that input to the channel. The other one would be that in some sectors, the industry structure is not necessarily favourable to price competition. As I consumer, I would say that.
Does that lead to adjustment strategies, processes and other factors that do not lead to immediate price reductions? Possibly, but I do not know. However, if I speculate a little further, the two sectors I would wonder about are consumer electronics and possibly books.
If I speculate further as a consumer, I would wonder why car retailing in Canada looks quite different than car retailing in the United States. I would want to know why the matter of dualing was an issue 20 years ago. The way car dealers have dealt with that issue is to now own dealerships that carry multiple brands, rather than have several brands under the same roof. I would ask myself why high-end vehicles are generally more expensive in Canada. Does any of this have to do with industry structure? I would say two or maybe three sectors.
Grocery seems to be very competitive. It would not seem to be a retailer issue with grocery. Supply management might be an issue with groceries, but I do not know. From the work 20 years ago, it would seem most products that were significantly influenced by supply managed inputs were materially more expensive at retail. Many of the others were not.
In my mind, I am going across all the sectors of the matrix that I mentioned before. I would speculate differently in each one.
Senator Gerstein: I appreciate that you would go into the depth that you have, and the points you have raised are very helpful.
We are a Senate committee, and as I see it — and I may not be seeing it correctly — the only area that the government I think could control, per se, is tariffs. I do not know if there is anything else on your list — other than by moral suasion or making it more evident to the public — that the government would be directly involved in.
In effect, is tariffs the only area the government could directly be involved in for pricing of goods to consumers?
Mr. Gordon: I thought you might ask that. I have prepared a partial response. To the extent that tariffs remain an issue, an accelerated response seems appropriate. I do not know if tariffs — say on footwear which were in place and material 20 years ago — have changed materially in the intervening 20 years. If they have not, one would have to ask what industry it is protecting and why that might not have changed. I do not know if it has changed or not.
Another issue that might bear some consideration is the issue of whether this is a 1-in-20-years kind of problem or something where industry or distribution channel competitiveness is ongoing and merits ongoing examination. There might be some mechanisms for benchmarking these data so there does not need to be a major examination every 20 years, but rather the key metrics are identified perhaps by this process and then tracked for ongoing competitiveness review on an ongoing basis.
We talked about supply management. If that is on the table or off the table, I do not know. We talked to some extent about the competitiveness intensity of industry structure and perhaps there is a role for government in considering some aspects of that. I do not know what role government might choose to play in examining or considering some aspects of these issues, say in the auto industry. The industry structure seems to be in place largely as a franchise network of the manufacturers.
I suspect I know the answer to this: If a retailer were to seek to import vehicles from an affiliate operation in the U.S. and sell them as new here that would presumably not be allowed, even with the daytime running lights, the seat belt anchorage tethering and all the other things needed to make it appropriate for Canada. There may be a role for government in looking at some aspects of industry structure. I have just chosen the auto industry; I do not know if that is an appropriate one to alight upon. Those are three that come to mind.
Senator Finley: Mr. Gordon, I have read your various reports and articles. As to your thousand pinpricks, maybe that was 20 years ago. I suspect it has increased by a factor since then.
I am interested in some isolated points that you raised during your opening. You appear to mention that manufacturers did at one point charge more, period, for goods sold in Canada for products intended for the U.S. This is at the manufacturing input level, presumably for identical product.
Does a manufacturer intention to hose Canadians still exist? I say that in as polite a way as I possibly can, simply because we accept that it is there. For some reason we do not mind.
Mr. Gordon: I am not sure they would characterize it that way.
Senator Angus: It is a Scottish word, you know.
Mr. Gordon: My exposure to manufacturers is they view the United States market as a market in which they must succeed to succeed globally. They have to do whatever is necessary to succeed in the U.S. Sometimes we here in Canada characterize that as the 10 to 1 rule and feel diminished by our relatively smaller scale. For the most part, I believe it is a function of the fact that to succeed globally you have to win in America, particularly for many of the well-known brands we are considering. When there are price discrepancies in Canada, it is a function of the fact that Canada, for the most part, does not matter to them as much.
Senator Finley: They just charge a markup; is that what you are saying?
Mr. Gordon: I suspect so.
Senator Finley: Do you have any idea of some scale or range of scales we are talking about?
Mr. Gordon: Again, I suspect it varies significantly by product category or by industry sector.
With the emergence of the continental global retailer and global sourcing, this may be less of a factor because they would be buying for global demand. For those people, their relationships with the well-known brands would be such that the manufacturers, maybe in the intervening 20 years, have less of a role to play for those particular retailers in setting pricing in a domestic market, for example Canada, because the totality of that relationship would be governed by the retailers in the market.
Senator Finley: I will be a little more specific. In regard to the consumer electronics business, you and I were discussing briefly before we started that the likelihood is — although I have not seen any numbers to confirm this — the Future Shop-Best Buy combination retails anywhere north of 70 per cent of Canadian consumer electronics. I think that would be a reasonable ballpark in which to put them.
Would a corporation like that, in effect, have a purchasing mandate probably offshore, I would guess somewhere in the Far East, to buy for North America as a continental unit and ship it to North America as a continental unit? Would that be a reasonable basis if we were looking at a very specific example like Future Shop or Best Buy?
Mr. Gordon: I cannot speak specifically for Best Buy or Future Shop, but it is not uncommon for global-scale retailers to have their in-market purchasing offices to facilitate global purchasing.
Senator Finley: Did you at any point in time, in your various analyses and your updates, look at port fees and airport landing fees in terms of their role in the distribution chain because it is possible, to go back to Senator Gerstein's question, there may be some impact that the Canadian government could have? I do not know. How big a role in the distribution chain does any significant difference, if there is such, between Canada and the United States in terms of port fees and airport landing fees have?
Mr. Gordon: I do not recall that being a material issue 20 years ago. At least for an increasing percentage of goods, I suspect there is actually transshipment in the United States for many of the goods coming into Canada, so they are handled a second time out of the U.S. hub rather than coming both into the United States and into Canada. Again, that would vary by company and by their logistics processes.
Senator Finley: I have about a thousand and one more questions, Mr. Chair, but I will wait for a second round.
The Chair: Thank you. I will put you down for the second round. We will be doing this study for six months so there will be a lot of interesting opportunities. If it turns out that we have to invite Mr. Gordon back to help us with some of the points, I am sure we will work that out as well.
Senator Marshall: We did have officials from the Department of Finance appear before us last week. One of my questions concerned what sorts of studies have been undertaken on this issue. Your study of 20 years ago was the one mentioned first so I have started to read it.
What I was interested in would be the methodology. When you spoke this morning you started from your 1992 report and you mentioned certain aspects that should be covered in order to bring it up to date. Could you explain to us what the methodology was? You broke it down into 10 categories of goods. Did you have 10 teams? I am interested in how the study was carried out. Could you give us insight into that?
Mr. Gordon: We had criteria for selecting the different categories of products — I think there were four — and the two most important criteria were that there were significant price discrepancies in the products and there was evidence of considerable cross-border shopping in those products.
What generally happened was that — I think in one case it worked the reverse way — we would make the product selection recommendation and then the client, through their advisers and different stakeholders would be involved, would confirm or redirect us. I think in one case it actually worked the other way. It was recommended to us that these are the products we should focus on.
We were looking for products that were reasonably representative of cross-border shopping behaviour. We do not know what percentage of all goods we covered; we cannot say that of the totality of cross-border shopping we looked at 30 per cent of that or whatever the number was. However, we do believe that the goods generally fairly represented non-durables, durables and semi-durables, as well as the auto sector.
Senator Marshall: In carrying out the work, did you have 10 teams? It was done by Ernst & Young, so I would have thought that there would be 10 teams set up to do what we would consider the legwork. Could you explain how it worked? I am trying to get a handle on how much time was spent on the study. How big a study was it? Is it something that took 1,000 hours, 100 hours or 10,000 hours? How many people worked on it? How was it set up?
Mr. Gordon: That is a good question. Let me answer it structurally, and then I will try to give a scale around it.
We drew on resources, as required, from the accounting firm to support it. Different people were tasked with different interviews. Say, for example, it was bedding and linen, someone would be tasked to sort that through. Would it be a team for bedding and linen? No, usually it was sort of task specific.
If it had a bearing on accounting or tax issues, then we would have someone from the accounting firm support that particular area. If it was someone to interview say bedding and linen retailers, then someone would have done that. That would all roll up in a project management manner.
Senator Marshall: I am trying to get a handle on the enormity of the task at hand.
Mr. Gordon: The scale is potentially very significant. The scoping exercise, I guess, is at least part of where we focused to get the most yield — can we look at everything or do we have to drop some things along the way?
Senator Marshall: You scoped it out back in 1992, and now this morning you had some suggestions for changing the scope. However, the finance officials told us about the report, and in reading the report it looks like it was quite a big undertaking. I realize we could use that as a base and move forward. Was it quite a large project? Can you give us insight into that?
Mr. Gordon: Yes. I was trying to reflect on the balance of skills involved in the task, roughly their hourly rates and hence at roughly how many hours went into this. It was very large. For its day, this would have been a very major undertaking for the firm.
If I had to do it again, if I might speculate, rather than seeking to gather all the data to develop the answers from the data as though the study 20 years ago was not done, I would use that as a touchstone and ask questions and then use data to inform those questions. That would narrow the scale of what it is you are doing here.
If you are looking for answers from unknown questions, developing a database and then seeking to drive all answers for that, if the intent is to narrow the scope of the work it might be best to ask the right questions at the front end.
Senator Ringuette: This is very interesting. I was interested in Senator Gerstein's question about what the government could do. There are at least two issues that the government can intervene on. One is in the cost of gasoline and diesel used to transport these goods. It is 32 per cent higher in Canada than in the U.S., mostly due to taxes.
The other issue that is now fait accompli but was probably not present in your study 20 years ago is credit card use and the cost to retailers in excess of $5 billion per year in Canada. That must be included in the shelf price of retail goods, which was not the situation 20 years ago. These are certainly two areas where the federal government can intervene.
You said you read the transcript of our prior meeting. I am going at the issue of cars made in Canada. Why is it that the three North American car manufacturers — GM, Ford and Chrysler Dodge — have cars made in Canada that are sold, on average, for $4,000 more in Canada than in the U.S.? At the same time, I have looked at Honda and Toyota, cars made in Canada, and the price they sell their product for in Canada is no different from the price in the U.S.
There are certainly a lot of new factors with regard to the study you did in 1992, although I think the basic methodology would probably be the same today, except to add global marketing, global purchasing and distribution aspect, as well as Internet purchasing.
With regard to Internet purchasing, I come from New Brunswick, which borders on Maine. It comes naturally for people along borders to seriously look at price differences in consumer goods.
One of the things that I have noticed is with regard to Internet purchasing. If a Canadian buys online products from U.S. sellers, there is a price difference. When you add the shipping costs, the product price difference is not that wide. However, the same product being purchased and delivered in Maine, just a small river across from where I live, there are no shipping costs to that U.S. resident for the same product. The cost factor for transportation is a major issue in Canada.
I do not know if you have done any recent studies. You have talked about the glasses. You have looked into that.
Mr. Gordon: If I might reflect on work done 20 years ago, we broke down the cost elements of transportation. Driver labour was 28 per cent of operating costs and other labour was 29 per cent, for a total of 57 per cent. Repair and tires were 20 per cent, depreciation was 6 per cent, other factors were 4 per cent and fuel was 13 per cent.
Senator Ringuette: At that time.
Mr. Gordon: That is 20 years ago. I do not know how much the fuel cost has increased, but let us say it has doubled. If one moves that all the way through to total cost, it would be another pinprick. It is an important issue, but there is a whole variety of important issues which, in aggregate, become the issue for examination here. However, it is not as big as would seem to be suggested when one puts transportation in the context of all the costs that have to flow through, and this is a smaller percentage of transportation in aggregate.
It is clear that, if one factors all these costs in, if retailers were asked to reduce prices by whatever the perceived gap is between Canada and the United States, depending upon their gross margins and depending upon the category you are looking at, they would need to sell between two and five times more than they are presently selling to reduce their prices 20 to 30 per cent. I know I am taking it in a little different direction from where you have concluded, but as one looks at all these costs and asks how it can be sorted through by the channel itself, the retailer, for the most part, cannot be the place to make the whole adjustment.
Senator Ringuette: I understand that there is purchasing power in volume when you have a population 10 times that of Canada, but it is interesting that you also brought up that global marketing would be a major factor for successfully entering the U.S. market for a manufacturer of any product.
Senator Angus: You will forgive me if I cover ground that has been covered before, because I am filling in for Senator Neufeld this morning. I have two very short questions.
When you refer to these manufacturers and say that they are setting the prices, are you talking about manufacturers in both the U.S. and Canada?
Mr. Gordon: As well as offshore.
Senator Angus: So basically all manufacturers in terms of the setting of pricing of goods that will ultimately be consumed in Canada as compared to other places?
Mr. Gordon: That is correct.
Senator Angus: Second, I am preoccupied more with the barriers to trade east-west within our own country than with NAFTA-type barriers, or removal thereof. Have you seen any evidence similar to the type of things that were described by the minister here the other day of prices in New Brunswick, for example, as compared to Quebec, for the same kind of reasons? Is there a similar issue?
Mr. Gordon: Going back 20 years, I do not remember all aspects fully, but I remember margarine and the colour of it being an issue. I do not know if that is now resolved. There were different colours for different provinces. I do not recall other specific instances.
Senator Angus: I am more involved in the energy and natural resources committee. We have instances, for example, of hydroelectric power being cheaper for consumers in the U.S. than it is right here in Ontario. Is that not an analogous situation?
Mr. Gordon: That would be a perfectly fair observation. Going back, we did not look at power rates as one issue. We did not look at gas price differences. We looked at differences in provincial and local taxes to the extent that those were different. Again, we were generally looking north-south, not east-west.
Senator Angus: I am a great believer in market as opposed to intervention by government. Prices generally settle at the level the market dictates due to supply, demand and extraneous factors. I have found that in one part of Canada glasses, for instance, and other consumer goods are cheaper than they are in other parts of Canada.
We should not overlook the issues within the four corners of Canada in favour of Canada-U.S.
Senator Runciman: You referenced the cost of business as an issue that we should be looking at. I am glad Senator Angus brought up hydro rates, because Ontario will have the highest cost of electricity in the world in the next few years. That is something we should certainly look at.
In your submission you mentioned what the market will bear. I am not sure if that is an assumption you are making or if it is based on your research. Senator Ringuette raised the issue of some models of cars costing more in Canada, where they are produced, than in other countries. I know this is not isolated to automobiles.
I talked to a marine operator on the weekend who is buying products from Bombardier to sell and said that and his competitor across the river can get them at less cost than he can.
Can you offer anything with respect to that? Is your assumption tied into what the market will bear?
Mr. Gordon: It is dangerous to go from the anecdotal to the general.
We heard of different car brands and what appears to be different continental pricing strategies. One would have to ask those companies on that issue. I do not have evidence either way with regard to whether certain brands have different pricing strategies than others in Canada. However, it does seem odd that some cars produced just down the road would cost materially more locally than they would in Florida. I do not have more to add to that.
Senator Runciman: You could expand on your earlier comment about your research on what the market will bear. You must have based that on something.
Mr. Gordon: Yes. I believe that would come from interviews we did at the time with decision makers who were setting prices for the Canadian market. We worked backwards through the supply chain from retail to manufacturers. I believe that is where that observation came from.
Does that still apply today? I have no evidence on whether it does or not, but it would be interesting to explore what the pricing levels and adjustment strategies are by the manufacturers all the way through the channel.
Senator Runciman: In terms of cross-border shopping on a product-by-product basis, is the Canada Border Services Agency doing something to keep track of that? I live in a border community and know that quite often you are asked whether your purchases are under the limit. I wonder how accurate the measurements are with respect to what Canadians are going across the border to purchase. What did you base your research on? You were talking about some kind of a laundry list upon which you based your research.
Mr. Gordon: The data that we had 20 years ago was based, for the most part, on published data from Statistics Canada. As we look at the cross-border shopping in any given category, it would have to be on the reported data. For unreported data, we did not do any scaling or attribution of gaps that might have existed.
Senator Runciman: In some respects, they could be significantly off base, particularly in the food sector.
Mr. Gordon: Potentially it could be materially more.
Senator Peterson: I am of the opinion that retailers charge what they do because they can. If there was major push back, they would change; they would have to alter what they do.
If we go to the retailers, they will give us many reasons why they charge what they do. As Senator Gerstein said, what do we do at that time? Our neighbours to the south have a major Buy America policy right now. If you get into that turmoil, we know where that will lead us.
Do we have any idea of the dollar magnitude of what it is costing Canadians for this imbalance that supposedly is out there?
Mr. Gordon: What the total cross-border shopping amount is?
Senator Peterson: Yes; the price differences — overall, what does it cost Canadians? How big a number are we talking — millions, billions?
Mr. Gordon: I do not have that data. I have not looked into that.
Senator Peterson: It seems that would important because there would be pluses and minuses; some would be higher and others would be lower. At the end of the day, we have a number and say how significant is this? That would be a good starting point.
The Chair: Mr. Gordon, you studied the factors that might have caused this inequality. Did you do any speculation and extrapolation, once you determined the existence of different inequalities in the marketplace, of what effect that might have on the economy in Canada, or what effect that might have on inflation and employment in Canada?
Mr. Gordon: No. That was not part of the scope of the work. As it was, it was challenging to manage scope and scope creep.
The Chair: The suggestions that you have made in your submission will be very helpful in our determining what particular segments of the economy we may wish to look into and we thank you very much for that. As I mentioned earlier, it may be the desire of the committee to call upon you again. If you are available, we would appreciate your attending again at some later date.
Mr. Gordon: I would be more than pleased to do so.
The Chair: Thank you very much. This concludes the first session this morning, colleagues. We will now to set up for the teleconference as part of our second panel.
We are pleased to welcome Mr. Tom Vassos, as an individual, to our second session. He has taught at various universities in Canada and internationally for the past 30 years. Mr. Vassos is appearing via video conference.
We are also pleased to welcome, live and in our studio, Mr. Michael Mulvey, assistant professor of marketing with the Telfer School of Management at the University of Ottawa, who is appearing as an individual.
We will begin with Mr. Vassos's presentation and then move to Mr. Mulvey. Mr. Vassos, do you have some introductory remarks?
Tom Vassos, University of Toronto, as an individual: Good morning, senators. I would like to thank the honourable members of the Standing Senate Committee on National Finance for the opportunity to lend my expertise to the task of understanding reasons behind Canada-U.S. price differentials.
[Translation]
To both English- and French-speaking Canadian citizens, I truly hope that you find our economic discussion and interaction today to be informative and educational.
[English]
I have been a part-time instructor at the University of Toronto and several other universities on four continents for the past 30 years. I have worked in the technology industry at IBM Canada for the past 32 years. My comments to the committee today reflect the results of my past research at University of Toronto and other universities, and should not be construed as representing IBM's position on this subject matter in any way.
I am a former business ambassador for the Ontario government and current ambassador for the Greater Toronto Marketing Alliance. It is an economic development organization promoting economic development and foreign direct investment into the GTA.
To determine the logical price of an American product sold in Canada, most Canadians simply consider the current conversion rate. If the Canadian dollar is at par with the U.S., they feel the price should be identical to the U.S. Nothing could be further from the truth.
Americans face a myriad of costs when selling internationally into the Canadian marketplace. I would like to highlight several of those cost factors.
As part of the business model course that I teach at CEDIM's International Masters of Business Innovation program in Mexico, we look at costs facing companies when they expand internationally into countries like Canada.
What are some of those costs?
Provincial and federal income taxes are 25 per cent of revenues. That is a little less than what they might find in the U.S. Payroll taxes for Canada Pension Plan, workers' compensation, and Employment Insurance can add up to more than $3,600 per employee. There are import duties and tariffs for bringing products across the border, although 90 per cent of American duties have been removed through free trade agreements. The cost of setting up a Canadian corporation with a board of directors and associated set-up costs includes registration, permit, accounting, auditing, ongoing tax filing fees et cetera. There is capital spending for plant and distribution equipment, cash registers, computers, software, and other supplies and services. They all require payment of provincial and federal sales taxes.
There are transportation and handling costs, including higher gasoline taxes that are about three times higher than the U.S. It is 33 per cent in Canada versus 11 per cent in the U.S.
Our vast Canadian geographic marketplace stretches from coast to coast and has a smaller population than the state of California.
There are import brokerage fees for bringing products across the border. As well, there are occupancy costs for creating a distribution channel in Canada, including leasing or purchasing factors, distribution warehouses, retail stores, the required property taxes, insurance and real estate commissions.
There are also occupancy and personnel costs of establishing subsidiary head office operations. These may include marketing, channel, HR, advertising, PR, finance, purchasing, logistics, IT, legal functions, and commissions for manufacturing sales and call centre reps.
Inventory carrying costs include spoilage, mark downs for unsold products, obsolescence and theft. This often runs as high as 20 or 40 per cent or more of the value of the inventory being carried.
There are production labelling costs for metric and translation to meet bilingual requirements. There are higher labour costs in Canada. Minimum wages range from $8.75 to $11 versus a federal minimal wage of $7.25 in the U.S.
Currency conversion costs must be paid to financial institutions when companies want to repatriate their Canadian earnings back to U.S. dollars.
Multi-national suppliers often charge Canadian retailers more than U.S. merchants. This is because of volume discounts that large U.S. retailers can obtain due to economies of scale.
According to the Retail Council of Canada, these charges can be 12 to 25 per cent more for Canadian companies. Entering new markets also adds currency fluctuations to the list of risks that American companies need to take into account. Many companies opt to hedge those currency fluctuations, which adds additional costs. There are higher fees to obtain prime retail shelf space. Powerful retailers in Canada charge manufacturers higher retail, listing, slotting, co-op, marketing, and warehousing fees. There are also credit card transaction fees and the currency conversion rate.
There is a long list of costs.
The net is that a small proportion of the uplifted Canadian price actually reaches corporations' bottom line profitability. There are many risks associated with when entering a foreign market, including currency risks and risk of the product failing in the target country.
To compensate for those risks, companies may rightly demand a higher margin on their products sold in Canada. Otherwise, why take that risk? I would suggest that even if the Canadian dollar hits $1.20, there will still be products that legitimately cost more in Canada because of the additional cost factors I mentioned.
Am I saying that unethical corporate practices such as price-fixing and anti-competitive actions do not exist? Of course not. However, the Federal Court of Canada imposed price-fixing fines of $2.25 million on Chinook Group, $1.5 million on Pfizer and $1.8 million on Cadbury. These are exceptions to the rules. The government already has price- fixing and anti-competitive legislation in place to successfully address these situations and ones that may arise in the future.
I understand that these pricing differentials are frustrating for Canadian consumers. However, as business and government leaders we need to help consumers understand where to vent that frustration and how to play a role in overcoming these hurdles.
In the end, consumers have more power than they realize. They vote with their dollars. Every dollar they spend is a vote. Manufacturers and retailers — and the very nature of the market dynamics — will react to consumers' actions.
[Translation]
In closing, I would like to again thank the members of the Standing Senate Committee on National Finance for the opportunity to appear before you today, and hope that this session provides value to Canadian citizens eager to better understand the issues surrounding cross-border Canada-U.S. pricing differentials.
[English]
I hope these comments have been of value to committee members. I look forward to the question and answer session.
The Chair: Thank you Mr. Vassos. We will now go to Mr. Mulvey from the University of Ottawa.
Michael Mulvey, University of Ottawa, as an individual: I would like to thank you for inviting me here to speak. I was telling my wife this is the best homework assignment I have had in a long time. It is fun to engage in new ideas and think it through.
This topic connects with me both personally and professionally. I have spent half of my life residing in the U.S. for graduate studies and as a professor at Rutgers University. I studied the topic of money and perceived value, and how consumers make sense of their financial lives. It is a topic close to my heart.
What I can offer is a perspective as a consumer researcher. My life task is to figure out what people do, why they do it, how to embrace the complexities and nuances of their behaviour, and relate that to a marketing context. How do we better satisfy customers' needs after we have done our homework?
I am not here as an advocate or consumer activist, but as a social scientist. I can offer an empathetic perspective. I understand that consumers' decision making is driven by emotion and we need to understand the emotion as a localized rationality. It makes sense from their point of view when they engage in cross-border shopping practices.
I hope to bring a realistic perspective. I will highlight what I have read and what is already established, try to hold my views to the sidelines and look at this in a systematic view. I have read some of the background information and listened in on one of the sessions you had last week. I know generally what you have talked about already. I will try to offer some counterpoints, fill in the blanks, and hopefully take the discussion in directions you have not been yet. I will let you have the opportunity to set the agenda beyond that.
Senator Gerstein: Mr. Vassos, I noted in your bio, and as you mentioned, you are a former business ambassador for the Ontario government and you are currently an ambassador for the Greater Toronto Marketing Alliance.
In your comments you stated that every dollar consumers spend is their vote. I would suspect I might interpret that to mean that perhaps you are an ambassador for retailers on the other side of the border. If I carry what you say forward, it suggests that if you were to purchase on the other side of the border, bring it back, pay the applicable taxes, you are probably still going to get it for less than what you will pay for it in Canada. I suspect this is exacerbated today by virtue of the fact that in talking about cross-border shopping 20 years ago, you were really talking about those communities that were close to the border such as in Senator Runciman's area. Today, with the Internet, it does not matter where you are in Canada, you can take advantage of cross-border shopping. Would you comment on that please?
Mr. Vassos: Consumers do have that power — one vote, one dollar — and basically people will listen. You mentioned that it almost sounds like I am leaning more towards the positive nature of U.S. retailers, but I look at it from a foreign direct investment standpoint and what we need to do to make investment in the Greater Toronto Area and Canada as attractive as possible.
Getting back to the dollar per vote, you think of examples such as J. Crew, one of the U.S. retailers who came up and opened up their flagship store and also their website and guess what, they were charging the full duties to Canadians and it turns out the price was almost 50 per cent higher in Canada than in the U.S. There was a big outcry and anger from Canadian consumers, who took to the social media and asked how they could do this. Those were legitimate costs they were simply passing on to the consumer.
J. Crew actually listened to the outcry and paid for the duties themselves and knocked it down to a flat, single $10 transportation fee and even handed customers a $25 gift card for their trouble because they were really listening. We have this power as consumers, especially enabled by social media, to really be heard by those retailers. I believe they will listen, so I think we can embrace some of those environments in order to exert that power and cause prices to get reduced in other ways versus what government can do through legislation.
The Chair: As a supplement to that, Mr. Vassos, was there any analysis of that almost 50 per cent more in the J. Crew case? You indicated when they were called to explain this they talked only about the transportation costs, which made up a small portion of that additional amount. Are you able to help us with the other costs that they decided to eat themselves?
Mr. Vassos: Not in detail, but other things like the cross-border duties that were charged on those types of goods, the additional cost of setting up operations here in Canada, the higher minimum wages they have to pay retail and other staff in Canada. Really it is the combined effect of those different things that added into the factor in the overall price.
By the way, there have been other retailers out there that are very much taking an opposite approach and saying that now the Canadian dollar is stronger they will slash their prices and make them almost equivalent. Once again, the more U.S. retailers do that others will likely have to follow suit unless they have brand strength in the marketplace which allows them to charge a premium price. In some cases that brand strength allows them to charge an additional price over and above the identical U.S. price.
The Chair: Mr. Mulvey, do you have any comment on that particular line of questioning?
Mr. Mulvey: No, I do not.
Senator Finley: My question is for Mr. Vassos. Recently, in an interview with The Toronto Sun you mentioned that labour costs are a fairly significant contributor to the cost differential between Canada and the United States. You see that at several levels. One might be at the manufacturing level itself, the second would probably be the labour costs involved in transportation and the third one obviously would be the retail operations.
How big a factor is this in costs generally between products on both sides of the border?
Mr. Vassos: I would say that you mentioned some of the key factors there. Again, one of the ones we are missing over and above straight cost factors are the macroeconomic factors of the nature of that new market you are entering. In Canada many of those macroeconomic factors are to our advantage right now, with a stronger economic environment, a better debt and deficit situation than the U.S. and several similar things that will be major factors.
As for the competitive nature, the U.S. market is a much more competitive marketplace with many more competitors in a given area that really have to fight for business. If that competitiveness is not quite there, once again, that is something else that will allow the price to be a little higher.
We mentioned the strength of the brand. BMO Capital Markets did research on price differentials between Canadian and U.S. products and one category that had the highest differential was running shoes, at 48 per cent higher prices in Canada than in the U.S. I suspect a big proportion of that is not just in the cost — maybe the cost made 10 per cent or 20 per cent of it — but a strong portion of it is in the strength of the brand and the premium price retailers are able to ask for in a less competitive market with a strong brand.
Anyone who has a pre-teen or a teen will know that in terms of the fact that they have to have a particular type of running shoe. I will never forget the amazing business case I put together 41 years ago to my mom on why I had to have these Adidas running shoes on that first day of grade 9 in high school and only three stripes would do. That, once again, was one more element of the pricing equation.
We cannot take that away from the vendors. That is what they aspire to be when they grow up, to have the ability to really have a brand that is elevated to a level in terms of the strength of the brand and the quality of the product underneath it that enables them to charge that price differential.
Senator Finley: Perhaps I misspoke my question, but I was trying to get to a specific area, which was labour costs, particularly minimum wage rates, the level or degree of unionization in Canada vis-à-vis the United States or, indeed, in the country. What kind of impact did that have in the price differential on products between the two countries? Could you specifically address the labour portion of the cost structure or of the retail structure?
Mr. Vassos: Sure. As we mentioned, there are the minimum wage rates of $8 up to $11 in Canada — $8.25 specifically in Ontario — versus $7.25 and in many states it tends to range from $7.25 up to $8. That alone is one factor and may make only a 50-cent to $1 difference by the looks of it, so let us say 5 or 10 per cent.
Underneath that though, when looking at all jobs in Canada, we also have to look at the underlying labour legislation that I believe probably provides additional strength for Canadian employees. Not only the wage rate itself but, once you hire an employee, the strength of our labour legislation, which once they work for you for several years you cannot simply let them go and say you are fired or let go, and here is a couple of weeks' pay. In many cases, they are having to pay them several months' worth of salary as a result of the underlying labour legislation that supports not letting someone go immediately but providing a couple of weeks of pay or whatever it is for every single year they have worked. That underlying labour legislation, I would suggest, also has a factor to elevate the cost of that company's need to pay out in Canada towards their operations here.
Senator Finley: I have one question, if may, for Dr. Mulvey. I did not fully comprehend where you were coming from.
Are there any cultural or societal differences between Canadians generally and Americans in what makes them shop, how they shop, emotionally, societally, brand name, whatever? Are there differences between the two?
Mr. Mulvey: The difference I would be most aware of is the fact that Canadians travel to the United States more often than Americans would come to Canada. Through that we acquire more knowledge of what the possibilities are. We become broader-minded, we learn about price differences, great customer service and variety in stores. We learn about all kinds of things.
In many respects, travel makes Canadian consumers a savvier lot. That being said, I think the portfolio of the potential experiences within a market are greater for Americans than Canadians, where the retail concentration is higher than in Canada, where we have a lot of oligopoly-type industries where there are not many choices.
Senator Ringuette: Mr. Vassos, you have an excellent presentation. You have 17 items here to justify or for us to accept additional costs in Canada to do business and to sell consumer goods, for instance, the 25 per cent Income Tax Act, the payroll taxes, the transportation that is 33 per cent higher in Canada than in the U.S. and so forth.
Have you done a pie chart in regard to the 17 factors? It seems that it is established that if we are looking at differences in costs across the board there would be anything between 15 and 20 per cent in certain sectors. Have you done a pie chart so we can see which greater elements we should be concentrating on in regard to the difference in prices?
Mr. Vassos: I do not know. I gave such a long list, and Professor Mulvey has done the same, that there are so many factors. Each one really has a fairly small proportion, but a couple of per cent here and there and you quickly see it adds up to that 15 to 20 per cent differential. Once again, the BMO Capital Markets study indicates that roughly the differential between most Canadian and U.S. prices is 20 per cent. At this time I cannot give a more detailed breakdown for each of the elements.
Senator Ringuette: Could we ask you to do that for us?
Mr. Vassos: I am not sure I have the underlying detailed breakdown for each single one. I would be happy, as a follow-up, to provide specific pricing elements for certain ones that may help you in understanding those differentials.
Senator Ringuette: Thank you.
Professor Mulvey, you have talked about emotional decisions by consumers. I remember a number of years ago — I think it was about two or three — when there was quite an uproar in the U.S. in regard to U.S. citizens buying Canadian prescription drugs online.
Can you tell us why prescription drugs cost a lot less in Canada than in the U.S.? What were those factors?
Mr. Mulvey: The specific reasons for the industry that you mentioned, the pharmaceutical industry, I am not an expert in the pharmaceutical sector. I cannot speak to their strategy in terms of charging differential prices. It probably has to do with many of the factors that have already been discussed in terms of volume buying and established distribution networks and things like that.
I can develop the consumer side of the equation. I have empathy for American citizens, many of them on fixed incomes, requiring certain items for their survival, health and well being. It was being pushed to the point where it was out of their budget. To see that so close, nearby, it makes sense for them to find a solution. In many respects roles are reversed for Canadians. It might not be pharmaceuticals, it might be the big-screen TV you have been dreaming about buying for 10 years.
We still have this envy that they have it for so much less than we do. In a way it can also slow down our Canadian economy because people defer their purchases. They keep waiting. When will prices come in line? Maybe when the dollar becomes equal I can finally get it for $1,200 instead of $2,000. In a way you almost stall the Canadian economy to an extent when there are differentials, especially the ones not fully understood, explained or transparent to consumers.
This is the neat thing about consumers. When they do not have information, they will assume it. They will come up with their own attributions. They like to simplify their lives. They say is this not a NAFTA world? We were supposed to get the same costs with NAFTA. That is a very important item, you would want that on your list in doing a systematic analysis, but it is not the only thing.
When people are put in a position where they do not have transparency and do not know what is going on and cannot go to a website and say this is why it is like this, they feel there is an inherent unfairness in the marketplace. That leads to everything form cross-border shopping to smuggling behaviour. Those are not necessarily what we want.
Senator Ringuette: Mr. Mulvey, I understand you are saying that consumers do not understand the "whys." Our own Minister of Finance does not understand the whys, and he has thousands of public servants to analyze this data.
There is a 32-per-cent price differential just on gasoline, which is due to government policy.
Mr. Mulvey: That is an important point. If you want to understand the phenomenon of cross-border shopping in all its variant forms, whether it is day trips, filling up your tank with gas or leisure vacations, you have to understand that there is the objective reality out there, which this committee is working to sort out. Why are there such differentials?
There is also the subjective reality that consumers live in. The truth is that consumers act on their subjectivity. If you really want to understand their behaviour of interest, why do people act, or why are they frustrated, why are they writing letters of complaint, you have to embrace the consumer side of the equation as to why they are feeling what they are, where does their information and misinformation come from and try to sort it out on that side as well.
Senator Nancy Ruth: I want to ask about the impact of Internet shopping. How is that productive or counterproductive in creating Canadian markets? It might eliminate some of the costs that have been mentioned, and what does that do in terms of the Canadian character?
Mr. Mulvey: I guess a simple version is that these online opportunities facilitate the transfer of information. You can get online and have shopping bots that can do comparison shopping. There are incredible efficiencies there.
When you couple that with things like smart-phone technology, you can figure out the convenience side of the equation: Where is the closest store that is selling it for the price I am looking for? Couple that with the labour costs. A lot of these online firms are pretty much robotic; they have warehouses where they go and get the merchandise, pull it together and package it automatically, which eliminates a lot of those labour costs.
I think the movement in that direction will put pressure on the market to have more parity. It will not happen on its own, though. You still have to look at things like brokerage fees and time delays at the border. There are a lot of reasons why people do not shop online. That would have to be investigated to understand why it has not fully taken off as much as one might assume it should.
Mr. Vassos: Web-based shopping does a couple of things. First, it starts to make the U.S. price more transparent so you more readily see those price differentials, but it also makes the uplift costs more transparent.
For example, I recently bought some motorcycle saddle bags, which cost me $45 on eBay. However, by the time I paid for things like transportation and duties, it was more than double the price at $100 for getting it over the border. Nevertheless I still bought that product because it was roughly the same as the landed price here and it had some features that some local products did not have.
People shopping in that manner now at least start to say that for those same charges I have to pay for that eBay transaction, those retailers have to pay to get them into their stores in Canada, such as the transportation, the cross- border, the duties, et cetera. It starts to make it visible.
I do not know whether that will placate consumers to say I am okay with it now, or they will still be unhappy and ask why are those duties there at the border? Why are those transportation costs so high? It is just the nature of entering a market that is further away from your home market, the transportation costs of reaching a country that goes from coast to coast with a population less than that of a single state in the United States. Those costs need to be paid, and that ends up being part of the cost.
Over and above that, even more powerful than the web-based shopping are a couple of other technological trends that I think could help reduce those Canadian prices. One trend is smart phones and another is web-based shopping comparison tools.
Before, if you were buying a product in a Canadian store, how often would you go to more than a couple of stores to compare prices? Probably not all that often because it is too much work to drive from one location to the next to the next.
With these web-based shopping comparison tools, I can say I want a certain flat panel TV screen and it will find the price of 200 of them nearby and tell me the exact price of each of those. I can see which retailer in Canada has the lowest price, the lowest uplift to the U.S. price possible, and I can go straight to that particular retailer.
On the smart phone side, it is amazing how many people are now shopping in stores with their smart phone in hand. Before they buy that flat panel TV screen, they are comparing prices on their smart phone. They can see the price of several online retailers and even see the price of that TV screen at several retailers in the neighbourhood. Now I do not have to drive to 10 different stores; I can see the price right there. If the price is $5, $10 or $20 less at a retailer just up the road, I can get back in my car and go to that retailer and buy that TV screen.
That more perfect information, compared to before where we had imperfect information, should also put price pressures on inefficient Canadian retailers that have an uplift that is too high relative to the U.S. marketplace. This is another powerful factor that I believe will start to diminish that price differential over the years to come.
Senator Nancy Ruth: Go on, Professor Mulvey, say it.
Mr. Mulvey: I agree that would be an ideal; I would like to see that happen. However, just to get a different point of view out there, I could also see an entrepreneur putting together a system where you can combine a trigger purchase occasion, like I need saddle bags for my motorcycle or new tires for my SUV, but then it says what else goes with that? You can go to Ogdensburg to get your tires and while you are there, maybe you can go to the Target store and get these accessories for your vehicle and stay overnight at this nice hotel and eat at these restaurants.
I want to point out that you can look at it as a system. Often it is not just an isolated purchase; it can trigger interrelated purchases. That also presents opportunities for intervention. You may think this is the real problem but it is something else that makes that possible. If gas were more expensive in the U.S., probably fewer people would go there.
In addition, I am generally aware there are a lot of places that will receive packages right at the border towns on the U.S. side. People will order it and have it shipped there. They will store it for $8 or $10; you go there and pick it up and bring it back. There are not a lot of costs to consumers, other than waiting in line at the border, dealing with the stress of talking to someone and filling in some forms.
It is not just the price. The old expression is a fool knows the price of everything and the value of nothing. I think it is amazing that people are willing to seek these price differences in spite of all these other costs. They are willing to travel, spend on gas, sit in line at the border and deal with the stress. They do it every weekend. I think the problem is even bigger than maybe on first appearance.
Senator Marshall: I think my question has been partially answered, but I will put it out there anyway. We started off talking about the study that was done in 1992. Even though the study was done, it did not appear to cure the problem so we are doing another study now.
It seems that consumerism is a great thing because consumers are finding a way around it. You were talking about shopping over the Internet — smart phones and comparison shopping using the Internet, things of that nature. Where do you think we are going in the future?
The 1992 study did not solve the problem and we are embarking on another study that may or may not solve the problem. I know Mr. Vassos listed 15 or 20 items that contribute to these increased prices, so perhaps the higher prices are valid.
Where do you think we are going in the future? Is it possible that there will be an even bigger shift to other ways of shopping? People go to the States a lot more than they did 20 years ago. Maybe at some point, these products that are being shipped to Canada for sale will not need to be shipped any longer because consumers are finding alternate routes. I would appreciate your views on that.
Mr. Vassos: It is still more efficient to do bulk purchases. Rather than a single shipment of a motorcycle saddle bag from the U.S. to Canada, it is still more efficient to ship a whole truckload of them here and have them available locally for purchase within a Canadian retail store.
However, the other factor is the myriad of features that people may be looking for. You cannot have the million different options sitting there. That is where the web comes into play. Even though you have the much smaller subset sitting on a store shelf in front of you, now I can augment that with the million choices I have on the web.
Even at the microeconomic level, individual stores are doing the same thing. If you walk into the store looking for a certain size or a certain colour and you do not quite get what you are looking for, some retailers now are saying, "Do not walk out of the store without the purchase because we do have what you want at our warehouse in Brampton; simply pay us for that and within a couple of days, we will have your order shipped out to you."
It is the combination of the in-store experience plus the experience of getting something shipped to you.
I will provide an even more extreme example, which is quite amazing. There is a grocery chain in Korea, owned by Tesco, called Home Plus, and they basically have not as many stores as the incumbents in Korea. They set up stores in subways, where they put posters on the walls of all their products. It looks like you are right in the grocery store. There is the milk, the bread and the eggs, but it is just a poster. Underneath the poster is a little QR Code, which is like a bar code, which people know they can take a picture of with their smart phone. You take a picture of the bread, the milk and the eggs; you place your order and pay for it; and in a few hours those grocery items are delivered to your home once you get there.
It is introducing entirely new business models of how to conduct business. That is the fascinating and exciting part that is happening here as we speak.
Mr. Mulvey: I will elaborate on the discussion.
One term I have heard bantered about — and business professors are as guilty of this as are economists — is the expression "charge what the market will bear." If you deconstruct that, it is a horrible metaphor. It basically means you are putting a burden on consumers until they break. That might be a fundamental viewpoint of how many Canadian businesses look at the market. They say, "They will take it; at what point will they bend or break?" and they often do not respond until there is pressure.
Historically, one of the biggest things that was good for consumers but not necessarily good for Canadian retailing at the time was that many of the big-box stores that came into Canada, such as the Walmarts and Home Depots of the world, were very disruptive. However, no one is complaining about the variety or the choice. No one is boycotting them. Those who were saying that it would kill their community are shopping there now. They are the community. Retailing does evolve.
I return to the original question: Are there any differences between Canadians and Americans? In the United States, when there is an excise tax or a price difference they are not happy with, they have a tea party in Boston Harbour and that sort of thing, whereas in Canada I think we are sometimes too polite for our own good. We grumble and complain, but we do not organize as well as other nations do.
I also encourage the committee to look beyond Canada-U.S. relations. Look at the European Union as an example of a group that has already had major issues in trying to reconcile, harmonize and deal with these huge labour rate and cost differences. Somehow, you can go from one country to the next and buy the stuff, no hassle. It is a nice place right now.
Senator Marshall: Thank you. That adds another dimension to our study.
The Chair: It does indeed. Thank you, Mr. Mulvey.
Senator Runciman: One thing about online shopping that has not been referenced is the ability to bid on products and see the prices drop as you bid and bid, especially with golf clubs, an area I am familiar with.
I was intrigued by a couple of things that you were saying, Professor Mulvey, about consumer behaviour. I think it is quite accurate. You can look at a number of ways that Canadians and Americans approach issues, not just with consumer products but with the implementation of the metric system in Canada, for example, versus what has happened in the United States. Because of the resistance of the citizenry, it just has not occurred.
I am curious about an issue raised earlier by Senator Ringuette. I do not know if you have looked at this in terms of the products. These are usually big-ticket items that are produced in Canada and sold in the United States at significantly lower prices. Automobiles were mentioned. I know of some marine products as well. Is that something that either one of you have looked at and analyzed in terms of being able to provide some explanation for us?
Mr. Mulvey: I can provide some perspective, but it is not based on specific analysis.
When I look at that issue, I know it is a hot button for many consumers; they are furious that the Camaro is made in whatever town and then it costs less in the United States than here. To me, it reeks of bad market strategy on the part of these companies, at the risk of offending the Big Three.
Here you have a great opportunity. It is a homegrown product; you have the local people. Why not celebrate it and fly the flag of patriotism without making it offensive to people? We do it at the Olympics very nicely. Why are they not celebrating this and trying to showcase some of this? I am not sure if they are scared to do it or the decisions are being made in other parts, but a lot of these issues are just missed opportunities. I am thinking entrepreneurially, that maybe I need to get a warehouse in Ogdensburg and an 18-wheeler and I will take orders. I will take my cut of the action and everyone will get a good deal; we are all happy at the end of the day.
That is an example of missed opportunity. It is very short-sighted. They think they can get a little extra out of consumers here and now, but it is not a sustainable model. Eventually you will offend your consumers and they will say, "Forget it. I will not deal with them anymore." I have experienced that with service issues related to vehicles, where I do not deal with a certain company because they did not provide satisfaction. We are in a wonderful market. It is very democratic. I have choice; I do not have to give them my money.
Senator Runciman: Essentially, we are back to a "what the market will bear" kind of approach and the consumer behaviour issue. We can talk about products like books and magazines. These are things I hear about where the distinction is right in your face, despite the value of the Canadian dollar. With alcohol products, we know there is a floor price in Ontario, for example, and they cannot sell below the floor price.
We have, as you know, supply-managed products in Canada as well. I am not sure how many Canadians are aware of what the implications are there in terms of cost differentials. Would you like to comment on any of those issues?
Mr. Mulvey: I agree with your points, basically. I think they are all important issues.
The Chair: Any comments, Professor Vassos, on any of those matters we have just discussed?
Mr. Vassos: No, not on that point.
Senator Runciman: I think I have touched on pretty well everything for now. I am not sure this is something that these gentlemen can discuss, but Senator Finley raised the issue of wages, compensation and unionization rates. I think that is something that perhaps at some point we can get further information on.
Mr. Mulvey: I can provide a little perspective there. When looking at labour rates and purchasing services, such as getting a pedicure in Montreal versus Manhattan, it is much cheaper in Manhattan. That is largely explained because it is a labour-intensive type of good; whereas things that are created automatically, with microchips, where there is not much of a human component, that is where you have to look more closely to see whether there are big price gaps. You get what you pay for with services sometimes, but there are also these structural constraints.
Senator Dickson: Thank you, gentlemen. Those were excellent presentations. The format where we get two points of view at the same time on the same question, I think that is excellent.
Professor Vassos, in your paper, under the heading "Do Canadians actually receive any benefits by paying higher uplift prices for American goods?" you say that one of the goals of our inquiry should be to help educate the public that most of the uplift in prices by these corporations goes back to the government. Actually, you can extend that, and it goes back to services that Canadians receive, for example, our health care system.
I would like you to elaborate in that area as to the policies and the benefits that flow back. As well, probably the chair and the deputy chair should give consideration to the fact that we found on the Energy Committee, under the leadership of Senator Angus and Senator Mitchell, that we should have a website dedicated to educating the public. I would like your comments in that sphere in terms of the goal of educating the public and as to what initiatives we can take.
Mr. Vassos: Yes, and not only educating them but, as a direct result of this inquiry, to let consumers know what those benefits are and where those tax dollars go, exactly.
Senator Dickson: Would you like to comment further on that?
Mr. Vassos: Yes. On that front, once again, all of those costs conspire to give us this higher price, but if you were to sit down with consumers and explain the price differentials, I do not think the consumer would say that we should drop our minimum wage from $10.25 to $7.25, we should have zero duties and taxes at the border, we should drop our gasoline taxes from 33 per cent to 11 per cent. When you start thinking about those things, you realize that there is value in that strong tax base with the proceeds used for roads, health care, et cetera. In my paper I was trying to communicate that we should use this as a forum to educate people so that they are not saying there should be zero price differential but rather that the $10 price differential provides various things for them and benefits those working in retail stores with a higher rate of pay. That is what I think we should do, as both business leaders and government leaders.
Senator Dickson: The government, in part, recognized this by committing a percentage of gas tax to municipalities for fixing roads, in which people are always interested.
Do you have any comment on that?
Mr. Mulvey: The frustration for consumers is that they are shopping in a fog in Canada. It is like we have to take it on faith. It is a Robin Hood mentality; you are taking our money and apparently giving it to someone who needs it, but we do not really know who is getting it or when or when we are going to get our fair share. I think that accumulated tension is why people decide to go to the States where it is cheaper.
The other point to recognize is that lower prices in Canada are good for the Canadian economy. When you buy a TV, you will buy all the accessories that go with it in the same place. When we keep money in the pockets of Canadians, they can choose to spend it or to save it. There are other reasons you want to empower consumers with a little bit of what they have earned.
Senator Dickson: On the macro and micro economic factors you list the strong Canadian economy and the many initiatives of the present government focused on the economy and jobs. You say that we are doing much better than the United States. You ask whether governments can actually influence these macro factors. This is demonstrated by the initiatives taken by the government of looking beyond Canada-U.S. trade. We are negotiating trade agreements with India and other countries. There have been more trade agreements focused on the U.S. under the present government than under previous governments for a long time.
Would you like to comment on some of the initiatives the present government has taken and on how effective those initiatives may be in addressing this issue? For example, there is harmonization, the perimeter initiative with the United States, regulatory harmonization and, as Senator Angus said earlier, harmonization of legislation among provinces. It does not all fall on the federal government's shoulders; other governments have a role here as well. There is no question that the present government has undertaken very strong initiatives on the macro factors.
Mr. Vassos: I would say that we still have not done enough. Let us look at the growth in trade between Canada and the U.S. and Europe, which has been fairly flat, compared to growth of Asian countries that are growing at double digit levels. We have not capitalized on that or done enough to expand trade with Asian countries. The more we can do that, the more that brings products into Canada that can compete with those higher priced American goods. This is enhancing the competitive nature of the Canadian environment.
I teach courses in Hong Kong and Shanghai, and it is amazing to see the economic growth there. They have trade shows where 20,000 people show up. I cannot remember the last time we had a trade show here where 20,000 people showed up. There is great excitement about the economic environment, and we are not capitalizing on it, other than some exceptions like Manulife and RIM.
We have not done enough in joining Asian trade organizations like the East Asia Summit and the Trans-Pacific Partnership. We do not do enough ongoing trade missions to countries like China to establish those relationships rather than jumping in and out. We need to do more there.
There are several things like that upon which we need to expand. I am hoping that is one more recommendation. Even though your mission here is much more U.S. focused, it is all tied together in terms of these factors having an impact on the competitive marketplace in Canada.
Mr. Mulvey: Many of the examples I have heard are point estimates, i.e., north of the border this is the price and south of the border this is the price. We need to recognize that there is variability within each of those markets. It is easy to cherry-pick deals, but the truth is that both markets have variability, and they may even overlap. A good shopper knows that essentially the same price is available if you have good information.
I want to come back to the interprovincial differences. We need to take care of our own house a little more. My brother-in-law is going to Quebec to buy beer and the people in Gatineau are coming to Ottawa to buy gas. People will find a way around the market, but do we need to antagonize them and make their lives more complicated than they are?
I sympathize with people in rural areas. Many senators are fortunate to live near cross-border towns, but what of those who live further north? You just do not have that opportunity. In a way, these prices are discriminatory. Not every Canadian is empowered with these choices in the current market place.
Senator Nancy Ruth: Is there a problem? Having listened to you, Mr. Vassos, I would kind of think there is not. I am not sure about you, Professor Mulvey, but if there is a problem, how would you define it succinctly from each of your perspectives?
The Chair: Thank you for that short, succinct question.
Senator Ringuette: One issue that we have not touched on is the on-time cost of inventory tied with choice from the consumers' perspective. Do they want it now or are they willing to wait a bit and pay a little less for the same item?
Professor Mulvey, you have brought up the issue of government influence. I go back to the Camaro that is made in Canada and costs $4,000 more here than it does in the U.S. Canadian taxpayers subsidized that manufacturer by billions of dollars in a bailout two years ago. There was no condition put on that bailout by the current government with regard to those price differences.
Mr. Mulvey: As to whether there is really a problem, to the extent that there are barriers in place that prohibit the market from operating efficiently and allowing consumers to achieve their goals, I think there are some issues that need to be addressed. Whether that is increasing transparency in terms of why there are tariffs, why the costs are higher or where their tax money is going, that is fairly important.
In terms of cross-border shopping, I do not want to say that we should facilitate it, because obviously that has some problems. However, why not flip it around? What are Americans coming to Canada to buy and what have they been doing historically? There are deals here sometimes, and sometimes by reversing the flow we can get a better sense of whether there is truly a problem.
I think there should be pride in what we are producing here. We do have wonderful Canadian companies, but when you get too much help it can have a boomerang effect, and people may want to stay away from it. It can be like the preferred child syndrome.
Mr. Vassos: I do not like the fact that we are having this inquiry about across-the-board price differentials because it almost legitimizes in the minds of consumer that they are being gouged and that is why senators are spending so much time on this analysis. Instead, I think that relative to the outcome of this inquiry the government and senators should be making specific recommendations focusing on the outliers. The Competition Act focuses on unethical companies that are price fixing. Existing tariffs should be considered. For example, reducing or eliminating the 13 per cent import duty on all bikes may cause some short-term pain for some Quebec-based manufacturers, but in the long run it could spur Canadian manufacturers to react to those new realities.
We need to cherry-pick what governments can do to influence those macro economic factors and micro economic factors of reducing the red tape of bureaucracy and having consistent legislation and processes among all 10 provinces and all levels of government. We need to focus on those aspects that can be controlled by government rather than trying to control things like price differentials that have so many different factors influencing them and are unlikely to have a direct impact but, rather, more of an indirect influence through these other actions, creating a much more competitive environment in Canada for companies doing business here.
The Chair: Thank you very much to both of you. You have given us many things to think about and we very much appreciate you having taken the time to think about your remarks beforehand and having explained them so succinctly for us today.
(The committee adjourned.)