Proceedings of the Standing Senate Committee on
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
Senator Joseph A. Day (Chair) in the chair.
The Chair: I call this meeting of the Standing Senate Committee on
National Finance to order.
This morning, we will continue our special study on the potential reasons
for price discrepancies in respect of certain goods between Canada and the
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
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.
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
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,
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
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
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
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
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
Mr. Gordon: I would like to be able to say yes, but I am not aware
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
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
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
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
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
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
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
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
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
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
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
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
To both English- and French-speaking Canadian citizens, I truly hope that
you find our economic discussion and interaction today to be informative and
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
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
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
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
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
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.
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
Mr. Mulvey: I can provide some perspective, but it is not based on
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
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
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
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
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
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
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
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.