Proceedings of the Standing Senate Committee on
National Finance

Issue 15 - Evidence - April 3, 2012

OTTAWA, Tuesday, April 3, 2012

The Standing Senate Committee on National Finance met this day at 10:30 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.


The Chair: Honourable senators, this morning we are continuing our special study on the potential reasons for price discrepancies in respect of certain goods between Canada and the United States.


This morning, we are pleased to welcome Dr. Tony Hernandez, Director of the Centre for the Study of Commercial Activity and the Eaton Chair in Retailing at Ryerson University, which is in downtown Toronto. Dr. Hernandez, I understand you have brief opening remarks, and then we will get into a question-and-answer period. The floor is yours.

Tony Hernandez, Professor, Ryerson University, as an individual: Thank you, and good morning. I have a set of my opening remarks in English.

The Chair: Would anyone like a copy of the remarks?

Mr. Hernandez: There are also a couple of graphics at the back of them that I would like to refer to.

The Chair: Why not pass those out, if no one objects to that. The written part of this will be translated. Next time, if you want to send it along ahead of time, we can arrange to have it translated prior to your arrival.

Mr. Hernandez: Honourable senators, thank you for your invitation to participate in the work of your committee. The topic of price differences between Canada and the U.S. has been an issue for consumers in Canada that has increased in visibility over recent years. If you were to stop and ask a group of Canadian shoppers about Canada-U.S. pricing, I am fairly sure that many would have a story to tell or, at the very least, an opinion to share. As more U.S. retailers enter the Canadian marketplace and the Canadian dollar skirts around parity, price differences will be of increasing interest to consumers.

I am the director of the Centre for the Study of Commercial Activity, a university-based research unit at the Ted Rogers School of Management at Ryerson University. As the chair noted, we are located in downtown Toronto, right by the Eaton Centre. I also hold the Eaton Chair in Retail at Ryerson, a research chair set up in 1994 by the Eaton Foundation to celebrate the one hundred and twenty-fifth anniversary of the T. Eaton Company. The CSCA was founded in 1992, and I joined the centre in 1999 and have been the director and Eaton Chair since 2005.

The CSCA is a not-for-profit academic research centre that partners with a broad cross-section of public and private sector organizations. We currently have support and partnership from over 60 organizations, including major retailers, shopping centre owners, commercial developers, real estate leasing companies, government agencies, consultants, data vendors and industry associations.

The research at the CSCA is focused on the locational imprint of commercial activities, in particular, retail and service. What this means in practice is that we track the store locations of major retail chains across Canada, and we also make estimates of retail sales by major retail conglomerates, which we term leading retailers. Our data can therefore be used to look at the changing level of retail concentration in Canada, the increased presence of U.S. retail chains, the locational preferences of retailers and associated shifts in market share.

We also collect location data on retail activity in the Greater Toronto Area and Golden Horseshoe and undertake a field survey of retail power centres across Canada. Power centres are defined as the clusters of large format or big-box retailers, of which many are well-known U.S. retail chains such as Walmart, Home Depot, Best Buy, et cetera. This particular location format, the power centre, has been a key element of big-box retail development in Canada since the early 1990s. The CSCA therefore focuses on location strategies and resulting changes in retail structure, that is, the retail geography of Canada.

Based on our data and analysis, I would like to make a few opening comments on the structure of the retail industry in terms of corporate retail concentration and U.S. retail chains in Canada. This, I trust, will serve as further context for the work of your committee.

The level of corporate retail concentration in Canada has been increasing over recent years. We base the classification of firms as leading retailers primarily on the total sales of the given retail conglomerate. For example, Walmart Canada is a conglomerate, and it operates two retail chains in Canada, Walmart and Walmart Supercentres. It previously also operated another banner, Sam's Club. The CSCA considers retail conglomerates that meet or exceed $100 million in revenue threshold to be leading retailers. However, this threshold acts as a rule of thumb, as certain retailers who do not meet this revenue level do exist within our list of leading retailers. For example, we would include major foreign retailers that only operate a handful of stores in Canada but that have an international reputation.

Our retail data for fiscal 2010 identified 122 conglomerates that collectively operated in the order of 400 retail chains and controlled $220 billion in sales — almost 75 per cent of the non-automotive retail sales in Canada. It should be noted that we exclude automotive and gasoline from total sales for Canada as we do not track commercial activities in these sectors.

Overall, corporate concentration from Canada's leading retailers increased by 0.5 per cent from 2009 to 2010, and Canadian retailers accounted for 59.5 per cent of the leading retailer sales in Canada, down 0.4 per cent. U.S. retailers accounted for 38.6 per cent of retail sales, up 0.5 per cent.

The top three corporations in Canada in 2010 — the Weston Group, Walmart, and the Empire Company — controlled just over 23 per cent of the non-automotive retail market, with estimated combined sales of $68.6 billion from their 3,104 retail locations. In fiscal 2010, 31 different companies operating in Canada generated at least $1 billion in total retail sales with a combined store count approaching 20,000 store locations. Overall, the one-billion-dollar club of retailers generated approximately $192 billion in total retail sales, or 87 per cent of the total sales by the leading retailers that we cover in our analysis. As would be expected, Canada's leading retailers tend to concentrate their operations in the four provinces that include the largest cities: Ontario, Quebec, British Columbia and Alberta.

While the trend of foreign companies expanding into the Canadian marketplace appears to be somewhat more pronounced in recent years, with the introduction of major retail players such as Apple, Zara, H&M, Lowe's, Victoria's Secret and Marshalls, to name but a few, retail internationalization has been a staple element of the evolution of the Canadian retail environment for many years. There has been a series of waves of U.S. retailers entering the marketplace. You can track this back as far as 1897 with the cross-border expansion of the F.W. Woolworth Company. Of particular note, they later became Woolco, which in turn was acquired by Walmart as their entry to the Canadian marketplace in 1994. U.S.-based retailers accounted for 95 per cent of the foreign retail presence in Canada in 2010 and 28.9 per cent of total non-automotive retail sales. As already noted, they account for 38.6 per cent of leading retailer sales.

I would like to draw your attention to the timeline in Exhibit 1. This provides a selected listing of retail chains by period of entry to Canada. As you will see, most of the retailers listed are from the U.S. The timeline in Exhibit 1 is further supported by Exhibit 2, which provides a selected list of foreign retail chains operating in Canada as of 2010, subdivided by retail sector. We defined that by the North American Industrial Classification System. Across all sectors, there are a number of major foreign retailers, with the vast majority being U.S.-based.

In summary, the Canadian marketplace has seen increasing levels of corporate concentration in terms of major retail conglomerates, accounting for a growing percentage share of total non-automotive retail sales. The Canadian market has recently seen a growing number of U.S. retailers enter the market, although this can be seen as part of a fairly constant stream of cross-border expansion into Canada over the last few decades, as illustrated in Exhibit 1. As a result, Canadian consumers have increasing access to retailers from within Canada, with further expansion of U.S. retailers on the horizon.

The Chair: Thank you very much, Dr. Hernandez. Maybe I should not try to extrapolate your comments, but let you do that, yet we are very interested in knowing why the pricing for a product here in Canada appears to be so much more than the U.S. that it is driving Canadians to go across the border to fill up their shopping baskets and come back again. It is not just to get their automobile filled up with gasoline; it is lots of other things.

Do you want us to think in terms of concentration as a factor in this? Is it good for Canada to have a large U.S. retailer expand into Canada? Should we anticipate the costs would become closer, taking into account variations in the value of the dollar?

Mr. Hernandez: My overall opening remarks are really to illustrate the scale and concentration of retail; essentially, that a fairly small number of large retailers within Canada control a large percentage of retail sales. Therefore, the decisions of a relatively small number of retailers have a potentially large impact on the Canadian retail industry.

Another side to that can be seen when you look at the number of retailers that are now retailers from outside of Canada, or headquartered outside of Canada. In essence, when you are looking at price differences, the issue 20 years ago may have been that we went to the U.S. because of access to the product. Now, the retailers are within Canadian borders and operating. It has changed from a consumer perspective.

If you think back to the cross-border flurries that you would have had with regard to fluctuations in the dollar, they may have been because, "I want to go to the U.S. in order to get access to that retailer." Now we have the U.S. retailers within Canada.

I think the issue of price differences becomes even more visible to Canadian consumers. It is not only that we went to the U.S. to purchase and that was the difference; the product is being sold in Canada and it is very easy for consumers to make comparisons to products being sold in the U.S. by that same retailer.

That landscape has changed. We estimate U.S. retailers control close to a third of the total non-automotive retail sales in Canada. That is a fairly large proportion of the retail sales pie.

The Chair: Where do you see this going? As more retailers come into Canada, should we anticipate more competition and therefore the prices will be driven down to ones similar to those in the U.S.?

Mr. Hernandez: It is an interesting issue with regard to the level of competition. If we look at a number of the sectors, one of the other metrics that we use is called a "corporate concentration ratio." We use it by sector. We look at the CR 4 ratio, which is the top four retailers within any given retail sector. Within merchandising, the top four retailers control over 80 per cent of the total retail sales. Within fashion, it is much lower. It varies by sector. The level of competition really does vary depending on which sector you are looking at, in terms of the number of competitors.

The general merchandise sector has these high levels of existing corporate concentration. We have the entry of Target stores coming in April 2013. One additional retailer in that space will potentially change the competitive makeup of that sector. The challenge there is determining whether it is a new U.S. retailer coming into Canada. Zellers is ultimately owned by a U.S. company, NRDC Equity Partners. It is a replacement of Zellers with Target stores, so you will see increased competition within that sector.

When you look at competition, you need to look at this on a sector-by-sector basis. That would be one of my general comments, having looked through some of the evidence that has been provided thus far, that there are differences within the different sectors of retail.

The Chair: Some of them are quite obvious to us, such as when we look at the publishing industry and see the price in Canada and the U.S. for the same pocketbook, for example. Those things jump out at a person. The Canadian public is asking why, and we are trying to help the government understand why.

Senator Runciman: Thank you for being here today. It is much appreciated.

In the budget, the government announced changes with respect to the 24-hour and 48-hour exemptions. I noted that some of the big retailers were complaining about that and thought it would have a negative impact. What is your view of that? I know we have heard testimony here that it will increase competitive pressures, which is a good thing for Canadian consumers. Do you have a view with respect to those changes?

Mr. Hernandez: I think there is a bit of a double-edged sword to increasing the exemption. On the one hand, Canadian retailers want to minimize as much leakage of retail sales across the border as possible. From a retail sales kind of shift, it is a challenge for Canadian retailers.

From an operational perspective, I think it will make the cross-border shopping experience less fraught for Canadian consumers over what one declares or not. I was looking at the expert witnesses you had from the Canada Border Services Agency and the issues they were raising in terms of turning Canadians into petty criminals, which I think was the term that was used.

There are some benefits from an operational perspective, but there will definitely be some pressures that Canadian retailers will feel. If you look at it over the longer term, will this start influencing price differences? Will this apply additional pressure on retailers in Canada to essentially narrow some of the differences in price?

Senator Runciman: When you looked at this, did you take into consideration the development and occupancy costs, such as property taxes and utility costs, those kinds of issues, in both jurisdictions? What role do they play in terms of pricing?

Mr. Hernandez: Our focus was not really looking at this cross-border shopping phenomenon. Our focus was very much on the structural analysis of retail within Canada and looking at the mix and shift of retailers that are within Canadian borders.

Senator Runciman: You are suggesting those structural differences are diminishing over time?

Mr. Hernandez: I think we are seeing increased competition, so we are seeing the larger retailers controlling a larger share of the retail market. The issue there is a smaller number of retailers potentially having more influence within overall retail sales.

Particularly over the last three or four years, Canada is really being seen as this venue for expansion. U.S. and European retailers have been looking at Canada as a highly viable market to come into in order to expand their operations.

Senator Runciman: I am not sure if this was part of testimony, but our researcher has indicated here that manufacturers sell their products at higher prices to Canadian importers than to American importers. Is that something you have noted as well? Is there any rationale for that?

Mr. Hernandez: It is not a factor we have done research on. As I said, we are very much a locational kind of research unit.

When you look at the price differences, a number of factors seem to be recurrent, whether it is looking at scale, cost of doing business or taxes and tariffs. Where in the retail system are the price differences being most heavily influenced? If your price difference has been heavily influenced at the point of manufacturer or vendor pricing, you will be carrying those costs through that entire retail chain.

I think there is an issue of if there are differences in the way Canadian retailers are being priced in terms of product between U.S. retailers operating in the U.S., then that will obviously carry its way through the entire retail supply chain because you have started that additional cost early on. It is not a cost that is the cost of doing business; it is a cost that you have immediately incurred because your base cost of bringing the product in is higher.

Senator Runciman: When you conduct these studies, at the end of the day do you make recommendations? Do you see a role for government at the provincial, municipal or federal levels?

Mr. Hernandez: A lot of our work revolves around looking at how commercial structure has changed, so we look at the vitality of shopping malls, power centres, retail strips and how the retail structure is evolving. We have a strong kind of land-use planning perspective to what we look at.

Senator Runciman: It is more at the municipal level?

Mr. Hernandez: Some of it is at the municipal level. For example, in the Toronto area, we look at sub-provincial smart growth planning, as one example.


Senator Ringuette: Good morning. Your presentation leads me to believe that your data concerns only regular department stores in Canada. Do you also have data on Internet purchases?


Mr. Hernandez: Our data is very much locationally focused, so we build databases of major retail chains and we track them. We have been tracking the major retailers in Canada for the last 10 years. We have been tracking retailers within the Toronto area for 20 years.

When we look at e-commerce, that is when we make reference to the work that you would get from Statistics Canada. We rely on secondary information when we are looking at e-commerce.

If I can make a couple of comments on e-commerce and how it impacts the retail sector, from a property perspective, there are increasing concerns as to how much retail is going through the e-commerce channel and what kind of potential impact that would have on the viability of some of the properties and the demand for retail space in Canada. There are a number of issues that we look at with respect to e-commerce, but we relate it back to the real estate issues that e-commerce creates.

Senator Ringuette: In your document, Exhibit 1, the trend in the last 20 years of U.S. operations expanding in Canada has been remarkable. What has been the impact of this expansion on Canadian-owned retailers?

Mr. Hernandez: I think for any retail business, the ultimate impact is what happens in market share. As you have more competitors coming into the marketplace, they are essentially taking away market share from the other retailers. It is interesting to note that from this graphic, only four of the companies listed, that I am aware of, actually closed business in Canada: Office Depot, Sports Authority, Linens 'n Things and Sam's Club. Retailers that have come in have been persistent retailers that are still operating in Canada. We have had retailers that have been in Canada for about 20-plus years. Imagine what the home improvement sector was like before we had Home Depot or, more recently, Lowe's. These companies are taking market dollars away from other retailers, but that is the competitive landscape.

Senator Ringuette: Further to that, many small and medium-sized retailers are negatively impacted by all of this. Nevertheless, with the expansion of these U.S. retailers into Canada, Canadians have not witnessed a reduction in prices. When you buy an article at Walmart in Canada, it is roughly 20 per cent higher in price than the same item at a Walmart in the U.S. Their entrance into the Canadian marketplace has not reduced product costs for consumers at all. As well, it has eliminated many Canadian-owned businesses from the Canadian landscape.

I realize that you analyze the physical geography of retail. Where are we going? You must have done some extrapolations with respect to where we are heading. Are we headed to a system where Canadian-owned retail will be completely absent or very limited? Will we be at the mercy of these U.S. super stores?

Mr. Hernandez: We have a large number of major Canadian retailers who have been long-standing and who essentially work hard to serve the needs of their customer base. They deal with competitive pressures as they come along, as any business does.

If we track back some of the development that we have seen, many of the retailers that we are looking at here have been the bigger box retailers that have focused on power centre locations. There have been a number of studies on the impact of the larger retailers on mid-size and small retailers. Ultimately, this comes down to where Canadian consumers are spending their money, where they are making their purchases. These larger retailers are increasingly taking more of the retail sales in Canada.

Senator Ringuette: Yes, and under the new policy, Canadians can cross the border and increase their purchasing power by 400 per cent.

Mr. Hernandez: One of the underlying questions for this committee to understand is where in the process the price differences are really taking place. Is it early on at the point of manufacturing? Is it through the nature of our market? Is it purely the scale and size of the market? We always hear that we are one tenth the size of the U.S. market and that we do not have the same kind of leverage as you would have if you were commanding a larger market. If your volume is one tenth of that of another retailer, obviously you are at a disadvantage. Understanding where in the process those price differences take place and how it varies by sector is the key question for this committee.

I am not privy to sitting in on retailer meetings where they look at their pricing models and decide on vendors, et cetera. An important aspect for this committee is to get that perspective to understand where the actual major price differential comes in. Is scale the big issue? Is the key issue the fact that we are a large country in terms of extensive costs to get product across the country?

With the data that we collect at the CSCA, we track the impact of that. We estimate the retail sales of those retailers within the country. As those sales change, we see the impact. They are taking sales dollars from other retailers, whether they are small or medium-sized, Canadian or other U.S. retailers. One of the myths of retail is that it is just U.S. retailers coming in and competing with Canadian retailers. U.S. retailers are coming in and competing with other U.S. retailers. Lowe's came in as a home improvement retailer and is competing with Home Depot. Target is coming into Canada and will be competing head-to-head with Walmart, along with other retailers. That is one of the other issues as well.

Often the question is broken down to Canada versus the U.S. I do not think it really works that way. Essentially, we have some Canadian retailers that are head-officed in the U.S.

Senator Ringuette: Nonetheless, my observation is that U.S. and Canadian retailers can compete among themselves for the market share. However, I have not noticed that they are providing better price structures for Canadian consumers in comparison to their retail operations in the U.S.

You indicated that you had data on U.S.-U.S. competition in the Canadian marketplace. Did I hear you right?

Mr. Hernandez: We have data on estimated sales for U.S. chains that operate in Canada who compete with other U.S. chains that operate in Canada. We have estimated sales data for Home Depot and for Lowe's. Over time, you can compare the changes that you will get between those two companies.

Senator Ringuette: You have nothing in terms of price-specific data.

Mr. Hernandez: We do not track specifically on the price side. We look at the location and strategies for these firms, which markets they go into and what their location preferences are. A large part of that is tracking the corporate financial overview. We do not get into the details of trying to dissect margins, profitability, asset base and development costs, et cetera. That is not a factor that we focus on.

Senator Marshall: Your schedule indicates all of the American retailers that are moving into Canada. I was placing some faith in competition, but then you said that four retailers dominate about 80 per cent of the activity.

Do you think that impacts where prices will go in the future? Do you think that we, as Canadians, are sitting here thinking, "Oh, great — more competition, lower prices?" However, in actual fact, the four big retailers have it locked up and that will negate any possibility of lower prices.

Mr. Hernandez: To clarify, in terms of the three top retailers I referred to, which were Western Group, Walmart and the Empire Company, essentially, general merchandising and grocery retailers, they command 23 per cent and are the top three retailers in Canada. They commanded 23 per cent of total retail sales in 2010.

We also have another measure, which is the concentration ratio by sector. We look at the top four retailers in any given sector and then report the percentage of market share that they control within their sector.

If you look at general merchandise, the top four companies take over 80 per cent of the market share. If you look at home improvement, the top four companies account for 70 per cent. If we look at pharmacy and personal care, it is just over 68 per cent. These are rough estimates, but I can provide you with the exact numbers at a later point.

Then you look at clothing and accessories, and we are closer to 20 per cent for the top four companies because for clothing it is a more of a comparison type of shopping activity. We look at the differences in impact across different sectors. Adding a few additional fashion retailers may not have as big an impact as bringing in another major general merchandise retailer because within the general merchandise sector, it is already highly concentrated.

That is how we look at the market.

Senator Marshall: With respect to the example you gave, then, for the general merchandise category, do you think that having four retailers dominating those goods makes a difference with regard to competition? We think, "Oh, good, the more American companies come in, the lower the prices will be." However, if it is locked up by four companies, do you think that will make a difference with regard to the price discrepancies?

Mr. Hernandez: That is a difficult question to relate to purely the number of retailers that are here. It depends.

The general merchandise sector is slightly skewed by the fact that we have traditional department stores grouped together with the new kind of general merchandisers. In the mid-2000s, Statistics Canada stopped reporting on department stores in Canada because, frankly, there were not enough traditional department stores in order to still report the numbers and not contravene confidentiality.

The issue with the number is not purely the number but the nature of the retailers that are competing with one another. If you look at it as Walmart versus Target, they are major head-to-head competitors in the U.S. In some ways, Canada then becomes another battleground for them.

On the fashion side, adding a few extra fashion retailers within a mall does not necessarily have as major an impact on the overall sector. I am not saying that fashion retailers are not important; it is critically important for many of our major malls to have the latest and best fashion retailers. I do not think it is as simple as the overall number; I think it is the nature of those competitors.

Senator Marshall: You referenced Target earlier, probably in your opening remarks, and you just referenced them again. Based on what you are saying, you think that their entry into the Canadian marketplace should have a major impact or will have some impact on prices?

Mr. Hernandez: I think the impact that Target will potentially have will be to provide potentially a slightly different product mix to what we currently have.

In terms of price points, the notion of a Target being slightly more mid-priced and Walmart being slightly lower, we might see some different price points for Canadians. It is not necessarily about lower prices. It might also be about differentiation of products and providing Canadians with a range of product offerings at different price points as opposed to purely being, "This must drive down prices for everyone." We have to look at it from a slightly different perspective. I think the price discrepancy issue is more related to when you have major differences in the same branded product being sold differently in the U.S. versus in Canada. What are the reasons for that difference for that particular branded product? They are exactly the same product. We really have to be careful about not talking about price in terms its being all about lowest price.

Senator Marshall: That is right, and we should not compare apples and oranges, but compare the same thing.

Mr. Hernandez: That is right. For example, I heard that factory outlets will be part of the committee's review process. In Canada, the factory outlet will probably be the next stage in development of retail in terms of location type.

There are a couple of developers actively looking at developing sites. I am not sure if any of you are familiar with the Cookstown factory outlet that has been bought by a company called Tanger, a major U.S. factory outlet developer. Another property developer, Simon Property Group, which is a large mall developer in the U.S., has partnered with Calloway REIT. Tanger partnered with RioCan to develop factory outlets, and Calloway is partnering with Simon Property Group and they are looking at developing a centre in the Halton Hills area.

That is a lot of what the cross-border shopping is. You go across the border and you say, "Look at the great deal I got at the factory outlet place."

I was at a presentation from the CEO of Tanger Outlets, Stephen Tanger, and I was surprised to hear that 80 per cent of the product — and this was his comment, so you need to validate that — that goes into a factory outlet is specifically manufactured now for the factory outlet. We now have a difference between full price and off price. You might have the same retail banner, and you have seen that shirt, and the shirt is $120 in the full-price store. You have seen that shirt at the factory outlet, and wow, it is only $40. It is the same style, it looks like the same kind of fabric but, in actual fact, it is slightly inferior cotton. The price difference there is not a real price difference. You are comparing brand to brand and it kind of looks the same, but there is potentially a difference in the product.

That is one of the other challenges because a lot of the cross-border shopping is actually to a factory outlet. It would be worth thinking about the notion of off price versus full price and ensuring that we are comparing apples with apples. That is the most important thing with a price discrepancy. It is easy to be comparing products that you think are comparable, but, in actual fact, they were never designed to be.

The Chair: That is an interesting point.

Senator Marshall: It is interesting. Thank you.

Senator Hervieux-Payette: That does complicate things a bit because there are three brands that I am aware of where I have been shopping. It is IKEA, which is from Sweden, Miele, which is from Germany, and Benetton, which is from Italy. We can ask ourselves why their products, for example, on the East Coast, are not sold at the same price. The transportation costs are the same. Is it only volume that would justify that? We discussed about cars before, the fact that cars imported from Europe are much more expensive in Canada than in the U.S. How do we explain that? It is not a question of quality. In fact, IKEA, Miele and Benetton are top quality. Miele is fabricated in Germany; manpower there is expensive. Why would the same product, whether I buy appliances, a car or clothing, be different in the U.S. from Canada?

Mr. Hernandez: That goes back to the series of issues that I think has been referred to in this committee before as a death of one thousand pinpricks. It could be any range of factors within that. Is it vendor pricing? Is it tariffs? Where do fuel costs come into that? You have to look at these literally on a sector-by-sector basis. How different is that pricing within the apparel sector? How much difference is there in the costs to actually service the East Coast versus the rest of Canada? Is the company actually operating all across Canada so it has to provide product across Canada, incurring other additional costs? What are some of the factors? Has it got national coverage? You need to look at a range of different issues.

From the perspective of being able to pinpoint one, I cannot make a comment; I am not sure what that would be.

Senator Hervieux-Payette: When you talk about apparel, we have heard from witnesses that most of it, although imported from the U.S., is fabricated in China. In fact, the order is placed by an American organization and then it comes either to Canada or to the U.S., but there is little U.S. content in these products. Why would they not be the same? Again, maybe we have rules between Canada and the U.S. in terms of a freer market, but when it comes to Benetton, perhaps there is a component related to the cost of it. I am not sure about appliances. IKEA is mostly furniture. We have hardly any people fabricating these things in Canada. There are a few left in the United States but most of it is still from China. We can accept that because of the size of our country and the size of our market there would be a little difference, but when the size of difference for a car goes up to more than $10,000 for the same product, it is not just the cost of it. There is some relationship.

The committee would like to know what you would suggest to do in order to reduce the gap.

Mr. Hernandez: You have to identify where the gap is.

Senator Hervieux-Payette: That is what we are trying to do.

Mr. Hernandez: That will vary. It will depend on whether the retailer is just passing along increased pricing. There is the notion that you often hear about price gouging and finger pointing at retailers, but are they actually passing that on? Where are those costs actually being incurred? Where is the price difference? Where can the price difference be justified? Frankly, that is where you need to have a set of retailers to sit before you to explain to you and show you the books and say, "Look, we are trying to provide the best value for Canadian consumers and this is how we are doing it." That is what you need to do.

I have looked at some of the evidence that has been presented to the committee and it seems that you have this recurrent set of themes: scale of the market, trade and tariffs, labour costs, fuel charges, manufacture and vendor pricing, markups for distribution, middle person kind of issues. In some ways, you need some harder evidence from the retail side to say that this is the reality. A lot of it is a series of themes and it is difficult to pinpoint and answer any one specific question.

How is it different for automotive versus apparel? How is apparel different from home improvement? How is home improvement different from electronics? That is one of the key issues. I can only see that coming from the retailers themselves in terms of providing some of that rationale.

Senator Hervieux-Payette: When we look at a sector like gasoline, we know there are just a few players. By a miracle, if it is $1.40 today at one place, eventually you will see all the other gas stations selling it at the same price. Of course, there is no problem with our competition laws.

Do you feel if we have just four in one sector that they follow the same pattern? Should we address some of these questions with our competition law?

Mr. Hernandez: The competition law as I understand it is there to ensure there are not anti-competitive activities taking place, price-setting cartel kinds of activities. One thing we have to always bear in mind with the Canadian marketplace is the size of the market and the scale.

If we have three or four major general merchandisers in this country, with our population and our geography, and we compare it to how many department stores and general merchandisers there are in the U.S. and say we are less competitive because we have fewer retailers, I think part of understanding the competition side is understanding it in terms of the fact that it is not purely about the number of retailers. It is a mix of the quality of competition, the mix of price points you can bring to Canadians and the mix of products you can bring to Canadians at different price points. It is not as simple as just saying, is four too many? Three would be too many if collusion were taking place. Five would be perfectly fine from my perspective, if you could have five companies that could profitably operate in Canada and provide value to Canadian consumers. Ultimately, is that not what the retailer system is meant to provide, value to the consumers while obviously maintaining profit for those companies?

It is not as simple as just the number of retailers. It depends on the mix of those retailers, bearing in mind the size of this country and the geography.

Senator Buth: It is interesting to understand where the retailers are, especially the timeline that you have looked at.

I think you have hit on the nub of the issue. I want to go back from that and then come back to the issue.

There are times when we make the assumption that we are paying higher prices across the board and over a certain timeline, but I think that we are paying less in Canada now with the advent of some of these U.S. companies coming in. You look at Walmart prices compared to those of some of the department stores that we used to have. My personal experience is that we are finally getting an IKEA in Winnipeg and we feel that we are a city that is now starting to grow up because we will finally get an IKEA.

I look at the prices there compared to other places and I think that prices are typically lower for Canadian consumers now. I suspect that in some cases retailers will charge what the market will bear, essentially.

You have talked a bit about the fact that you do not track prices, et cetera, and you have made the comment that it is important we tackle this by comparing apples to apples.

I have two questions. First, are you aware of research that has been done, even in other countries, looking at price comparisons and the factors that impact prices within a particular zone, perhaps even in the eurozone? Second, getting information about retailers about how they do their pricing and the impact on their pricing between Canada and the U.S. is extremely difficult. Can you tell us which retailers you would recommend that we should perhaps invite to come and talk about price differences between Canada and the U.S.?

Mr. Hernandez: In terms of the first question, I really looked more at the few studies that have looked at Canada-U.S. pricing. From my previous work in the U.K., there was a lot of debate over regional pricing issues in the U.K., particularly for food retail. That is another dynamic that is out there in terms of pricing. When we talk about pricing between borders, then what about pricing between provinces? I am aware of some of the literature in the U.K., but this is from quite a few years back. I am not aware of any recent studies that have been undertaken in the eurozone, for example.

In terms of the retailers to talk to, I can provide you with our list of 122 conglomerates. I can show you the list of the retail chains that they take, and you can easily pick through that list. I think what you want to do is get a cross-section of retailers from different sectors, or have some representation that can speak to a cross-section of retailers from different sectors. That is more challenging.

I work at a university with a lot of young Canadians whose phone is like another limb to them. If you say to them, "I will take your phone away for half an hour," it is like the world will end for them. They are totally immersed in social media, in product review and product comparison. There really is a growing issue for retailers that the consumers — and generation Y is our next major band of consumers — will be using this technology to look at those price differences. They will not be going to studies of price differences; they are going straight to their smartphones and to the price comparison sites.

I will give you a number from a study in comScore, which is one of the big smartphone tracking companies. This is important for the committee from the perspective that this is where many Canadians are finding out about price differences. How did you do that before? You used to travel across the border. It was cheaper and you knew that through hearsay. Everything now is immediate. It is instantaneous. This is from comScore and it relates to what smartphone owners do when they are actually in the retail store. They take a picture of the product and it is 24 per cent. They text and call their friends or family about the product. They scan the bar code. They send a picture of the product to their family or friends. They find the store location. They compare product prices; at 14 per cent that actually went down. They found coupons or deals. They researched the product features. They checked product availability.

The next generation of Canadians are in a totally different world of shopping, and it is immersed in comparison, peer group, social media and community. The important issue for retailers is to ensure that they do not disenfranchise their community. We have seen that with some of the pricing issues where retailers and consumers have actually responded and said, "Look, we are not going to accept this price difference."

The work of this committee is really key because for retail this is where it is at. The technology is there. We are aware of these differences. A problem for a lot of retailers is that most consumers just think about it in terms of price. The committee needs to hear from retailers to tell you about cost and actually say, "This is where the costs are accruing. Our margins are no bigger or smaller. We are not making outrageous profits. We are working lean and smart. We are trying to be innovative." That is one of the perspectives that you definitely need to hear as well.

We are currently doing a survey of 10,000 students at the Ted Rogers School of Management on smartphone use. It will be fascinating just to see how they report to us on how they are using this kind of technology for shopping because it is a different world.

The Chair: Are you doing that study now?

Mr. Hernandez: Yes. The survey is actually live right now.

The Chair: When do you anticipate you will have something published on that?

Mr. Hernandez: By the end of April. It is an online survey. It is QR code linked. It is the way the students want to work.

The Chair: Do you anticipate that even those of us who might not be using the smartphone to do price comparisons could reap the benefit of the results of those who are?

Mr. Hernandez: As it becomes more of an issue that consumers are taking to retailers, then you reach the point of needing to explain where the price differences are. From a government perspective, it is a matter of putting in place whatever policies you can to support the most viable and dynamic retail industry in Canada.

The Chair: Those are some very good suggestions.

Senator Callbeck: You are the director of CSCA, the Centre for the Study of Commercial Activity.

Mr. Hernandez: That is right, yes.

Senator Callbeck: From listening to you I understand that every year you update certain data on certain things. Do you undertake special studies as well?

Mr. Hernandez: Yes. We have between 8 and 12 reports that we write each year, and the core part of our work is updating information on where retailers are located. We track store locations, and we have a geographical database where we house all the data.

Senator Callbeck: In these special studies, who determines what you will study? I see here where you partner with 60 organizations. Do they have an input into what you will be studying?

Mr. Hernandez: With our membership, there are no exclusive deals with membership where we limit data or studies to any one particular member. All of our studies are out in the public domain. We have an advisory group. I obviously meet with a lot of our members on a fairly regular basis to get input as to what the hot topics are. At the centre we try to make sure our studies relate to our stakeholders. Many of them are in real estate and retail.

Senator Callbeck: Do they make any financial contribution towards the studies?

Mr. Hernandez: They do not necessarily make a financial contribution to the studies, but we are a not-for-profit, also not-for-loss, academic research unit.

Senator Callbeck: They contribute something, do they?

Mr. Hernandez: Yes. It is based on a membership, so there is a range of different membership levels, and I have a staff of analysts who work for me who essentially manage all of our data.

Senator Callbeck: What would be the maximum and minimum of your membership levels?

Mr. Hernandez: These are nowhere near consulting levels or anything. Our top level of membership is $10,000 a year.

The Chair: On that point, if I may, because we had asked earlier about the report you are doing on the smartphone, could you work out a good price for us on that particular report?

Mr. Hernandez: I can forward that to you electronically as a PDF.

Senator Callbeck: You say here that your data can be used to look at changing levels of retail corporate concentration in Canada and the increased presence of U.S. retail chains, which you talked about. Then you say "the locational preferences of retailers."

Mr. Hernandez: Yes.

Senator Callbeck: You have been keeping data for 20 years. Can you briefly go over the changes that have come to pass in locational preferences for retailers in that 20 years and where you see retailing going in the next 10?

Mr. Hernandez: Very simply, as we increasingly suburbanize our population, commercial activity is suburbanized. The format that has served that suburban market has been the power centre, which is the cluster of large-format retailers, typically around a parking pad. I always refer to them as islands of retail in a sea of parking.

Many of the retailers in Exhibit 1 are actually those big-box retailers that some call category killers, the warehouse-style retailers. Big-box retailers have gone through a period of development in the suburbs feeding the population growth that we have had in our major markets. Our existing shopping malls have seen an increasing integration of those big-box players within them. The shopping centres are evolving to accommodate the needs of larger retailers.

We have done studies on how shopping malls have evolved in Canada. They are increasingly bringing a couple of retail units together to enable a larger retail unit to be in a shopping mall.

We have seen a transition towards larger-format big-box retailers, which are obviously working on the notion of scale for their own retail offer. That has been the dominant factor over the last 15 to 20 years.

As I see it moving forward, there is currently a lot of redevelopment opportunity for older malls. Transitions are occurring with older malls that are coming toward the end of their development cycle.

Senator Callbeck: Where do you see this going in 10 years?

Mr. Hernandez: I think that a large proportion of retail in the Canadian landscape will still be in power centre locations. Each year we go out to close to 500 centres across Canada comprising about 160 million square feet of retail. The big power centres will be there. The major malls have constantly reinvested in their space, so the big regional and super-regional malls will be there with a mix of retail. I think we will start to see other formats coming in; more factory outlet centres, more lifestyle centres, which are more mid- and up-market retail. Based on baby boomers retiring, I think we will see more centres of retail linked to housing to meet the needs of older consumers as well.

The Chair: This is very interesting. With the big-box power centres, you have to drive from place to place.

Mr. Hernandez: Yes. You forget that you have legs and you drive.

The Chair: My observation has been that seniors seem to prefer the traditional large shopping mall where they can park their vehicle once and walk around. However, you see the trend moving away from that?

Mr. Hernandez: No, I think that housing development will cater to the demographic that we will have of aging baby boomers. That is a significant demographic wave that is moving through. They will be at different income levels. The baby boomers are not just one group; there is a range of groups within that covering different ages, et cetera. Community will still be a key part of retail and the social aspect of retail. E-commerce has been around for 20 years. There were notions that e-commerce was going to totally obliterate bricks and mortar retail, but there is something intrinsically social and tangible about bricks and mortar, and I think that is one thing that will maintain the vitality of retail.

The Chair: Thank you very much. That concludes my list of senators who have indicated an interest in asking questions, and we have just run out of time as well.

Colleagues, please join with me in thanking Dr. Hernandez from Ryerson University in Toronto for being here and helping us with a very interesting aspect of the study that we are doing.

Mr. Hernandez: Thank you for the opportunity.

The Chair: That concludes our meeting.

(The committee adjourned.)