Proceedings of the Standing Senate Committee on
National Finance
Issue 16 - Evidence - April 24, 2012
OTTAWA, Tuesday, April 24, 2012
The Standing Senate Committee on National Finance met this day at 9:30 a.m. to study the potential reasons for price discrepancies in respect of certain goods between Canada and the United States, given the value of the Canadian dollar and the effect of cross-border shopping on the Canadian economy.
Senator Joseph A. Day (Chair) in the chair.
[English]
The Chair: I call this meeting of the Standing Senate Committee on National Finance to order.
[Translation]
Honourable senators, this morning we are going to continue our special study on the potential reasons for price discrepancies in respect of certain goods between Canada and the United States.
[English]
Colleagues, in our first session this morning, we are very pleased to welcome the Retail Council of Canada. We have been looking forward to this meeting, and we are glad that we have been able to work out a time when we could get together on this interesting price study.
Appearing before us this morning, for the first panel, are Diane Brisebois, President and Chief Executive Officer; and Karen Proud, Vice President, Federal Government Relations.
Ms. Brisebois, I understand that you have a few introductory comments, and we have all received a copy of the material that you have circulated in both of our official languages.
Diane J. Brisebois, President and Chief Executive Officer, Retail Council of Canada: Since we have five minutes or so to present our comments and recommendations on the difference in retail prices between Canada and the U.S., I will get to the point immediately and will hope that you have time to carefully review our submission, which includes more details about the matter at hand. We sincerely hope that our testimony and the facts we are about to present will lead to real action by the federal government to begin to level the playing field for retailers in Canada.
It is also important to note, Mr. Chair, that retailers across Canada believe and understand that consumers have every right to shop when and where they want. Retailers compete locally and globally, and their only request is to ensure that governments in Canada strive to establish an environment where businesses in this country can compete on a level playing field.
[Translation]
Of course, we will be delighted to answer any questions you may have after our presentation.
[English]
It has been clear from the beginning of this study that this is a complex issue. We are sympathetic to the frustration you expressed during one of the past meetings, Senator Day, when you mentioned specifically:
The frustration we have is that we keep hearing from witnesses saying it could be any of a number of factors. We would like to try to reduce that number of factors so that we can understand the significant ones. . . .
In response to that comment, we are here to focus on four significant areas that we believe to be the largest contributing factors to the difference in retail pricing between both countries.
The four factors include import duties on finished goods, supply management affecting prices of food products such as dairy and poultry, vendor pricing in Canada, and regulatory harmonization. Quickly, let me address import duties.
One of the main areas where the federal government does have a role to play is in eliminating the outdated tariffs on finished goods entering into Canada. While you have heard from some witnesses that these tariffs are only applied to 10 per cent of all products entering Canada, they are overly represented at the retail level. For some retailers, they may account for nearly 100 per cent of the items they import and sell in this country.
As an example, on page 9 of our English submission and on page 8 of the French submission, we have listed the tariffs applied to hockey products. We thought that that was appropriate, considering the next witness. For the most part, there are no duties applied in the U.S., yet the same products entering into Canada carry tariffs as high as 18 per cent. Page 10 of our brief provides another sample list of some of the tariffs that we believe should be eliminated. As a retailer, hearing that these tariffs do not impact the price of goods is quite shocking.
The second factor is supply management. One area that has not been discussed at this committee is the issue of supply management and its effect on the difference in pricing for dairy and poultry products between Canada and the U.S.
While retailers fully respect and support Canada's agricultural community, we do know from our members that these products are the most popular products purchased by consumers during the great majority of cross-border shopping, same-day trips.
We understand that this is a sensitive issue, but if this committee is really going to look at factors that contribute to the differences in pricing between Canada and the U.S, it would be remiss in not addressing supply management in some way. At the very least, should the current system continue to be sustained, the government must acknowledge its role in supporting marketing boards and higher prices in Canada for those popular grocery products.
If the government wanted to provide retailers in this country with a level playing field, they would exempt or restrict these supply-managed products from personal exemption, as they do with tobacco and alcohol, and actively enforce those rules at the border.
The third factor, which I think will create quite a bit of discussion, is country pricing. In some cases, it is referred to as multinational vendor pricing. It should be noted that the majority of products that retailers buy are sourced in Canada, unless imported from Asia or Europe, and they are not sourced directly from the U.S. Country pricing is one of the largest contributors to the difference in pricing, so it is important for the committee to understand how procurement in retail works.
It has been suggested here that large, multinational retailers should be able to negotiate one price from suppliers for the products they sell in North America. Nothing could be further from the truth. The reality is that suppliers of products — those where you would tend to see the greatest difference in pricing — will at times charge Canadian retailers up to 50 per cent more to buy those products than they charge retailers in the U.S.
Contracts with suppliers are negotiated on a country-by-country basis, and while there is some room for negotiation, retailers are often at the mercy of a vendor's Canadian price list. Suppliers tell retailers that the reasons for the differences in pricing are the following: one, it is what the market can bear; two, it is a smaller country, thus more expensive — an issue of scale; and, three, higher prices are necessary to compensate our Canadian distributors and wholesalers.
On page 7 of our submission, we have provided a generalized list of just some of the everyday products that Canadians buy and the differences in what retailers pay for them in the U.S. and in Canada. Let me note here that these examples come not from small but from large retailers. This is just a small sample of items to illustrate our point.
Retail private brands have been growing in an effort by retailers to be more competitive, but consumers are still looking to buy name brands. This is where you will continue to see the large price discrepancies in many categories.
While we do not believe that the federal government has a direct role to play in this area, we do believe that this is important for the committee to reflect in its final report and to set the record straight about vendor pricing in Canada. We certainly would encourage you to look into this matter more fully.
Finally, on regulatory harmonization, I would like to speak briefly about the need for better harmonization of regulations and policies within the federal government as well as between Canada and the U.S. Lack of harmonization and different standards and requirements all contribute to increased prices of products in Canada.
We applaud the government's creation of the Canada-U.S. Regulatory Cooperation Council. However, even after this was announced in February 2011, our submission provides the example of new car seat testing regulations that came into force in Canada which were not at all harmonized with the U.S. Our submission speaks in more detail to this, so I will not go into the details in my remarks. Suffice to say that while we are supportive of this initiative, we remain a bit skeptical about its implementation.
We also applaud the government's creation of the Red Tape Reduction Commission and the implementation of a "one- for-one" rule to control the administrative burden associated with regulation on business. Our submission again includes recommendations to assist in meeting those objectives.
Mr. Chair, in conclusion, I would like to thank the committee for providing us this opportunity to bring forward the views of the 45,000 retailers we represent across the country. I would urge the committee to help set the record straight about the real causes of price differences in Canada versus the U.S. and consider the recommendations we have presented in our submission.
The Chair: Thank you very much, Ms. Brisebois. Your submission is very extensive. We have not had an opportunity to review it in detail, but we do very much appreciate the work that you have put into preparing this for us. There is a lot of interesting background and information here.
On your four points, we appreciate your analyzing those. As far as supply management is concerned, you are quite right that if we are looking at the global picture in Canada, we have to mention it. We have decided we would not be studying that as a separate subject for this report, but it may well be that this committee might decide to pursue something along those lines at a later stage. It will be mentioned, but those goods will be excluded from our study.
On your comment with respect to regulatory harmonization, does the Retail Council of Canada participate in the regulatory council that was created?
Karen Proud, Vice President, Federal Government Relations, Retail Council of Canada: We do indirectly. We have not been part of the direct group that was brought together for the RAC, but we indirectly contribute through our submissions to the government to that initiative.
The Chair: It was announced and established in February of 2011; did I understand that correctly?
Ms. Proud: Yes, that is correct.
The Chair: You have some concerns about its implementation at this stage, do you?
Ms. Proud: Yes.
The Chair: There may be other senators who wish to pursue that. I am just trying to lay the groundwork.
Senator Neufeld: The cross-border exemptions that were raised in the budget obviously have not been changed for a long time. I think the government wanted to try to harmonize them more with the actual experience of U.S. travellers, and to lessen the difficulties getting across the border and those kinds of things. However, they did not change the 24-hour rule. If a traveller is away for 24 hours, the amount stays the same.
Would you say it is beneficial to those businesses on the Canadian side of the border that that part was not changed? Would you talk a little bit about those exemptions being increased and also the 24-hour one, please?
Ms. Brisebois: Let me say, senator, that we were indeed surprised that the exemptions were changed in this budget specifically because of this committee. This committee was tasked to look at the differences in pricing between Canada and the U.S., and obviously cross-border shopping is an important element of that study. However, in saying that, you are correct that there was no change in exemption for same-day trip. I am trying not to be jaded here in my comments, but that will be difficult. What is the difference in changing the exemption if there is no checking at the border if everyone is flagged in? To be realistic, we all understand that the main focus at the border is security and so we already know that they tend to be a bit more — I was going to use the word "liberal," but that may not be the right word to use in this instance.
Senator Neufeld: For some it may, but for others it may not.
Ms. Brisebois: Very few people are stopped at the border when they are coming back.
We held a town hall meeting in Niagara Falls for the businesses in that area and it was a real eye-opener. Number one, most of the people do regular same-day trips, and our submission shows that that has increased substantially. They are buying dairy products, poultry, cigarettes, beer and gasoline. All of those things are extremely important for local communities, including your gas station, your convenience store, your local grocery store, and most of them are franchisees. Therefore, it would be incorrect to assume that because there have been no changes to the exemption for same-day trips, it has no negative impact on those communities. Saying that, though, we cannot build walls to stop consumers from shopping where they do want to shop. It is an ongoing challenge and it will continue to be as our dollar remains strong.
Senator Neufeld: That is an interesting response. Would you agree, then, that we should lift all exemptions, that there should be absolutely no exemptions at all, just let them go? I somewhat understand your jaded view about how many people are checked. I do not know how many people you would have to increase at border crossings to check everyone. That could be pretty difficult. As far as I am aware, it has been the same for a long time. I do not live close to a border, so I do not get to run across the border to buy gasoline and whatnot. I am not familiar with how much it actually happens.
There is something to be said for not being able to stop everyone. At least the government left the 24-hour rule in place. Hopefully most people have some sense of, "I cannot bring $200 back when I am just going over for a couple of hours because I might get caught." Who knows when someone might be pulled over and caught.
Ms. Brisebois: You make very good points, senator. I do not think we are arguing the exemption as such. We are saying, however, that if we are going to point the finger at the retail community and say, "You must adjust your prices to be competitive with the U.S.," then our responsibility as an industry is to come to you and say, "Let us make sure we have a level playing field." That does not mean building walls at the border. Remember, senator, that close to 85 per cent of the population lives within an hour of the border, and so it does have real impacts to communities. This is also an enormous number of tax dollars not coming back into Canada.
If there are ways we can work with you and with government to level the playing field, then I think that will go a long way to make sure we have strong communities in this country.
Senator Buth: Can you provide us with more details on the requirements of suppliers who demand certain prices for products? Clearly, suppliers are looking for profit as are retailers. However, I would assume there would be some competition between suppliers so that a retailer essentially could reduce their costs; or there would be some ability to shop around in terms of the products. Is it true that there is competition between suppliers? Can you describe the issue a bit more? Are there products where there is no competition — where the supplier is essentially the sole source of a product?
Ms. Brisebois: In short, the answer to both questions would be yes. To provide a bit more detail, when we talk about "country pricing," we are talking about products that are sold at a much higher price to retailers in Canada. We are not using the same brush to paint over the entire supplier community. However, there is no question that there are suppliers who carry important brands — recognized brands. To their credit, they have built that value behind the brand and consumers want that brand; so they are able to dictate.
I do not think retailers in Canada argue that. Retailers in Canada, be they extensions of a U.S. company or a Canadian-based domestic company, understand the fact that scale is different in that we are 10 per cent of the U.S. market. However, we also understand that when the Canadian dollar started to rise, it was not only retailers who were importing who were benefiting, but also a great number of suppliers. Retailers in Canada did not see the prices go down, as was expected, because of the benefit that the suppliers, or in fact wholesalers and distributors, were enjoying with the strong Canadian dollar.
We would rather not name companies, but we have gone as far as to provide some samples. You can fill in the names of those well-known brands. If I am a sporting goods retailer in this country and I do not carry Reebok or Nike, chances are that I will not have too much retail traffic in my store. God bless those manufacturers because they have built that brand recognition. That explains why they also sometimes have the ability to tell a Canadian retailer or a subsidiary of a North American retailer how much they will sell a product for if the retailer wants it in their store.
The other challenge, which is the reality of a smaller market, is that certain products are not available in Canada. We have a lot of retailers who tell us they go to trade shows in the U.S. and once they admit that they are a Canadian retailer, the door opens and a Canadian price list is provided; that is a reality. As well in some cases those manufacturers have decided not to make that product available in Canada in a brick-and-mortar store. Those create a lot of challenges, but the biggest concern is vendor pricing on a fairly large number of branded products. It is difficult to explain a 35 per cent or 40 per cent difference in pricing between what is sold to a retailer in the U.S. versus in Canada.
Senator Buth: Do you have any recommendations in terms of what could be done about this?
Ms. Brisebois: Our submission speaks to that. We are very clear. We do not believe that government should be involved in the contractual agreements between a retailer and a supplier. That is a business discussion, and our retailers certainly are becoming much more assertive in the way that they negotiate.
Of greatest concern to us, and we hope it will be reflected in the committee's report, is the fact that the finger has been pointed 99 per cent of the time at the retailer. We have heard government officials, media and economists, misinformed I should say, suggest that retailers are gouging consumers. The problem with retailers is that they are in the business of trying to stay under the radar screen. They are there to serve a variety of consumers; certainly, they are not there to alienate their suppliers. If I know that all my customers want a particular tire, and it is 40 per cent more than what that tire manufacturer is selling to my competitor in the U.S., I will negotiate as much as I can; but I still need to carry that product. However, the retailer will not publicly admit that brand A is selling at that much because the last thing that retailer wants is to lose the ability to be able to stock that product. Therein lies the challenge.
We are asking this committee to at least highlight that fact because retailers are feeling a bit bruised and frustrated these days because of the assumption that they are the ones gouging consumers.
Senator Buth: Can you comment on the percentage mark-up that retailers in Canada have versus those in the U.S.?
Ms. Brisebois: Thank you for asking that question. In fact, it is specifically in the submission, on page 5 of the English version. Ms. Proud will confirm where it can be found in the French version. In the second paragraph on page 5 of the English version, it shows, according to Statistics Canada, net operating profit margins operating of 3.4 per cent versus 3.5 per cent. In fact, the argument that retailers are making a lot more in Canada than in the U.S. is misleading. We must also admit that Canadian retailers have enjoyed a much healthier economic environment than their U.S. counterparts for the past few years. That is why we ensure that we use 2008-09 figures so we can compare apples with apples. However, I can assure you that those are published and public numbers, so there is absolutely no question that it is less challenging to run a retail business in Canada than it is in the United States.
The reality is that there are differences. It may be difficult to explain that to consumers. Why should we do that? That is the question we need to ask. It is also important to make sure that the facts are made public so consumers can make a well-informed decision.
Senator Callbeck: Thank you for your comprehensive brief. You mentioned four factors in terms of why prices might be higher in Canada. I want to ask you to comment on remarks made by Mark Carney, the Governor of the Bank of Canada, when he appeared before this committee and talked about concentration. In Canada, the top four retailers have 28 per cent of the market, as compared to in the United States where the top four retailers have 12 per cent. He indicated that the high concentration in Canada is a key reason for high retail prices. Would you comment on that?
Ms. Brisebois: Would I dare contradict the Governor of the Bank of Canada? I would and so I will disagree. He is correct with regard to the concentration, but that is no different in a lot of countries that are the size of Canada. We are looking at a population of 35 million versus more than 300 million in the U.S. People forget that we have as many people living in Canada as live in the State of California. The environment is very different. In Canada, because of all those factors, large retailers only remain competitive if they get scale. In fact, I would contradict him by saying that the larger they get, the stronger they get in this country and the more competitive they become.
In fact, the media has covered retail price wars in Canada for the last three or four years and, certainly with a lot of interest and speculation, the recent entry of Target into Canada. We have seen more than 100 new chains enter this country over the last 10 years. First, it is a compliment to the strength of the economy; second, it says that they believe they can be competitive and make money in this country; and third, it ends up being a win-win for consumers because they have more competition, greater assortment and great value. In fact, we believe the market here is very competitive.
Senator Callbeck: Something else that we have heard from witnesses regarding the retail sector in Canada is that there is low productivity in the sector as compared to the United States. I think one or two of the witnesses said that it was because of the lack of competition. What are your comments on that?
Ms. Brisebois: We will provide you with a copy of the Industry Canada study on the leading retailers in Canada, which shows that they were and are more productive than their U.S. counterparts. It is an interesting study. It looks at investments and at all the productivity elements of the retail sector. It was published about two years ago. We will ensure that every member of this committee receives a copy. That study contradicts that statement.
Senator Callbeck: It would be great to get that.
On page 10 of the English version you have a sample of proposed tariffs. That is only a sample; there are many items. Are any of these manufactured in Canada in a big way?
Ms. Brisebois: Not in a big way. Most people think that retailers source outside of Canada only because of price, but in many cases it is because the required volume is not available in Canada; there is greater demand than what can be supplied. That is the greatest challenge in the retail sector.
In speaking with the Department of Finance, we have made it very clear that we are proposing to look at the manufacturing sectors that do exist in Canada. We want to and need to continue supporting them. We want to look at the tariffs that do not have a negative impact on those sectors, and there are many of those.
Senator Callbeck: You will be looking at that.
Ms. Brisebois: We are, but we are also hoping that this committee will strongly recommend the elimination of those tariffs on finished goods where it is shown that there will not be a negative impact on current domestic manufacturing.
Senator Callbeck: Will you provide us with a complete list?
Ms. Brisebois: We will be pleased to do so.
Senator Marshall: You spoke about the four reasons for price discrepancy. We talked about import duties, and I understand the kinds of recommendations we could make in that regard, and the same with supply management.
Will you speak a little more about vendor pricing? Did I understand from you that there was no recommendation we could make that would address that issue? I think you said the spotlight is now shone on the suppliers. Is there no recommendation that we could make to address that issue?
Ms. Brisebois: We make two recommendations in the report with regard to vendor pricing. I will repeat that we are talking about a percentage of the vendors; not all the vendors, but key vendors, specifically North American multi- national vendors. We are recommending that they be asked to appear before this committee. We were surprised when we looked at the list of witnesses to see that they had been successful in remaining under the radar screen, so to speak.
Based on the comments we have been receiving from our small, mid-sized and large retailers, we need the support of this committee in at least highlighting the fact that this exists in the Canadian market, that it is very much part and parcel of the differences in pricing. Retailers are feeling frustrated because they do not want to jeopardize the relationship they currently have. They do not want to be cut off, so to speak, so they feel like their hands are tied. Our second recommendation is to highlight that in the report as a key element that contributes to the difference in pricing between Canada and the U.S.
Senator Marshall: What about regulatory harmonization? When you spoke on that issue earlier I got the feeling that you were not convinced that we are on the right track. You talked about red tape reduction. Could you elaborate on the regulatory harmonization?
Ms. Brisebois: I will ask Ms. Proud to do so as she is knowledgeable in this area and has been working on this file.
Ms. Proud: We absolutely believe that the government is on the right track with regulatory harmonization. We are very pleased with the work done and announced last year. We have some skepticism about its implementation. As we mentioned, the regulatory harmonization was announced last year, and at the beginning of this year we saw the new car seat regulations come in. The government said that they were harmonized with the United States. They were for a number of testing requirements, and then there were a number of made-in-Canada testing requirements tossed into the regulations that, in essence, made them not harmonize with the United States.
That is where we have a little skepticism. They talk about the harmonization, yet any made-in-Canada requirements that are added toss that harmonization out the window, because now car seats have to conform. If it is for safety reasons, of course our retailers are completely behind that. However, when Transport Canada says that the existing scar seats are all fine, it makes us wonder why we need these additional made-in-Canada bits added to the regulations. It means that we need a whole new sort of car seat made for Canada which will, of course, increase the price and reduce the availability of variety in Canada.
We believe entirely that the government is on the right track. We will watch and comment as regulations come forward in order to ensure that they are harmonized where they can be.
Senator Marshall: Earlier during this session you talked about low productivity. Previous witnesses have raised a couple of things with regard to why there is a price discrepancy. One is the geography of the country and another is the cost of retail space. Could you comment on those? Do you think they are bona fide arguments?
Ms. Brisebois: They are. However, as we discussed in the submission, those are costs of doing business in Canada. I know that some members of the committee have retail backgrounds and will know that it is what it is. To remain competitive and to protect your margins you find other ways to be cost efficient.
Scale is an issue. We are a large country, and when you are shipping to the next market, you are not shipping 60 miles away but usually 600 miles away, and there are costs associated with that, the cost of gasoline being one.
In Canada there are more retail leases than retail ownership. In the United States there is a lot of real estate ownership. In the United States there are less municipal regulations. The regulations in Canada make it very challenging for retailers to build and open new space.
Those definitely contribute to the cost of doing business in Canada, but we need to understand that retailers are very much aware of that and they understand that that is the price you pay when doing business in a certain community.
They also know what the margins are in the United States. That is the why we do not agree, and obviously Industry Canada did not either, as evidenced in its report, with the lack of productivity in retail. For the last 10 years retailers in Canada have been investing more per capita than in the United States on logistics, technology and innovation. Those are the things they do to counteract the increased costs in one area of their business.
They are elements, but we do not believe they are the key factor in the price differences in Canada.
Senator Marshall: When the changes were made to the cross-border shopping exemptions your organization issued a press release saying that it is a particular concern to your retailers along the border because they are facing price pressures that our American counterparts are not facing. Does that refer to those four issues that you raised along with things like geography and the cost of retail space? Is there anything else?
Ms. Brisebois: Over and above the realities they have to face, and we refer to it in our submission as an unlevel playing field, the biggest concern they have now is reputational. Consumers will be consumers. If I can get it here for $8.99 and here it is $9.99, I will go with the $8.99. I do not think of the consequences. Unfortunately for a lot of our small- to mid-sized businesses in these border communities, they are often told by consumers that they are gouging them, which is not the case. You can appreciate that a small retail business cannot spend their time trying to showing evidence. Most consumers do not want to know. It is understandable that they want value. They want the most competitive price.
Certainly, we have heard some emotional testimony from our members about how difficult it has been for them to remain positive and to try to provide information to their customers so they are not perceived as gouging them, and for small- and mid-sized businesses, it has been difficult. It has been difficult for many of them to keep staff who found that it was impossible to deal with consumers who were becoming more aggressive.
I will tell you a short story about an amazing, independent retailer in the Burlington area who buys most of her products from a small Canadian baby furniture manufacturer. She says it is not uncommon for women to stop and spend an hour with that retailer to get product knowledge and say, "Okay, thanks. I will cross the border now to buy the product." That is the reality of their world, and it has been challenging.
Can this committee do anything about it? I do not think so, apart from making it very clear what the issues are and where the challenges lie. That is the reality of a lot of our small to mid-sized retailers today.
Senator Marshall: What do your members say about Internet shopping? I know a lot of people, including my own family, shop in the U.S. over the Internet. How big an impact has that had, and where do you think we are going? Consumerism is a great thing, and we heard about people doing comparison shopping using their iPhones. Can you comment on that?
Ms. Brisebois: Retail sales via the Internet in Canada represent about 1.5 per cent of total sales in Canada. In the United States, it is nearly 10 times more than that, about 8 per cent, so growing much faster in the United States. Again, it is economies of scale. We do not have as many companies in Canada with interactive websites. However, saying that, the winter of 2011, specifically the holiday season, we have seen the largest pick-up of Internet sales in Canada. It nearly tripled compared to the year before.
There is no question that it will play a very big role, and our retailers are very much aware of that. As we say, retailers are competing locally and globally. They need to be competitive and provide special value. That is the reality of retail in Canada and anywhere else in the world.
Senator Runciman: Thank you, witnesses, and thanks for the good work that you have done in preparation for your appearance here. It is very much appreciated. It does contradict some of the testimony we have heard and counters some of the recommendations that have been put to us as well. It will be helpful in our final deliberations.
When you talk about the tariff reductions, has there been any analysis done with respect to the net impact in government revenue, perhaps comparing it to how it would be offset by tax revenue from increased sales? Has anyone looked at that kind of analysis?
Ms. Proud: When we spoke with the department, they had quoted — and I could have this slightly wrong — that by 2015, the existing tariffs that are there today represent about $4 billion-worth of revenue to the federal government. I know there has not been an analysis as to what happens if they eliminate those tariffs and there is additional revenue, but if you look at what the government did around reducing the GST and their statements that is better for Canadians to have more money in their pockets to spend, I think the same logic would go to eliminating the tariffs, saying it is likely that if we can eliminate the tariffs and reduce the costs in Canada, then some of that money will flow back into the economy.
Ms. Brisebois: While there was not a Canadian study done, we can provide the committee with information on what those tariffs represent today from a government revenue perspective.
We can also provide you with examples of the results of eliminating tariffs on certain goods in the U.S. and how industries benefited, footwear and apparel retailers, for example, and also how consumers benefited. In a competitive environment, the moment you can sell a product at a lower price, you will, and there is always one out of the gate and the rest follow. All of the studies have shown that it is of great benefit to local industry as well as to consumers.
Senator Runciman: You talked about a level playing field and also about the regulatory environment. I am surprised at the profit margins in some respects when you look at the property tax, property cost, utility costs.
When you talk about regulatory reform, how much of an impact is it with respect to federal versus provincial regulatory challenges? What is the distinction there, and how much of a challenge is that?
Ms. Brisebois: The greatest challenge for the retail industry today is the lack of harmonization between provincial jurisdictions. We did not add it into our submission, but we could take waste diversion, for example. Most of you would know curb-side blue boxes. Those are paid by retailers and suppliers. At the Retail Council, we are now managing 42 different legislated waste diversion programs, some of them on electronics, some on packaging, some on used tires, from different jurisdictions in the country, and none of them look the same.
We have retailers saying to us that, in their sustainability departments in their companies, they have more people doing compliance than they have people developing new programs, and the greatest challenge for us is to try to get the different provinces to work together, to try to harmonize regulations, so that companies can grow across the country and not spend more money on compliance but spend more money on innovation.
Senator Runciman: As the chair indicated, we will not be making recommendations with respect to supply management, but the expression of concern here is interesting. I do live in a border community. I am wondering about the spinoff impact. Have you taken a look at that? If someone is going across because they will save $20 on groceries or whatever it might be, do they tend to spend money in other areas as well? I am wondering if there was a spinoff negative impact with respect to that from a Canadian retailer's perspective.
Ms. Brisebois: There is a huge negative spinoff or impact. There is no question about that, based on our research and the research that large Canadian retailers have done. Let me be specific about the research. Some of it is literally counting the licence plates in parking lots in major shopping centres and also watching what people are purchasing and putting in their trunk, and also where they are going afterwards.
Our retailers are telling us that the border communities in the U.S. have never been happier, and there is increased marketing. Our consumers are getting flyers from most of the retailers in the U.S. that border Canada. While someone is going for a same-day trip, and that is not uncommon for close border communities, they will be tempted to go to the hardware store or the apparel store or any other store. There is no question. We think, based on the research we have seen to date, that there is at least 30 per cent slippage. That means that if they are going for food, they will be spending $70 on food and the extra $30 on other products. It has a huge impact on the retail community. It has a huge impact on other trades in the community. Retailers are huge investors through retrofitting stores, building stores, and advertising and marketing. Trades, radio stations, and newspapers in the communities are impacted. The impact is quite broad.
Senator Runciman: Being an elected representative for quite a period of time, I can tell you that my federal counterpart and I have not heard that from retailers in the area that we have both represented, in the past for me and currently for him.
You talked about removing exemptions from supply-managed products. The reality is that that would essentially close the border.
Ms. Brisebois: It would make consumers very unhappy. We appreciate that that is the electorate, and we live with that reality. That is the reason why we have said many times during our remarks that we would greatly appreciate if the committee at least highlighted some of the discrepancies, even though they may not be dealt with by government. The misinformation —
Senator Runciman: I think a bigger issue is the efficiency of the border.
Ms. Brisebois: I can assure you, senator, that when you have an industry that employs 2 million people who, as you know, work hard and invest in their community, it is extremely discouraging to read on a daily basis that you are gouging the consumer. This is industry in Canada. It is more disturbing if government officials are suggesting that that happens, and so we are hoping today that we can provide you with the information that will at least shed some light on price differences in the country.
Senator Runciman: Much appreciated.
Senator Neufeld: In response to Senator Runciman's question about provinces and different regulations and rules, I appreciate that. Coming from British Columbia, I know that we started a process with Alberta and now Saskatchewan.
Ms. Brisebois: Greatly appreciated.
Senator Neufeld: It is slow, but it is coming. I am one for doing that, but I just want to clarify one thing. Those same people in retail across this country, facing that in Canada, would face that same thing in the U.S. You would have to agree with me because not all the states in the U.S. are exactly the same. In fact, they are probably more fractured, in many cases, than we are in Canada. Would you agree with me with? It is a give and take.
Ms. Brisebois: The question, then, is this: Should we be as bad as them or better than them? My job is to ensure that the retail community can invest and grow because it is important for the sector and important for communities.
If there are things that can be improved upon to make our industry and other sectors more competitive, we focus on them. However, I totally agree with you that the issues of state regulatory challenges and provincial regulatory challenges are similar in different areas.
Senator Neufeld: That is all I am trying to say.
Ms. Brisebois: Absolutely.
Senator Neufeld: I am not saying that we should make it more difficult. I come from a province that is trying to make it easier, and I was in government when that took place. In the U.S., they have problems too. Not that we should be the same as them, but they do have some problems too.
Ms. Brisebois: It is important to note the environmental waste diversion example that I provided. This is provincial legislation, so that is one of the examples. However, there is no question that there are challenges in the U.S. and Canada in that regard.
Senator Ringuette: Thank you, Ms. Brisebois. From my perspective, that was one of the most illuminating presentations that we have had. Coming from a border community, I have a lot of concern in regard to the announcements that were made two weeks ago in the budget.
One is the increase, by 400 per cent, of exemptions for 24-hour overnight stays in the U.S, and the 100 per cent increase in exemptions for 48 hours. Minister Flaherty even went on to say that this would cost the government $17 million a year in lost revenue. That means that in the Department of Finance estimates, on a yearly basis, Canadian consumers will buy over $2 billion worth of goods in the U.S, not at Canadian retailers, just due to this new scheme of increased exemptions.
I am looking at the fact that the retailers in Canada are the largest employers. How devastating will that be if we include the fact that they are also reducing the number of border guards across the country by 1,600?
Already, we all acknowledge that cross-border shopping has gone up exponentially to the detriment of Canadian communities and retailers, and now we have this. They estimate that the additional policy will cost over $2 billion per year, notwithstanding what it will do to the Canadian tourism industry. This is an incentive for Canadians to go and sleep over in the U.S., not in Canada.
I know it is a recent measure, but has the retail council looked into how this will affect the council and its members?
Ms. Brisebois: We have, senator. Thank you for the question.
While the industry was surprised by the announcement, I think that the industry, generally, is somewhat resigned to the fact that, with a very strong Canadian dollar, consumers will be attracted to the United States. I think retailers are fairly realistic in understanding that, if this is a popular public policy, something that is requested by consumers, that government will respond. In response to that, that is the reason why we are here today. We believe that there are things that can be done by government to start levelling the playing field. We talked about import duties, regulations, vendor pricing, and the list goes on. Those are important issues in addressing the challenges that our retailers are facing. The reality is that consumers will shop wherever they want, whenever they want, and I am not sure if changing those exemptions has changed their behaviour completely.
Senator Ringuette: It is certainly an incentive to do so for those who were already inclined.
You say, Ms. Brisebois, that it is a popular policy. However, it was a very popular policy for the government to reduce the credit card fees for merchants, and they have done nothing about that. One of the major costs in regard to differences in pricing is gasoline and diesel — the transportation of these goods — in comparison to the U.S. They have not done anything about that to help the retailers in Canada.
Is the government willing to implement some rules in regard to country pricing for all of these items for which the manufacturer has different prices for Canadians and Americans? I look at page 7, where you have a sample of all of these products. In regard to the difference in pricing between Canada and the U.S., is the federal government ready to regulate in some form so that those manufacturers will be selling to Canadian retailers at the same price as to their counterparts in the U.S.?
Ms. Brisebois: Senator, the word "regulate" always resonates with me on credit card fees, but when it deals with the relationship between two businesses I truly believe that our members would not support regulations. What is important here, and the reason for putting it on page 7, is to bring up a factor that has not been addressed appropriately before this committee. This has a huge impact. We are certainly not asking for government to regulate prices, but we want to make sure that this committee is aware that there are price differences between Canada and the U.S. that are not always determined at the retail level. That was the point of page 7.
Senator Ringuette: I understand that. I have highlighted the fact of cars produced in Canada and sold at a higher price in Canada than in the U.S. We have attempted to get those car manufacturers to come to our committee hearings and so far we have been denied the opportunity to question them. However, I certainly sympathize with the Canadian retailers. For the life of me, I cannot understand why Canadians are sometimes too proud to ask their government to do what is right with regard to their side of the story.
Ms. Brisebois: It is also important, senator, to understand, for all of those who have been in the retail sector or have had experience with the retail sector, the primary business is to attract and keep customers and not to argue with them. That is why retailers have generally been fairly quiet about this issue; they do not want to add fuel to the fire. They do not want to disrupt what are sometimes delicate relationships with their suppliers. They want to ensure that they stay in business so they will continue to do that. Today they are just asking for this committee to look at ways to try to create a level playing field. We believe there are some opportunities to do that.
Senator Gerstein: I have not had the opportunity to read your submission in detail today, but I would like to focus on the front page just for a moment. You have entitled it "Study on the Potential Reasons for Price Discrepancies between Canada and the United States." In fact, the request from the minister, as outlined on our agenda here, also includes "given the value of the Canadian dollar and the effect of cross-border shopping on the Canadian economy," which is not included in your title.
I suspect the genesis of this study is that in the last 15 to 20 years the Canadian dollar has appreciated by some 50 per cent, if not more. It is now hovering at par, give or take, for what we might term an extended period of time. I do not know what may happen in the future, but it has levelled off and is relatively at par.
This is an outstanding submission. The reality, I respectfully submit, is that the majority of it could have been prepared 15 years ago. On the issues of tariffs and country pricing nothing has changed. It was this way 20 years ago; it was this way 50 years ago.
You said that there may be a perception, which I do not agree with, that retailers are "gouging" — your word, not mine. Do you feel, in focusing singly on the issue of the appreciation of the Canadian dollar, Canadian retailers are passing on the benefits of this appreciation to the Canadian consumer?
Ms. Brisebois: My answer, without hesitation, is yes.
Senator Gerstein: With or without hesitation?
Ms. Brisebois: Without hesitation. The retailers in this country are obviously not in the business of discouraging their customers from shopping with them. The reality, though, and I mentioned this in my opening remarks, is the majority of products purchased by retailers are purchased in Canada, through distributors, wholesalers and headquarters of multinational companies. If I am buying soap, I am buying it through a head office in Toronto of a multinational. It does not matter if the dollar is at 50 cents or at a dollar. I am buying it in Canadian dollars. You are absolutely right; there is no difference for retailers between 15 years ago and today. That is one of the reasons for our being here.
I believe there is a misconception that because the dollar was so strong all the retailers in this country, or everywhere around the world, are buying with a strong dollar. In fact, that is not the case. Eighty per cent of the products are sourced in Canada. If the supplier, the wholesaler, the distributor, is not changing his or her price, those prices do not change.
I have another comment to make and I realize time is of the essence.
Senator Gerstein: Are you now pointing your finger, as a result of that, at the wholesalers and distributors as distinct from the retailers?
Ms. Brisebois: No, I am saying that if the savings are not passed down through the supply chain then the savings are not passed down to the consumer.
Senator Gerstein: You are pointing a finger.
Ms. Brisebois: We could have that conversation for a long time. We do that all the time.
The Chair: Senator Gerstein is getting close to cross-examining.
Ms. Brisebois: It is a fascinating issue. I think we need to remember that there are hundreds of thousands of retailers in this country. They have to compete. They have no choice. This is not a hobby to watch people cross the bridges and the borders. To assume that they are just letting that happen and overprice their products would be a bit naive on all our parts. There are great challenges, but the costs in the supply chain are definitely a huge factor and I do not think those should be ignored.
Senator Gerstein: Are you saying that in your view retail prices have not come down in the last 15 to 20 years as a sole reflection on the change in the value of our dollar?
Ms. Brisebois: No, I would say that they have. In fact, there is evidence to show that there has been price deflation in some retail categories. Interestingly enough though, senator, some of the areas where retailers are most competitive is where they control their private brand or where they source their own products. That would bring you to the conclusion that I have been supporting.
Senator Nancy Ruth: I want to ask about the multinational vendor pricing issue again, apart from poultry and dairy. You said the price could be up to 50 per cent more, and then you gave reasons such as Canada has a smaller population and there are greater distances, the price of real estate and so on and so forth. Then you made a comment, and I have inferred from this comment, partly because of your tone of voice, you suggested that it is the big stores that are accepting this 50 per cent more when they import the goods. Can you explain that a bit more clearly?
Ms. Brisebois: Yes, senator. In fact, they are not importing the goods, so all retailers who, for example, want to buy shampoo or conditioner from a well-known brand, in Canada they are buying it from the Canadian distributor so it could be the multinational brand with head office in Canada. That shampoo, as shown on page 7, is sold to the Canadian retailer at $12.46. The equivalent shampoo is sold to an American retailer at $9.33, which begs the question, Senator Gerstein, considering that the dollar is so strong that does not make any sense. That price difference exists. We are not saying all suppliers, but there is enough evidence to support that this is fairly comment with large multinational brands. For example, the huge price difference in tires is pretty scary. We hear people talk about that all the time. Most consumers do not realize that a large retailer in Canada is buying that big brand from the distributor in Canada. They cannot get it from the U.S. If they want to put that product it in their store so that you can come in and buy it, they must pay that price to have the privilege of having that brand in their store. That is the reality. They cannot import it from another country because that is parallel importing, and you cannot do that in Canada. They have to buy it from the Canadian distributor at the price set by the Canadian distributor. That is the reality for multinational retailers in Canada and for independent retailers in Canada.
Senator Nancy Ruth: That price is set by the American manufacturer.
Ms. Brisebois: It is set by the manufacturer. They do that in Canada, in Australia and in other parts of world. The challenge we have, without painting all suppliers with the same brush, is that we also live so close to a mammoth market; so it is normal for us to want to compare. Sometimes you cannot compare because of the size of the market. It is challenging. However, in this case, it is a huge issue.
Ms. Proud: It is important to clarify that in our table we have generalized and we have talked about tires, but the pricing that we have put in our table is for the exact same product. It is not that we have looked at tires on average. It is just because of the competitive nature of the information we get from our members. These are the exact same products.
Ms. Brisebois: We are comparing ABC tire in Canada and ABC tire in the U.S. We are comparing apples and apples; we have just taken the brand names out. We are controversial most of the time, but we thought we would control ourselves.
Senator Peterson: We have heard a number of presentations on today's topic. Some are quantifiable, while others are quite subjective. You have talked about things that the government can do to level the playing field. One area would be duty remission, but the Department of Finance says that is not a major factor at all. What is your comment on that?
Ms. Brisebois: Thank you, senator, for the question. We appreciate that the Finance Department stated that it is not an important factor. We obviously disagree, as we have noted in my opening remarks and in the submission.
It may be only 10 per cent of all the products coming into Canada, but in some cases it represents 70 per cent of the products imported by retailers; therefore, using that 10 per cent is misleading. It is 10 per cent of what? If 10 per cent is 80 per cent of the market in retail, then it is substantive. That is what we are saying. Even though compared to the entire universe, it is 10 per cent, but it is misleading to just throw that number out. You then have to ask that with the 10 per cent, which sectors are most affected? I am convinced that the Finance Department would not disagree with that. It is the retail sector. Most of the duties that are left, especially those that are fairly high, are on finished goods; and retailers import finished goods.
The Chair: Regretfully, our time has run out. This has been most helpful. We very much appreciate the material and the information that you have provided today. There may be some follow-up questions, in which event, through Ms. Proud, you will hear from us, Ms. Brisebois.
Ms. Brisebois: We will provide you with the documents we noted that we have.
The Chair: If you could provide those to the clerk, she will ensure they get around to everyone in both official languages.
On behalf of the committee, I thank the Retail Council of Canada, President and CEO, Diane Brisebois, and Vice President of Federal Government Relations, Karen Proud.
[Translation]
Honourable senators, we now continue our special study on the potential reasons for price discrepancies in respect of certain goods between Canada and the United States.
[English]
We are pleased to welcome Lisa Zajko, Senior Manager of Indirect Tax at Deloitte & Touche LLP; and Eric Levert, International Senior Tax Manager at Reebok-CCM Hockey.
Ms. Zajko, I understand you have opening comments, after which we will move to questions.
Mr. Levert, I will call on you after Ms. Zajko.
Lisa Zajko, Senior Manager, Indirect Tax, Deloitte & Touche LLP: Thank you for the opportunity to present before you in support of the study that has been commissioned by the Honourable Finance Minister regarding the persistent price discrepancies between Canadian and U.S. prices for certain consumer goods.
By way of introduction, the Customs and Global Trade team at Deloitte & Touche is actively engaged in advising many clients in customs and global trade issues with a global network of more than 450 professionals in the CGT area and robust practices in both Canada and the U.S. Our team has been actively involved for many years in preparing submissions to the Department of Finance respecting tariff relief on behalf of a wide range of clients. We have significant expertise and leadership in the consumer business/retail industry, and our intention today is to focus on the impact of tariffs specifically.
As per previous submissions that Deloitte has made to the finance minister and to the Department of Finance, we believe that tariffs are at least partly attributable to the persistent discrepancies and that Canadian consumers would benefit from the reduction of tariff rates on certain goods without detriment to Canadian industry. This is largely due to the fact that the tariff rates in Canada are antiquated, and the Canadian manufacturing landscape has changed significantly since the last major overhaul of the tariff in 1998 with the Tariff Simplification initiative. While there have been sweeping revisions to the tariff rates over the past couple of years, these have been focused entirely on the manufacturing industry, i.e., machinery and equipment, raw materials, et cetera. We are not aware of any comprehensive review recently undertaken to consider the benefits to Canadians of reductions in the tariff rate on consumer or retail goods.
As additional background, Deloitte has made some submissions to the Department of Finance in order to request tariff removal or reduction on particular consumer goods, namely those that presently carry relatively high duty rates. Our submissions have focused specifically on recreational products as well as other family-friendly consumer products used by hard-working families across Canada. It is our view that such duty rates are unwarranted, particularly based on the current Canadian manufacturing landscape and the fact that the general tariff rate for the same items under the U.S. tariff are significantly less than those that prevail in Canada. In fact, in some cases the U.S. tariffs have been completely removed.
It is our view that eliminating duties payable on certain consumer goods imported into Canada, where such goods are not produced domestically, would benefit the economy and the competitiveness of our retailers and, most important, the requested tariff relief would be in the public interest as the lower costs should result in lower domestic prices, thus benefiting the Canadian consumer. Eliminating import duties on goods that must be sourced from outside of Canada is an important and necessary stimulus that would raise consumer purchasing power and confidence. In these recessionary times, the tariff relief that is being requested provides a much-needed boost to the Canadian economy through increased consumer spending locally.
The proposed tariff removal also mirrors actions recently taken by some of our largest trading partners, including the U.S., where it has been acknowledged that the elimination of unnecessary and outdated tariffs would have a profound and immediate impact on the recovery of the economy and would provide immediate and direct relief to hard-working families.
One of the most significant opportunities for price relief falls under the purview of the Minister of Finance. On most items imported into Canada, retailers and consumers pay significant amounts by way of import-related costs, duties and taxes, particularly as the compliance continuum is becoming increasingly complex. We have identified certain mainstream family-friendly consumer products that are subject to high import duties in Canada for no reason other than they have always been that way, irrespective of the changing economic climate and the evolving Canadian manufacturing landscape.
Since the introduction of income tax and sales taxes, the revenue generation capacity of these tariffs has become marginal, recently comprising less than 1 per cent of total government revenues. In 2008, Canadians imported $443 billion-worth of goods into Canada, with the government collecting approximately $4 billion in import duties. In 2009, $373 billion-worth of goods was imported and $3.6 billion in duties was paid.
While revenue generation has historically been one of the main purposes of the imposition of tariffs, this is currently not a main priority of the Canadian government in the area of customs and trade. Tariffs are not a significant source of revenue and, as such, the reduction or removal of tariffs on certain goods that benefit Canadian consumers without detriment to domestic industry should be viewed as favourable by the federal government.
To demonstrate the reducing importance of tariffs, the CBSA's 2011-12 Report on Plans and Priorities describes the main priorities of the agency as being protection of national security and facilitating legitimate trade and travel. The raison d'être of the CBSA is indicated as being made up of eight different factors, of which only one relates to the collection of duties and taxes. Forecasted spending attributable to revenue and trade management is only 6 to 8 per cent of program spending.
Further, Canada has engaged in a number of free trade agreements and instituted unilateral tariff reductions. Most recently, tariffs were eliminated on a broad range of machinery and equipment in 2009 in recognition of the productivity and competitiveness benefits to domestic manufacturers and to the overall economy. The federal budget of March 4, 2010 implemented a second phase of tariff relief on machinery, equipment and raw materials.
Throughout the process the federal government has communicated a willingness to consider additional requests for tariff relief. It has now become important to turn our focus on assisting the retail industry. It is important for retailers to continue to find ways to meet the price and quality expectations of Canadian consumers. The parity of the Canadian dollar has created a further and more urgent demand for corresponding parity in prices between the U.S. and Canada.
We have put forward in a chart some of the specific items that we believe would benefit from immediate tariff relief without detriment to the domestic industry, and we will hear from Eric Levert of Reebok on some of the goods that are listed in this chart.
It is our view that the committee should consider making a recommendation for tariff relief on these goods that we have put forward in addition to recommending an in-depth review on additional consumer goods that should be considered for tariff removal or reduction. There is historical precedent for reducing tariffs on retail goods to combat cross-border shopping.
To this point, Senator Gerstein commented earlier about whether this could have been the case 20 years ago. In fact, it was the case 20 years ago. In the early 1990s there was a lot of cross-border shopping and the government responded by putting into place the Canadian Retailers Remission Order of 1993, eliminating tariffs, at least temporarily, on certain consumer goods and then removing those tariffs permanently with Tariff Simplification in 1998. At that time, the Canadian manufacturing landscape was of a certain structure where perhaps certain goods could not be included in that relief. Since 1998, or 1993 when the remission was first put into place, that landscape has changed, so additional goods should warrant further consideration for such relief.
In view of the serious economic downturn that our country has been facing since 2009, it is clear that the Canadian government is committed to minimizing the impact of any future economic downturn on Canadians and ensuring a timely recovery by providing the necessary stimulus to boost the economy.
While the elimination of customs duties on necessary consumer goods would certainly fall in line with government priorities that are linked to economic recovery, it is also noteworthy that the proposed tariff relief is in keeping with other priorities of the federal and provincial government departments and social agencies such as Health Canada, the Public Health Agency of Canada, the Ministry of Quebec, for example, with respect to promotion of infant breastfeeding and the Child Fitness Tax Credit.
In an era of increased market volatility and economic uncertainty, it is imperative that, through government policy and action, we continue to assist Canadians with their ability to purchase everyday goods, and particularly those items that are family-friendly consumer items consumed by hard-working families. This measure would also contribute to reducing the disparity between Canadian and U.S. prices.
Thank you for your time.
The Chair: Thank you very much, Ms. Zajko. Your ice skates inclusion is interesting at this time of year in Canada. You estimate that the federal government will take in $9 million worth of revenue by keeping a tariff of 18 per cent on ice skates. Am I reading that correctly?
Ms. Zajko: Yes.
The Chair: Was there an ice skate manufacturing industry in the Kitchener-Waterloo area in the early 1990s that we were trying to protect, namely, Bauer?
Eric Levert, International Senior Tax Manager, Reebok-CCM Hockey: I do not know about Kitchener, but CCM was manufacturing hockey sticks in Saint-Jean, Quebec. Also, in New Brunswick we had the helmet manufacturing facility until lately. CCM has a large network manufacturing hockey apparel and hockey equipment through Ontario, Quebec and New Brunswick.
The Chair: The 18 per cent tariff on skates was interesting one.
Mr. Levert: Thank you for this opportunity. I am an international tax manager at Reebok-CCM Hockey, a division of Adidas Group. Reebok-CCM does about $300 million in sales throughout the world. CCM has 100 years of presence in hockey in Canada. I am sure that some of you grew up with hockey equipment with the CCM brand on it.
The Reebok-CCM headquarters for the division is in Montreal and we have a significant R & D department. Also, the distribution centre for all of North America is located in Montreal. We have two manufacturing facilities, one in St- Hyacinthe, Quebec, which manufactures a small quantity of NHL jerseys as well as jerseys for smaller leagues such as the Canadian Hockey League and the American Hockey League. In Saint-Jean-sur-Richelieu, Quebec, we still manufacture some hockey sticks and skates on a limited basis. They are mainly oriented toward professional hockey players in the NHL, the AHL, the CHL and in junior leagues.
We sell our products in 30 countries, although mainly in Canada, which comprises about 40 per cent of the worldwide market. We also sell in Norway, Finland, Sweden and the U.S.
This is the main market, including Russia, which is an emerging market. Ninety per cent now is manufactured and out-sourced mainly to Asia. Reebok-CCM still maintains some capacity with Quebec manufacturers for sticks and some goalie equipment as well, but it is of very limited quantity.
We spoke about the hockey market. The hockey market is about $800 million U.S. worldwide. It has been flat for the last 10 years. The market is not growing, maybe at 1 per cent a year at the maximum. This is not what we want. We want to grow the market. We want to make sure the company will survive and that Canadians go back to playing hockey and buy our equipment, so we think that, to be competitive in that market, we need to bring innovative products at a competitive price and ensure that the product will be affordable for Canadian consumers.
I want to bring you to the slide that talks about the impact of tariff rates on the retail price. Let us assume $100 FOB price, and not considering foreign exchange or the freight. I just want to demonstrate that the tariff on the products will at the end be paid by the consumer and not only the tariff by itself. When you look at the wholesaler and then the retailer, each has a markup on it. At the end, we are demonstrating that a $15 duty on a product will end up at $36 for the consumers at the end.
Just to show the last page is similar, I just added Finland's rates on different products. We are showing here that Canada, which is supposedly known as the hockey country, is paying 18 per cent on ice skates, 15.5 on all protective equipment, and 8.5 per cent on helmets, while the U.S. is paying zero. When you look at the Scandinavian countries, they are not paying anything or a very small rate. I know that Europe is not part of what this committee is looking at, but we are just showing to you that what we are asking is a reduction or removal of the tariff rates on these products that is not different from what we find in other countries as well.
The Chair: Thank you for your comments. Normally, we think of tariffs on imported goods as being put there by the government to protect Canadian manufacturers. You are, in part, a Canadian manufacturer, and you are still recommending that these tariffs, by virtue of the worldwide market of today, could be removed.
Mr. Levert: To our knowledge, if you look at Bauer maintaining at 40 per cent of the market share, and Easton has about 15 per cent, with Reebok-CCM it is about 85 per cent, and none of them are manufacturing on a large scale in Canada any more.
Senator Ringuette: Mr. Chair, you started where I wanted to go first.
On one of your slides, you indicate that 90 per cent of the Reebok-CCM Hockey production is outsourced to Asia.
Mr. Levert: Correct.
Senator Ringuette: This goes to the production costs, but at the end of the story it is still the consumer who pays. These tariffs were all fine and dandy when you were producing in Canada, but now that you are producing 90 per cent of your products in Asia, you do not want tariffs any more.
Mr. Levert: Correct. It is not only us but the industry in general. If you look at Bauer or Easton or any of the smaller competitors, they are not manufacturing in Canada any more.
Senator Ringuette: This outsourcing is certainly one of the issues in regard to consumer pricing.
You give us the supply chain scenario in Canada and in the U.S., and you indicate the $15 in regard to duty. However, when I look at the supply chain, the wholesaler, which is probably licensed by your company because you are giving a sample of your company, takes a 40 per cent cut, which represents $77 in Canada but only $67 in the U.S. What would be the cause of that? Why would the wholesaler on a $100 product have an additional fee? First of all, your wholesaler price here that you have identified for your products is almost as high as the manufacturing cost.
Mr. Levert: That is correct. First, the only differences between Canada and the U.S. in these scenarios are the duties, the tariff rate, the $15.
Senator Ringuette: That is what you wanted to sell to this committee. That is not the question that I am asking you.
You licensed the wholesaler to distribute your product. Their cut in the pricing of your product for the consumers is almost as high as the manufacturing costs. Their only scenario in there is to import your product from Asia, 90 per cent of it, and then distribute it to their network. That is their only mission in life as a wholesaler.
Mr. Levert: We are the wholesaler. We design and develop the product, we source the products and we market the products. What we want is the wholesaler to have a target of profitability of around 40 per cent in order to cover all these other expenses that you are incurring.
When I sell to the Canadian market and to the U.S. market, I will look at my costs. This is a theoretical scenario. When I set the target, it is a 40 per cent margin. If I set that margin or target there and my cost is lower when I sell to the U.S. compared to Canada, my profit, if you look at the 77 per cent, the 77 will equal that 40 per cent margin, and the 67 will equal a 40 per cent margin. In order to make the same target margin, I need to increase my price. If not, as the wholesaler, I will need to take that margin, and my margin will not be 40 per cent but 30 per cent at the end.
Senator Ringuette: Mr. Levert, you are saying that, in your specific case, you are acting in a dual role here. You are a manufacturer of the product, and you also wholesale your product.
Mr. Levert: Correct. I wholesale to retailers.
Senator Ringuette: You are a direct wholesaler.
Mr. Levert: Yes.
Senator Ringuette: I have some questions, but I have to digest what you have just said.
Ms. Zajko, in your comments, you said that it is your view to eliminate duties payable on certain consumer goods imported into Canada where such goods are not produced domestically.
You are saying that if the goods or some of the goods are being produced in Canada, the tariffs should be maintained in order to keep that production and that economic stimulus in the country. Am I right?
Ms. Zajko: I think we need to look at the context of the production if there is some. As in this case, if there is limited production but it is only geared to one particular niche area such as professional hockey players, then retaining a tariff on all ice skates, for example, does not really makes sense in that situation.
I think if there is no production then the tariff should be completely removed. If there is some production then maybe we could segregate the tariff out such that we have relief on ice skates, for example, but not on those that are produced here, such as high-end; there are ways to do it.
Senator Ringuette: You refer to hockey sticks that are made in Canada.
Ms. Zajko: Yes. There are ways to define what that removal should be and if there is someone to protect, then that is not necessarily what we are advocating. It is where there is no one we are protecting or the quantities are not in sufficient capacity to meet Canadian demands for the product.
Mr. Levert: Making references to hockey sticks, they are now 2.5 per cent compared to 18 per cent on skates. You manufacture more hockey sticks in Canada than you do skates.
Senator Ringuette: Mr. Levert, I want to come back to the scenario on your slide that I was referring to earlier. When you say landed costs of, for example, $100, that is for the items that you outsource to Asia?
Mr. Levert: Correct.
Senator Ringuette: If we take an item that you make in Canada, a hockey stick, what would be the scenario in regard to your pricing the wholesale margin and the retail margin in regard to the scenario you have put in front of us comparing Canada to the U.S.? Would you still be looking at a 40 per cent margin? Then you would not have the tariff. That particular item should be at the same price level in Canada as in the U.S.
Mr. Levert: To give you an example, making a hockey skate in our St. Jean facility compared to Asia, right now the difference in costs is at least $80 per pair of skates.
Senator Ringuette: What are you comparing?
Mr. Levert: For the same skate manufactured in Asia compared to our Saint-Jean facility, we are talking about at least $80 in cost difference.
Then you will still expect at least around a 40 per cent. If you look at any wholesaler, any comparable in sporting goods, you will be between 35 and 45. You will be in that range in comparables, in Canada, in U.S., around the world.
Senator Ringuette: My question was in regard to a hockey stick made in Canada and then sold in Canada and the U.S. Do you sell at the same price in Canada as you would sell it in the U.S.? I will check on the Internet.
Mr. Levert: You can check. I do not control the price of the retailers. The same pricing group is in Montreal, pricing for both Canada and the U.S.
We have differences. I am not saying we do not have differences between Canada and the U.S. Foreign exchange is one difference. Market conditions are another; the economy in the U.S. in the last three or four years has been a little more difficult than in Canada.
Senator Ringuette: It has nothing to do with tariffs. In reality, it comes back to what the retail council was telling us earlier. One of the major issues in regard to price differences between Canada and the U.S. is a marketing issue and it is called country pricing.
Mr. Levert: It is not only that. In one of our slides, we are saying the difference in price is due to foreign exchange, tariff rates and the market conditions. The tariff rate is a significant part.
Senator Ringuette: I was looking at an item that has no tariffs because it is made in Canada and yet, just like the cars, it is a country-specific marketing issue.
Mr. Levert: I do not agree with you. You need to look at what we manufacture here in Quebec. The manufacturing that we do here is high-end sticks for pro players. It is very different from what you find at retail. It is a custom stick, where each player has his own blade, his own shaft. Each player is different.
The Chair: You have quite a discussion going here. It is interesting, but we are running out of time.
Senator Runciman: Mr. Levert, how big a problem is this for the industry? Have you quantified it? How much business are you losing because of this?
Mr. Levert: The market has been flat in the last 10 years, so it is difficult to say. What we hear when we are on the ground is what you just heard before. When we go to our customer in Canada, we hear complaints about our Canadian consumer going to the U.S. and buying there, all the time. In recent years we find online retailers. People are buying cheaper, apparently, in the U.S. It is what we hear. It is cheaper to buy on the U.S. side, either retailer online or retailer on either of the other side of the border.
Senator Runciman: You have not done anything to assess the real impact in terms of lost business.
Mr. Levert: No. We have recently started an investigation to understand if a U.S. customer that is selling online is selling on the Canadian market. We have just started that investigation right now.
Senator Runciman: Ms. Zajko, I asked this question of the previous witnesses and this may be a more appropriate question for you, representing Deloitte & Touche, about an analysis on the net impact of removing these tariffs and if there is any way to do it in terms of contrasting it with increased retail sales to offset any revenue losses. Has there been a look at that type of impact study?
Ms. Zajko: I will say no, not in any detail. The most is just looking at the difference in the rates and what the lost revenue would be per se, but that is about it.
Senator Runciman: That is unfortunate. That would be helpful in terms of making a case.
I want to touch on something I do not think is in your submission and that is customs valuation jacking up values.
When the Canada Border Services Agency requires items with respect to arriving at a price for assessing duty, are there distinctions in terms of the border here that are creating concerns for you and your organization or your company?
Ms. Zajko: There are a couple of valuation-related concerns, particularly vis-à-vis Canada and the U.S. One is the for-sale principle, which the U.S. has adopted, which allows where there are multi-tiered sales into the country of import basing the customs value on one of the earlier sales and therefore a lower base upon which to assess duties and taxes.
Canada has implemented legislation that would thwart such a valuation, basically requiring that the value be based on a sale to a purchaser in Canada. There has been jurisprudence over the last few years, which customs has lost in Canada, so it has created a type of planning around that. However, we understand that CBSA is looking at amending the regulations. Therefore the planning the importers can do into Canada to try to get on par with what the value is in the U.S. is risky and not a lot of importers want to do it — for good reason — because change is coming.
Senator Runciman: Is that part of the conversation between the U.S. and Canada now in terms of regulatory and border streamlining?
Ms. Zajko: My understanding is that it would not focus on things like this. This is something that they want to base value on a sale to a purchaser in Canada. That is not up for negotiation. It is more for things like harmonizing the advanced data that needs to be provided.
Senator Runciman: Can you give us an example or two of what that impact might be on particular products or materials, in terms of contrasting it with what the price would be in the United States?
Ms. Zajko: Are you asking for a numerical example?
Senator Runciman: Or a percentage. You have heard concerns about this, so they must be giving you some detail with respect to impacts.
Ms. Zajko: In terms of numbers, I am not sure. One of the leading cases in Canada, for example, was Ferragamo. They actually won on this issue and they were able to base the price on the sale from an Italian entity to a U.S. entity, who then sold to their Canadian entity. Therefore, it was not based on the sale to the Canadian entity but based on a U.S. entity buying from Italy. However, I am not sure what the difference in the mark-up or pricing was.
Senator Runciman: Could you send us some detail on this? It is something we might want to incorporate into our final report regarding what the impacts could be.
Ms. Zajko: Another discrepancy or difference between the way Canada and the U.S. deal with valuation specifically is related to transfer pricing adjustments and related party transactions. In Canada, there is a policy that if I am selling goods into Canada to a related party at a certain price, at year end when I do my transfer pricing analysis for my margins and I do an adjustment and that adjustment is a downward adjustment to the intercompany transfer price, Canada says you cannot make that adjustment to the import value. Therefore, you leave with the Canadian government all this extra duty, per se, that you have paid to the Canadian government; you do not get a refund. However, if your price adjustment was upwards, you have to remit additional duties.
On the U.S. side, similar wording in a provision that Canada relies on is in their legislation, but they have allowed and put into place a policy that would allow transfer pricing adjustments, both upwards and downward to be reported.
Senator Neufeld: Mr. Levert, if the tariff rate were removed from helmets, ice and roller skates, and arm, knee pad and goalie pads, would that reduce the price; would you reduce the price that you charge retailers by that same amount? Can you sit here and tell us that is exactly what you would reduce it to — we had questions about this at the end of the day — so that the retailer can sell it cheaper to the consumer? Can you tell us that your company — because that is the business you are in — would reduce it by that amount?
Mr. Levert: I think that at the end it will end up with the customer who will have a better, more affordable price. We believe that right now we are seeing players going away from hockey because it is expensive.
Senator Neufeld: Your cost to the retailer will be reduced by 18 per cent?
Mr. Levert: It depends; correct.
Senator Neufeld: Okay. I have that on record. That is great.
Senator Peterson: In regard to duties and tariff, I think you have both stated that removal would not be detrimental to Canadian production for manufacturers. Does the Government of Canada agree with that statement?
Ms. Zajko: It would not be detrimental if it was selective removal. We put forward certain goods that we think are not detrimental because of the level of manufacturing and recommended a further study and consultations on additional ones.
From that respect, I think the Canadian government should agree that there would not be a detrimental impact to Canadian industry if it is done in a selective way.
Senator Peterson: You say "they should agree," but did you have consultations with them? Do they or do they not agree?
Ms. Zajko: We made submissions. The last submission was submitted to the Department of Finance and then directly to the finance minister who referred us to this committee.
Senator Peterson: Are you suggesting if it does not have an impact, it would be a revenue grab?
Ms. Zajko: I think it was simply that the last time concentrated effort was put into reviewing the tariffs and whether they are justified based on our manufacturing landscape was in 1993/1998, other than the last couple of years, which were focused specifically on manufacturing inputs and machinery equipment. There has been no detailed review of the justification of remaining tariffs on retail goods and whether those are still justified.
Senator Peterson: It is a bit like the Income Tax Act: No one wants to delve into it and modernize it.
Senator Nancy Ruth: When the Department of Finance's international trade officer was here, he said that we have 8,200 tariff categories and each category has 18 different treatments. Do you have a comparison of these categories between Canada and the U.S.?
One of the things he also said is that the tariffs that Canada has are not that different from that which the U.S. is putting on our goods. Therefore, if you have such a list of comparative categories, how many of these categories have a difference that you consider material?
Ms. Zajko: It is a very good question and I hope I am not speaking out of turn in saying that today we were going to hear from Canadian Tire, one of our other clients, on this matter. They have conducted not a review of all 8,000 tariff items but all the SKUs that they import into Canada, which is, as you can imagine, quite vast and covers a lot of those tariff items.
Their internal study that was to be presented showed the difference. It was significant on what would have been paid into the U.S. versus what is paid into Canada under the regular category "most-favoured nation duty rate."
If you would like, I can speak to Canadian Tire about getting details of that study and present it to the committee, if that would help.
Senator Nancy Ruth: I would find it interesting because it has to do with trade as well as purchasing in Canada. If we do something, what will the response impact be?
The Chair: We would be interested in either the results of the study or, if Canadian Tire wishes to appear before the committee, we would be pleased to hear from them.
Senator Buth: I want to go back to something that Senator Neufeld raised specific to Reebok-CCM. Ms. Zajko, you commented that there was the tariff reduction in 1993, which was then made permanent in 1998. Do you have any information on what happened to retail prices or whether those savings were passed on to consumers as a result of the tariff reductions?
Ms. Zajko: I do not.
Mr. Levert: I might be mistaken, but I think Ms. Brisebois raised earlier that there was a positive effect of this reduction.
Senator Buth: I am wondering if there is any information in terms in terms of what the percentage reduction might be relative to the total amount of the tariff.
Ms. Zajko: I can certainly undertake to try to look into that. I have not looked into it up to this point.
Senator Buth: That would be helpful for us, I believe.
I have a quick question for Mr. Levert. You continue to produce hockey sticks and hockey jerseys. Do you sell jerseys as well in Canada?
Mr. Levert: Yes.
Senator Buth: Are there any tariffs on hockey jerseys and sticks that you would still like to protect?
Mr. Levert: To protect?
Senator Buth: To protect your production in Canada. Would you recommend that tariffs still be maintained?
Mr. Levert: I will say no. The majority of them are made in Asia. What we find here is very high-end — customs for professional players. Therefore, there would be no impact at retail if this were to be removed on those things.
The Chair: I am wondering about the study of the analysis of the effect in consumer price when the tariff was reduced 20 years ago.
If you could tell us that that study was done by the government, by the Department of Finance, that would be helpful. If an independent accounting firm did the analysis, it would be very interesting for us to understand the impact, as Senator Neufeld has posed that question. If we are about to recommend a reduction in tariffs, we should feel fairly secure that that will have an effect on the consumer price.
Ms. Zajko: I have to believe that when they first put it in temporarily, when deciding to make it permanent there would have been some analysis, so I will look into that.
The Chair: I remember this committee handling the legislation a few years ago making all of these permanent, but I do not remember going back to look at why they were temporarily reduced. We never got around to the different reasons, and there probably were several.
Ms. Zajko: Yes.
Senator Callbeck: Ms. Zajko, on page 2 of your brief, you say on most items imported into Canada retailers and consumers pay significant amounts by way of import-related costs, duties and taxes.
Regarding import-related costs, I would like to know what you have included there. Are you talking about the country pricing that the Retail Council of Canada talked about this morning of transportation, or what is it?
Ms. Zajko: No. I was more referring generically to the costs around importing, which are not just tariffs and taxes. As I mentioned, the compliance continuum is getting increasingly complex, and by that I mean requirements for advanced trade data, complying with the container security initiative. All of these programs around security and advance trade data and pre-screening by customs causes various parties in the supply chain to incur additional costs related to complying with providing that data. Various parties in the supply chain are investing in automation, in systems, in getting the right information to the right parties, to customs, in order to meet the requirements that customs is imposing.
To a certain extent, Canada has sort of lagged behind, if I can say that, to the U.S. in this respect. We are catching up now and a lot of requirements are coming to the forefront in the last couple of years that require a lot more compliance cost.
Senator Callbeck: Do you have any idea what per cent the import-related costs that you talk about would represent of the retail price? I am just trying to get a handle on how large they are.
Ms. Zajko: Not specifically.
The Chair: If you would like to take that under consideration and advise us after you have looked at it more closely, that would be fine too.
Ms. Zajko: Sure.
Senator Callbeck: With respect to Reebok-CCM and the wholesaler 40 per cent, retailer 30 per cent, I always thought that the retailer had a higher gross margin than the wholesaler. Is this true of most goods?
Mr. Levert: I would think in the sporting goods area, yes.
Senator Callbeck: However, not in other goods?
Mr. Levert: I cannot say. I am not in the market of other goods. I know in sporting goods, when you look at public financial information that is available, you will see that this is about the range. Canadian Tire is about, for public information, 26 per cent, and you look at Bauer in our industry, a public company, is about 40 per cent. This will give you an idea for our industry. We are similar to that.
Senator Marshall: Mr. Levert, most of the discussion here has been around the tariffs. Are you saying that if the tariffs are eliminated and the Canadian dollar is on par with the American dollar that the American price and the Canadian price will be exactly the same?
Mr. Levert: It is difficult to say because you need to take into consideration the freight. There are other market conditions that can be different between Canada and the U.S., but hopefully that will bring the difference a bit closer.
Senator Marshall: What does this term "market conditions" include? It is freight. What else would it include?
Mr. Levert: As an example, it would be more how the U.S. economy in the last three or four years has been more difficult than in Canada. We have seen not a reduction in growth, but there were fewer people buying new equipment.
Senator Marshall: It is possible the American price would be lower than the Canadian price in that case?
Mr. Levert: Correct. We need to look also at the type of customers. Canada has a larger customer with Canadian Tire Forzani Group compared to more mom and pop shops in the U.S., more fragmented. We are not selling to large companies.
Senator Marshall: Is harmonization or regulations an issue with regard to your products? Do certain standards have to be met for the American product but are different for the Canadian product?
Mr. Levert: No. It is all the same. As I said earlier, we are buying first the products from Asia, putting our warehouse in Montreal and then selling back to the U.S. The cost for U.S. or Canada is exactly the same. The difference at the end is probably market conditions and then the tariff.
Senator Neufeld: In response to a question of Senator Callbeck, you said the markup for wholesalers is 40 per cent, and that is related to sporting goods, and other goods might be as low as 3 per cent. Can you tell me why sporting goods would be as high as 40 per cent? I wondered about that too when I saw the numbers, but I did not have time to ask the question. Why is it 40 per cent?
Mr. Levert: Why 40 per cent? First, hockey sticks require more investment in research and development. We invest about 3 or 4 per cent in that area, design and all that. There is a lot of investment into marketing. This is one.
It is more that the market is more fragmented. The volume, first, is less. Then the market is more fragmented. Canadian Tire and Forzani are probably the exception, the large corporations, but the rest are fairly small retailers. It requires more workforce to sell. There is also the sourcing.
I cannot compare to the automobile industry or food. I do not know exactly what their model is. If you look within the sporting goods industry, this is what we will see. There is a lot of investment in marketing, sponsorship of charitable events like the NHL Winter Classic. If you look at the Vancouver Marathon, there are different sponsorships that we do, either charitable or larger events that require some investment.
Senator Ringuette: Has Deloitte & Touche done a comparative study with regard to the compliance cost that you were referring to earlier to Senator Callbeck's question between Canada and the U.S.?
Ms. Zajko: A study per se, no.
Senator Ringuette: It seems you highlighted that import-related cost issue in your statement, and when questioned by Senator Callbeck, you talked about the cost of compliance between Canada and the U.S. Therefore, you seem to indicate it is a major issue. I was wondering if you had compared these two costs between Canada and the U.S.
Ms. Zajko: It is more from my experience in dealing with clients, as well as being part IE Canada's —
Senator Ringuette: The Department of Finance has not asked you about this issue?
Ms. Zajko: No.
The Chair: That regretfully brings to a conclusion this session. We have learned about a lot of interesting items, and it has been good to have you here to help us explain the market and the various factors that go into this pricing.
Colleagues, on your behalf, I would like to thank the representative of Deloitte & Touche, Lisa Zajko, and the representative of Reebok-CCM Hockey, Eric Levert. Thank you so much for being here.
The meeting is concluded. We meet again tomorrow evening with the International Automobile Association Manufacturers, which is as close as we could get to any manufacturers of automobiles.
(The committee adjourned.)