Are Canadians paying too much? What can we do about it?

May 2, 2013

Canadians pay more for most retail goods than Americans living just across the border, despite the fact that the Canadian dollar has been near or above parity with the U.S. dollar for several years now. We are constantly reminded of this when we see American advertisements on television, when we shop online, when we buy books and magazines that have 2 different prices on the back cover, and when we visit the United States. My recent investgation into this matter (Are Prices Higher in Canada than in the U.S?) confirmed my suspicions. The price differences in certain product categories are glaring – gasoline (20-35% higher), automobiles (other than economy models), groceries (especially dairy and poultry products), alcoholic beverages, etc. Are we being gouged?

Our unelected Canadian Senate recently looked into this matter, releasing its study on the reasons for price discrepancies for goods between Canada and the U.S. (The Canada-US Price Gap).  They did not look at the price of services, which are harder to compare, nor supply-managed goods (e.g. eggs, poultry and dairy products, which we definitely pay more for but are a political hot-button issue). Although their report was anything but definitive, they concluded that in many cases retail prices are higher in Canada, and the reasons for this difference include: lower economies of scale, a higher level of retailer concentration, higher transportation costs, higher Canadian tariffs and taxes, the high volatility in exchange rates, and different regulatory requirements (like bilingual packaging and product safety standards). For its part, the Senate recommended that Canada review its tariffs, better integrate safety standards between the 2 countries, and consider an increase in the minimum threshold at which low-value shipments from the U.S. are taxed. One of the biggest reasons for price differences that they identified is country-specific pricing by international manufacturers who charge more in Canada simply because Canadians appear willing to pay more.

In order to maximize profits, manufacturers attempt to segment the market, creating real or imagined differences that allow them to sell their products at different prices in the two countries. An example of this are car manufacturers who don’t allow their warranties to be transferred between the two countries. Some manufacturers charge Canadian retailers 10% to 50% more than U.S. retailers for identical products. Manufacturers try to justify this by saying that their higher prices subsidize the cost of maintaining operations in Canada and are necessary to compensate Canadian distributors and wholesalers who face higher costs than their American counterparts. But they also openly admit that they charge more because Canadians are used to paying more (which seems like a chicken-and-egg situation to me). Manufacturers may price more aggressively in the U.S. because in order for their brand to succeed globally, it is essential that it be a success in the U.S. American consumers benefit from this effect. In fact, market segmentation allows manufacturers to lower their prices in the United States, effectively subsidizing their prices using earnings from higher profit territories like Canada.

In addition, American retailers are more competitive. They enjoy lower labour rates, higher productivity, and are quick to respond to competitive pressures. Many Canadian retailers have failed to pass along to consumers the benefit they’ve garnered from a stronger loonie.

Ultimately the price gap is about Canadian’s willingness to pay. Sellers simply believe that Canadians will pay more, and they appear to be right. Canadians don’t shop as aggressively as Americans, and aren’t as quick to seek out deals. Canadian retailers and consumers are failing to put the sort of pressure on manufacturers needed to bring prices down.

This situation won’t improve by itself. Neither the increase in the Canadian dollar nor the arrival in Canada of giant U.S. retailers like Walmart and Target has had a significant effect. So, what can we do about it?

  1. Shop Local

    Where possible, buy locally made or Canadian made products that provide good value for the money. This doesn’t solve the problem of higher prices for Canadians, but at least the profits are going to Canadian manufacturers.

  2. Switch to cheaper brands or basic commodities

    As the Canadian economy has matured and we have become wealthier, we consume more and more differentiated goods rather than basic commodities. The manufacturers of differentiated goods are able to increase their prices as long as consumers demand their products. e.g. They can charge more for Pizza Pockets than no-name pizza snacks, and much more than for wheat flour and tomato sauce.

    Canadians can increase competition and lower prices by switching to cheaper brands whenever possible or using basic commodities instead. e.g. Buying generic brands in the grocery store. Buying unbranded products. Buying commodity items like bulk foods, fresh produce, etc. Choose brands that don’t practice country-specific pricing (or that minimize it) and that are competitively priced to those in the U.S. Manufacturers will lower prices if Canadians don’t pay their marked-up costs.

  3. Check prices and shop smart

    The Senate report noted that, “As more Canadian consumers become aware of smartphone applications and Internet sites for price shopping and comparison, and become price-savvy consumers, competitive pressures in Canada will increase and the price for products in Canada will converge to U.S. prices”.

    Compare prices and buy where things are cheaper. Price comparison web sites make this easy (e.g. Shopbot.ca, ShopToIt.ca, PriceGrabber.ca, NextTag.com, Shopzilla.com). Smart phone apps that scan bar codes and compare prices make this even easier (e.g. RedLaser, Google Shopper, Amazon Price Check, Pricegrabber).

    Choose retailers that offer prices competitive to those in the U.S. Retailers will lower prices if we shop elsewhere.

  4. Speak up

    Let manufacturers, retailers, and governments know that you’re fed up with paying more, and that you’re voting with your wallet. Join consumer associations that advocate for fair pricing.

  5. Shop cross-border

    Canadians have a long-standing tradition of cross-border shopping. 75% of us live within 161 kilometres (100 miles) of the U.S. border. The total number of Canadians travelling to the United States by automobile is closely correlated with the movements of the exchange rate. According to Statistics Canada, in 2011 an average of 3.4 million Canadian travelers crossed the border into the United States by automobile each month, including 2.4 million Canadian travelers (69.7% of all Canadian travellers) who made same-day trips (which likely involved some shopping). Duty-free exemptions for Canadians were increased effective June 2012, making it easier to bring back more stuff. Although the duty-free limit for same-day trips is still zero (unlike Americans who get $200), Canada Customs often doesn’t bother with smaller purchases like groceries.

    Shop online. The price advantages of shopping in the U.S. (or even other countries like England) often more than make up for the costs of shipping, a customs broker fee, and duty (if applicable). More U.S. companies offer free shipping to Canada, and downloaded items (like music, movies, and software) don’t need to be shipped at all. Many items are duty-free under the North American Free Trade Agreement, and Canada Customs doesn’t charge duty on items valued under $20 Canadian (an amount which has effectively increased with the rise in the value of the Canadian dollar relative to the greenback).

I can hear some patriotic Canadians squealing, those who believe that we have an obligation to ‘Buy Canadian’. Hopefully I’ve covered that with my Point #1 above. Please note that while we are smart shopping, I believe that Canadians should continue to pay whatever sales or other taxes are required. I believe that in the long run, Canadians will be better off if our manufacturers, retailers, and government remain competitive in the global market. Competitive retail pricing will benefit all Canadians, rather than line the pockets of international manufacturers.

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