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.

Advertisements

Are prices in Canada higher than in the United States?

April 17, 2013

I’ve noticed that many prices seem to be lower here in the United States than in Canada. Am I imagining it? With the help of my Canadian friend Annette (an experienced shopper), I decided to find out.

Methodology

I selected a basket of 20 common retail items (food, alcoholic beverages, and fuel), and compared the prices for these items in Vancouver, Canada (my home) and San Antonio, Texas (my location when this crazy idea struck me). Annette and I gathered regular retail prices (not sale prices) not including sales taxes from comparable retail outlets (to the extent that they are available in both cities) within a few days of each other. The American prices were converted to Canadian dollars at the current exchange rate. Where quantities or package sizes differed, the prices were adjusted to equivalent volumes.

Findings

The table below shows the items we checked, the U.S. price, the Canadian price, and the percentage difference of the Canadian price compared to the U.S. price.

Product U.S. Canada Percnt
Frosted Flakes (760g box) $3.92 $7.23 84.6%
Cheerios (396g box) $2.90 $5.02 73.3%
Milk (3.78L = 1 gallon) $4.32 $4.56 5.4%
Eggs (12 Large Grade A) $1.71 $2.63 53.5%
Coors Light beer (24×355 ml cans) $20.39 $43.99 115.7%
Corona Extra beer (12 x 330 ml bottles) $13.25 $25.69 93.9%
Yellowtail Cabernet Sauvignon (750 ml bottle, Australia) $5.07 $12.99 156.2%
Woodbridge Merlot (750 ml bottle, California) $8.64 $13.99 61.9%
Coca Cola (12 cans) $3.04 $5.97 96.4%
Coca Cola (2 Litre bottle) $1.41 $1.87 32.9%
Chicken thighs skin-on, bone in (per pound) $5.04 $4.98 -1.2%
Ground beef (85% lean, per pound) $3.25 $6.28 93.0%
Ground beef (89% lean, per pound) $3.79 $7.98 110.3%
Ground beef (93% lean, per pound) $5.08 $9.88 94.5%
Bananas (per pound) $0.49 $0.58 18.5%
Fuji Apples (per pound) $1.70 $1.19 -30.1%
Yellow Onions, medium (per pound) $2.43 $1.28 -47.3%
Russet Potatoes (per pound) $0.90 $0.48 -46.5%
Gasoline (regular, per Litre) $0.91 $1.34 47.9%
Diesel fuel (per Litre) $1.01 $1.41 39.4%

Analysis

Vancouverites are paying a lot more!

Of the 20 items on the list, 16 were more expensive in Canada. 3 produce items were significantly cheaper in Canada (apples, onions, & potatoes), and there was a trivial difference in the price of chicken thighs. All other items were between 5% and 156% more expensive in Canada.

The price differences were the biggest for wine and beer (61% to 156% higher). The probable reasons for this are: a government monopoly on alcohol distribution in British Columbia, high government taxes on alcoholic beverages, and restrictions and tariffs on importing alcohol into Canada.

Grocery items (other than the few that were cheaper) were between 5% (milk) and 110% (ground beef) more expensive in Vancouver, with the remaining 9 items between 18% (bananas) and 96% (Coca Cola) more expensive.

Vehicle fuel was priced 47% higher in Canada for regular gasoline and 38% higher for diesel fuel. This is due, in part, to higher taxes.

I recognize that this was a very limited sample size (20 items, 2 stores, 2 cities, none of which were randomly chosen), and so few general conclusions can be drawn from these results. But it does confirm my suspicions. In my experience, groceries, alcohol, and fuel are consistently more expensive in Canada than in the United States.

Why is this the case? What can Canadian consumers do about it? Stayed tuned for more on this topic.


Flying à la carte with Wizz Air

May 31, 2012

We flew from Budapest to Barcelona return on Hungary’s discount airline Wizz Air.  I think the name was meant to conjure images of speed but I can’t help thinking of urination when I hear it.  With the bankruptcy of Malev Hungarian Airlines in February 2012 (after 66 years of continuous operation), Wizz Air is now the leading airline and flag carrier of Hungary.  Officially, it’s a 2 star airline (that’s 1 star less than Air Canada whose service Canadians love to complain about) and it hasn’t made a profit since it began operations in 2004.

Hot pink, purple, and white plane flying through purple clouds

Wizz Air Plane

Wizz Air follows the ‘everything is extra’ business model, similar to Ryanair in Europe or Southwest Airlines in the United States.  This means that, in return for your hard-earned money, you are entitled to board an airplane to your destination with 1 carry-on bag.  And that’s it.  Everything else is extra.  And I mean everything.

Booking Fee — Want to use a credit card to pay for your flight? It’s $12 per flight per passenger or $48 for two people on a return trip.  Debit card is only slightly cheaper, so these fees are unavoidable.  How, when I pay for my booking once (for all flights and passengers), can they justify levying the fee per flight and per passenger?

Call Centre Fee – Want to book your flight over the phone rather than using their web site?  $15 per flight per passenger.  That’s $60 for two people on a return trip.

Airport Check-in Fee – If you want to check-in at the airport rather than online (or if you’re forced to because you don’t have access to a printer), it’ll cost you.  $10 per flight per passenger ($40 for a couple return).

Flex Fee – Think you might want to change your flight, but not sure?  You can avoid the Flight Change Fee later if you pay an extra $15 at the time of your original booking.  Basically you’re paying a fee to buy insurance to avoid potentially having to pay another fee.  It’s brilliant!

Name Change Fee  — If you make a mistake on the spelling of your name (which for security reasons can prevent you from getting on the flight), it’s $60 per flight per passenger to change it ($120 return).  But you’d better do it on their website.  It’s $90 per flight per passenger ($180 for a return ticket) if you do it at the airport.  Ouch!

Xpress Priority Boarding Fee – Wizz Air does not normally assign seats, so how early you board can mean the difference between sitting with your traveling companions or not.  People start lining up at the boarding gate immediately after they clear security.  Want to board early?  $6 per flight per passenger ($24 for a couple on a return flight).  $12 per flight per passenger if you change your mind and decide to skip the line at the airport.

XXLong Extra Legroom Fee – If you’re over 5’10”, the small and close seats on Wizz Air won’t do for you.  If you want to sit in an exit row for the extra leg room it’s $12 per person per flight ($48 for a couple return).  You still don’t get an assigned seat though, just a seat somewhere in the exit rows.

Food and Drink – Nothing is included, but a fine selection can be purchased on the plane for a fee.  I wonder if they charge for water?

Cancellation Fee – You can cancel your flight for a fee of $90, but none of their many extra fees are refundable, so you’re not likely to get any money back.

These fees are in addition to more common fees like Baggage Fees and Flight Change Fees.  Wizz Air has these too.  In fact, the fees mentioned above are just a sample of the 62 different fees that Wizz Air has listed on their web site!

If you have a question about any of these fees or the service you’ve received, you can of course telephone Wizz Air’s customer service center.  Calls to customer service cost $1.50 per minute for you to talk to someone in India.  They probably earn $1.50 per hour.  All calls are charged, and complaints must be made by email.

Do I sound bitter?  I’m not.  More fascinated by the business model.  Wizz Air competes in an ultracompetitive marketplace where consumers are attracted by low base ticket prices.  I know that I’ve been excited in the past by advertisements for flights or cruises with what appear to be low prices, only to learn that when all taxes and fees are included the total price is double or even triple.  When people search for flights online, the lowest airfares are typically displayed first.  Consumers very often choose the flights with the lowest base price.  It’s only after they’re invested in the reservation process that they learn of the extra fees.  Admittedly some of these fees are optional for some people, but some are impossible to avoid (i.e. booking fees) effectively resulting in a higher price than advertised.

With base ticket prices so low, Wizz Air has to make most of its money in fees.  They’re like contractors who underbid with the expectation of making their profit through change orders once they’ve got the work, or like steak houses that charge extra for the baked potato and for the vegetables.  And they’re not alone.  We took a flight from Frankfurt, Germany to Vienna, Austria on Berlin Air last September.  The base ticket price for this one-way, 1 hour flight was only $11 (can you believe it?), but with taxes and fees it grew to over $100.

We made the choice to fly Wizz Air despite all the extra charges.  Even though we paid the Booking Fee, the Xpress Priority Boarding Fee, and the XXLong Extra Legroom Fee, our total price was still half that of the next cheapest competitor.  With such low prices, we were worried that they would cut corners somewhere else (e.g. poor service, old planes, etc.) but the experience wasn’t any different than we’ve had with other small airlines.  Just fine for a short flight, and all flights in Europe are short flights.

Will this excessive level of extra charging be coming to North American soon?  Many discount carriers already charge fees for services that are free (or were once free) on other airlines.  I hope that it doesn’t get to this extreme, but the same basic business model applies, so I don’t see any reason why it can’t or won’t.  Hopefully consumers will stay focused on the total price and service and won’t be overly mesmerized by a low base price.

Note — I used an exchange rate of $1.50 per Euro to keep the price conversions simple.