This article was originally published in Maclean's Magazine on August 18, 2008
Why You're Still Getting Gouged
Once a month, Henry Tenby jumps in his car - just after the morning rush hour and with a tank close to empty - and makes a 45-minute drive from his Vancouver home to Blaine, Wash. After zipping across the border using his recently acquired Nexus pass, he fills up with cheaper American gas and stops off at a packaging store, Hagens of Blaine, where the aviation buff and Internet entrepreneur picks up the computer parts and memorabilia he routinely buys online from the U.S. and has shipped there under his name. The cross-border shopping ritual saves him anywhere from $50 to hundreds of dollars a trip - at the very least, the equivalent of a nice dinner out, he says. This month, he plans to buy a piece of new computer hardware in the U.S. for about $200. Buying the part in Canada would cost $320, he estimates. As for Canadian retailers charging more than their American counterparts: "I think they're just being greedy and gouging Canadians," he says. "I don't like it."
It wasn't supposed to turn out like this for Canadian consumers. When the Canadian dollar reached parity with the U.S. greenback on Sept. 20, 2007, Canadians celebrated. The news was trumpeted in headlines like the results of some epic sporting match. "$1 Cdn = $1 US," one simply stated. For the first time in over three decades, Canada seemed to be back on equal footing with its neighbour to the south. But after reaching such great heights, Canadians quickly discovered that the view wasn't all it was cracked up to be. Shoppers noticed they were still paying alarmingly high prices for basic goods compared to Americans - in the case of big-ticket items like cars, sometimes many thousands of dollars more. Retailers and distributors vowed these cross-border price gaps would narrow over time as they adjusted to the stronger loonie. Well, almost a year later, we're still waiting, and savvy shoppers like Tenby are still saving thousands by taking their business to the U.S. - even after factoring in things like the cost of gas and duties.
Few people have been shafted worse than Canadian consumers by recent economic conditions. The loonie has soared in the past few years compared to the U.S. dollar largely because of demand for Canadian goods and confidence in the oil- and commodities-rich Canadian economy. That's all good news, and with a dollar that gives them more bang for their buck, Canadians should feel richer. Few are. Over the past year, the loonie has averaged almost US99 cents. But consumers are still paying as much as 30 per cent more than Americans for many basic goods, according to some surveys. "It's maddening," says Carrie Trueland, who works at an interior design store in Burlington, Ont. She crosses the border about every six weeks to visit her sister in Lockport, N.Y., and buys nearly all her clothes and cosmetics there, as well as groceries and electronics. Trueland says she went against her better judgment this spring and bought a sweater at a Canadian Winners for $29.99, only to find it at the retailer Bon-Ton in Lockport for $19.99 (all U.S. prices are in U.S. dollars) - 50 per cent less. "I was sick!" she says. "I wish it didn't have to be that way."
Why is it, then? There's plenty of blame to go around for the price assault on Canadian consumers, from retailers and distributors pocketing the difference from the stronger loonie, to government regulations and taxes pushing up prices higher than they need be. But the end result is always the same: at cash registers across the country consumers are losing out, and in that typically Canadian way, tolerating it without much of a fuss.
According to a recent report by BMO Capital Markets, prices of consumer goods in Canada are, overall, 18 per cent higher than in the United States. That's down from 24 per cent in 2007, but the gap is still "extraordinarily large," says Douglas Porter, deputy chief economist at BMO. In fact, consumer prices have actually risen faster in Canada than in the United States over the past three months, suggesting that any meagre price reductions we've seen so far thanks to the stronger dollar may be all we're going to get, adds Porter. The Consumers' Association of Canada (CAC) has also been tracking prices in the U.S. and Canada, and its informal survey pegs the difference at closer to 25 to 30 per cent. Building on the BMO survey, Maclean's looked at an additional 60 items - everything from cars to perfume - and found Canadians are paying 24 per cent more than their American neighbours. A Hannah Montana toy microphone costs $14.99 in Canada and just $10.99 in the U.S. - 36 per cent less. The average price of ChapStick in Canada is about $2.50. In the U.S., it's more like $2 - or 25 per cent less. Forget a narrowing of the price gap, these results (based on nationally advertised prices where available as well as averages from across the country) suggest that, overall, retailers and wholesalers have not made any progress at all over the past year. "It's still very real and it's still there," says Bruce Cran, president of the CAC. "We're being ripped off."
Even purchasing power parity data from the Organisation for Economic Co-operation and Development, which shows currency conversion rates that eliminate the differences in price levels between the two countries, haven't budged. In the past five years, they've hovered stubbornly around 1.20, suggesting Canadian currency gives us 20 per cent less purchasing power than Americans.
Nowhere have these pricing distortions been more glaring than in the auto industry. When a Canadian pays 25 per cent more than an American for a DVD, it amounts to a few extra dollars. When the item in question is a $41,000 BMW sedan, suddenly it's an extra $8,000. Earlier this year, under pressure from consumers, several automakers took out full-page newspaper ads announcing new "Canadian" prices. In some cases, the reductions were significant. Lexus cut the price of its RX350 SUV to $42,950 from $51,550. It's now 14 per cent higher than the U.S. suggested retail price of $37,700. But these were the exceptions. In general, the price gap remains about as wide as the Grand Canyon. The manufacturer's suggested retail price for a Mazda CX-9 SUV, for instance, is US$30,070 compared to $39,995 in Canada, or 33 per cent more. In its survey, BMO found that mid-range cars cost 19 per cent more in Canada, while luxury brands costs 30 per cent more. A Maclean's survey of 20 vehicles in various classes found 25 per cent higher prices in Canada. "If there are 1.5 million vehicle sales a year in Canada and if each vehicle is on average three or four thousand dollars higher in price, that's about an extra $6 billon a year that consumers are paying for cars," says Ian Irvine, a professor of economics at Concordia University, who has studied the price gap. Irvine's survey prompted him to travel across the border, to Burlington, Vt., to buy his new Subaru - saving about $9,000, he says.
Carmakers say the gap is due to the extra costs of doing business in Canada. Toyota says the only reason its prices are higher here is because of regulatory requirements (to its credit, Toyota has gone further than most other automakers to close the gap). But that defence hasn't stopped Canadians from taking their money and heading south in record numbers to buy cars (many of which are built in Canada). In just the first six months of this year, Canadians have bought over 150,000 vehicles from the U.S., putting them on pace to smash last year's record of 190,000 cars. "When you go down the car prices, that's where it really becomes obvious that there's more than just traditional factors at play here," says Porter.
Arguably, the price reductions automakers have made in Canada have less to do with giving Canadians the best deal possible than they do with trying to shut down the fast-growing grey market for cars created by cross-border shoppers. Cross-border deals for consumers are lost profits for automakers, who are putting enormous pressure on U.S. dealers not to sell to Canadians, says Avi Zur, manager of Toronto Auto Brokers, which imports cars from the United States. Subaru, for example, has until recently tolerated Canadians buying its cars from U.S. dealers. Now, like other automakers, it's telling dealerships in the States to cut it out, says Zur. Consumers, however, aren't giving up. Last September, a $2-billion class action lawsuit was launched against automakers, alleging they have been interfering with independent dealers who sell cars across the border. "There's a big problem here," says lawyer Henry Juroviesky, whose firm filed the suit in September. "We feel there's a carefully choreographed and designed behaviour to keep prices inflated in Canada."
There are plenty of places in the supply chain where price bottlenecks can stop the benefits of a strong loonie from reaching consumers. More often that not, it's retailers that get fingered as the main culprits. But retailers and wholesalers have no shortage of excuses for their pricing behaviour. Topping the list is the notion that Canada is a smaller market than the United States. Because Americans live in a land brimming with fierce competitors and 10 times the number of shoppers, they inevitably end up with cheaper prices. Canadians, on the other hand, have fewer options, and retailers here don't get the same volume discounts as their American counterparts. On top of this, retailers argue that it's simply more expensive to do business in Canada. Transportation costs in a huge country like Canada are higher and there are unique costs associated with things like bilingual labelling.
Economists agree there's some truth to all this. "Companies around the world fight tooth and nail for market share in the U.S. because it's the largest and most important," says Porter. "When the U.S. dollar weakens they are very loath to raise prices. It's as much a U.S. story as it is a Canadian story." Size also does matter, says Millan Mulraine, an economist at TD Securities who has studied the price gap. Take the book industry, he says. In Canada, there are only a few big publishers. "In the U.S. there's much more diversity. You can take that right across the board," he says. It's Economics 101: more competition leads to lower prices. Even so, these complexities don't account for the enormous size of the markup that Canadian consumers are being forced to pay, say economists. Ten per cent perhaps, but not 20 or 30 per cent.
Scratch a little deeper and many of the explanations for such a large price gap between Canada and the U.S. quickly begin to wear thin. First off, Canada isn't such a small market. Its population (33 million) is roughly the same as that of California (36 million), which has never been brushed aside as an uncompetitive market. In fact, Canada is one of the 10 biggest economies in the world. Second, Canada may be geographically large, but most of the population is bunched along the border, a short drive from the U.S. The same thing that makes cross-border shopping so easy for consumers should make transporting goods relatively painless for businesses. If transportation costs were really such a big factor, then prices of some goods in Calgary or Winnipeg would be noticeably higher than they are in, say, Toronto.
Despite all the rumblings about the costs of doing business in Canada, there are companies, large and small, that do sell many products for the same price in both countries. A rechargeable Black and Decker lawn mower at Wal-Mart actually sells for $12 less in Canada than it does in the United States. The Canadian company Roots sells hooded sweatshirts for $89.95, in both countries. Madonna is selling tickets for her upcoming tour slightly cheaper in Canada than in the United States. Toyota sells its made-in-Canada Matrix for about $400 less in Canada. If they can do it in these cases, why can't everyone?
Even retailers will point out that there are cases where unfair gaps in prices exist. But the blame lies with multinational distributors, they argue. "Big multinational brand owners will price goods into different markets at very different prices according to what the cost will be for them and taking into consideration what they think the market can bear," says Derek Nighbor, senior vice-president of national affairs at the Retail Council of Canada. Bombardier Recreational Products sells its made-in-Canada Ski-Doo Legend Touring model for $10,199 in Canada and $8,349 in the States, a difference of 22 per cent. Individual markets, not exchange rates, determine the price of its goods in different countries, and nothing else, says spokesman Pierre Pichette. "That's the way it's got to be." BRP, which is headquartered in Canada, argues that doing business here is 15 per cent more expensive than in the U.S., so its prices are not all that out of line.
Many companies, including BRP, are extremely reluctant to react to exchange rates at all - adjusting prices, after all, is costly and complicated. The dollar has been at or near par for a year, but BRP's Pichette says there's no guarantee it won't start falling again in the near future. (Many currency traders are now predicting that will indeed happen over the next year.) Even when companies do factor in rates changes, it can happen at a glacial pace. While the bulk of adjustments should have happened already, it can take up to two years for the changes to trickle their way into retail prices, says Avery Shenfeld, senior economist at CIBC World Markets. That's the case at Reebok, where its EDGE hockey jersey sells on the NHL's online store for $299.99 in Canada and $249.99 in the U.S. The difference reflects wholesale prices set by Reebok 18 months ago, for the 2007-2008 hockey season, says Craig Ryan, the vice-president of Reebok-CCM's sports licensed division. The price won't get adjusted again until the upcoming hockey season in September. At that time, the jersey will cost the same in both countries, he says. But it won't be much of a coup for Canadian consumers - Reebok plans to boost U.S. prices to $299.99, not cut Canadian prices.
Bargaining with these big brand companies is difficult, says Nighbor. "We don't have the size and are not buying in the quantities that would allow us to affect a great deal of change." But consumer advocates say that's no excuse. Retailers, they argue, need to pass on the pressure they get from consumers to suppliers. "The reality is that what you can buy in the States for a dollar costs $1.35 up here. That's the reality they should be facing, not this other smoke and mirrors," says Cran.
The evidence suggests that it is largely at the retail level where the benefits of a strong dollar hit a wall. "The pass-through to import prices and the producer price index from changes in the exchange rate are high and statistically significant," said TD's Mulraine in a report last September. "It is just the follow-through to consumer prices that is non-existent," he added. "The evidence appears to point to the pricing behaviour of Canadian firms." Cran is more direct when asked what's behind the gap. "There's only one reason and it's got to be greed on the part of Canadian retailers."
But shifting exchange rates and nefarious pricing are not the only factors at work. An unhealthy dose of government interference also plays a role, particularly in one important industry: agriculture. Christopher Maule, a professor emeritus of economics at Carleton University, recently surveyed 11 food products, shopping at a Wal-Mart in Ottawa and one in Fort Myers, Fla. The goods in Canada cost 35 per cent more than in the U.S., he found. The main reason, he notes, is because of supply management policies in Canada, especially in the dairy industry. In the most extreme example, 500 ml of Häagen-Dazs ice cream cost $5.97 in Canada compared to US$2.81, or 112 per cent more. "You've got a series of price differences that are directly due to government policy," he says.
Canada's import tax system also adds, on average, about 10 per cent more to the price of goods imported from outside North America. For instance, a Canadian company will pay a five per cent import tax to bring an MP3 player in from Asia, while an American company won't pay a dime, says Nighbor. It all adds up, say retailers.
If Canadians are being bullied into paying more, they may also be the only ones who can do anything about it. As the car industry experience has shown, a backlash from consumers does indeed help push down prices. It also worked in the case of the Apple iPhone. When Rogers Wireless Communications announced its price plans for the much-hyped cellphone, customers were outraged at the idea they would be paying far more than Americans to download data - potentially hundreds of dollars a month more. Petitions, angry calls and mountains of bad publicity ensued. Rogers then announced a new plan that would bring monthly data rates closer in step with U.S. ones. Most products, however, don't evoke the same kind of passion as cars and iPhones. Who's going to march in the streets over paying more for running shoes than Americans?
Ruthless as it seems, by setting prices as high as the market will bear, companies are behaving quite naturally. "The retailer's job isn't to give you the item at the cheapest possible price. Their primary job is to make money," says Avi Goldfarb, a marketing professor at the University of Toronto's Rotman School of Management. Canadian consumers are also acting predictably. "There's nothing irrational or uneconomic about the Canadian consumer," says Goldfarb. "It's not so much that the Canadian consumer is willing to pay higher prices. It's much more that the Canadian consumer doesn't have a choice," he says. Canadians can cross-border shop for better deals. But at the end of the day, once duties, taxes and shipping are taken into account, it's often not worth the added effort for everyday items. Tenby set up a site called crossbordershoppingdeals.com to try to share his tips, but participation on it has been disappointing, he says. In the end, the Canadian market has settled into an unhappy balance, with prices just high enough that Canadians will swallow them without setting off a stampede of cross-border shoppers.
The government has been reluctant to step in and try to correct the price gap. Transport Canada recently took the small step of changing vehicle bumper standards to harmonize them with U.S. rules, making it easier and less costly to import cars. But the message from the Finance Department has been simple: "I say to Canadians, shop around, put pressure on retailers," Finance Minister Jim Flaherty told reporters this summer. "It's up to consumers to make sure they exercise their choice and their power in the marketplace and insist on parity, on our dollar being treated as a dollar that's at par with the American dollar or a little bit lower." In other parts of the world, consumers just might rise to that bait. Protests over high energy prices have broken out in France, Britain, Portugal and South Korea, to name a few places. Ill tempers over the rising cost of living these days are flaring everywhere. Everywhere but Canada.
"The way that the commodity boom that we're seeing can be spread amongst everyone in the country is through a stronger currency and thus lower import prices for everyone," says Porter. Given what we've seen in the past year, don't expect that to happen anytime soon. This boom has been all bust.
The Great Canadian Rip-off
Item Canada U.S. % gap
ENTERTAINMENT AND ELECTRONICS
Hannah Montana microphone 14.99 10.99 36
BlackBerry Pearl 8130 499.99 429.99 16
(Telus Mobility) (Verizon)
Movie purchase on Apple iTunes 19.99 14.99 33
DVD of The Other Boleyn Girl (at Best Buy) 25.99 19.99 30
Concert tickets for Madonna (avg. of two) 350.00 352.00 -1
ChapStick 2.49 1.99 25
Black & Decker rice cooker 27.83 19.96 39
Gillette Mach3 10.99 8.99 22
Suncast garden hose reel hideaway, 100-ft. hose capacity 34.99 35.92 -3
Wonder Bread (avg. of three stores) 2.79 2.19 27
Hair dryers (avg. of three similar) 51.65 33.23 55
Perfumes (avg. of three) 80.00 63.00 27
Coleman inflatable queen-size mattress 36.94 27.88 32
CLOTHING AND SPORTING GOODS
H&M women's white blouse 34.90 24.90 40
Gap men's white collared shirt 49.50 39.50 25
Roots Canada men's hoodie (made in Canada) 89.95 89.95 0
Reebok Edge hockey jersey (at NHL.com) 299.99 249.99 20
New Balance 740 running shoe (at Footlocker) 119.99 79.99 50
Nike SQ Sumo 5000 Driver (golf) 349.99 299.99 17
Ski-Doo Legend Touring 2009 10,199.00 8,349.00 22
Ford 2008 Escape 23,914 19,140 25
GM 2008 Sierra 1500 23,520 18,515 27
Mazda 2008 CX-9 39,995 30,070 33
Lexus RX350 (SUV) 42,950 37,700 14
Toyota 2009 Matrix 15,705 16,190 -3
Honda 2008 Civic Coupe 17,190 14,810 16
BMW 2008 328i Sedan 41,000 32,700 25
Subaru Outback 2.5i 30,995 23,595 31
Honda 2008 Accord Sedan 25,090 20,360 23
Jaguar 2008 XJ 80,500 64,500 25
Above is a sampling of 30 of the 60 consumer goods surveyed by Maclean's, based on an exchange rate of one U.S. dollar to one loonie. The average price gap for the entire survey is 24 per cent. For the complete list go to www.macleans.ca/prices
See also RETAIL TRADE.
Maclean's August 18, 2008