Why aren’t Canadian retail prices coming down? The strong Canadian dollar and the challenge for retail prices

It is rather easy to blame Canadian retailers for in-store prices that are higher here than in the United States. A detailed examination, however, reveals that a retailer has little control over higher prices for everything from books to linens. Readers will learn the real causes of those higher prices and what can be done to make the playing field level.

As the Canadian dollar reaches new highs, consumers, industry observers and the media are wondering why retail prices in Canada are not coming down. This situation is somewhat similar to one that developed in the early 1990s, when the Canadian dollar stood at $.87 U.S. — then also an historic high — and many Canadians were crossing the border to get the most value from their money. Today, Canadians are again going to the U.S. in large numbers to shop; they are also staying home and shopping in the U.S., on the Internet, too.

Assertions have recently been made in the media that Canadian retailers may be responsible for price differences between Canada and the United States. However, from facts developed when cross-border shopping by Canadians was examined 20 years ago, retailers were then not primarily responsible for the higher prices on the shelves. It is clear that any current consideration of retail price differences between Canada and the U.S. ought to dig deeper than simply observing the price differences, and then conclude that Canadian retailers are responsible for the higher prices in this country.

Twenty years ago, to help stem the tide of Canadian shoppers rushing to the U.S., a number of concerned stakeholders, including all levels of government, sponsored a detailed examination of the competitiveness of Canadian distribution channels. Their goal was to understand why shoppers were going to the U.S. and identify possible tactics to stem the flow.1 Distribution channels were taken to mean the path that goods take as their title transfers from producer to consumer. Distribution channels would thus include importers, wholesalers and retailers. The 1991 examination led to the development of several initiatives intended to help stem the flow of shopping dollars. But now, with the Canadian dollar at much higher levels than those that prevailed even in the 1990s, some of these actions seem outdated or insufficient.

This article discusses the reasons for Canadians’ love of cross-border shopping, including those that were identified in landmark studies conducted the last time cross-border shopping was affecting Canadian retailers, in 1991/2. The article then goes on to suggest measures that could stem outflows from the Canadian economy.

Canadian distribution channels in the early 1990s

The issues that were affecting relationships in Canadian distribution channels in the early 1990s included the following:

  • There were relationship and communication problems between retailers and suppliers in Canada. Manufacturers and importers felt that retailers’ service requirements, demands for supplier exclusivity, poor communication, and other factors were having a negative affect on them. Some manufacturers and importers were considering reducing the number of retailers they were dealing with, while others were contemplating setting up their own retail operations, to sell directly to consumers. This would hardly have improved relationships among industry participants.
  • Simultaneously, some distribution channel intermediaries, including retailers and wholesalers, were considering reducing the number of suppliers with whom they were dealing. Suppliers were aware of this and it was compounding relationship difficulties.
  • The number and size of retailers was increasing, thus changing the balance of power between retailers and their suppliers.
  • The relationship problems among industry participants were being compounded further by the actions of a few, such as buying products on the grey market outside Canada and then selling them here.
  • While companies understood their own costs and how they compared with competitors’, few knew what impact the build up of costs was having on their competitiveness. (Build up occurs as products move from production to consumption through distribution channel intermediaries). This lack of industry intelligence was problematic for companies thinking about alternative business models and how to meet other financial challenges.
  • The factory outlet model was underdeveloped in Canada, with relatively few large manufacturers and importers operating outlet stores.

Given the foregoing, it is not surprising that opportunities existed in the early 1990s to improve partnering and communications between suppliers and distribution channel intermediaries. This would, in turn, have improved the competitiveness of the overall system compared to the one that existed in the United States.

Distribution channel competitiveness

In the early 1990s, examinations were conducted of the major factors that explained retail price differences between Canadian and U.S. distribution channels. The studies considered the same products in Canada and the U.S., the underlying reasons for the differences, and provided options for stakeholders to consider.2

The main conclusions included the following:

  1. Retailers were not primarily responsible for retail shelf price differences.
    Manufacturers, their Canadian subsidiaries and their distribution channel intermediaries, excluding retailers, were more important than the retailers for improving the price competitiveness of Canadian distribution channels. As noted below, there were a number of other causes for retail shelf price differences that were unrelated to retailers, such as freight and tariffs.
  2. The country of origin affected retail shelf prices.
    Distribution channels with the lowest relative mark-up distributed products made in Canada, while those with the most mark-up distributed products made in Asia or the United States. This was principally because of the very existence of Canadian subsidiaries or importers, which represented a cost that the consumer ultimately would need to pay for, a situation naturally absent for Canadian-manufactured products.
  3. Manufacturers had higher margin expectations for sales in Canada.
    Where manufacturing occurred offshore, in consumer electronics, for example, Canadian prices were higher, in part because of the relatively lower strategic value manufacturers placed on the Canadian market than on the U.S. market. Pacific Rim manufacturers of consumer electronics typically had a strategic requirement that they succeed first in the U.S. in order to succeed globally. Thus, they priced their products in the U.S. to reflect this strategic imperative and the competitive intensity of that market. As a result, their U.S. prices were typically lower than those in Canada.
  4. Smaller Canadian channel intermediaries impacted prices.
    The average sales of Canadian wholesalers, importers and distribution channel intermediaries were approximately half that of their U.S. counterparts. Canadian intermediaries contributed to retail shelf price differences through their comparatively smaller scale, less efficient operations and less bargaining power.
  5. Other costs, such as tariffs and transportation, added materially to retail shelf price differences.
    While the Free Trade Agreement provided for reduced tariffs for products made in the U.S., discrepancies remained for products made in emerging markets, such as footwear. Transportation costs were also lower in the U.S. than in Canada. Packaging, labelling and other compliance costs added to product costs.
  6. Opportunities remained for retailers to improve pricing.
    Although not central to price differences, retailers were considered to have some potential to improve overall distribution channel competitiveness and hence consumer pricing. The following were among the main considerations here:

    • A higher degree of concentration of retailing in Canada than in the US;
    • Less intense competition between retail formats;
    • The rapid emergence of non-store distribution channels such as direct-to-consumer, network marketing/multilevel marketing and catalogue shopping, where pioneers were generally to be found in the U.S.;
    • Smaller scale economies of independents and smaller Canadian chains;
    • Less attention to inventory turns in their retail business models; and
    • Relatively greater development of value retailing in the U.S., such as outlet centres where the majority of tenants are manufacturers operating their own stores, which sell firsts as well as seconds, end-of-lines, unsold or seasonal merchandise.
  7. Price competitiveness differed among channels and retailers within specific sectors.
    The range of mark-ups varied significantly between sectors. For example, bedding and linens had a higher aggregate channel mark-up in Canada, as did apparel.
  8. The underlying costs of doing business in Canada were higher.
    Occupancy costs comprising property taxes, operating costs and net rent were higher in Canada than in the U.S., in some cases up to 10 percent higher. Although Canadian retailers paid a higher proportion of their sales for rent, their typically smaller size resulted in higher sales per square foot than U.S. stores. Tax treatment of larger Canadian firms was generally negative compared to their U.S, counterparts, while smaller Canadian firms had lower relative taxation rates. Labour costs were not central to retail price competitiveness. Canadian labour costs were generally comparable to U.S. rates for the retailing sector and typically lower than the U.S. rates for wholesalers. Other, second-order factors impacted retail occupancy costs, such as municipal zoning regulations for new shopping centres in Canada.

Other differences between Canada and the U.S. — such as supply management systems in Canada — may also have had an impact on some retail shelf prices.

Considering issues such as those mentioned above, Canadian distribution channels were generally not competitive with those of the U.S. for four main, inter-related reasons:

  • Smaller scale of Canadian wholesalers and retailers compared to their U.S. counterparts;
  • Distribution channel structure, including an additional participant in Canadian distribution channels – the subsidiary or importer – which represented an extra level in Canada for goods made in the U.S.;
  • Higher prices charged by manufacturers for goods destined to be sold in Canada;
  • Factors such as occupancy costs – principally rents, and corporate taxes — which affect the costs of doing business for retailers and other participants in the distribution channel in Canada.

Diagram 1: Issues affecting the price competitiveness of Canadian distribution channels

Diagram 1: Issues affecting the price competitiveness of Canadian distribution channels

What, if anything, has changed?

The current question is whether these same issues apply in equal measure today as they did 20 years ago. Or, what might be different that could change the conclusions above or affect their relative importance?

Certainly, there have been a number of important changes since the investigation in the early nineties. These include the introduction of NAFTA in 1994, meant to reduce U.S.-Canadian tariff and non-tariff barriers to trade, the reductions in Canadian corporate tax rates, and innovation by Canadian channel intermediaries, including the adoption of new technologies and an increase in skills and knowledge. In the latter regard, one example is the inception of Ryerson University’s well-regarded program in Retail Management, which has served to disseminate knowledge and train a new generation of retailers to develop more broadly based skills and sharper insights.

The following are among the changes that have occurred since the early nineties study:

  • Growing scale of Canadian wholesalers and retailers compared to U.S. counterparts.
    Many U.S. retailers, such as Wal-Mart, Home Depot and Lowe’s, have entered Canada and a number of Canadian retailers such as Canadian Tire/Mark’s Work Wearhouse/Forzani have continued to grow. Retail restructuring continues in Canada as new entrants, such as Target, enter from the United States. Collectively, changes such as these have altered the scale, structure, retailing density and nature of Canadian retailing, presumably making the smaller relative size of Canadian retailers in the 1990s a less important consideration. On the other hand, it’s not known whether or not Canadian subsidiaries of U.S.-headquartered retailers are expected to return a similar or greater profit than the same companies’ U.S. operations. One can speculate but the facts are not in. The relatively larger scale of U.S. retailing has historically also meant that U.S. consumers have been provided with more choice across a broad array of products, including automotive tires and batteries, for example.
  • Changes in the structure of Canadian distribution channels.
    At the time of the previous study, many U.S. manufacturers operated Canadian subsidiaries. This represented an additional layer of distribution-channel costs and margin requirement that did not exist for U.S. distribution. Since 1992, a number of U.S. manufacturers have slimmed down their Canadian subsidiaries, which now resemble regional sales offices rather than the full-function operations that preceded them.Canadians were not yet shopping on the Internet at the time of the previous examination; this has obviously become very important since. When it comes to the Internet, Canadian retailers should find themselves on a level playing field with U.S. retailers either because they are part of continental retailing enterprises or because they have a similar ability to mount an online presence, as do U.S. competitors of a like scale. On the other hand, many U.S. web-only retailers have emerged that have fundamentally different business models and which challenge the ability of Canadian retailers to compete on a price basis.New store formats and distribution channels have emerged, including, for example, big box stores and factory outlet malls, both of which would have the effect of making Canadian retail formats more similar to those found in the United States.

    Still, some structural differences remain. For example, factory outlets in Canada are still relatively underdeveloped when compared to this channel in the United States, although this, too, may soon change. Tanger Factory Outlet Centers, Inc., a North Carolina company with interests in 33 U.S. outlet shopping malls has joined with RioCan, a Canadian REIT, to develop outlet shopping centres in Canada . Collectively, considerations such as those noted above suggest that structural issues – like the relative underdevelopment of outlet stores – remain for the time being, but may be of lesser relative importance than they were 20 years ago.

  • Higher prices charged by manufacturers for goods that are imported into Canada.
    It remains likely that this factor continues to be an important reason why some products have higher retail prices in Canada than in the United States. It is not uncommon for manufacturers to price their products based on what the Canadian market will bear and based on volumes they expect to achieve in Canada. Both of these factors have the effect of widening the retail price gap between Canada and the United States.
  • Higher underlying costs incurred by participants in the distribution channel when conducting business in Canada.
    Two of the most significant underlying costs at retail are occupancy and labour costs. Real estate costs have escalated significantly since 1992; they have continued to go up more recently in Canada while softening in the United States. This has had the effect of increasing cost pressures for Canadian retailers, with the likely result that consumer retail prices will move higher. The softer labour market in the U.S. compared to Canada likely also reduces this cost component for U.S. retailers, while likely increasing it for Canadian retailers. There are a number of other factors which impact the underlying costs of doing business in Canada and which likely remain since the previous study. These include issues such as labelling for Canadian markets and transportation cost differences.

Although issues such as those mentioned above may prove to be material contributors to the price competitiveness – or lack of same – of Canadian distribution channels, one might reasonably hypothesize that other factors are also important, possibly including the issue of timing differences. For example, when input costs go up, some subsidiaries, channel intermediaries and retailers might be inclined to raise their prices faster than when the reverse occurs.


With Canadians again shopping in the U.S. in large numbers, it is clear that their behaviours are motivated by retail shelf price differences at a time when Canadian dollar exchange rates make purchases in the United States more attractive. In addition to the impact of exchange rates, retail prices may be higher in Canada for reasons that could potentially include the following:

  1. The higher margin expectations that foreign-owned companies may have for their Canadian retail subsidiaries.
  2. The prices foreign suppliers charge for products to be sold in Canada compared to the U.S., and pricing on the basis of “what the market will bear,” more generally.
  3. The higher underlying costs of doing business in Canada compared with the United States, including occupancy costs.
  4. Costs associated with Canadian subsidiary operations that function as more than sales offices, effectively an additional layer in Canadian distribution than in the U.S. for U.S.-made goods.
  5. Some structural channel differences that remain in Canada, such as a lack of outlet centres.

It would be appropriate to confirm or refute hypotheses such as these above and revisit the issue of Canadian distribution channel price competitiveness. Considerations such as those noted in this article can be examined to assess whether or not relative Canadian mark-ups have narrowed, remained the same, or expanded since the original fact base was developed 20 years ago, and which types of channel participants have been responsible for any changes so identified. It is also worthy of looking into what opportunities there are for Canadian retailers, wholesalers and importers and other stakeholders, including industry organizations and the three levels of government, to stem the flow of retail shopping dollars to the United States.

Helpful though it may be, Canadian retailers cannot wait for the facts to emerge as they witness the significant haemorrhaging of sales to U.S. retailers. Some retailers may be less affected than others, particularly those that are subsidiaries of U.S. enterprises or those for which there is more limited cross-border shopping, such as for carpets and mattresses, for example. Others may wish to find new ways of keeping shopping dollars in Canada by considering whether approaches such as the following might be helpful:

  • Competing on price rather than avoiding price competition, in the process reconsidering many aspects of their businesses including, for example, business models, sourcing strategies, brand mix, cost structure, inventory turns or margin expectations, trade terms, input prices and supplier relationships;
  • Expanding product assortments to compare with those found in the U.S., especially at the low end where there are often more products to be found in the United States;
  • Developing deeper relationships with individual customers rather than focusing on target markets in general. This consideration could include getting to know individual customers — especially the best customers — well enough to cater to the product, price and service expectations of each customer. This, in turn, has profound implications for customer loyalty strategies, including customer engagement, two-way dialogue, the use of social media, and learning relationships.

As this article has suggested, there are several reasons for the differences of prices in Canada, and a resolution of the underlying issues affecting prices requires engagement with all stakeholders. It generally makes no sense to heap blame on retailers alone in situations where products are priced higher in Canada for the simple reason that, for the most part, retailers are likely not solely responsible.

  1. A series of studies examined Canadian prices and distribution channel competitiveness for a wide variety of consumer durables, semi-durables and non-durables including new and used cars, car parts, bedding and linen, hardware, foods and many other products. Among these studies was Responding to Cross Border Shopping, A Study of the Competitiveness of Distribution Channels in Canada, The Task Force on Cross-Border Shopping, March, 1992.
  2. For example, Responding to Cross Border Shopping examined 49 case studies for like products moving through similar distribution channels in Canada and the US. Products selected for consideration included items from sectors such as apparel, appliances, bedding and linens, consumer electronics, footwear, groceries [food and non-food], hardware and tools, lumber and building products, sporting goods, and toys. A number of different factors which affected the underlying costs of doing business in Canada were also examined including taxation, occupancy/rental costs, labour costs, transportation and information technology, among other considerations.