In the wake of Black Friday and with Christmas just around the corner, Canadian consumers are enjoying lower prices as a result of increasing competition within the retail landscape. The holiday season is in full swing and the sales that can’t be missed are emblazoned on every store front window. All the stores are jockeying for your hard earned money but even with the illusion of great savings, the cold hard truth sends a chill colder than -30 degrees Celsius: things are cheaper south of the border. Why are Canadians are paying more than Americans for exactly the same products?

How Bad is the US-Canada Price Gap?

A BMO Capital Financial Markets study conducted earlier this year compared US and Canadian prices of identical products to quantify the difference. The study showed there is an average price discrepancy of at least 10% over a broad variety of items. The difference was the highest for baby diapers and running shoes at 34% and 19%, respectively. Interestingly enough, the study concludes that the price gap has narrowed- down from an average of 14% in 2012- as the value of the Canadian dollar declines against that of the US dollar. Has the gap really been shrinking?

I did a quick comparison to see if this was the case. Keeping in line with similar categories as the BMO study, my random sampling of items resulted in more than double their numbers: an average price gap of 31%.

[table]
“”,Canada Price,U.S. Price,U.S. Price (in CA dollars),Price Gap
“”,(C$),(US$),(C$),””
Sealy Baby Posturpedic Mattress,$198,$84.47,$89.82,54.64%
Cuisinart DLC-2009CHB Food Processor,$284,$138.86,$147.66,48.01%
Frye Jet Engineer Boots,$869.64,$590,$627.37,27.86%
Ender’s Game Paperback Book,$9.49,$4.39,$4.67,50.81%
Canon 50mm f/1.4 Lens,$459,$399,$424.27,7.57%
J.Crew Men’s Cashmere Sweater,$342,$298,$316.88,7.35%
Michelin Defender Standard Touring All-Season,$128.75,$94,$99.95,22.37%
Google Nexus 7 Tablet 16GB,$249,$199,$211.6,15.02%
20 Piece Chicken McNuggets,$10,$5,$5.32,46.83%
“”,””,””,Average,31.16%[/table]

Reasons for the US-Canada Price Difference

After studying the US-Canadian price difference for eight months, the Senate Finance Committee reported that while tariffs on imports are a significant factor, they are not the only contributors to price differences. Country pricing, market size, and distribution costs are also contributing factors.

Custom tariffs

In 2010-2011, custom tariffs brought in a cool $3.6 billion in revenue for the government. The Senate Finance committee observed that wholesalers and retailers apply their margins on top of the tariff. This results in more expensive products for consumers and bigger profits for companies. The committee also noted that tariff rates for certain products exist for no other reason that the fact that they have never been challenged by free trade negotiations.

Country pricing

From the consumer perspective, nothing is more infuriating than country pricing. Country pricing is the practice where corporations or suppliers charge Canadian retailers up to 50% more than their US counterparts for identical items, simply because that is what the market can bear.

For example, when the American discount retailer Target made their way into Canada, I was expecting prices to be on par with US stores but was surprised to find that this was not the case. Target Canada president Tony Fisher indicated that Target Canada “built this business model to be successful in Canada”; prices were to be competitive with other Canadian stores and not with the U.S chain. In short, Target Canada is charging as much as Walmart in Canada instead of providing a differentiating value to maximize their earnings.

Market Size

As of 2012, the population of the US was around 314 million people compared to about 35 million in Canada (in terms of population, we’re smaller than the state of California with 38 million people). Less people buy less stuff. As a result of Canadian businesses buying less merchandise, they have less bargaining power; larger US operations with more buying clout lead to lower production cost and lower retail prices. We just have to face it, when it comes to potential profits for US companies, we’re just small beans.

Distribution/Labour Costs

A smaller population results in a smaller population density. Within the US there are 34.2 people per squared kilometer compared to 3.4 in Canada. Ultimately, this leads to an increase in the cost of moving goods around. Factor in the the higher cost of gas and the cost of labour (minimum wage in the US ranges from $7.29-$9.19 compared to $9.95-$11 in Canada), there is a much higher distribution cost on a per-item basis in Canada.

The Cold Hard Truth

To the Americans, we’re just a huge barren wasteland filled with beavers and igloos. There isn’t much that the government can do in the way of changing the economies of scale; the only thing within their control is the reduction of tariffs (but I wouldn’t hold my breath for that). In the meantime, we’ll take advantage of the 30% “discount” and shop south of the border whenever it makes sense. Mayhaps we’ll meet at McDonald’s for them McNuggets.

Do you take advantage of the south of the border “discount”?

Photograph Source: Mark McClellan wallpaper