There has been a lot of attention paid to the issue of cross-border price differences lately, which appears to be triggered by the opening of J. Crew’s operation in Canada which had prices higher here than in their US stores.
As outlined in a recent Globe & Mail article, J. Crew backtracked after the consumer outrage (and let’s face it, the media coverage helped).
Now the Federal Finance Minister, Jim Flaherty has jumped on the story and is vowing to look into the issue further through a Senate committee.
With a parity dollar this issue was bound to come up and it could be a potential issue for CPG companies and retailers that do business on both sides of the border.
In conjunction with Field Agent, we conducted a price survey at Walmart and Costco stores on both sides of the border and found that on a basket of good available in both stores that prices were about 20% more expensive in Canada vs. the United States.
We know that retailers are responsible for setting the shelf prices, however these prices are also driven by the suppliers dead net costs on the items they supply to retailers.
In the past these types of gaps were easier to justify given forex differences. Not so now.
There is likely still an argument to be made that it is more costly to do business in Canada due to lower economies of scale (marketing costs, staff costs, transportation) but differences in these costs do not account for a 20% price difference. Retailer gross margins in Canada are obviously not 20 points higher than the US either.
Retailers such as Carrefour in Europe have started multi-country price negotiations with its vendors, attempting to “cherry-pick” the lowest priced similar/same goods in one market for the overall larger market. Retailers like Walmart, Costco, Home Depot, Sears, Best Buy, Staples, Safeway and even Couche Tard have visibility into dead net costs on both sides of the border and could use this as a negotiation point with vendors.
Canadian vendors need to assess their cross-border dead net cost gaps, evaluate the real and justifiable differences and identify potential risks.
On the other hand, Canadian retailers need to take a balanced approach on this issue to prevent unnecessary price deflation and attempt to understand the different costs its vendors face doing business here in Canada vs. the US.
On both sides, the dollars involved here are massive and worth immediate attention.