A price gap between Canadian and U.S. products has widened sharply with a surge in the loonie that should lower prices on this side of the border.
Prices on a selection of goods studied by BMO Capital Markets are now an average 20.4 per cent higher than those of the same products in the United States, compared to a spread of less than 7 per cent in the summer of 2009. It showed a range of price gaps from as high as 48 per cent more on running shoes to 2 per cent for the Canon Rebel T1i camera.
Why the gap
The gap reflects a ferociously competitive U.S. market, where prices are frequently lower than in the rest of the world, said Douglas Porter, deputy chief economist at BMO. And it points to the time it takes for Canadian retailers to adjust to the reality of a higher dollar - and a very volatile one, he said.
He expects the price difference to narrow a little this year - but not to close entirely because the cost of doing business is typically higher in Canada.
Diane Brisebois, president of the Retail Council of Canada, estimated that North American and global producers charge Canadian retailers 12 to 25 per cent more than they do U.S. merchants.
Canada provides fewer economies of scale, resulting in higher costs to distribute products, Ms. Brisebois said. As well, suppliers find that U.S. consumers are more economically challenged and just won't shell out more for goods, she said.
Canadian retailers also grapple with having to pay substantially higher import duties on goods coming from Asia than their U.S. counterparts - and a growing array of merchandise is from Asia, she said. For example, U.S. merchants pay no import duties on hockey and soccer pads, while domestic retailers shell out 15.5 per cent duties on those items, she said.
Higher gas prices - and freight charges - have also pushed up costs, said Mark Lefebvre, president of the Canadian Booksellers Association. The price gap can be even wider for textbooks, said Mr. Lefebvre, who is also a book operations manager of the Titles Bookstore at McMaster University. For example, a textbook here that costs $120 can be just $80 south of the border. Still, some publishers have cut prices recently, he said. For instance, Pearson, a textbook publisher, dropped prices about 20 per cent, he said.
Bruce Cran, president of the Consumers' Association of Canada, said he has no sympathy for retailers here. He said his own studies show that comparable prices in Canada are 30 per cent higher than those in the U.S. "It's quite a shocking state of affairs."
Even so, individual retailers keep the pricing decisions under wraps, failing to reply to requests to talk about why prices are higher than those in the U.S.
The loonie has gained more than 30 per cent over two years, pumped up by high commodity prices, the attractive Canadian market and the general weakening of the U.S. dollar. And economists believe it's going to stay strong for quite some time.
But the 30-cent-plus swing in the currency over the past few years puts pressure on retailers, Mr. Porter said. "That's a very tough environment to set your prices in."
At the same time, the strong dollar restrains inflation and keeps interest rates low, he said. "The strong currency rewards consumers first and foremost, by helping hold prices lower than they would be otherwise." Inflation trends in Canada have dipped below those in the United States recently, helping keep prices down, he said.
The strong dollar also keeps interest rates low, he said. "With the Fed unlikely to start lifting interest rates for some time yet (we believe they will start in early 2012), and the currency on a roll, the Bank of Canada is constrained from lifting rates as quickly as they would like ... markets now seriously doubt if the bank will even begin hiking rates by July."
In this way, a rising dollar supports business capital spending. "A common refrain amid the dollar's rapid rise is that it will help Canadian business invest in new machinery and equipment, by slashing the price of imported gear. While the long-term evidence is not exactly obvious on this score, we did find some modest impact on real capital spending on [machinery and equipment]of a rising dollar."
"If you think it's bad on a $9.99 paperback that is $11.99 in Canada, what happens when it's an $80 textbook in the U.S. that's suddenly $120 Canadian."
Mark Lefebvre, president of the Canadian Booksellers' Association
"There is certainly no evidence that it [the reason for higher prices]is retailers tripling their profits. That's in fact not the case."
Diane Brisebois, president of the Retail Council of Canada
"It's quite a shocking state of affairs. The only thing you can put this down to is the greed of the retailers and very strong margins during this period. You can see where the money went. It went right into their pockets."
Bruce Cran, president of the Consumers Association of Canada
"Frankly the sprint in the currency in the last few months has taken a lot of companies by surprise."
Douglas Porter, deputy chief economist at BMOReport Typo/Error
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