The introduction of Target Corp. into Canada and a Wal-Mart Canada Corp. expansion is terrific news for Canadian consumers. The benefit to consumers is obvious, as more options will provide a wider variety of goods and services along with keeping prices low through competition.
Competitive pressures bring reduction in prices, but not solely through the reduction in margins. There is only so low margins can go, with average Canadian retail margins hovering around five per cent (though large profitable stores such as Wal-Mart have higher than average margins). Rather, a more competitive market spurs innovation and increases in productivity, which lowers costs. Much of those cost savings are then passed along to consumers as these stores compete for customers.
A 1996 OECD study examined the role competition plays in cross-country productivity differentials. Not surprisingly higher levels of competition within both manufacturing and service industries were correlated with higher levels of productivity. This does not just affect the price and number of goods in a country, but can also help to explain differences in economic growth rates. The paper concluded that “the variation in productivity levels and growth rates across countries appears to some extent related to the degree of competition facing industries and sectors in different countries.” Although there is some controversy over how much Canada is lagging behind the United States in productivity, any move that is likely to escalate the growth of Canadian productivity should be welcomed.
Much will be made of the construction jobs that will be created through the expansion of Target and Wal-Mart and the benefit those jobs will have on the Canadian economy. Those discussions should be ignored, as my colleagues Andrew Leach and Stephen Gordon are fond of saying: “Jobs are a cost, not a benefit.” The real benefit to the economy will be the increase in productivity brought on by enhanced retail competition.