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Gap between loonie and greenback narrows: Report

TORONTO — After decades of a deep pricing chasm between U.S. and Canada on some retail goods, most notably books and cars, the gap appears to have narrowed substantially, according to a new economic report.

"(Prices) now compare surprisingly well, even with the recent dramatic sprint in the loonie," said the report Wednesday from Douglas Porter, chief economist at BMO Capital Markets.

Porter and a research team looked at a basket of goods and found them to be just 6.8 per cent more expensive in Canada than in the U.S. before taxes, adjusted to current exchange rates.

That gap is "significantly narrower than we have found in the past," the economist noted in the report. In June 2008, the price spread was above 18 per cent, and Porter's 2007 analysis pegged the price differential at 24 per cent.

Much of the recent narrowing is due to the drop in the Canadian dollar since parity against the greenback a year ago, Porter said.

"But there has also clearly been some underlying price chopping going on in the past year in Canada, which has carved into the spread. While there are still some items where significant gaps remain, there are other areas where previously wide differentials have been all but eliminated."

Most notably, a sampling of eight cars revealed a price difference of just one per cent between the U.S. and Canada, a vast difference from the average 17 per cent price premium on cars sold in Canada found in a 2006 analysis by Canadian Driver. The same survey found that entry level vehicles generally had the lowest gap (under 10 per cent) while luxury cars had Canadian price premiums of 15 per cent to 25 per cent.

Books, another category that has drawn tremendous consumer scrutiny since the rise of online bookselling, cost 11 per cent less in the U.S. at regular prices, but at sale prices there was no difference between the two countries.

The change is due in part to retailers pricing more aggressively in Canada, Porter suggests. "Little more than a year ago, the spread was as much as 20 per cent on both (cars and books)."

Others, such as Crate and Barrel, which entered Canada last year and said it would keep its prices similar to those of the U.S. chain, likely take a hit on margin. A Mandarin sideboard, priced at $1,099 Cdn, is just one per cent higher than the same piece of furniture in the U.S. But a Pottery Barn Kids table priced at $419 Cdn is 11 per cent higher than the same item in the U.S.

Meanwhile, some goods are still priced at a significant premium, according to Porter's analysis. Identical barbecues were priced 37 per cent higher in Canada, magazines were 14 per cent higher and chainsaws were 25 per cent higher.

There are numerous reasons why goods typically cost more in Canada, said retailing consultant Wendy Evans, president of Evans and Company Consultants Inc. They include currency fluctuations and time lags between the wholesale purchase and the retail point of sale, bilingual labelling, import taxes and higher distribution costs.

"It is an interesting reflection on the Canadian market trying to move to greater price competitiveness because (retailers) recognize that they do not want to lose any business across the border and online," Evans said of the BMO report. "They are sharpening their pencils."

When the dollar reached parity last year, she noted, "there was a great hue and cry and lots of pressure on Canadian retailers to lower their prices as (the pricing divide) became so much more obvious."

"Zone" pricing, whereby retailers in major markets or with outlets close to the national border price goods more cheaply in order to dissuade cross-border shopping, complicates all spot price assessments, Evans added. "I was in the U.S. last week and bought three books and they were all more than 12 per cent (cheaper)" than in Canada, she said.

The BMO report said the price-cutting by Canadian retailers is not likely resulting in a corresponding inflation drop because the loonie's descent over last year led to higher food prices in Canada and has kept energy prices from falling as far as they have in the U.S.

But the news is not all that rosy for Canadian consumers, unless they go on a shopping spree post-haste. After climbing 20 per cent in less than five months, if the dollar makes a return to parity, price differentials will naturally widen again to about 15 per cent, BMO estimates.

That could in turn inspire Canadians to cross-border shop, hurting domestic retail sales.

 •  Post by: sarayutt puttawong Email: News Date: 2009-07-29 Review: 3530




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