Flaherty’s Pricing Parity Initiative

Clothes Retail

Flaherty’s Pricing Parity Initiative

by Paul Hunt – President

Finance Minister Jim Flaherty recently announced his desire to commission a Senate Committee into Canadian pricing. There have likely been a number of triggers for his reaction, but J Crew, a specialty apparel retailer, entering Canada at a significant price premium to its US pricing and subsequent reversal I am sure was part of the cause.

Ever since the Canadian dollar reached parity to the US dollar, consumer watch groups have been demanding that pricing come into line across the border. The media has jumped on this story as well. CBC Radio’s popular call in show Cross Country Check Up with Rex Murphy dedicated 3 hours to the issue in a recent airing.

It’s easy to say as consumers that we love low prices, but let’s look at the complicated business issues rather than the political ones.

First, there is the issue of operating costs. Mr. Flaherty correctly identifies the higher cost of doing business in Canada including transportation, tariffs, and real estate costs. He didn’t mention minimum wage rates in Canada which are higher than in the US, and the effect that has on all hourly pay classifications in a business. French-language labeling has an impact here. Production runs for Canadian skus are smaller because it is not possible to use the US package. Given the history of bilingual packaging in Canada, I would not want to be the marketing manager who proposes a trilingual package for NAFTA. Finally, fixed costs are spread over a larger sales base in the US (usually 10 times larger). So, let’s accept that operating in Canada has a higher cost. However, frequent readers of this blog know that cost is not a good basis for determining price — it sets the floor, below which you would not want to do business. Let’s look at some of the other issues.

Retail concentration is much higher in Canada than the US. Whenever the issue of pricing parity comes up, the context is retail pricing. But with a smaller population base, and access to capital tighter in Canada than the US, trade channels (consumer or commercial) have either never broadened the way they have in the US, or they have consolidated. Either way, fewer sales channels mean higher prices.

On the other hand, we have had several clients who have been faced with tremendous pressure from retailers to roll back prices. (Fewer channels also mean you cannot afford to be shut out of any of them). Unfortunately these price decreases rarely find their way to the end consumer.

Cultural differences are also important to consider. The archetypal pricer is a “diplomat” rather than a “general.” Diplomats gather information, build consensus, assess options and determine whether it is worth going to war for an issue (or reduce price). Generals on the other hand prefer to shoot first and ask questions later. At the risk of painting with a very broad brush, Canadians are the world’s diplomats while Americans are the world’s generals. Understanding the nuance of communication, gathering information and selling based on value is a better way to win a customer than cutting a price. But if you are culturally pre-disposed to winning all battles, the result over time will be lower prices to the end consumer. In my work in many countries around the world, I have found that Americans have a harder time resisting the urge to cut price and win a deal than managers from almost any other country.

Do you need a Canadian brand manager if the pricing and marketing match that of the US brand? I know one account manager who finally told the buyer he was dealing with “Look, if I give you this price concession, we are both out of a job.” Canadian marketers have to believe they add incremental value. Their understanding of the Canadian market and where prices can be premium and where they need to be reduced has to result in higher profits for their company, or their job will vanish.

European managers spend a lot of time worrying about price harmonization – preventing grey market and arbitrage opportunities that arise from price differences between countries. At the end of the day, the era of significant price premiums in Canada may be nearing an end. In Europe companies have invested a lot of money to develop tools and processes to ensure that prices are within a price band. Multinational distributors quickly arbitrage price differences in Europe. The risk is that your customers cherry pick the lowest price in any market on every item. Therefore gathering the data, defining processes for keeping it up to date, and developing a strategy for how to set appropriate price bands has been a key initiative for our European practice for several years now. It is only a matter of time before this process must be adopted in North America.

Mr. Flaherty’s objectives are noble, and millions of Canadian consumers will thank him for taking on big business. However, the issues are incredibly complex from a business perspective and the Senate will definitely have its hands full.

Jim Saunders leads the Pricing Management practice at Pricing Solutions, an international pricing strategy consultancy dedicated to helping clients achieve World Class Pricing competency. Pricing Solutions publishes a monthly pricing column in the FP Executive, and also writes for the Pricing Solutions Club.