New duty-free limits will challenge Canadian retailers

With new duty-free limits for cross-border shoppers kicking in Friday, Canadians may decide they will want to make even more trips south for all those cheaper consumer goods.

For Canadian retailers, though, those trips would represent more money lost from their cash registers, and magnify the problems they are having with the noticeable price gaps between the two countries on everything from ketchup to running shoes.

"The increased [duty-free] exemptions, the currency equivalency and the challenges from a cost perspective are a perfect storm of conditions that are going to be challenging from a Canadian retailer perspective," says David Wilkes, senior vice-president of the Retail Council of Canada.

Under changes introduced in the 2012 federal budget, the duty-free limit on visits of more than 24 hours quadruples, rising from $50 to $200, effective June 1.

As well, any visit longer than 48 hours allows Canadians to return with duty-free goods worth up to $800. That's an increase from the previous rules of $400 for up to a week, and $750 for longer than a week.

For stays of less than 24 hours, there's no change: the allowance for duty-free goods remains at zero.

Finance Minister Jim Flaherty has said that he's not particularly concerned about cross-border shopping because the 24-hour rule hasn't changed. But many retailers and at least one economist see the changing limits in a different light.

Douglas Porter, deputy chief economist for BMO Capital Markets, put out a report last month under the title Cross-Border Shopping: Here Comes the Flood.

In that report, he estimated that cross-border shopping alreadydrains more than $20 billion from domestic retail sales.

The changing duty-free limits wouldn't be an issue, he says, "if there wasn't a compelling lure for Canadians to cross the border." But there is.

BMO's most recent random sampling of a comparative basket of goods found that Canadian retail prices are about 13 per higher than their U.S. counterparts. That's down from 20 per cent last year, due in part to a slightly softer Canadian dollar.

Any gap, however, is a worry for retailers, and one retail analyst sees the increased duty-free limits as a tipping point for Canadian consumers to consider more cross-border shopping.

"Now it makes it an easier shopping trip," says Willy Kruh, a partner at KPMG in Toronto and its global chairman of consumer markets.

Particularly for Canadians living close to the border, the shopping lure is increased by the new limits.

A quick 24-hour outing by a family of three (parents can make a declaration on behalf of a child) could net $600 worth of goods duty-free. That's a $78 savings, assuming only a 13 per cent price difference. But many high-end U.S. consumer goods have a much bigger gap.

"Amongst a few people you can buy a lot," Kruh says.

Level the tariff field

Kruh is one of those who thinks it is a "very good thing" to raise the duty-free limits and that there is not as much cross-border shopping going on as most people believe.

At the same time, he hastens to add, there is a "parallel issue" of import tariffs and a need for Ottawa to level the playing field for Canadian retailers.

"I think to level that playing field, they've got to help bring the costs of like goods in Canada on par with the U.S.

"To do that, they've got to eliminate certain import tariffs on finished goods coming into Canada that makes the landscape not competitive."

That's a message the Retail Council of Canada has been sending to Ottawa, too.

The council, Wilkes says, wants the federal government to eliminate tariffs "that are no longer achieving their original goals, which was to protect domestic production."

To demonstrate his point about tariffs, Wilkes points to hockey equipment.

In Canada the duty applied to an imported pair of hockey pants is 18 per cent. In the U.S., it is 2.9 per cent. For a hockey helmet, the duty into Canada is five per cent. In the U.S., there is no duty.

While the federal government hasn't shown any particular appetite to give up revenue sources, like duties, Wilkes suggests there is another way of looking at this: "As more and more Canadians shop south of the border, they are draining the GST revenue that would have been generated if Canadians were shopping within this country."

Government solutions needed

The retail council sees two other issues driving the Canada-U.S. price gap: the cost wholesalers or suppliers charge to retailers (higher here than in the U.S.) and the supply management system around certain food products in Canada, such as eggs or milk, which generally cost more at Canadian grocery stories.

"Production quotas have left Canadian industry with a large number of smaller high-cost producers," the council said in its April 2012 submission to the Senate committee exploring the Canada-U.S. price gap.

The council is urging a review of the supply management system, and if the federal government chooses not to change it then the council suggests exempting or limiting supply-managed products from personal duty exemption limits at the border.

In the U.S., the increase to the duty-free limits has not gone unnoticed.

Fashion Outlets of Niagara Falls USA, a popular mall just over the Ontario border, expects the increase will have a "positive impact" on the community.

"This gives the Canadian shopper the opportunity to take further advantage of our great selection of brand name merchandise," marketing director Julie Clark said in an email.

Staff at the mall are always working with tourism partners to bolster shopping packages and programs to attract shoppers for extended stays, she said. And Canadian shoppers are noticing.

Making a difference

"If I have to buy something really sharp, like a suit, I would probably spend the night to take advantage of the cap," Karl Rohrmoser of Burlington, Ont., told the Buffalo News recently.

"I usually do my heavy-duty damage when I'm here on vacation. The new allowance will make a difference."

Wilkes and others at the retail council are determined to do what they can to encourage shoppers such as Rohrmoser to look for their goods closer to home.

But it is an endeavour Wilkes says that no one business can tackle on its own.

While businesses can offer good customer service, or ensure they are well-located to attract their target market, Wilkes considers the drive to level the playing field for Canadian retailers is a bigger task.

"No one company, no one retailer can respond to the government-based issues that are driving the un-level playing field," he says.

"No matter how big or small you are, those are current facts of cost that retailers south of the border aren't facing, so it's very difficult to arrange a strategy around something that's affecting an entire industry."