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Retail sector battles out-shopping phenomenon.

Retail sector battles out-shopping phenomenon

With millions of dollars at stake, a few towns and cities in Northern Ontario are adopting strategies to discourage consumers from making purchases on the U.S. side of the border - a practice known as out-shopping.

For example, officials in Sault Ste. Marie are prompting consumers to "Shop Ontario," while Thunder Bay officials are pinning their hopes on a smile and handshake.

Retailers in Fort Frances have been advised to cut their costs by finding new suppliers and loss-leader gas stations have also been recommended to keep shoppers on this side of the border.

"Retailers have to look at the service they provide," says Garth Plunkett, chairman of the Thunder Bay Chamber of Commerce's retail committee. "They have to put the people component back into their businesses."

Unlike the border towns of Fort Frances and Sault Ste. Marie, Thunder Bay is located four hours away from its U.S. retail competitor, Duluth, Minn. Despite the distance between the two cities, Canadian shoppers declared goods worth $28.4 million at the Pigeon River border crossing between June 1989 and June 1990 (the latest figures available).

According to Revenue Canada, the figure is almost double the amount declared during the previous year.

An Ernst & Young Inc. study of the situation further indicates that for every dollar's worth of goods declared at the border there is another dollar which is not declared.

"The Canadian shopper is a pretty significant part of our retail economy," says Mike Boland, a business recruiter with the Duluth Chamber of Commerce. "We have a good-size retail sector which draws not only from Canada, but from Minneapolis and other states like Wisconsin, too."

Boland says the city's retail sector features an enclosed mall, which is anchored by retail giants J.C. Penney and Wards, as well as approximately 200 shops and junior retail operations. Boland says the sector generates an estimated $800 million in revenue annually.

Duluth retailers actively market their goods and services in the Thunder Bay area. Boland says the sector publishes a quarterly newsletter and steps up its advertising prior to Canadian holidays such as Victoria Day and Canada Day.

The latter move is part of Duluth's efforts to promote itself as a destination.

"With the increase in two-income households, the tradition of a long family vacation is declining because it's too hard to get vacations at the same time," explains Boland. "So the trend is to take more frequent, but shorter-duration vacations."

However, both Boland and Plunkett say that the price difference, or at least a perceived difference, between U.S. and Canadian goods is the main reason for the popularity of cross-border shopping.

"The perception is that everything is half-price in the U.S. and, of course, it's not," says Plunkett.

The Thunder Bay retailers, as well as their counterparts in Fort Frances and Sault Ste. Marie, are caught between a rock and a hard place when it comes to pricing goods.

Plunkett notes that Canadian taxation, wage and benefit levels make it difficult to reduce prices.

"We'd like to have a level playing field but, by and large, the consumers don't want it to be level," Plunkett says, making reference to the impact reducing prices would have on jobs. "The public wants it both ways."

However, one U.S. official agrees with Thunder Bay's strategy to promote customer service.

"Canadian customers have the perception that American retailers have a sincere desire to make them feel welcome in their stores," notes Bud Mansfield, director of the Sault Ste. Marie (Mich.) Chamber of Commerce. "They appreciate good customer service."

However, improving customer service often costs money, according to one retail consultant.

"Service costs. The more service, the higher the cost," says John Winter of John Winter and Associates Ltd. "The service in the Safeway in Thunder Bay is superb, but they sell ketchup for twice the price it costs in the States."


Stating that consumers are motivated by price, Winter advises retailers to evaluate their supply contracts.

"The problem (of price) is not with the retailer, but with the system behind the retailer," he says. "There is no simple answer to the problem."

For example, Winter notes that a 24-can case of pepsi costs about $7.27 in Fort Frances and only $6.24 a mile away in International Falls. Winter was hired by Fort Frances to develop a cross-border shopping strategy.

"The problem is that the goods are usually warehoused in Toronto, which just adds to the cost of the item," Winter says, adding that warehousing the goods in Northern Ontario could help reduce costs.

Winter says retailers need to determine whether there are better sources of goods, either in Canada or the U.S., than the ones currently being used. His sentiment is echoed by Fort Frances's economic development co-ordinator Frank Meyers.

Meyers says Fort Frances retailers might have to circumvent their current distribution systems just to survive.

"It may end up hurting Canadian manufacturers, but they're doing very little to help the merchants," he notes.

Meyers says that Winter's report, which was scheduled to be made public at the end of last month, was necessary for the local business community to formulate a plan of action.

"We want to be able to target something out of the report," he says, adding that there was previously no data concerning cross-border shopping.

He says the report will help Fort Frances retailers determine how they can compete, by determining where the bulk of their costs come from.

Bill Boulton, president of the local chamber of commerce, notes that the plan could also encourage some Canadian businesses to market their goods and services south of the border.

"It goes both ways," he says. "There's a lot of bargains on this side of the border."

Boulton identifies dry cleaning, Black and Decker Workmates, garage door openers and ski packages as examples of goods and services which cost less in Fort Frances than in International Falls.


One item which is definitely not cheaper in Canada is gasoline, and the difference in price is a major factor driving consumers across the border to International Falls.

Winter recommends that a "loss-leader" gas station be built near the Canadian side of the border, and that gas be sold at U.S. prices to discourage consumers from crossing the bridge.

The price of gasoline is also the hub of the problem in Sault Ste. Marie.

"Our study shows that gasoline is the catalyst for cross-border shopping," says Gayle Logan, executive director of the Sault Ste. Marie Chamber of Commerce. "And while the people are there (in Sault Mich.), they purchase milk and dairy products and, in some cases, purchase some larger items on impulse."

The Ernst & Young study completed late last year estimates 1990 losses to the city at $42 million in sales of goods and $62 million in sales of services.

Logan says the chamber is proposing to create zones with reduced gas prices near the border.

The chamber and the city's broadcast media combined efforts to produce a "Shop Ontario" program. Under the program the city's radio and television stations donated a total of $120,000 worth of air time to broadcast vignettes on the importance of shopping in Sault, Ont.

"We were promoting the need to shop here," says Gerry Clifford, the station manager of CKCY FM. "It's real motherhood stuff."

Clifford says the campaign helped people realize that shopping in Sault, Ont. is important to the city's economy. He says it resulted in a decline in the level of cross-border shopping.

Aside from promoting the local economy, Clifford and Logan say the campaign also focused on a number of "awareness aspects" regarding purchases in the U.S.

"We informed consumers that the quality of the goods is not the same," Clifford explains. "If it doesn't have Canadian Standards Association approval, insurance companies won't cover you if something happens."

The cross-border shopping also has an impact on Clifford's operations. CKCY estimates that it loses an estimated $1 million annually in potential sales to nearby American stations.

"Their stations are very strong in the marketplace. In fact, one of them is number one," he says. "The problem is that we're totally regulated and they're totally deregulated.

"We have to play a certain number of non-hits, while they can play anything they want."

Clifford says his station is combating the problem by marketing itself more aggressively on the Canadian side of the border.

"We're going for total visibility. We want to be all things for all people," he says.

According to Clifford, the efforts are paying dividends. In the fall Bureau of Broadcast Measurement report, the station moved up to second place in the Sault market.

While cross-border shopping is detrimental to Sault, Ont., it is vital to the economy of Sault, Mich., which boasts a population of about 16,000 compared to Sault, Ont.'s, population of 81,000.

"The Canadian business means a great deal to us," Manfield says.

However, he admits that U.S. retailers are sympathetic to the plight of their Canadian counterparts.

"If our roles were reversed, we'd try everything to stop the flow of shoppers across the border."

Mansfield says Sault, Mich. marketing also targets Canadian holidays in an effort to attract consumers over the bridge between the two communities.


Reducing Canadian prices is just one part of the solution to the cross-border shopping problem, according to the Canadian officials interviewed. Prices of goods being brought into the country need to be increased.

While there is little Canadian authorities can do at the source of the goods, they can impose additional taxes when the goods cross the border.

"A lot of this has to do with the federal and the provincial governments getting together," says Winter. "There is no question that the provincial tax should be collected at the border."

Winter says the structure for collecting the tax is already in place and would incur "virtually no cost to collect."

He adds that the eight-per-cent increase would also offset the impact of the change from the manufacturers' tax to the GST.

"You really shot yourselves in the foot when you brought in the GST (goods and services tax)," says Boland. "Before, people would have to pay 13-per-cent tax on whatever they brought back, now it's seven per cent.

PHOTO : Retail sales tax could be collected on American goods crossing the border if the federal and provincial governments could work out an agreement for tax collection, says one consultant. CHRIS KREJLGAARD Staff Writer
COPYRIGHT 1991 Laurentian Business Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Northern Ontario towns and cities adopt strategies to discourage consumers from making purchases on the U.S. side of the border
Author:Krejlgaard, Chris
Publication:Northern Ontario Business
Date:Mar 1, 1991
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