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Executive Report on Strategies in Canada
ICON Group International, June 2007, Pages: 393
How to Strategically Evaluate Canada
Perhaps the most efficient way of evaluating Canada is to consider key dimensions which themselves are composites of multiple factors. Composite portfolio approaches have long been used by strategic planners. The biggest challenge in this approach is to choose the appropriate factors that are the most relevant to international planning. The two measures of greatest relevance are “latent demand” and “market accessibility”. The figure below summarizes the key dimensions and recommendations of such an approach. Using these two composites, one can prioritize all countries of the world. Countries of high latent demand and high relative accessibility (e.g. easier entry for one firm compared to other firms) are given highest priority. The figure below shows two different scenarios. Accessibility is defined as a firm’s ease of entering or supplying from or to a market (the “supply side”), and latent demand is an indicator of the potential in serving from or to the market (the “demand side”).
Framework for Prioritizing Countries
Demand/Market Potential Driven Firm
Relative Accessibility
Accessibility/Supply Averse Firm
Relative Accessibility
In the top figure, the firm is driven by market potential, whereas the bottom figure represents a firm that is driven by costs or by an aversion to difficult markets. This report treats the reader as coming from a “generic firm” approaching the global market - neither a market-driven nor a cost-driven company. Planners must therefore augment this report with their own company-specific factors that might change the priorities.
Latent Demand and Accessibility in Canada
This report provides an extremely detailed overview of factors driving latent demand and accessibility in Canada. Latent demand is largely driven by economic fundamentals. But, latent demand only represents half of the picture. A country may at first sight appear to be attractive due to a high latent demand, but it is often less attractive when one considers at the macro level how easy it might be to serve that entire potential and/or general business risks.
Chapter 2 deals with macro-accessibility. While accessibility will always vary from one company to another for a given country, the following domains are typically considered when evaluating macro-accessibility in Canada:
Openness to Trade in Canada
Openness to Direct Investment in Canada
Local Marketing and Entry Strategy Alternatives
Local Human Resources
Local Risks
Across these domains, a number of not-so-obvious factors can affect accessibility and risk. These are also covered in Chapter 2, which is presented from the perspective of an American firm, though it is equally applicable to most firms entering Canada. This chapter has been authored by local offices of the U.S. Government. I have included a number of edits to clarify the provided information as it relates to the general strategic framework.
In Chapter 3, I summarize the economic potential for Canada over the next five years for hundreds of industries, categories, and products. The goal of this chapter is to report my findings on the real economic potential, or latent demand, represented by Canada when defined as an area of dominant influence. The data presented are the result of various spatial econometric and time-series forecasting models which, for each category presented, are applied to forecast and allocate latent demand across all countries of the world and major distribution centers or centers of dominant influence within each country. This is accomplished knowing that economic fundamentals (e.g. income) generally vary from one country to another within a given country over time. In this chapter, I report the allocation for each category for Canada as an area of dominant influence in North America & the Caribbean and, potentially, the world.
The report concludes with trade indicators for Canada. Often, the amount of trade flowing into and out of a country is a strong indicator of trading partners, trade openness, and related latent demand. Trade indicators are purely statistical in nature. Although international trade is not a direct measure of latent demand, it does provide an indicator of general market conditions with respect to trade flows and trade openness in Canada.
As a whole, this report presents a strategic assessment of Canada by considering an extremely broad set of factors affecting both latent demand and accessibility, as outlined in the following chapters.
MACRO-ACCESSIBILITY IN CANADA
Market Entry Vehicles
The US Commercial Service encourages American firms to come to Canada to participate in one of a variety of low-cost market entry programs offered by the US Government. Our Dealmaker events, for example, offer pre-screened appointments with Canadian firms, briefing sessions with experts, and networking events at minimal cost to US companies. Customized assistance and appointment scheduling is also offered to US firms under the Gold Key program.
For additional information on the Canadian market, please contact the US Department of Commerce Export Assistance Center serving your area or the Commercial Service of the US Embassy in Ottawa, Canada.
US exporters seeking general export assistance and/or country-specific commercial information should contact the Trade Information Center by Tel: (800) 872-8723 or (202) 482-0543, or by Fax: (202) 482-4473. Information for US exporters is also available at the following Web sites: www.usatrade.gov/canada, www.export.gov, and www.tradeinfo.doc.gov.
Economic Fundamentals and Dynamics
Canada has a thriving economy that is closely integrated with that of the United States, resembling the US not only in per capita output, but also in its market-oriented economic system and pattern of production.
Government Intervention Risks
Production and services in Canada are predominantly privately owned and operated. However, the federal and provincial governments are significantly involved in the economy. They provide a broad regulatory framework and engage in redistribution of wealth from high-income individuals and regions to lower income persons and provinces. Federal government economic policies since the mid-1980s have emphasized reduction of public sector interference in the economy and promotion of private sector initiative and competition. Nevertheless, federal government regulatory regimes affect foreign investment in telecommunications, publishing, broadcasting, aviation, mining, and fishing.
Balance of Payments Issues
The most traded commodities are transportation equipment, energy products, investment-related machinery and equipment, natural resources other than energy, and agricultural products. Canadian FDI in the United States is concentrated in finance and insurance, metallic minerals and metal products, communications, and chemical products.
Economic Relationship with the United States
The United States and Canada are allies and close friends that share a wide range of fundamental values, a commitment to democracy, and traditions of tolerance and respect for human rights. Both have dynamic market economies with sophisticated industrial, agricultural, natural resource, and service sectors, and both are committed to high living standards for their citizens. These factors complement the obvious geographic facts and have combined to make each the others best customer. Despite the occasional friction over trade issues, the bilateral relationship, probably the most intensive and complex in the world, is positive and highly cooperative.
Infrastructure Development
Transportation
Canada has excellent roads, railroads, air transport systems and port access. Canadas truck, air and rail services are well integrated with US networks, providing efficient access to consumers and suppliers throughout North America.
Railways
Canadas two major railways, Canadian National Railways (CNR) and the Canadian Pacific Railway Company (CPR) offer rail services on a national scale, including inter-modal services, to shippers and receivers from the Atlantic Ocean to the Pacific Ocean. Both transcontinental railways are already highly integrated with the rail transportation systems in the United States. In particular, the CNR owns the Illinois Central Railroad and Wisconsin Central Railroad and through the IC has direct rail connections to ports on the Gulf of Mexico.
Motor Freight
Canada has more than 500,000 miles of public roads. The 4,500-mile Trans-Canada Highway is the countrys major east-west route, linking all 10 provinces. The road network includes a large number of crossing points with the US, eighteen of which are major trade gateways. Every year, roughly ten million trucks cross the United States-Canada border. The provinces have jurisdiction over highways in Canada and common carriers require an operating authority (or trip permit) from the appropriate provincial Department of Transport or Highways in which cartage will occur.
Water Transport
Canada is a maritime nation with access to three oceans (the Pacific, the Atlantic, and the Arctic) and to the worlds longest inland waterway open to ocean shipping, the Great Lakes/St. Lawrence Seaway System. Vancouver is Canadas largest port and the main terminal for goods being shipped to the Asia-Pacific region. In the eastern part of Canada, shipments are divided among several ports, including Montreal, Halifax, Saint John, and Quebec City. Despite the cold climate in winter, many of Canadas deep-water ports are open year round. Modern container facilities at major ports, such as Halifax, Montreal, and Vancouver, connect with inland container trains to ensure rapid movement of goods throughout North America. Canada, like the United States, places restrictions on foreign activity in the “Coasting Trade.” Foreign-flagged vessels require a license to operate commercially within Canadian territorial waters.
Aviation
Canada has a highly developed air transportation system that includes eight airports with more than one million passengers per year each, 18 other major airports, and some 500 smaller paved airports. Canadas principal airline, Air Canada, has comprehensive domestic and international route networks and is complemented by several national discount carriers and a number of regional carriers. Air connections between the United States and Canada are extensive, with well-developed facilities for freight and passenger traffic. Canadian and American carriers have unlimited access to fly between any US-Canada city pair. Travel between the United States and Canada is facilitated by the presence of US border inspection personnel (Customs, Immigration and Agriculture) who “pre-clear” US-bound passengers at seven airports in Canada: Calgary, Edmonton, Montreal, Ottawa, Toronto, Vancouver, and Winnipeg.
Information Technology
Canada is one of the most “wired” nations in the world. All major cities are well connected to a high-speed Internet backbone and, according to OECD figures, Canada has the lowest Internet access costs among G-8 countries. The Government of Canada has made a priority of supporting high-speed research networks and Internet access for institutions and communities.
Political System
Canada is a parliamentary democracy and a federal state composed of ten provinces and three territories. A government is elected for a period not to exceed five years, but normally calls elections during the fourth year.
Since 1984, the federal government has “devolved” many powers and social programs to the provinces, at first for political reasons and later, in the 1990s, in response to a fiscal crisis. During much of the same period, trade between individual provinces and the United States grew faster than inter-provincial trade, exacerbating economic strains on the Canadian federal system. Following elimination of the federal budget deficit by the end of 1997, in January 1999 the federal government finally reached agreement with the provinces on an approach to joint decision-making for new social spending.
Marketing Strategies
Distribution Channel Options
Sales to Canadian companies are handled through relatively short marketing channels, and in many cases products move directly from manufacturer to end-user. A large number of Canadian industries are dominated by a handful of companies that are highly concentrated geographically. In many cases, 90 percent or more of the prospective customers for an industrial product are located in or near two or three cities. Canadas consumer goods market, on the other hand, is much more widely dispersed than its industrial market. The use of marketing intermediaries in consumer goods is common practice. Often, complete coverage of the consumer market requires representation in the various regions of Canada. Toronto, the largest metropolitan area and commercial center of the country, is usually the most logical location for establishing sole representation. From a regional perspective, the country may be divided geographically into five distinct markets, plus the territories, which are detailed later in this chapter. Establishing representation in each of these markets provides optimal coverage and the ability to target promotional programs to suit specialized market needs.
Agents and Distributors
Distribution channels in Canada vary greatly according to the products and commodities involved. Large industrial equipment, for example, is usually purchased directly by end-users. In contrast, smaller equipment and industrial supplies are frequently imported by wholesalers, exclusive distributors, or by manufacturers sales subsidiaries. US firms have historically preferred to appoint manufacturers agents that regularly call on potential customers to develop the market.
Many sales agents expect to work on a two-tier commission basis. Agents receive a lower commission for contract shipments and a higher rate when purchases are made from the local agents own stocks. Consumer goods are purchased by importing wholesalers, department stores, mail-order houses, chain stores, purchasing cooperatives, and many large, single-line retailers. Manufacturers agents play an important role in the importation and distribution of consumer goods. In addition, the importance of department stores, mail-order houses and cooperative purchasing organizations as direct importers has increased substantially. Many of these groups have their own purchasing agents in the United States.
For assistance in identifying appropriate agents and distributors in Canada, US companies are advised to contact the Export Assistance Center serving their area to request the International Partner Search (IPS) or Gold Key Service. To locate the nearest office, please call the US Department of Commerces Trade Information Center at the toll-free number: 1-800-872-8723, or check the US Commercial Service Web site: www.usatrade.gov.
Franchising Activities
Canada is among the largest foreign markets for US franchises. Canadas franchising sector is comprised of roughly 1,300 franchises and over 80, 000 individual units, ranging from restaurants to non-food retail establishments, from automotive product retailers to purveyors of business services. Annual sales generated by franchises in Canada, which account for only about 5 percent of total businesses in the country, total over US$60 billion, or roughly half of all service and retail sales.
Franchises have enjoyed exceptional success in Canada. The principal advantage US franchisers have over others is the strong recognition and familiarity of American products and services with consumers. The high volume of travel to the United States, combined with constant exposure to US media, results in very high receptivity even before these products and services come onto the market. Overall, US companies seeking operations (supported by sufficient marketing and promotional campaigns) can expect to be extremely well received by Canadian consumers and franchise investors.
The franchise model is an increasingly attractive method of doing business because no federal regulations exist which specifically restrict franchise activities. Ontario and Alberta are the only provinces with franchise legislation. These provincial regulations ensure that small business investors are better able to make informed decisions prior to committing to franchise agreements. Disclosure requirements provide prospective franchisees with information about how sellers plan to approach key contractual issues, such as termination, and afford buyers stronger legal remedies regarding court action. Similar legislation is now under consideration in other provinces. US franchisers already doing business here, and those considering establishing themselves, should take note of the proposed legislation and the strong likelihood of its adoption. Franchisers should be prepared to review existing and/or new franchise agreements, internal disclosure policies, and operating procedures to ensure their consistency with the new legislation.
US franchisers seeking market entry should review guidelines and regulations as related in US Commercial Service market reports, available on our Web site at: www.usatrade.gov. The Canadian Franchise Association also has a comprehensive Web site located at: www.cfa.ca. Further, each province or territory in Canada should be viewed as a unique market, both on a regulatory and business level. Market entry strategy should include information on whether the company…
is export-ready as determined by its US penetration;
has done the necessary market research and financial analysis to determine that its concept will work in Canada; and
is appropriately registered to ensure conformity of corporate disclosure documents.
Direct Marketing Options
Per capita, Canadian consumers purchase more goods through the mail than do their US counterparts. Tapping into this market can be as easy as placing an advertisement in a magazine or on the Internet. In general, Canadian audiences are targeted using the same techniques that are used in the United States. However, shipping goods to Canadian customers involves additional preparation.
When mailing goods to Canada, properly completed paperwork will ensure the goods reach their destination without delay. For most mail order shipments, the only paperwork needed is a standard business invoice. When completing the invoice, two elements are critical: a description of the goods and the value of the goods.
Companies should indicate the amount paid by the customer for the goods, in either US or Canadian dollars. If goods are shipped on a no-charge basis (samples or demos), companies must indicate the retail value of the shipment. Two copies of the invoice should be attached to the outside of the package.
All goods entering Canada are cleared through Customs, where duties are levied based on the value of the item(s). Duties for a specific product are determined by the type of product and the country of origin. The Customs Act states, “that the validation for duty is the selling price that appears on commercial invoices covering sales in the country of export. This price may include freight, warranty, and other charges applicable in the domestic market of the country of export.”
All shipments to Canada are also subject to the seven-percent Goods and Services Tax (GST), a multi-stage sales tax. Although companies pay the GST on each purchase, it is recoverable because the GST is a consumer tax, not a business tax. Canada Post also charges a C$5 (approximately US$3.65) processing fee on all packages that owe duty or tax.
Mail-order companies can avoid having the C$5 fee assessed to their customers by registering to collect Canadian duties and taxes themselves as a Non-Resident Importer. Companies registering with Canada Customs and Revenue Agency (http://www.ccra-adrc.gc.ca/) will be required to prepay duties and taxes monthly. Companies can also arrange to put up a bond in the amount of the estimated duties and taxes.
Joint Ventures and Licensing Options
In the broadest sense, any arrangement in which two or more businesses combine resources for some definable undertaking is considered a joint venture. The Canadian legal system provides great flexibility and imposes few restrictions as to the form that joint ventures may take, such as equity or non-equity. Some joint ventures require approval from the Government of Canada under the Investment Canada Act. Approval is based on the “net benefit” of the venture to Canada. The “benefit criteria” include: the level of Canadian participation; the positive impact on productivity; technological development; product innovation; industrial efficiency; and product variety in Canada. In certain key industries, joint ventures with Canadian partners may prove to be the most effective or, in some cases, the only means of market entry for US companies.
There are a variety of reasons that Canada is an attractive market for foreign licensors. Most notably, Canada has no regulatory scheme governing licensing arrangements. Foreign licensors also do not require registration or public disclosure. Moreover, the Investment Canada Act has no direct application to licensing unless it relates in some way to the control of a Canadian enterprise.
Creating a Sales Office
Incorporation in Canada is a straightforward and inexpensive procedure, accomplished federally under the Canada Business Corporations Act, or provincially under provincial corporate statutes. The major differences between incorporating federally and provincially are: the need to publicize financial statements; fees; and turnaround time on the incorporation process. Incorporating federally allows companies to conduct business in any province, although the corporation may still be required to pay a license or registration fee in some provinces.
A flat fee of C$500 (approximately US$365) is charged to incorporate federally. Fee structures vary among the provinces, although most provinces charge approximately C$200-300. An average of three-four weeks is required to process an application. Information on incorporating federally under the Canada Business Corporations Act can be obtained from Industry Canadas Corporation Branch. Visit their Web site for more information: http://strategis.ic.gc.ca.
As indicated above, a company incorporated under the laws of one province must register to operate in each of the other provinces in which it wants to do business. An important exception is the reciprocal arrangement between the provinces of Ontario and Quebec that allows companies incorporated under regulations in one of these provinces to do business in the other without additional licensing requirements. Also, the province of New Brunswick does not require registration of extra-provincial companies.
It is noted that firms established or operating in the province of Quebec must comply with the requirements of Quebecs Charter of the French Language and adopt a French corporate name. Firms considering establishing operations in Quebec are advised to contact the Office de la Langue Francaise (Office of the French Language), which routinely works with companies to develop plans for complying with Quebecs language laws.
Marketing Factors
For first-time exporters to the market, it is important to note that distinct cultural differences between Canada and the United States may in some cases dictate a wholly Canadian approach to selling, advertising and marketing. Although many strategies used by firms in the United States can be equally effective in the Canadian market, US companies are advised to not automatically assume that selling in Canada is the same as selling in the domestic American market. US companies should carefully research the implications of promotional activities prior to their implementation in Canada.
Advertising Options
Television advertising accounts for the largest percentage of net ad revenues, followed by advertising in magazines and newspapers. Although a majority of Canadians speak English, the French-speaking areas, concentrated in Quebec province, should be considered a distinct market. Quebec is well served by French-language press, radio and television. Advertising directed toward this market should be specifically tailored to Quebecs distinct cultural identity, consumer tastes, preferences and styles. Over 600 advertising agencies operate throughout Canada and a number of these are subsidiaries of US companies. Canadian advertising rates are generally comparable with those in the United States.
The Press
There are currently more than 108 daily newspapers in Canada, of which 95 percent are published in English and approximately 5 percent in French. Trade magazines, usually sent to specific audiences without charge, typically carry a large amount of advertising and serve almost every major industry sector in Canada. In 2002, the top 5 general interest Canadian magazines were: TV Guide (weekly: 837,800), Chatelaine (monthly: 716,700), MacLeans (weekly: 512,400), Readers Digest (monthly: 500,600), and Time Canada (weekly: 360,000), Canadas two daily national newspapers with substantial business sections are: The Globe and Mail (Monday-Friday: 363,000) and The National Post (Monday-Friday: 249,900, Saturday: 284,700). The Toronto Star (Monday-Friday 462,700, Saturday & Sunday: 1,188,400) has high circulation numbers due to the fact that the paper serves the whole Toronto Metropolitan area and is also available throughout the entire country. Additional information on print media is included in Chapter 11.
Television and Radio
More than 89 percent of Canadian households have at least two television sets and approximately 98 percent of Canadians have some form of audio equipment (e.g. radio or CD player). Hundreds of public and commercial firms operate cable television and major broadcasting stations in metropolitan areas. More than 617 television stations, 1,880 licensed radio stations, and 785 cable television systems, serving over 14,285,000 subscribers, broadcast in Canada.
The Canadian Broadcasting Corporation (CBC) operates both English- and French-language national television networks. Both networks broadcast on two channels, one with regular programming and one with all-news programming. There are two private national television networks: CTV, broadcasting on two English-language channels (regular programming and all-news) and Global Television, broadcasting on a single English language channel. There are also 105 independent television stations in Canada.
Pricing Issues
As in the United States, product pricing is key to remaining competitive. In the retail sector, for example, Canadian businesses have followed the successful American trend toward larger stores with highly competitive prices. Retailers in sectors such as food, drugs, consumer electronics, home improvement, office equipment and supplies, and general consumer goods have invested in large discount-style operations to expand sales in an increasingly competitive market. The emergence of high-volume warehouse merchandising in this market is the direct result of consumer demand for competitively priced quality goods. Value for dollar is the predominant purchasing determinant in both the consumer and industrial markets.
When determining appropriate product pricing levels, US firms should pay particular attention to the effects of exchange rates and applicable taxes on the price charged to customers and end-users. A price survey of competitive products available from domestic and third-country sources is an absolute necessity in developing any pricing strategy. Moreover, US firms should be careful not to select pricing levels which may constitute “dumping” or “predatory pricing” infringements under the NAFTA or other international trade agreements.
Supplying Customer Service
Canadian companies have a strong awareness of, and preference for, US products and services. Nevertheless, Canadian customers, whether corporate or individual, demand high-quality sales service and after-sale customer support, particularly because of the often significant distances involved between customers in Canada and sellers in the United States. Corporate clients often expect the US seller to have an agent or distributor whom they can contact immediately should any problems arise. Like their counterparts in the United States, Canadian customers expect fast service and emergency replacement if required.
An American company entering Canada should evaluate the system of after-sale service and support in the US market, and replicate that network as closely as possible in the Canadian market. If the market demands a strong network of sales and after-sale service in the United States, it is probable that success in Canada will depend on appointing agents who can provide that service. There are many companies in Canada that can offer that service as an agent or representative, or on a retainer basis. Alternatively, many US companies have found that establishing a toll-free telephone number that services both Canada and the United States is extremely useful in maintaining contact with customers. This gives Canadian customers instant access to US vendors for solving problems, answering questions, or simply providing a higher “comfort level” with a new product.
Public Sector Marketing
The US-Canada Free Trade Agreement (FTA) expanded the size of Canadas federal government procurement markets by lowering the threshold for contracts offered by federal entities to as low as C$25,000 (approximately US$18,250) for goods and C$100,000 (US$73,000) for services and construction. The FTA opened these markets to free, non-discriminatory competition between US and Canadian suppliers. It stipulated clear, fair rules of bid selection and provided for an effective bid challenge system. This meant that a US company bidding on a Government of Canada contract could compete on equal footing with its Canadian competitors, and would be judged solely on its ability to deliver a low-cost, high-quality product.
The NAFTA incorporated FTA provisions and expanded them to cover services and contracts offered by selected Crown corporations. The new, liberalized NAFTA thresholds make the following available to US firms:
Contracts of C$37,500 (approx. US$27,370) or more offered by a federal entity such as a Department or Agency for goods. The list of these federal entities was expanded to include Communication Canada, Transport Canada, and the Ministry of Fisheries and Oceans.
Contracts of C$84,400 (approx. US$61,610) or more offered by a federal entity for services.
Contracts of C$10.9 million (approx. US$7.957 million) or more offered by a federal entity for construction services.
Contracts of C$422,200 (approx. US$308,210) or more offered by a Crown corporation or other federal government enterprise for goods and services. The list of these corporations includes the St. Lawrence Seaway Authority, the Royal Canadian Mint, the Canadian National Railway, Via Rail, Canada Post, and numerous others.
Contracts of C$13.5 million (approx. US$9.855 million) offered by Crown corporations or federal government enterprises for construction services.
The WTO Agreement on Government Procurement (WTO-AGP), which came into effect on January 1, 1996, applies to most federal government departments. It is a multilateral agreement that aims to secure greater international competition. The WTO-AGP applies to the procurement of goods and services valued at C$255,800 (approx. US$186,730) or more, and construction requirements valued at C$9.8 million (approx. US$7.154 million) or more.
The Canadian governments official Internet-based electronic tendering service, MERX, gives subscribers access to more than 1,500 open tenders from the federal government, provincial governments, and many municipalities, school boards, universities and hospitals. Approximately 200 new tenders are posted daily. US companies can log onto MERX (www.merx.com) free of charge to view and search open tenders. Bid documents can then be ordered directly from the Web site. MERX subscribers, who pay C$29.95 (approx. US$21.90) per month, have access to additional services, such as reduced prices for bid documents, lists of companies that have ordered a par
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