The top 7 mistakes American firms make when crossing the northern border
Given the proximity, similar cultural history and enormous trade volume, doing business in Canada seems like a no-brainer for U.S. companies. However, that’s the first mistake many U.S. companies make when they approach a business expansion into Canada – they don’t think about adapting their operations to a distinctly different market.
Many American retailers have found success in Canada: Walmart, Amazon and Costco are doing brisk business. Others, meanwhile, have made serious missteps, as Target did when it failed to reconcile its pricing for Canadian consumers. Canada is a second home for major American manufacturers from Ford and GM to GE and Cargill. The television and film industries have taken root in both Toronto and Vancouver as alternatives to Hollywood and New York City. Toronto created more technology jobs in 2017 than the Bay Area, New York City and Seattle combined and is rapidly becoming Silicon Valley North. Microsoft, Alphabet, Nvidea, Salesforce, Amazon and Uber amongst others have all made significant investments in Canada.
As long-term players in the Canadian real estate arena, we’ve seen many U.S. companies whose businesses thrive in Canada, while others have flopped. The flops are usually due to bad execution. To help other U.S. businesses find the best footing north of the border, here’s our list of the top mistakes to avoid.
1. Not doing enough research.
It’s important to understand just how complex an undertaking it is to go across the border. Canada’s land mass is slightly larger than the United States, but its population is just a little over one-tenth that of its southern neighbor, or neighbour if you are Canadian! There’s tremendous diversity between the provinces within Canada, both from a regulatory and demographic point of view. For instance, doing business in bilingual Quebec requires advertising, labeling and user guides, in both French and English. If you don’t take the time to research your market, consumer demand, your competition and the available talent, your new business venture could end up stumbling.
2. Assuming Canadian customers are just like Americans.
Canadian shoppers are often classified as value shoppers, more cautious and spending less. Sales often require a stronger business case. Canadians are more likely to own a home, though they earn less than Americans. And Canada’s population has more foreign-born residents per capita.
3. Setting prices too high.
U.S. retailers often price their products at a premium in Canada to compensate for their investment, and to account for a higher minimum wage and cross-border duties. Canadians are well versed in pricing south of the border. While some discrepancies are tolerable, vast “transparent” differences lead to backlash. For example, Target tried to enter the market and failed largely because there was a large, and noticeable, misalignment between U.S. and Canadian pricing very visible on its website. Much of the NAFTA/USMCA trade negotiations were focused on re-levelling prices, so that costs of Canadian products would be in line with the U.S.
4. Failing to understand Canadian provincial employment laws.
When hiring Canadian employees, you must treat them, pay them and manage them following the individual Canadian provinces’ employment standards, not U.S. standards. There are statutes guaranteeing minimum wage, hours of work, overtime pay, vacations, statutory holidays, parental leave, notice of termination, and in some cases additional severance pay. Even the sale of a business may trigger job-protection provisions.
5. Taking on too much, too quickly.
Some companies that have had success in the United States by expanding rapidly to capitalize on consumer interest have seen the strategy backfire in Canada. With the low dollar, we are seeing an uptick in the manufacturing sector, which uses a lot of industrial real estate. That wasn’t really the case 18 months ago. In the office sector, we continue to see technology companies, including Google and Amazon, looking to Toronto and other parts of Canada as a place to grow. For others, instead of making a big commitment too fast, consider trying an online presence first.
6. Ignoring duties, shipping and transportation regulations.
Bringing inventory into Canada, dealing with customs and managing inventory all require resources. Certain products, from food and appliances to lumber and electrical motors, are subject to special safety or other standards, and some require special licenses and certificates. Companies should consider reconfiguring logistical channels. Most U.S. companies operate in Canada by setting up a Canadian version of their company as a wholly owned subsidiary of the U.S. parent company. This gives them several advantages in the handling of taxes and other legal issues, but also creates an additional layer of complexity.
7. Not acquiring local market knowledge.
For new entrants, acquiring an established Canadian company is often a path to success. Business operations are already in place, and the Canadian personnel can provide strong local market knowledge. Local leadership may be viewed by suppliers, customers and business partners as a strength, too.
In our own case, Savills Canada is living proof of the value of the local acquisition strategy. Toronto-based commercial real estate firm, Real Facilities, was acquired in 2015 by real estate service provider Savills Studley, expanding the brand in North America. This deal gave the U.S. firm a strategic presence in Toronto as the fourth-largest commercial real estate market in North America.
The size and significance of the Canadian market, along with access to a highly educated and skilled working population, are real reasons for U.S. companies to do business in Canada. Just be sure to look both ways when crossing the border.