CHAPTER V. Marketing U.S. Products and Services A. Distribution and Sales Channels In spite of Canada's vast size, sales to Canadian industries are characterized by relatively short marketing channels with direct producer-to-user distribution of primary importance. Many Canadian industries tend to be dominated by a few large-scale enterprises that are highly concentrated geographically. In many cases 90 percent or more of the prospective customers for an industrial product will be located in or near two or three cities. Canada's consumer goods market is more diffused than its industrial market. The use of marketing intermediaries is prevalent. In many cases, complete coverage of the consumer market requires representation in several commercial centers across Canada. For most product areas regional representation is considered the optimal marketing approach. Toronto, the largest metropolitan area and the national center for distribution, is usually the logical location for establishing single representation. If the country is to be geographically divided into two markets, the natural division between east and west is on the western shore of Lake Superior at Thunder Bay, Ontario. The primary distribution centers for Eastern Canada are Toronto and/or Montreal. For Western Canada, the most appropriate distribution centers are Vancouver or Calgary. If three regional markets are considered, Quebec and the Atlantic Provinces would comprise the first, with a distributor in Montreal; Ontario the second, with a distributor in Toronto; and the four western provinces the third, with a distributor in Vancouver or Calgary. B. Use of Agents/Distributors; Finding a Partner Distribution channels in Canada vary greatly according to the products/commodities involved. For example, industrial equipment of considerable size and value is usually purchased directly by the end-user. Smaller equipment and industrial supplies, on the other hand, are frequently imported by wholesalers, acting in some cases as exclusive distributors, or by U.S. manufacturers' sales subsidiaries. U.S. firms often prefer to appoint manufacturers' agents who regularly call on potential customers. Many major distributors expect to work on a two-tier commission basis. For contract shipments, agents are offered a realistically low commission, but they receive a higher rate when purchases are made from the local agent's own stocks. Consumer goods are purchased by importing wholesalers, department stores, mail-order houses, chain stores, wholesalers' and retailers' purchasing cooperatives, and many large, single-line retailers. Manufacturers' agents also 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 been increasing substantially. Many of these groups have their own purchasing agents in the United States. For assistance in identifying appropriate agents/distributors in Canada, U.S. companies are advised to contact the District Office of the U.S. Department of Commerce serving their area to request the Agent/Distributor Service (ADS). C. Franchising Franchised businesses of all varieties have enjoyed exceptional growth and success in Canada over the past decade. Franchising is an increasingly attractive method of doing business in Canada, in part because no federal regulations currently exist which specifically restrict franchise activities. Alberta is the only province to have established franchising legislation which stipulates that the franchise must be registered with the provincial securities commission. Canada is the dominant foreign market for U.S. franchisers, with 240 franchise firms operating 11,182 franchise units. A large proportion of franchise units are restaurants, non-food retail, convenience and food establishments, automotive products and services, and business services. The steady growth in the Canadian market for franchises is expected to continue. According to the Canadian Franchise Association, the best franchising prospects are for fast food type operations. Do-it-yourself franchises are also expected to do well throughout the remainder of the decade, as are franchises which focus on housekeeping and lawncare chores. The principle advantage U.S. franchisors have over third-country competitors in this sector is the strong recognition and familiarity of U.S. products and services by Canadian consumers. The high volume of travel by Canadians to the United States combined with constant exposure to U.S. television media through cable networks results in a relatively high pre-disposition by most Canadians to U.S. products and services, even before they are introduced into the Canadian market. Overall, U.S. companies seeking to introduce proven franchise operations supported by sufficient marketing and promotion can expect to be well received by Canadian consumers. D. Direct Marketing Mail order sales in Canada are big business. In fact, Canadian consumers purchase more goods through the mail, per capita, than do their U.S. counterparts. For many companies, tapping into this market can be as easy as placing an add in a magazine. 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: (i) the description of goods, and (ii) the value of the goods. The exact amount paid by the customer for the goods should be indicated, and the currency used should be stated (U.S. or Canadian dollars). If the goods are shipped on a no-charge basis (samples or demos), the price that would have been charged if the goods were sold must be shown. Two copies of the invoice should be attached to the outside of the package. Unlike shipments within the United States, shipments to Canada may be subject to customs duties and taxes. Whether shipping via the U.S. mail or private firm, these additional charges are always paid by the Canadian customer. Duties and taxes are not charged on a product when the value of the shipment is under C$20 Canadian (approximately US$15). Nevertheless, a fully completed business invoice must accompany the package. On shipments worth more than C$20, duties and taxes are applied to the full value of the goods. Duties for a specific product are determined by the type of product and the country of origin. Although duties are paid by the customer, exporters should be aware of the final cost to their customers to evaluate their price competitiveness. In addition to duties, nearly all shipments to Canada valued at over C$20 are subject to the Goods and Services Tax (GST). Canada Post (the Canadian Postal Service) charges a C$5 processing fee on all packages that owe duty or tax. Since nearly all items owe at least the seven percent GST, the practical effect of this measure is to increase the cost of all mail order shipments into Canada by C$5. The U.S. Postal Service maintains a similar US$5 processing fee on dutiable imports. Mail order companies can avoid having the C$5 fee assessed to their customers by registering to collect Canadian duties and taxes themselves. Companies registering with Revenue Canada 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. Additional information on mail order rules is available in the U.S. Department of Commerce publication, "Mail Order Sales to Canada." E. Joint Ventures/Licensing Under Canadian law there is no precise meaning for the term "joint venture". 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 very few restrictions as to the form which joint ventures may take, such as equity or non-equity. Some joint ventures require approval of the Government of Canada under the Investment Canada Act. Such approval is based on whether the venture is likely to be of net benefit to Canada, taking into account the criteria of "benefit" specified in the Act. Net benefit criteria applied to the review of joint ventures relates to issues such as: the level of Canadian participation; the positive impact on productivity; technological development; product innovation; industrial efficiency and product variety in Canada. The majority of joint venture proposals reviewed under the Act readily meet the test of net benefit. 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 U.S. companies. Canada is an attractive market for foreign licensors for a variety of reasons. Most notably, Canada has no regulatory scheme governing licensing arrangements. In some countries, licenses are not valid until government approval or registration has been completed and often registered licenses are available for public inspection. Potential foreign licensors are usually pleased to learn that Canada does not require any such 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. Finally, Canada does not have any exchange controls or other restrictions on the payment of royalties. As with many other countries, Canada taxes royalty payments to non-resident licensors. A "withholding tax" on such royalties is set at 25 percent under the Canadian Income Tax Act, but is reduced to 15 percent or less if the payment is made to licensors in countries with which Canada has entered into tax treaties, like the United States. F. Steps to Establishing an Office The selection of the most appropriate form of business organization depends on the purpose of the business in Canada and the particular circumstances of its establishment, such as the type of business activity, location, scope of operations, etc. Business is carried on in Canada in forms similar to those in the United States. Public or private corporations, partnerships, and sole proprietorships are all familiar forms of doing business in Canada. Although the corporate form of organization is often used by foreign investors in Canada, a foreign corporation is not obligated to incorporate its operation in Canada. Corporations can be either federally or provincially incorporated. Incorporating in Canada is considered to be a relatively simple and inexpensive procedure and can be accomplished federally under the Canada Business Corporation Act or under one of the ten provincial corporations acts. The general requirements are similar for both federal and provincial incorporations. Incorporating under the Canada Business Corporations Act permits a company to do business in all ten provinces, although separate registration to carry on business is still necessary in most of the provinces. Incorporating provincially permits a firm to conduct business only in the province where the incorporation takes place. However, a number of the provinces have reciprocal agreements under which the registration requirement is waived. The federal and some provincial legislation requires that a certain portion of companies' directors be Canadian citizens and/or residents of Canada or the province. A flat fee of C$500 is charged to incorporate federally. Fee structures vary among the provinces, depending in some cases on the authorized capital of the company to be incorporated. About three weeks or sometimes less is generally required to process an application of incorporation once the requisite documents have been received. Information on incorporation federally under the Canada Business Corporations Act can be obtained from Industry Canada, Corporation Branch. As identified above, a company incorporated under the laws of one province must take out a license to do business in each of the other provinces in which it contemplates carrying on business. An important exception is the reciprocal arrangement between the Provinces of Ontario and Quebec, whereby licensing requirements do not apply to a company incorporated in the other province. The Province of New Brunswick does not require registration of extra- provincial companies. Information regarding the documents which must be submitted when applying for incorporation in one of the provinces may be obtained from the respective Canadian provincial ministries. Companies applying for a provincial charter in the Province of Quebec must comply with special French language provisions. Since obtaining a provincial license involves practically as much expense as incorporating, many U.S. firms have preferred to incorporate under federal procedures. In addition, Canadian profits are more easily segregated in a local corporation, and the determination of liability for Canadian and U.S. income taxes is facilitated. Registration as an extra-provincial company is generally required to do business in each of the Canadian provinces in which a foreign company establishes an office, shop, warehouse, or branch plant. However, some provinces define "carrying on business" more broadly than others. A foreign corporation is required to take out a license and pay a fee in each province in which it is deemed to be carrying on business. Whether or not to obtain a license in a Canadian province to do business as an extra-provincial company rather than to incorporate federally will depend on the nature, extent, and duration of the anticipated business activities. For example, where the company's business activities can be conducted through a small sales office in one province without the necessity of opening an office in other provinces, registration as an extra-provincial company may be a suitable method of operation. Firms established or operating in the Province of Quebec must comply with the requirements of Quebec's Charter of the French Language, which makes French the official language of the province. Firms considering establishing operations in Quebec are advised to contact a representative from the Office de la Langue Francaise, which routinely works with companies to develop plans for complying with Quebec's language laws, at the following address: Office de la Langue Francaise Public Relations Services Tour Place Victoria, 16th Floor Montreal, Quebec H4Z 1G8 Tel: (514) 873-6565 Fax: (514) 873-3488 G. Sales Methods, Marketing, Advertising and Promotion Selling strategies in Canada can vary greatly depending on the type of product or service or regional market. It is important for first- time marketers to note that distinct cultural differences between Canada and the United States require, in some cases, a wholly Canadian approach to selling, advertising and marketing. However, marketing and advertising strategies employed by U.S. companies in the domestic market can sometimes be equally effective in the Canadian market. U.S. companies are advised not to assume that selling in Canada is the same as selling in the domestic market and to carefully research the implications of marketing and promotion activities prior to implementation in Canada. A variety of media is used to advertise in Canada. Television accounts for the largest percentage of net advertising revenues, followed by magazines and then newspapers. Although a majority of Canadians speak English, the French-speaking market, concentrated in Quebec, should be considered as a distinct market. Quebec is well served by French-language press and radio and television stations. Advertising directed toward this market should be specifically tailored to Quebec's distinct cultural identity, consumer tastes, preferences and styles. Over 450 advertising agencies operate throughout Canada. A number of the larger dominant agencies are subsidiaries of U.S. companies. Overall, Canadian advertising rates are generally comparable with U.S. rates. Detailed information on rates as well as lists of media representatives and advertising agencies may be found in a publication entitled "Canadian Advertising Rates and Data", published by Maclean Hunter, Ltd. 1. The Press In the area of print media, there are more than 124 daily newspapers published in Canada. Over 85 percent are English and approximately ten percent are French. A few daily newspapers are published in languages other than English or French. Trade magazines, most of which are sent to specific audiences without charge, typically carry heavy advertising. Trade magazines may be found which serve almost every major industry sector or cluster in Canada. The top four general interest Canadian magazines include; "Readers Digest" (circulation 1,300,000); "Chatelaine" (circulation 900,000); "Maclean's" (circulation 600,000); and "Canadian Living" (circulation 520,972). Canada's largest daily national business newspaper is the "Globe and Mail". Two business weeklies, "The Financial Post" and "The Financial Times", are widely read in the business and financial community, with circulations of about 285,000 and 100,000 respectively. 2. Radio and Television More than 97 percent of Canadian households have at least one television. More than 99 percent of Canadians also have radios in their homes. Hundreds of public and commercial business firms operate cable television and major broadcasting stations in the metropolitan areas. More than 116 television stations (originating), 695 licensed and originating (362 a.m. and 333 f.m.) radio stations, 2022 cable television systems broadcast in Canada. The Canadian Broadcasting Corporation (CBC) operates two national television networks, one in English and one in French. A second national television network (CTV) is private and broadcasts only in English. A third private network (Global Television) operates in the heavily populated area of southern Ontario and some areas of Western Canada. There are fifteen independent television stations in Canada. Cable television use in Canada is expanding rapidly. Over 70 percent of Canada's population is hooked into a cable television system. The Canadian Radio-Television and Telecommunications Commission (CRTC) regulates publicly owned broadcasting, commercial based radio and television, and cable television. H. Market Research Market research is available from a wide variety of sources including: federal and provincial governments; advertising agencies; accounting firms, government relations consultants and market research companies. Lists of firms specializing in market research firms activities may be obtained by contacting the Canadian Professional Marketing Research Society. In Canada, the primary source of federal government statistics is Statistics Canada, which is roughly comparable to the U.S. Bureau of the Census. Statistics Canada collects a wide variety of detailed statistical data on national income accounts, balance of payments, industrial production, imports and exports, demographics, inflation rates, wages, etc. As a starting point for collecting detailed market research on specific industry subsectors and market intelligence on emerging business developments in Canada, U.S. companies should contact their local District Office of the U.S. Department of Commerce, or the US&FCS office of the U.S. Embassy in Ottawa, Canada. I. Product Pricing Considerations As in the United States, product pricing is key to remaining competitive vis-a-vis Canadian and third-country producers in both the Canadian industrial and consumer markets. In the retail sector for example, Canadian businesses follow the successful U.S. trend toward larger stores and highly competitive pricing policies. To date, retailers in sectors such as food, drugs, electronics, home improvement and general consumer goods have invested in large warehouse or discount-style operations to expand sales and market share in an increasingly competitive market. These types of adjustments are largely being driven by consumer demands for competitively priced quality goods. Faced with increased taxes, employment uncertainty and less than stellar economic growth, Canadian consumers and businesses alike are now more than ever concerned with competitive pricing and value in all purchasing decisions. J. Sales Service/Customer Support Canadian companies not only have a high awareness of U.S. products and services but also have a strong inclination towards them as well. Nevertheless, Canadian customers, whether corporate or individual, demand appropriate sales service and after-sales customer support, especially given the often significant distances involved between customers in Canada and sellers in the United States. Corporate clients often expect the U.S. 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 should the need arise. A U.S. company entering Canada should evaluate the demand for after-sales service and support in its domestic U.S. market, an try to replicate that network as closely as possible in the Canadian market. If the product demands a strong network of sales and after-sales service in the United States, it is likely that success in Canada will demand appointing agents who can provide that service. There are many companies in Canada which can offer that service as an agent, a representative or on retainer. If the domestic U.S. market can be served by a widespread customer-support base, that same is likely to be a successful formula in Canada. Many U.S. companies have found that the relative ease of establishing an 800 telephone number serving Canada and the United States may offer a solution to this problem, at little marginal cost. This allows the Canadian customer instant access to the U.S. vendor whether for solving problems, answering questions, or just providing a higher "comfort level" with a new product. K. Selling to the Canadian Government 1. General The 1989 U.S.-Canada Free Trade Agreement (CFTA) expanded the size of the government procurement market open to free and fair (non-discriminatory) competition between U.S. and Canadian suppliers. The CFTA established clear, fair rules of bid selection and provided for an effective Bid Challenge System (BCS). The CFTA opened certain federal procurement valued at C$25,000 or more. This means that a U.S. company bidding on a C$30,000 Government of Canada contract competes on an equal footing with its Canadian competitors; the company is judged solely on its ability to deliver a low-cost, high-quality product. As a result of these measures, U.S. suppliers successfully competed for 591 Canadian contracts worth over US$26 million from January 1989 through 1992. NAFTA, which entered into force on January 1, 1994: - Extends coverage to listed government-owned corporations for goods and services contracts valued at above $250,000 and construction contracts valued at over $8 million. - Extends coverage to purchases of services valued over $50,000 by listed federal government agencies and adds coverage valued at $6.5 million for construction contracts. - Adds Crown Corporations to the list of covered entities. (the St. Lawrence Seaway Authority, the Royal Canadian Mint, the Canadian National Railway (freight), and Via Rail (passenger service). - Canadian federal entity coverage to include Communications Canada, Transport Canada, and the Ministry of Fisheries and Oceans. 2. Services The CFTA was the first trade agreement to include trade in services. The Agreement paved the way for companies in over 150 service sectors to provide their services in Canada without discrimination. The Agreement also required that business regulations for services be clear and explicit. The CFTA did not change existing regulations governing services in the two countries but locked in current levels of protection. In effect, the Canadian Government is prohibited from passing new legislation which would further restrict the right of a U.S.-based engineering, advertising, or other covered service firms from doing business in Canada. The services chapter of the CFTA also included special provisions for the architecture, tourism, and telecommunications sectors. NAFTA: - Extends coverage to nearly all service sectors. - Eliminates existing federal and local regulations restricting partner country access to services markets, unless reserved. - Removes citizenship or permanent residency requirements for licensing of professional service providers. 3. Financial Services The CFTA removed virtually all discrimination on the basis of nationality in the financial services sector (commercial and investment banks, savings and loan institutions, and certain insurance activities). Specifically, the CFTA eliminated Canadian restrictions on market share and asset and capital expansion for U.S. bank subsidiaries in Canada and gave U.S. financial institutions the same rights as Canadian financial institutions to establish insurance companies, trust companies, and certain types of banks in Canada. The CFTA also provided that the benefits of further liberalization in both countries be extended to the financial institutions of the partner country. NAFTA: - Establishes a comprehensive set of principles and rules governing trade and investment in financial services. - Covers state/provincial and local, as well as federal, measures. - Guarantees U.S. firms in Canada the right to process data in the United States. - Provides access to the NAFTA dispute settlement mechanisms for NAFTA financial services firms. L. Protecting Your Product From IPR Infringement Canada's intellectual property protection in many ways mirrors that of the United States, with only a few exceptions. Detailed information regarding product protection from intellectual property rights infringement, and registering a patent, trademark, or copyright can be found in Chapter VII, Section H. M. Need for a Local Attorney The population of attorneys in Canada is far less than that of the United States, and using an attorney for routine business practices is less prevalent. U.S. companies should consult with an attorney for a variety of business activities in Canada, such as establishing a corporate investment or other presence, or marketing a product or service that requires copyright, patent or trademark protection. The Canadian legal system is closer to the British model than to the U.S. system, although there are many similarities between Canadian and U.S. commercial law. Most large Canadian law firms have partnerships or strong associations with counterpart firms in many parts of the United States, and are well experienced with matters that cross international lines, especially in trade and business. Naturally, any legal problems, or difficulties with Canadian Customs or other government agencies, are likely to be best handled by an experienced local legal representative. The U.S. Embassy and Consulates in Canada can provide lists of local attorneys experienced in a range of commercial and other legal matters.