Everything You Need to Know about Selling in Canada

E-commerce is nothing new for Canadian consumers. The internet penetration is among the highest in the world and more than half of the population has embraced online shopping. Not being an especially populous country, the market is still relatively small at just over USD 20 billion, but cross-border e-commerce dominates the industry, with eMarketer reporting that 7 out of 10 online purchases in Canada are made to international merchants.

Canada’s culture of e-commerce and cross-border shopping is firmly established, so there’s no race to catch the wave. The growth will be slow and steady – instead of the excitement of cashing in on a new trend, the market offers a solid, low-risk, long-term investment. In this article we’re going to take a look at some of the reasons why Canada is the first choice for so many merchants selling across borders, and how to decide if it is the right market for you.

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In the “Everything You Need to Know” series, we take a look at a specific e-commerce market to help you decide whether you should expand online sales across borders. As a provider of comprehensive payment processing services, we at DalPay specialise in cross-border commerce and have first-hand experience facilitating business in over one hundred markets worldwide.

Unless otherwise noted, figures in this article are sourced from:

When deciding whether to expand your business across borders, you need to consider which countries you are targeting and what each one can uniquely offer you. If you’re selling a niche product or service and your target audience is very specific, you need to identify which markets have a demand for what you provide. But in terms of sheer growth, Canada is an obvious first choice for international expansion.

Canada is in fact the single most popular market for cross-border merchants around the world by a significant margin. According to Multichannel Merchant’s MCM Outlook 2014, 84% of international merchants said they sell into Canada, well above the runner-up, Australia, at 54%. This fact is a double-edged sword, since it both represents the reality that Canada is a very attractive market for cross-border e-commerce and suggests that the market may be flooded and highly competitive.

Quick Figures

  • Total population: 35.1 million
  • Internet penetration: 87% (29.8 million)
  • Mobile penetration: 78.9%
  • Online shoppers: 18.5 million
  • E-commerce sales: USD 20.6 billion
  • M-commerce sales: USD 1.3 billion
  • E-commerce annual growth rate: 15.5%

The widespread popularity of cross-border commerce in Canada can be traced back to the country’s geography. Canada was not settled in the same way as the US – it never had a frontier. Instead, Canada was settled primarily by boat, through the St. Lawrence Seaway and the Great Lakes, which is where the border between Canada and the US was drawn, the world’s longest continuous border between two countries.

As a result, the vast majority of the country’s population lives within a short drive of the American border, and throughout the 20th century cross-border shopping was a very popular weekend activity among Canadians of all demographics. By the time e-commerce came along in the 21st century, most Canadians were already highly accustomed to buying from international merchants, and once that was no longer limited to the US, they embraced it even further.

What You Need to Know

Industry Trends

Media products – books, music, film and TV – dominate the Canadian online retail market, accounting for a value 21.4 billion USD, nearly triple the next most popular category, apparel and footware. One third of total e-commerce spending goes to American merchants, with Amazon.com being the most popular.

There are three main drivers for cross-border purchases among Canadian consumers. 41% cite lower prices as their primary reason for buying from international merchants and 23% cite better selection. Free or discounted shipping is also a key motivator, with merchants offering free shipping seeing a 69% increase in their conversion rates.

Preferred Payment Methods

As with most of the world’s e-commerce markets, credit cards are the most popular method of online payment, with MasterCard being the most popular scheme in Canada. E-wallets account for nearly one-fifth of online transactions and prepaid cards for 11% of the total.

Canada also has one of the most mature national debit card networks in the world, the Interac network. Debit cards have contributed significantly to decreasing the country’s dependence on credit cards at the point-of-sale, and the more recent development of Interac Online has received widespread adoption in the e-commerce sphere, representing 9.1% of the market after only its first two years. The increased security and lack of debt concerns associated with debit and prepaid cards has encouraged the growth of Canadian e-commerce.

M-Commerce

Similarly, Canadian consumers have been more ready to embrace new m-commerce technologies than Americans and Europeans. More than a third of the populations uses mobile banking and over 5 million Canadians shop online using their smartphones.

The eagerness for emerging technologies among Canadians is clear: the average Canadian spends nearly twice as much time on the internet as the worldwide average (23 hours per month); almost half have said they are ready to embrace m-commerce on wearable devices; and 47% have said they want retailers to provide more secure mobile payment options. All this has contributed to Canada scoring #2 on the Mobile Payments Readiness Index (MPRI).

Fraud Report

Partly because debit card use in Canada is among the world’s highest, payment card fraud in Canada is relatively high. When the major credit card schemes began migrating to EMV chip and PIN systems, Interac was slow to catch on since debit cards were always perceived to be more secure. However, fraudsters caught on to this and began targeting debit cards.

After the rollout of EMV, online fraud grew from 31% of the total in 2008 to over 64% today. In Canada, 3D Secure is mandated to counteract online payment card fraud, but international merchants in particular need to be careful when accepting payments from Canadian-issued cards since they are one of the most commonly targeted by fraudsters.

Canadian E-Commerce in Brief

Pros:

  • The most popular e-commerce market for international merchants
  • Canadians, on average, spend the most time on the internet
  • More than two-thirds of online purchases are cross-border
  • High mobile penetration and m-commerce acceptance

Cons:

  • Relatively low growth rate
  • Highly competitive market for international merchants
  • High payment card fraud rates

The interesting thing about Canadian consumers is how readily they will purchase from an international merchant. Lower prices and better selection will always trump most Canadians’ desire to purchase from a domestic retailer. Canadian consumers even buy from Amazon.com 2.5 times more often than they do from Amazon.ca, the company’s Canadian arm.

One of the world’s largest countries with a highly mature online retail sector, Canada is a seller’s market wherever you may be located. Though it is competitive, it’s relatively easy to begin selling into the country and, with its strong economy and steady e-commerce growth, Canada could serve as a low-risk, long-term investment with a steady return to help you fund future international expansions.

Expanding into a new international market is a risky venture but a very rewarding one if done right. For the latest information about how you can build and maintain a strong e-commerce enterprise and keep it compatible with legislation and buying habits at home and abroad, subscribe to the DalPay Blog and follow us on Facebook, Twitter and LinkedIn for the latest industry news.

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International Expansion: What You Can Learn from a Retailing Giant’s Mistakes

What-you-can-learn-from-a-retailing-giant-mistakes

Target, the American retailing giant, announced this week the closing of its Canadian operations after less than two years in the market. This amounts to the closing of 133 stores and the loss of 7 billion USD invested by Target in its Canadian roll-out, including the purchase of the Zellers retail chain.

It’s a classic case of biting off more than you can chew. Target banked their first international expansion on the high level of brand awareness among Canadians due to cross-border shopping and international media.

While Target is a giant in the American retailing space (and there are some unique reasons why their Canadian expansion failed) the basic requirements for successful cross-border commerce apply across the board for businesses of any size, online or brick-and-mortar. For any merchant, Target’s mistakes are a treasure trove of lessons about what not to do when selling across borders.

Why Target Failed in Canada

First and foremost, Target didn’t do their homework. They underestimated the power of their brand and overestimated the size of their potential market. We can’t just blame the marketplace – plenty of retail organisations have successfully expanded into Canada – but there are a few reasons why Target faced unique challenges, such as:

  • Compared to the US, Canada’s consumer market is tiny (and spread out).
  • Shipping goods over the longer distances required is a significant added expense (and the cost of fuel is higher).
  • Minimum wage is higher than in the US.

The last point could have been partially worked around by operating an e-commerce store in Canada, which would require less staff north of the border and would cut down on real estate costs. It’s remarkable, in fact, that Target never did so. Opening an e-commerce store could have been an excellent way for Target to test the market, grow their brand awareness and build enthusiasm for their expansion.

Instead they opened over 130 physical locations with no trial period, little local brand development and an insufficient distribution chain. Consumers complained of empty shelves, understaffed stores and high prices. There was little to distinguish Target stores from their failing predecessor Zellers and they didn’t offer anything to compete with established chains like Canadian Tire, Home Depot and Walmart.

After company analysts predicted continued losses through the next five years, Target accepted the failure of their first international expansion and received court approval to begin the liquidation process, resulting in:

We don’t need to come up with a hypothetical worst-case scenario for entering a new cross-border market, because this is it.

How to Succeed in Cross-Border Commerce: The Basics

Know your market

One of Target’s biggest mistakes was to overlook the ways in which the US and Canadian markets differed. They didn’t know how to compete with the loyalty consumers already felt toward Canadian Tire, Home Depot and Walmart. Target assumed their winning formula at home was going to be a success elsewhere, not accounting for how localised shopping habits can have a major effect on the retail space.

To avoid making the same mistake when expanding into a new market, there are two things you will need to know:

  1. Is there an audience for your product in this new market?
  2. If so, how does it differ from your local audience and how can you tailor your marketing and services to accommodate that difference?

What makes a successful business is the ability to provide something consumers aren’t getting anywhere else – you need to carefully analyse the competition in a new market to ensure that you can bring something new to the table. If you can’t, then that market may not have room for you.

Check out our article about Knowing Your Customer (KYC) to learn more about identifying and addressing your target audience.

Test your market

Target’s entrance into the Canadian retail space happened overnight. First there was nothing, then 130+ stores.

What if they had started with just 20 stores, or only 1, or even just opened up their online store to customers north of the border? They could have tested their products in small localised regions, gathered preliminary feedback and worked with focus groups. If Target had taken the time to do so, they would have had the chance to adapt their business to more accurately reflect the needs and desires of Canadians.

Preliminary research can never fully prepare you for the realities of entering a new market. No matter how confident you are, don’t dive in like Target did – start by dipping your toes in the water. Start small and plan for an exploratory phase. This is your chance to discover any pain points in the current market conditions and what effect they may have on your business. Once you’ve confirmed demand and refined your product, only then is it time to fully invest your resources.

Keep your promises

Canadians were expecting the same high quality and low cost they experienced at Target stores in the US. What they got was empty shelves and high prices.

Target promised to be a new major player in the Canadian retail space but couldn’t keep that promise. And how did it turn out? 7 billion USD down the drain, 130 empty stores and thousands of people out of jobs. On top of that, they’ve compromised their ability to ever do business in the Canadian market again. Target will be a case study for years to come about what not to do in international expansion.

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When you expand your business into a new market, be careful not to overextend yourself. Shoppers are savvy. With e-commerce and cross-border shopping, consumers will compare products and prices from around the world. If your potential customers notice a huge disparity based on where they live, that’s going to be hard for them to swallow.

Don’t forget that you’re going to have to live up to all the promotion and hype you build. Your potential customers are expecting you to provide exactly what you’ve promised – letting them down is a sure-fire way to not only lose a customer but to seriously damage your long-term reputation.

Everything you need to know about selling across borders

Entering into a new market doesn’t have to be a game of chance. The poker pros know that you never go all in unless you’ve got nothing to lose. That’s why we’re launching a series of articles designed to help you prepare for tackling a new international market.

Keep an eye out in the coming weeks for “Everything You Need to Know about Selling in Germany”, the first of our articles detailing the regulatory requirements, market conditions and payment habits of a specific country. In the coming months we’ll be visiting countries in all parts of the world to help you take the first steps to expanding your business across borders.

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