Canada’s Market Realities
I was having a casual discussion with a colleague at work concerning broken equipment, and the repair was taking a bit longer than usual. While we talked about the design being obsolete and that surely a newer model would be available, I quickly opened the internet to check for a new version of the equipment. While surfing through the internet and checking out the different manufacturers of that equipment, I noticed that none of them were resident in Canada, which made me ask out of curiosity: “Why is it that we don’t have many original equipment manufacturers (OEMs) in Canada?”
My colleague quickly said, “I think I have an answer to that,” and he continued by telling me how his father was into the distribution of toys for children in Canada while getting them from the United States. He elaborated on how quite a number of the manufacturers were not interested in his father’s proposal, not because of the quality of the proposal or that the opportunity wasn’t there, but because of the size of the market and the logistics.
Using Canada as a case study, he talked about the low population density, citing that in Canada there are just about six major cities with reasonable populations to attract a lot of business. From a numbers perspective, Toronto has about 6 million people, Montreal with about 4 million, Vancouver with less than 3 million, Calgary with about 2 million, Edmonton with less than 1.5 million, and Ottawa with a population estimate of roughly 1.2 million people. This is quite a small number for some large-scale production or industrial concentration, as the case may be. This population density is a major concern when it comes to market development.
Next to the population density is the distance between these populated cities. This is where logistics costs become extremely important. While the population density in these major cities may seem reasonable for different businesses, the logistics costs of distribution between these cities are very high; hence, businesses are developed to serve a particular location.
Putting these two major factors together, you will recognize that companies in Canada are designed to serve a localized market or an international market. Because of the high distribution costs, businesses are modelled to target a particular location or region, and as such, capacities are limited to the intended market. On the other hand, bigger companies use these highly populated localities as manufacturing hubs for international markets and not mostly for the local market. Quite a number of the manufacturing companies in Canada are situated near the U.S. border to serve the large U.S. market with a population of more than 330 million people in a better-localized distribution channel.
A good product is not enough; market size and distribution costs must be integrated into the playbook as they ultimately will affect your pricing. Pricing is another topic, as you cannot transfer all the costs to the consumer. It will limit purchasing willingness and capability. As you may already know, most products are not essential. In fact, big players don’t satisfy essential needs but rather play around with value-adding products to improve quality of life. Thus, in modelling your business, market size and logistics costs of distribution play a crucial role in the success of your strategy.
