The Pacific Rim -- Duty Spree -- Running For Border To Go Shopping

Oct 6, 1991

Himanee Gupta

U.S.-CANADIAN BORDER - The Aldergrove Duty Free Shop, north of Canadian customs at Lynden, has the cozy, crowded feel of a small, family run antique shop.

Greg Bloudell, a former customs broker, runs the store with his parents and three sisters in a red-and-white Colonial-style building.

The shop, like other duty-free stores, sells an array of liquors, perfumes and cigarettes. But its shelves are also stocked with more unusual items such as pear butter from Quebec, salt shakers with a Canadian insignia and maple syrup from Abbotsford, B.C.

This is duty-free shopping, Canadian-style.

Thanks to an unusual, government-run program that promotes small business, tourism and an awareness of Canadian-made products, duty-free shops are thriving in 29 locations across the border, including one at each of the four major crossings into Western Washington. It's a welcome boost to the economy at a time when Canadian businesses are losing an estimated $2 billion a year in sales to U.S. retailers, mainly because of taxes and higher prices on goods sold in Canada.

By selling merchandise tax-free to price-conscious customers, duty-free retailers have watched sales grow 20 percent to 25 percent annually, to $85 million total last year.

The advent of GST, a 7 percent federal sales tax, this year makes duty-free shopping especially attractive to Canadians going for weekend trips to Washington state.

Canadians who are leaving the country can buy $100 (U.S.) of merchandise, including 40 ounces of alcohol and either a carton of cigarettes or five tins of tobacco. As long as they stay out of Canada for 48 hours, they can bring back up to $100 (Canadian) worth of that merchandise without paying taxes on it.

U.S. residents who spend at least 48 hours in Canada may buy the same quantities of alcohol and tobacco products, as well as up to $400 (U.S.) duty-free.

About 60 percent of the West Coast Duty Free store's customers are Canadian, says Gary Holowaychuk, who owns the store in Surrey, just north of the I-5 "truck crossing."

"By giving people an opportunity to shop at our stores and save money by not paying taxes, we can keep jobs in Canada," Holowaychuk says. "We keep dollars in Canada, too."

U.S. entrepreneurs recognized that duty-free trade could be lucrative along the border long before Canadians did.

Duty-free stores began opening on the U.S. side of the border in the 1950s. Canada did not get into the act until 1983.

In the late 1970s, Holowaychuk recalls watching cars pulling into two duty-free shops on the south side of the border before entering British Columbia.

Seeing potential for a rousing business, Holowaychuk began lobbying the Canadian government to allow entrepreneurs to open similar shops.

Eventually, the Canadian government agreed to open six "experimental" shops, including the Heritage Duty-Free store in Douglas, north of the I-5 Peace Arch crossing. By late 1992, it is expected that 40 duty-free shops will be operating.

Unlike the U.S., where duty-free stores are privately owned and operated, the Canadian government runs its program like a franchise operation.

Even though the government takes in no sales tax from the duty-free stores, Revenue Canada, the agency that operates the duty-free program, collects a monthly licensing fee based on 1 percent to 3 percent of sales.

This year that fee should exceed $2 million, says Shirley Jen, chief of the duty-free program.

Every so often, Revenue Canada opens bids for stores at specific crossings. Applicants must be Canadian citizens who own or want to start a small business. If they already have a business, it cannot generate more than $2 million in annual revenue. At least 20 percent of the non-liquor merchandise must come from Canadian companies.

"For the operators, it's a business opportunity," Jen says. "But, as a government, we wanted to make the program do a little bit more. We want it to be like a regional economic development tool."

That idea appealed to Garry Dickinson. He used to sell tires, but in 1985 he and his wife, Carolyn, opened the Huntingdon Duty Free shop north of the border crossing at Sumas.

They invested about $700,000 in leasing land, building a store and opening the business. Today, annual sales are about $2.9 million.

"It's a good solid business with profit margins that are a lot higher than the tire business," Dickinson says. "We're hoping to have our children take over."

Duty-free shops tend to specialize in selling fine liquors and tobaccos, as well as expensive perfumes and chocolates. But Dickinson's 4,000-square-foot store is like a mini-department store.

He sells tea bags from Murchie's (a Vancouver tea company) and chocolates from Victoria, as well as children's car games, Canadian sweatshirts and baseball caps.

Carolyn Dickinson, who buys most of the non-liquor merchandise,

showcases local artisans.

She buys jeans jackets from a Huntingdon-area designer, honey from the Chiliwack River Valley and jade clocks made by a man from a nearby town. All are sold tax-free.

"It's kind of a nice way to raise awareness of local products and it helps businesses in this area," Garry Dickinson says.

"Even though our staple business is liquor and cigarettes, we do have a lot of sales in these other areas."

Airport duty-free stores tend to draw more affluent shoppers who still appreciate bargains, says Dick Outcalt, a Seattle retail consultant.

By contrast, border stores such as Dickinson's tend to draw a more everyday crowd and, as a result, the merchandise tends to be more down-home.

About 70 percent of Dickinson's customers are Canadian. Many own cabins near Mount Baker and will drop into the store to pick up a bottle of brandy or some other liquor before heading for the cabin for the weekend.

"Instead of a Gucci purse for $300, we have a nice purse that sells for $75," Dickinson says.

Inside Holowaychuk's 6,000-square-foot store near the I-5 truck crossing is an air of elegance with soft lighting and carpeting.

But, outside, picnic tables encourage families to drop by. Holowaychuk is quick to admit that standard, everyday items such as tube socks and soup mixes are popular sellers.

"When they first said they were going to require that 20 percent of our merchandise be Canada-made, I fought it," Holowaychuk says. "It didn't quite fit my idea of duty-free - expensive and exotic.

"Today 60 percent of my merchandise is Canada-made."

For most Canadian duty-free operators, the main challenge ahead is in marketing to U.S. shoppers.

Holowaychuk, for instance, spends $500,000 on advertising. This includes television commercials and radio spots aimed at markets such as Bellingham.

He also advertises heavily in travel, automobile-club and other specialty magazines.

In hopes of bringing more Americans into their stores, duty-free shops now act as GST rebate centers. If you spend more than $100 in Canada, excluding meals, you can save your receipts and get a rebate at each of the duty-free stores.

"Our hope is that more Americans will come in for their rebate, see our merchandise, how nice our store looks and stay awhile," Holowaychuk says.

"And maybe then we can convince them to spend the last of their Canadian money."

Douglas, north of the I-5 Peace Arch crossing. By late 1992, it is expected that 40 duty-free shops will be operating.