Wholesale Services in Canada: SPPI Development and Market Trends

1. SPPI for Wholesale Services in CanadaFred Barzyk 23rd Voorburg Group Meeting Aguascalientes, Mexico September 22nd to September 26th 2008

2. Background • Distributive Trades Division • Responsible for surveys of revenue and expenses (turnover) • Prices Division • Responsible for developing/producing SPPI • System of National Accounts • Responsible for estimates of real and nominal GDP

3. Definition of the service (1) • North American Industry Classification (NAICS) 2002 Classification 41  Wholesale Trade  • Establishments primarily engaged in wholesaling merchandise and providing related logistics, marketing and support services.

4. Definition of the service (2) • Wholesale Merchants • Buy and sell merchandise on their own account, take title to the goods they sell. • Wholesale Agents and Brokers • Buy and sell merchandise owned by others on a fee or commission basis, do not take title to the goods they buy or sell.

5. Pricing Unit of Measure Collected • Margin price per unit for product or homogeneous product line. • Prices reflect real transactions measured monthly, but collected on a quarterly basis. • The reported purchase and selling prices represent an average monthly price.

6. Market conditions and constraints (1) • In Canada, wholesaling is a multi-billion-dollar industry, with sales totalling $660 billion in 2006. • The industry employed an average 740,000 Canadians in 2006. • Between 2001 and 2006, wholesale output (GDP), grew 2X the rate of the overall economy, fastest growing of all major industrial sectors during this period.

7. Market conditions and constraints (2)

8. Market conditions and constraints (3)

9. Special Conditions and Restrictions • Not a regulated industry in Canada • Import a large share of the goods they distribute (typically from the United States) • Quick to adopt new information and communications technologies, have recorded above-average growth in capital investments • Globalisation, offshore outsourcing, and the arrival of American-style retailing (big box stores and club warehouses)

10. Record Keeping Practices (1) • Specific data collection issues were identified for each of the Trade Group/NAICS strata. • Variation in the types and quantities of products that wholesalers carry • Relatively small number of unique items to thousands and sometimes tens of thousands of specific products

11. Record Keeping Practices (2) • Some wholesalers have difficulty in reporting price information by product or item, and find it much easier to supply information by line or department • Collection of corresponding detailed product or item specifications is an ongoing challenge for the wholesale industry • Availability of electronic data, but historical product price data is generally difficult to get

12. Standard classification structure, product detail/levels (1) • Main classification of wholesale activity is by industry  NAICS (North American Industrial Classification System) • The wholesale sample of approximately 3,000 units selected using the 2005 Business Register (BR) frame • Publication target NAICS 5-digit classification (excluding Brokers & Agents for now)

13. Standard classification structure, product detail/levels (2) Main variables collected • Product Description • Country of Origin (if imported) • Wholesale Average Purchase Price • Wholesale Average Selling Price • Unit of Measure • Wholesale Activities

14. Standard vs. Definition and Market Conditions • No special or additional classifications that differ from the turnover survey program • Existing classification structure (NAICS) used to produce the SPPI are consistent with the turnover surveys. • Sample source for the SPPI and turnover surveys is the same – STC’s Business Register. • Sample comparison and clean up is easier • Industry level estimates of price change and turnover will also be directly comparable

15. National Accounts Concepts and Measurement Issues (1) For monthly GDP, • Changes in constant price output are used as indicators of the growth rates in constant price value added. • The movement in constant price output is assumed to be represented by the month-to-month growth rates in constant price sales by wholesalers.

16. National Accounts Concepts and Measurement Issues (2) For annual GDP estimates, Real GDP is derived by taking the difference between the industry gross output and the industry intermediate inputs at constant prices (the double deflation method) In the absence of a direct price index, the price movement is measured indirectly via a derived implicit price index. The implicit price index is calculated by taking the sum the current dollar wholesale margins divided by the sum of constant dollar wholesale margins.

17. Pricing Method and Criteria for Choice (1) Price is the margin for a product or product line. Relative is constructed on margin price t/t-1

18. Pricing Method and Criteria for Choice (2) Why? Nominal output (margin) is defined as, Outputt = Pricet x Quantityt for wholesale services. In the classical sense, we need a price index for deflation.

19. Pricing Method and Criteria for Choice (3) Quality Assurance Framework: • Shipment Price • Representative of current period production • Transaction price • Output price • Timely measure • Constant quality maintained

20. Quality Adjustment Methodology • Quality change in service • identified in survey and follow-up with respondent • Quality change in product • comparable or non-comparable substitution • Change in price • reason(s) identified and assessed

21. Evaluation of Comparability with Turnover/Output Measures The level of comparability is high. • Turnover and SPPI use the same industry (and soon product) classification system (NAICS, and then NAPCS). • SPPI sample is a sub-sample of the Annual Wholesale Trade Survey (AWTS) frame • Coherence analysis is conducted between the SPPI and turnover • One difference in comparability  wholesale margin data (turnover) is collected annually, SPPI will be monthly data.

22. Other Uses - Import Price Information (1) • Acquisition cost as proxy for import price • What does it measure? • LIFO valuation • Total cost to wholesaler (includes freight etc.,) • Average for the month • About 60% of reported products are imports.

23. Other Uses - Import Price Information (2) If same product or product line (k) is imported for a sufficient period, then a second price relative could be constructed for imports,

24. Discussion