What do direct-to-consumer (DTC) brands Warby Parker, Thinx, and Casper have in common? They all chose a warehouse in Canada as their first foray into international fulfillment.
Expanding into foreign markets is a logical step for ecommerce brands that have reached a critical mass in their domestic markets. But to turn a profit, they'll need to source local ecommerce fulfillment centers to keep shipping costs low. As companies like Allbirds and SmileDirectClub have proven, Canada can act as the perfect launchpad for international sales.
By starting with an international warehouse in Canada, ecommerce brands can gain invaluable experience in cross-border ecommerce fulfillment while minimizing risks and costs. Canada offers American companies a large, English-speaking customer base close to home, as well as attractive tax rates. By capitalizing on these factors, businesses can effectively test the waters of international fulfillment while maintaining streamlined logistics operations.
In this article, we'll discuss the advantages of establishing a warehouse in Canada as the starting point for DTC ecommerce brands looking to expand internationally. We'll also explore the importance of partnering with a third-party logistics (3PL) provider that can manage both U.S. and Canadian operations to ensure a smooth transition into the global market.
DTC brands use a warehouse in Canada as an international fulfillment launchpad
Canada's unique qualities make it the perfect gateway for DTC brands seeking to expand their operations internationally. Its proximity to the U.S., cultural similarities, and consumer demand make it an ideal starting point for businesses seeking to test their capabilities in an international context.
Here are a few reasons why Canada has become such an appealing springboard for DTC ecommerce brands expanding into international markets:
- Geographically convenient
- Language and cultural similarities
- Hotbed for consumer demand
- Advantageous tax structures
- Diverse populations for market testing
- Concentrated population eases fulfillment
A geographically convenient neighbor
Canada's close proximity to the U.S. makes it easier for businesses to keep an eye on their fulfillment operations as they learn to oversee logistics from a distance. With easy access to bustling hubs like Toronto, companies can visit their Canadian warehouses when they need to, while still gaining valuable experience in international warehouse management.
Additionally, the U.S. and Canada share a strong trade relationship: the countries exchange more than $2.5 billion in goods and services every day. That makes Canada a good trade partner for DTC brands that are just getting their feet wet when it comes to exporting inventory, because there will be fewer hoops to jump through and plenty of resources available. Plus, the inventory can easily travel by road or rail, unlike any exports going to Europe.
Seamless communication and cultural compatibility
Canada's shared language with the U.S. and familiar cultural landscape makes it easier for American businesses to launch sales without having to rethink their marketing and customer services efforts. In many ways, the strategies that have worked at home will resonate here, too.
A hotbed for consumer demand
Canadian consumers' tastes and preferences often align with those of their American counterparts, allowing DTC brands to capitalize on existing brand recognition and demand. In fact, Canadians spend more than 60% of their disposable income on U.S. consumer goods. This synergy simplifies the process of expanding into the Canadian market, as businesses can continue to leverage their existing strategies and product offerings.
Financially advantageous tax structures
The basic rate of federal corporate income tax in Canada is 38%, with a 10% federal tax abatement and a 13% general tax reduction. This leaves a 15% effective corporate tax rate for general corporations, while the U.S. is at 21%.
The lower corporate tax rates in Canada can lead to cost savings for businesses operating warehouses in the country. These savings contribute to a more attractive bottom line, encouraging brands to choose Canada as a base for their international fulfillment operations.
Diverse urban populations for market testing
Major Canadian cities like Toronto and Vancouver are characterized by diverse, multicultural populations. This diversity offers DTC brands a unique opportunity to test their products and marketing strategies with various target demographics, providing valuable insights for future expansion into other international markets.
Concentrated population eases fulfillment
Despite the country's size, Canada's population is extremely concentrated: 90% of its residents live within 100 miles of the U.S. border, and about half of the population is concentrated in the metropolitan areas near Toronto, Montreal, and Ottawa. That's good news for ecommerce fulfillment because it means most orders will be destined for a relatively small geographic area, lowering shipping costs.
The advantages of establishing a warehouse in Canada
While shipping to Canada from the U.S. may initially seem more cost-effective, sourcing a warehouse in Canada offers numerous benefits that can outweigh the costs. Establishing a warehouse in Canada allows DTC brands to optimize logistics, save on customs and duties, and gain valuable experience managing international operations.
Customs and duties savings
Operating a fulfillment center in Canada can significantly reduce the costs associated with customs and duties because you'll only pay for importing inventory as a bulk shipment, rather than paying on a per-order basis. And if you manufacture your goods domestically, you're in luck: the USMCA removed tariffs on Canadian-purchased goods manufactured in the U.S.
Without a warehouse in Canada, American companies often have to charge Canadian customers a significant shipping premium to cover the costs incurred from tariffs, taxes, and duties. By shipping products domestically within Canada, DTC brands can avoid the complexities and expenses of cross-border shipping, allowing for more competitive pricing and improved customer satisfaction.
Leveraging Canadian carrier networks and rates
A warehouse in Canada not only provides better access to local shipping carriers but also allows businesses to benefit from the negotiated rates that 3PLs and warehouses typically have with these carriers. This advantage can lead to lower shipping costs and improved delivery times. By having a direct connection to Canadian carrier networks, businesses can offer their customers a smoother and more efficient shipping experience.
Benefiting from tax incentives and trade agreements
Canada's tax structure offers several advantages for businesses operating warehouses within the country. The lower corporate tax rates can lead to considerable cost savings, further improving the financial outlook for DTC brands expanding their operations internationally.
While you are responsible for taxes in Canada, your obligations are limited to the sales tax in various provinces. You do not need to pay any corporate or income tax. One significant advantage of the GST/HST tax is its "pass-through" nature. This implies that the end consumer bears the entire GST/HST tax burden, and the GST paid by the company during import is reimbursed to you. As a result, your company faces no tax liability.
This partnership is also supported by robust trade frameworks that reduce barriers to entry. The USMCA, for example, encourages sound regulatory practices and fosters competitiveness within North America.
Gaining experience in international fulfillment management
Establishing a fulfillment center in Canada allows businesses to learn the ins and outs of managing an international operation. This hands-on experience can prove invaluable when planning further expansion into other global markets, better equipping businesses to navigate the unique challenges and complexities associated with international fulfillment.
Even better, coupling your warehouse in Canada with a 3PL service provider experienced with Canadian regulations can save you time and money in your shipping efforts.
