Luxury Business in Canada: developments in international trade, tech, influencers and cannabis

21 Mar 2019 , 10:00am

McCarthy Tétrault LLP recently hosted its Retail and Consumer Markets Summit, an annual gathering of retail and consumer goods businesses. Carmen Francis and Lara Nathans outline some of their take-aways for luxury businesses that operate in Canada.

The year in international trade from a Canadian perspective

The past year has seen significant developments on the international trade front, particularly in relation to the new and evolving trade agreements that are reshaping the trading landscape. Specifically, the terms of the new United States-Mexico-Canada trilateral agreement (USMCA), the Comprehensive Economic and Trade Agreement between Canada and the European Union (CETA), and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership between Canada and ten other countries in the Asia-Pacific Region (CPTPP) have practical and concrete implications for companies moving goods and services across borders.

Too often disregarded as complex and high-level legal instruments, these agreements can be leveraged to achieve preferential trading terms that contribute directly to a luxury business’s bottom line. For instance, the CPTPP establishes less onerous rules of origin for textile and apparel items that allow these products to be imported from significant textile production jurisdictions like Vietnam at substantially reduced rates of duty. The CETA, which is currently in force on a provisional basis, provides mechanisms by which agricultural and food products previously subject to prohibitive rates of duty can be imported into, or exported from, Canada.

Companies in the luxury goods sector should also be aware of changes to tariff classifications effected by the USMCA, and should verify that goods imported from or exported to the United States, Canada or Mexico are classified appropriately.

As our UK-based colleagues are well aware, a no-deal Brexit is an increasingly real concern that could have significant and abrupt repercussions for Canadian companies engaged in trade with Britain. In the absence of a back-stop deal (and at present none is in place), a hard Brexit would mean that Canadian and British companies would immediately lose the benefits of the CETA’s preferential trading terms. Goods that were imported on a duty-free or reduced-duty basis under the terms of the CETA would, immediately after a hard Brexit occurs, be once again subject to much higher rates of duty. Accordingly, those with trade interests in Britain should turn their minds to navigating a no-deal Brexit environment.

Under the influence - influencer advertising in Canada

It’s a trite observation that consumers trust other people more than they trust brands, and this is borne out by the explosion of influencer advertising in the luxury goods space. What initially took the form of a rather frenzied rush to leverage influencer platforms has since evolved into a more wary approach from both consumers and brands alike. A lack of transparency, follower fraud, and the rise of click farms has to some degree eroded the trust on both sides of the equation. So how can those in the luxury goods sector mitigate these perceived risks?

Canada’s Competition Bureau recently issued guidance on influencer marketing best practices, designed to ensure that consumers are aware when a social media personality receives a material benefit in exchange for posting about a particular product or brand. In short, the use of widely accepted disclosure hashtags (such as #ad or #sponsored), placed prominently and in close proximity to the post in question, are a must. Disclosure must be effective, in that it isn’t buried in the middle of a vlog, comment or string of other hashtags.

Whether in Canada or elsewhere, when it comes to ensuring your brand is adequately protected and that your valuable marketing dollars are actually generating the customer engagement you’re paying for, there are a number of practical measures you can take to reduce your exposure. First, choose an influencer who closely aligns with your brand message and identity - this may be a “microinfluencer” (having between 1,000 and 10,000 followers) or a major social media personality. Either way, ensure they understand your product and the image you want to present. Second, consider making compensation conditional upon reaching certain measurable thresholds, whether they be click-throughs or some other verifiable impression – anything more than simple “views” or “likes”. Consider including penalties for the use of paid followers in your contract, to avoid your sponsored post being disseminated to thousands of roboaccounts rather than real consumers. Finally, instituting audit initiatives and measurement metrics in your influencer agreement will provide you with greater visibility into the effectiveness of their posts, and will ensure that your influencer partner remains on track and on-message.

Retailtech, Proptech and Fintech Trends in Canadian Retail

If these terms conjure in your mind some distant future in which robots play a prominent role, you aren’t alone. However, it’s time to become familiar with each of these increasingly prevalent and fast-moving trends in the luxury goods industry.

Retailtech refers to the intersection of retail and technology while Proptech refers to the intersection of the property industry and technology, and Fintech refers to the intersection of financial services and technology. Each signifies the degree to which technology has become integral to developments at the vanguard of these three sectors. Luxury businesses are increasingly likely to use artificial intelligence for the purposes of predictive searches, for instance, or are turning to cryptocurrencies and blockchain to advance their business objectives. Within the Fintech space, consider how retailers are offering services such as gift cards, loyalty programs and robo-advisors to strengthen their customer relationships and increase their reach.

The much-anticipated Payments Canada payments modernization initiative and the ongoing consultations on open banking and its implications for retailers are further bolstering the prevalence of Retailtech and Fintech. By establishing open, risk-based access to retail payments, the objective of these initiatives is to enable more data to travel with payments and enhance daily payment interactions.

While these tech tools generate significant opportunities in the luxury goods space, they inevitably raise important legal considerations, ranging from data protection and privacy, to consumer protection, financial services regulation, and anti-money laundering compliance. Industry members should give careful thought to these issues as they embrace the intersection of technology, retail, and consumer goods.

The cannabis effect

Following a ground-breaking year for the Canadian cannabis industry, the broader retail and consumer goods sector is turning its attention to the opportunities and related products and services on the horizon. With the anticipated legalization of edibles and topicals by October 17, 2019, brands can begin to assess the market for everything from luxury patisseries and chocolates, to premium skincare and cosmetic products.

When considering dipping a toe in the cannabis space, brands should first keep in mind the relatively restrictive prohibitions on marketing, advertising and sponsorships as set out in the Cannabis Act and Cannabis Regulations. While the scope of permissible marketing activities is itself limited, companies need to keep in mind the possibility of “tainting” their entire brand by engaging in cannabis-related activities.

The current legislation imposes certain prohibitions in relation to promotions, marketing activities and sponsorships that involve the use of brand elements or the name of entities that produce, sell or distribute cannabis and cannabis accessories. The risk is that luxury goods companies that begin participating in the cannabis industry could unintentionally limit their ability to engage in these activities by virtue of the association between their name and brand and the sale, distribution or production of cannabis products. The establishment of a separate brand identity under which cannabis-related activities would be conducted may be one means of insulating a luxury brand from potential taint. Research and development activities can be initiated, but should be approached with caution, and only under the authority of appropriate Health Canada licences.

From a real estate perspective, one of the perhaps unforeseen challenges associated with cannabis legalization is ensuring that tenants engaged in cannabis-related activities are doing so legally and with the requisite licences and authorizations. Legalization is far from synonymous with deregulation, and landlords should consider how their lease agreements should be tailored where a prospective tenant will be participating in the cannabis sector.