1. SUMMARY

A number of federal laws and regulations concerning the packaging and labelling of consumer products sold in Canada require that certain information be presented in both official languages. The cost to manufacturers and distributors, and ultimately to the consumer, has long been the subject of debate. Some people have gone so far as to claim that the cost to businesses, and therefore Canadian consumers, is as much as $2 billion per year. Despite these claims, no systematic study of this issue has ever previously been undertaken.

The Office of the Commissioner of Official Languages, working in close consultation with Professor J. E. Boritz of the School of Accountancy at the University of Waterloo, developed a methodology based on generally accepted accounting principles to carry out such a study. Four public accounting firms were invited to survey their clients and to report the costs of their compliance with federal language requirements. Since it was felt that the impact of compliance was likely to be greater on small businesses size criteria were established and ultimately 33 small and medium-sized businesses in four regions of Canada agreed to take part. Accountants interviewed the CEO of each company and studied financial statements to extract compliance-related costs.

For ease of comparison among businesses and among regions costs for selected, representative products were expressed as a percentage of product revenues. Average cost of compliance for participants, including estimated one-time set-up costs incurred (in most cases, long ago), was in all cases less than one cent per dollar of product revenue. Once the initial set-up was in place, the average recurring compliance cost for these products was one-fifth of one cent ($0.002) per revenue dollar.

The $0.002 per dollar of product revenue ratio was determined by studying the costs incurred by small and a few medium-sized businesses. Extrapolation of these ratios to total sales of all packaged products sold in Canada would yield a figure that would be unrealistically high. (The larger the business, the smaller the unit cost.) Even so, application of that figure to total sales, and making no allowance for the many products included in that total that are exempt from two-language requirements, shows that rather than the $2 billion cost claimed in some quarters the absolutely maximum annual cost would be considerably less than $100 million.

The study found that many firms exceed the regulatory requirements on their own initiative as part of their marketing strategies. While some of the participating firms expressed the view that the regulations could be simplified or made more flexible it was nevertheless clear that they appreciate the value to them of making it possible for their customers to read about their products in their preferred official language. The principal benefit of regulated language requirements on packaged products, however, is the protection afforded to consumers of both official language communities, especially with regard to information protective of the consumer's health or safety. This study comes to the conclusion that the cost is less than has been claimed and that the benefit is worth the cost.

2. INTRODUCTION

Although the first Official Languages Act (OLA) adopted by Parliament in 1969, required the Commissioner of Official Languages to investigate only those complaints concerning "...the administration of the affairs of any of the institutions of the Parliament or Government of Canada"(1) this Office has been receiving complaints about absence of adequate labelling on consumer products produced by the private sector virtually since the day it opened. In response, successive Commissioners have expressed firm support for the principle of providing clear, understandable consumer information on packages, on labels and in instructions for assembly and usage in both official languages.

Section 26 of the second Act (1988) gave federal regulatory agencies concerned with matters affecting the health, safety or security of the public the duty to ensure that Canadians can deal with regulated organizations in either official language.(2) At the same time, Section 57 of the Act gave the Commissioner a mandate to review any regulations or directives that affect or may affect the status or use of the official languages.(3) Since then several hundred complaints, almost all about the absence of adequate information in French, have required that the Commissioner and his staff become familiar with a wide variety of legislative and regulatory requirements. As that familiarity has grown it has become increasingly apparent that these regulatory requirements are little understood by the public or indeed by much of the manufacturing and business sectors. This, in turn, has allowed certain persons to make claims regarding costs which, in the absence of systematic studies, were difficult to confirm or refute.

A preliminary review of various sets of regulations was carried out in 1992 and 1993 under the Commissioner's Section 57 mandate. That review, which included consultations with the major associations of consumers, producers, manufacturers, importers and distributors, and with related federal and provincial government departments, indicated that, in fact, the value of two-language packaging and labelling is widely accepted in all regions of Canada. There seems to be a broad consensus, shared both by industry representatives and by consumer groups, in favour of packaging, labelling and instructions in both English and French for products that under certain circumstances can constitute a risk to the health, safety or security of the Canadian consumer. Industry respondents also recognized that the value to them of being able to reach the entire Canadian market, and international markets as well, far outweighs the costs associated with compliance. Firms involved in manufacturing and marketing products in large quantities reported that as far as their operations are concerned the cost of providing information in both official languages is negligible and represents a very small percentage of production costs.

Assessment of the impact on "small business" was less categorical. It was recognized that in small production runs, where product unit costs are higher, it was possible that the cost burden of producing packaging and labelling in both languages could be relatively heavier. Accordingly, the Commissioner announced in 1995 that his Office would undertake a study of the costs of two-language packaging and labelling to small and medium-sized businesses in Canada.

We found that little work had been done on this issue. Despite this, the cost of compliance with bilingual packaging and labelling requirements is frequently advanced as an example of how the OLA and related regulations are damaging the country's economy.

The report that follows seeks therefore to shed light on the actual costs to small business of complying with the language requirements of the Consumer Packaging and Labelling Act and various other Acts and regulations. The study followed methodology based on generally accepted accounting practices, developed and tested in consultation with leading academic and professional authorities in the field of accountancy. Though modest in scope, it can fairly lay claim to being the first systematic study of its kind ever undertaken in Canada.

3. OBJECTIVES

The objectives established for the study were:

• to gather information on the cost of complying with federal two-language packaging and labelling requirements by surveying a sampling of small businesses in Canada
• to gather information about the impact of these requirements on small business operations and products
• to inform the small business sector and Canadian consumers about two-language packaging and labelling.

4. METHODOLOGY

4.1 DEFINITIONS

In the course of the study several different kinds of costs were calculated and compared. For purposes of clarity these can be defined as follows:

Total unit packaging costs

The total cost of packaging, labelling and instructions for one unit of a specific product.

Two-language packaging and labelling costs

The cost of including all the information presented on a product in both official languages. This may include information provided for marketing purposes, over and above the limited information required to be in both official languages by the packaging and labelling regulations.

Total estimated compliance costs

The estimated costs of compliance with the two-language packaging and labelling requirements of the regulations, including estimates of initial set-up and capital costs as well as recurring operating costs.

Incremental recurring compliance costs

Recurring operating costs incurred solely in order to meet the two-language requirements of the regulations. These are costs of items such as additional printing, larger labels or packages, etc., that would not have been incurred but for the regulations. (Also referred to in the report as "specific compliance costs.")

4.2 PILOT STUDY

To test and refine methodology for the national survey we first conducted a pilot project in the Toronto area. We took a two-tiered approach to data collection: a chartered accountant was asked to design a cost accounting prototype and costing procedures that would capture the necessary accounting information, while a questionnaire, to be completed in face-to-face interviews with senior officers of the selected small businesses, was developed by staff of the Office of the Commissioner of Official Languages in consultation with accountancy experts. After exploring several possible approaches to sample selection it was decided that the most cost-effective method of collecting the data would be to recruit practising accounting firms to carry out the study and to choose the sampling of small businesses, according to pre-set criteria, from among their own clientele. Criteria were that small businesses chosen to be surveyed must be manufacturers or importers of products required to have two-language packaging, labelling and instructions, must have annual revenues of no more than $50 million and must have no more than 50 employees.

The pilot project surveyed 11 small businesses (5 manufacturers, 5 importers and 1 distributor) with annual revenues ranging from $100,000 to $40 million. Six businesses were in the field of food products, three in hardware and two in cosmetics. All reported incurring costs in relation to the Consumer Packaging and Labelling Act and regulations, while seven also had obligations under the Food and Drug Act, two under the Meat Inspection Act and one under the Hazardous Products regulations. Each business was invited to select one of its products to be tested that would be as representative as possible of its entire product line.

A problem identified early in the pilot data collection was that only one of the firms could recapture the initial costs incurred in setting up the capacity to produce packaging, labelling and instructions in both languages for specific products. We found, in fact, that in several cases these costs had been incurred on a completely voluntary basis as a marketing decision taken more than 20 years before. This had the effect of clarifying that such costs are not, in fact, compliance costs although they do make subsequent compliance less costly. Throughout the pilot study and the subsequent national survey, therefore, care must be taken to distinguish between costs of two-language packaging and labelling incurred at the company's own initiative in order to reach French-speaking markets, both national and international, and true compliance costs that would not have been incurred but for the requirements of various federal acts and regulations.

The one business able to provide accurate front-end set-up costs was a company with total annual revenues of $11 million and test-product annual revenues of $172,000. It produced receipts showing that its one-time set-up costs in relation to the test product had amounted to $1,405.00. Others estimated that their initial set-up costs would have been of a similar order.

To provide a basis for comparison as well as more readily understandable data total unit packaging costs and specific compliance costs for test products are expressed in each case as a percentage of product revenue. Of the 11 small businesses surveyed in the pilot study 3 were unable to produce either total unit packaging costs or specific compliance costs. The remaining eight, most of which provided two-language information on their packages far in excess of regulatory requirements, reported total unit packaging costs ranging from a low of one-third of one cent ($0.003) to a high of 31 cents per unit in the food sector and to as high as $1.90 per unit in cosmetics. Within those total unit packaging costs specific compliance costs, without exception, amounted to less than one per cent of product revenues.

The pilot study increased our appreciation of the difficulty small businesses would have, even when fully committed to co-operation with the full-scale study, in producing accurate cost data, whether for original start-up costs or even for on-going operating costs. The explanation for this was that the costs of compliance with two-language packaging and labelling requirements are seen simply as the cost of doing business in Canada and are not of sufficient magnitude to justify retention of the specific cost figures by the businesses concerned.

4.3 NATIONAL STUDY

The findings of the pilot study encouraged us to proceed with a broader survey that would put the findings to the test in a greater variety of circumstances. Key considerations were to generate and compare data from different regions of Canada, to expand the range of product categories and to compare and contrast the impact of the language requirements of the regulations on manufacturers on the one hand and importers and distributors on the other. The comments volunteered by participating small businesses during the pilot study also lent reinforcement to our aim of helping small businesses gain a better understanding of the regulations and of the costs of complying with them.

The pilot study, while confirming the value of the one-on-one interview technique, nevertheless caused us to make refinements to the cost model and the questionnaire. The need to ensure that the members of the accountancy firms who would be doing the actual interviewing had themselves sufficient knowledge of the requirements of the regulations to enable them to go more deeply into the responses also became apparent. Evaluation of the pilot study methodology led us to the conclusion that, wherever possible, the person interviewed in each small business should be the Chief Executive Officer.

The relative merits of attempting to do a random sampling of small businesses across Canada as compared to one selected by accounting firms from their client base were weighed. Discussions with the academic and professional advisers to the study indicated that to be statistically valid a study covering four major product categories, including both manufacturers and importers and in four regions of the country, would require hundreds of respondents. Costs would therefore be high while the benefits would be unlikely to differ in any significant way from the results that would be generated by a broadened client-base study similar to the pilot project. Four regions of the country, Atlantic Canada, Quebec, Ontario and British Columbia were chosen.

Four public accounting firms were asked to review their respective client bases and to invite small businesses, as defined, to participate in the study. This proved to be more difficult than expected (though consistent with the experience of the firms that carried out the pilot study.) Some small businesses were sceptical as to the ultimate use that would be made of the data. Some doubted that the government would act on any findings. Most of those declining to participate, however, stated quite simply that the costs of providing packaging, labelling and instructions in two languages are not a major issue to them and therefore they felt no motivation to take the time to review their costs.

The firms that carried out the survey were:

We wish to express our sincere appreciation of the work performed by members of these firms. We also wish to recognize the vital contribution made to the project by Professor J.E. Boritz, Ph.D., FCA, of the School of Accountancy at the University of Waterloo. Professor Boritz's role in reviewing the methodology, advising on all aspects of the carrying out of the survey and in analysing and commenting on the data generated has been of crucial importance to this project and we thank him.

5. PACKAGING AND LABELLING REGULATIONS

Before presenting the findings regarding costs of compliance let us briefly review the federal laws and regulations with which small businesses must comply. Note that this study does not address any cost impacts of provincial statutes or requirements.

The key federal acts and regulations that contain linguistic requirements do so to protect the Canadian consumer. The Acts and regulations and their principal respective requirements regarding two-language labelling include the following:

A. For non-food products:

1. The Consumer Packaging and Labelling Act

• the generic name of the product
• the net contents.

2. The Hazardous Products Act

• directions for safe use
• warnings.

3. The Textile Labelling and Advertising Regulations

• the textile fibre content.

B. For food products:

4. The Consumer Packaging and Labelling Regulations

• the common name
• a net quantity statement
• sizes of servings
• "imported by/for" (when required)
• "contains artificial flavour" (when required).

5. The Food and Drug Regulations

• the generic name of the product
• the list of ingredients
• durable life date (when required)
• various commodity-specific information.

6. The Meat Inspection Regulations

• the identity of the product
• the net contents
• the ingredients
• the country of origin (for imports)
• durable life date (when required).

In addition to the above the Processed Products Regulations, the Dairy Products Regulations and the Canada Agricultural Products Act all contain some two-language labelling requirements.

C. Exemptions:

Most regulations provide for exemptions from two-language requirements for products that are being test-marketed or distributed only locally in certain specific geographic areas. The nature of the product and the nature of the packaging may also permit certain exemptions. For example, food products or beverages that have special religious significance and are used in religious ceremonies need present the required information in only one of the official languages. The same provision applies to imported products not widely used by the population as a whole and for which there is no comparable substitute produced in Canada.

Products such as greeting cards, books, and games in which a knowledge of the language used is essential to their use, may be labelled only in the official language appropriate to the product. A pre-packaged non-food product that is clearly visible through transparent packaging material need not be described in writing and pictograms may also be used instead of writing in some circumstances. The Consumer Packaging and Labelling Act provides for exemptions for certain medical devices, for duty-free goods and goods intended for export or for commercial, industrial or institutional use, for artists' supplies and for replacement parts for vehicles and appliances. Similarly, products subject to the Feeds Act, the Fertilizers Act, the Pest Control Products Act and the Seeds Act all qualify for exemptions.

A check of any kitchen or bathroom cabinet will demonstrate another key factor in arriving at an understanding of the compliance cost issue: many products marketed nationally provide information in both official languages far beyond these requirements. Once again, this underlines the importance for this study of distinguishing between two-language packaging and labelling undertaken as part of a marketing plan aimed at reaching the entire Canadian, or international, market and those costs incurred specifically in order to comply with the regulations summarized above.

6. FINDINGS

The survey yielded 33 responses distributed as follows:

Twenty-nine of the respondents were manufacturers and four, all from Ontario, were importers. The various product sectors were represented as follows:

Although all fell under our definition of small business the range of revenues was considerable, from $65,000 to $45 million. Average annual revenue was $6.7 million. Each business was asked to report all costs, both one-time and recurring, related to compliance with federal two-language packaging and labelling requirements during the current fiscal period. Given the large differences of scale, as in the pilot study, costs were calculated as cost incurred per dollar of revenue in order to permit analysis and comparison.

For ease of reference and comparison, the data are presented in four tables grouped in the Appendix. Table 1 shows total estimated compliance costs for all products marketed by the responding firms. However, as noted earlier, many respondents had difficulty recapturing initial start-up costs. The non-recurring personnel and capital costs included in the figures in Table 1 are estimated costs that were, in most cases, incurred years ago and are therefore somewhat less reliable than are the on-going operating costs.

To produce more reliable cost estimates businesses were asked to select one of their products for which complete information could be obtained and which would best represent their cost structures. For that product they were asked to calculate first, total unit packaging costs and second, recurring costs specifically related to compliance with federal two-language packaging and labelling requirements. The data in Tables 2, 3 and 4 are therefore for 33 individual consumer products selected by CEOs' as being reasonably representative of all their products. Table 2 presents average reported costs by region, Table 3 by product group and Table 4 by nature of the business, either manufacturing or importing.

Note that these tables present incremental recurring compliance costs. Thus Ontario businesses appear to incur the highest compliance costs while in Quebec, where marketing in French and English is a long established norm and where provincial requirements for French-language packaging, labelling and instructions are generally more demanding than federal ones, the incremental costs of complying with federal requirements are zero.

Considering the ratio of average cost of compliance to average packaging cost, it appears that average compliance cost compared to total packaging cost is highest for pharmaceuticals, followed by household products, and lowest for food products. Since food products have the highest average packaging cost the impact of the incremental cost of compliance is therefore proportionally less.

Importers appear to have lower average packaging costs and lower average compliance costs than manufacturers. However, these figures should be interpreted with caution since the respondents in the importer category were all from Ontario, making it difficult to distinguish between the costs related to the business's geographical region and those related to the nature of the commercial activity.

Overall, it will be seen that in the year reported on the responding businesses spent an average of close to 5% of their product revenues on the total cost of packaging their products. The cost of complying with federal regulatory language requirements was found to average 4% of that amount or $0.002 (one-fifth of one cent) per dollar of revenue earned by the product.

These figures for 33 products from four of the five major regions in Canada are consistent with the cost figures produced by the Toronto-based pilot study which, it will be recalled, found that compliance costs for the eight products for which data were available were less than one per cent of product revenues. The estimated total costs presented in Table 1 bear this out. When estimated non-recurring costs incurred in the past are included total compliance costs for all products, at $0.0086 per dollar of product revenue, are still well below the one per cent figure.

The unit cost ratio, $0.002 per dollar of product revenue, is based directly on cost figures provided by small and a few medium-sized enterprises. We know that unit costs shrink as production runs increase, so the larger the business the smaller the unit cost. Clearly, therefore, it would not be appropriate to base a calculation of total cost to Canadians on application of the small business cost ratio to all producers of packaged products, both large and small; the resulting cost estimate would be much too high. The fact that many packaged products qualify for exemptions of one kind or another would also have to be taken into account in arriving at an accurate figure.

Nevertheless, were we to do that calculation, using Statistics Canada's most recent Retail Commodity Survey(4) which shows total sales of packaged products somewhere in the region of $50 billion for 1989, even applying a unit cost ratio that we know to be high yields an absolute maximum annual cost of no more than $100 million with the real cost falling far short of that. In the light of these figures it can be reliably concluded that claims that packaging and labelling in two languages cost billions of dollars a year are greatly exaggerated.

Summary of qualitative comments

In addition to the above quantitative analysis of compliance costs the 33 interviews generated a variety of qualitative comments. These observations are summarized in this section.

Most of the respondents had not found it necessary to obtain legal advice in order to comply with the regulations. Many had benefited from general guidance available from trade associations or from packaging and label producers. Nevertheless, respondents exhibited widely differing levels of understanding of the actual requirements in that, for example, some business took full advantage of the provisions for exemptions for products marketed within defined geographical areas, while others had no idea that any exemptions were permitted.

Manufacturers of small items distributed in small packages related their difficulty in complying with requirements in limited space. Some respondents, including importers, expressed the view that there is insufficient enforcement of the regulations at points of entry into Canada, with the result that many imported products, especially from the United States, are not properly labelled.

Predictably, views on the benefits of two-language packaging, labelling and instructions were mixed. Quebec-based businesses had no doubt of the benefits. A majority of Ontario-based respondents agreed. Respondents in Atlantic Canada and in British Columbia were less sure. Those who were aware of the exemptions available saw no negative effect on their marketing. Many respondents felt the requirements could be simplified or made more flexible.

APPENDIX

TABLE 1

TABLE 2

TABLE 3

TABLE 4