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CANADA GRAPPLES WITH AN EVER-WEAKENING DOLLAR

By Susan Thorne

Question: When is a dollar not really a dollar?
Answer: When it’s a Canadian dollar; then it’s only worth 62 U.S. cents.

Take a U.S. greenback into Canada (worth C$1.57), and its purchasing power will be significantly greater than in the United States. For Canadians, anything priced at the going rate in the United States is likely to be expensive. That differential in values has important implications for the retail and shopping center sector north of the U.S. border.

Canadian retailers expand globally.

Canada is the United States’ No. 1 trading partner, and a lot of U.S.-manufactured merchandise is sold by retailers in Canada. Many U.S.-based retail chains have Canadian stores and move merchandise and personnel northward across the international boundary, while a smaller number of Canadian retailers have also exported their concepts to the U.S. market.

U.S.-based cross-border retailers confront the dollar differential when they are pricing their merchandise for the Canadian market. Generally, these retailers would like to keep point-of-sale prices roughly in line on both sides of the border, but it isn’t quite that simple. A garment priced at $20 U.S. may be relatively more expensive in Canada at the equivalent Canadian price of $32 because of the lower purchasing power of Canada’s population compared with Americans. Canada’s high sales taxes also increase the final cost to the customer. Provincial and federal taxes combined add 15 percent to many retail purchases in Ontario, for example.

American Eagle Outfitters Canada, a fast-expanding branch of the U.S. parent that has 46 Canadian stores, arrives at its Canadian pricing by looking at a number of local market variables, including the competition’s prices for comparable merchandise, said Lora Tisi, the unit’s president.

“It’s a blend of American pricing plus consideration of factors in the Canadian environment,” she said. “You also have to understand how your customer shops.” American Eagle prices competitively for the Canadian market so customers are not tempted to cross the border to avoid paying taxes, for instance.

Ian Thomas

For this and other reasons, the dollar differential could make it difficult for some U.S. specialty retail concepts to make the price transition in Canada.

“The price point becomes tricky in some cases. If you’re going to buy something for $10 U.S., you may not be able to justify charging nearly $19 Canadian [after taxes],” said Suzanne Cayley, director of specialty leasing at Ivanhoe Cambridge, Toronto. “We’re used to paying somewhat more than in the U.S., but not that much more.”

Cayley said she also sees the currency gap as a psychological barrier for Canadian retailers contemplating the U.S. market. “I think what ends up happening is that when the Canadian dollar is low, people are not as willing to try — they’re more cautious,” she said. “It just makes things that much more difficult.”

At the same time, the dollar factor gives American interests an advantage in buying their way into the market north of the border. Best Buy’s purchase of the entire Future Shop chain last year shows that U.S. players may be waking up to this fact.

“That was a bargain for them,” said Ian Thomas, president of Thomas Consultants, Vancouver, B.C. “It involved 100-odd stores and a significant market share of that sector in Canada for $11.51 U.S. per share, or $17 Canadian. With the quality that Future Shop offered, this was good value. Such transactions underscore the fact that companies are realizing there are bargains to be had north of the border.”

In the wider context of international trade, Thomas said he views this as a loss of control for Canadians.

“We begin to realize that we are no longer sovereign, but part of the global investment market,” he said. “It means that Canadians are no longer master of our own fates: The big decisions are being made elsewhere — out of Minneapolis, Minnesota, in the case of Future Shop.”

The Canadian dollar’s value has been declining fairly steadily over the past 10 years, falling 30 percent since the early 1990s, when it was worth 90 U.S. cents. So while U.S. businesses can be fairly confident of the continuing strength of their currency, many Canadian retailers must keep one eye on exchange rates and use various strategies to beat the odds when the Canadian dollar slides.

The fall of the Canadian dollar in the past year has had major significance for Canadian retailers, said Robert Raven, vice president of finance and treasury at Aldo Group, the Montréal-based specialty footwear retail chain.

“Volatility is impacting us all,” he said. “We’ve gone from paying C$1.49 for a U.S. dollar last January to almost C$1.60 now. That’s an increase of over 6 percent.”

The crunch comes when a retailer is sourcing merchandise from non-Canadian suppliers, whether in the United States or abroad. Raven says that most international purchase transactions are implicitly pegged to the value of the U.S. dollar, even when they are made in other currencies, such as the euro. “So when our [Canadian] dollar goes down 6 percent as it has this year, if you haven’t hedged as we do, that means you just added 6 percent to your costs.”

Because purchase deals are typically struck months in advance, it is difficult to anticipate the currency situation on the closing date. Retail buyers must adapt quickly to currency fluctuations.

“If you’re out there buying and the dollar drops, I’ll tell you what happens,” Raven said. “You have to find the merchandise that fits the price you can pay, so you either negotiate harder or maybe the quality of the merchandise suffers.”

Retailers caught in a currency slump may also consider raising the price the customer pays, but Raven noted that there is limited scope to do so. “I have to ask whether I’m still competitive, and how elastic my price is with my customers,” he said. “You’ve already settled a price with your customers, in effect.”

To avoid jacking up prices, many large Canadian retailers rely on hedging to reduce their risk exposure. Hedging typically involves a contractual obligation to buy currency at a certain rate on a given date, but some retail companies simply maintain a pool of U.S. dollars to cushion the effect of Canadian dollar swings.

Canadian Tire Corp., a retailer of automotive accessories and a variety of home and recreational merchandise with 444 stores across Canada, purchases “a significant amount” of its merchandise (which includes 104,000 stock-keeping units) in the United States, said Scott Bonikowsky, senior director of corporate affairs. The company’s hedge fund is a key factor in maintaining stable, long-term pricing.

“It’s like an insurance policy,” said Bonikowsky. “It protects against sudden currency drops. A one-quarter or one-half cent drop in the dollar is meaningful, but it wouldn’t affect our prices.”

Over the years, the management of currency volatility has become part of normal operations for Canadian Tire’s treasury group. “We’ve been at a depressed [exchange] rate for a decade in Canada, so it’s pretty well ingrained,” Bonikowsky said. That said, Canadian Tire is always looking for sourcing alternatives and will consider a Pacific Rim or European source for a given item if it becomes too costly to buy in the United States.

Foreign exchange issues demand expertise, are time-consuming for retailers and can be critical to the bottom line.

“If you look at the public statements of many Canadian retail companies, you’ll see that they operate with a 5 percent return on sales,” Raven pointed out. “Consider against that the fact that 6 percent has been added to this year’s costs by foreign exchange.”

An ever-lower dollar isn’t all bad news, however.

“In terms of shoppers, it’s probably a good thing for us,” said Peter Sharpe, president and CEO of Cadillac Fairview Corp., Toronto, Canada’s regional mall leader. In the days of the 85-cent Canadian dollar during the early 1990s, Canadian retailers in border areas were losing significant sales to cross-border shopping.

“But the drop in the dollar tends to keep shoppers at home and shopping here, while it makes Canada attractive to tourists and foreign customers,” Sharpe said. “When foreign tourists get in our malls and realize the tremendous value they’re getting, they’re great shoppers.”

Tourism is a significant contributor to sales in many Canadian regional malls; the Eaton Centre, for example, is Toronto’s biggest tourist attraction with an average of 1 million visitors daily, more than 40 percent of them out-of-towners.

As for the future, Canada’s economic slowdown will probably batter the dollar further. In tough times, the U.S. dollar tends to be seen as a safe haven, attracting investment while the Canadian dollar suffers from lack of confidence. This has been seen in the post-Sept. 11 period. In early October Jeff Rubin, chief economist at CIBC World Markets, a Toronto financial advisory firm, startled attendees at the ICSC Canadian Conference in Toronto by predicting a 60-cent Canadian dollar in the near future; at the time, it was hovering between 63 and 64 U.S. cents. Now that the Canadian buck has slid to 62 U.S. cents, Rubin’s predictions are looking less like speculation and more like the new reality.

 

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