Retailers Brace for New Reality With Weak Loonie

Vawn Himmelsbach

Published: 07/07/2016 09:08:11 AM EST in Vawn Himmelsbach

Retailers Brace for New Reality With Weak Loonie

This article originally appeared in the June 2016 issue of WiFi HiFi Magazine

Canadians are used to dealing with fluctuations in currency. But the loonie has been down - way down - for well over a year. And retailers that were hedging exchange risks are now looking for more permanent solutions, whether that's raising prices, cutting staff, or finding supply chain efficiencies.

For the most part, retailers initially resisted passing price hikes onto customers. But as time wears on, trying to absorb a 25-35% currency shift isn't viable in the long-term.

This is particularly the case for retailers and distributors sourcing products or components through U.S. suppliers, or importing them from other countries while paying in U.S. dollars.

Larger companies have been hedging the currency and using other financial strategies. But "you can't hedge forever," says Michael LeBlanc, Senior Vice President of Marketing and Digital Retail with the Retail Council of Canada. And hedging is not a viable strategy for smaller companies; they simply have to pay more for the goods they source.

"In a world where the currency was a different rate, it was more compelling to bring that in from out of country," he says. Now, it often makes more sense to source goods locally. But that's not always an option.

Michael LeBlanc, Senior Vice President of Marketing and Digital Retail with the Retail Council of Canada

"You don't grow avocadoes in Winnipeg," says LeBlanc. And, "you can't get certain electronic components domestically." As margins shrink, something has to give. In many cases, that means passing on those increased costs, at least in part, to the consumer.

Though Canadians are used to dealing with changes in currency, "when you've had some of the moves we've had over the past 15 months, it's a bit harder to plan," adds Daniel Baer, Leader of Retail and Consumer Products with Ernst & Young.

Many goods that are sold by retailers, particularly in segments such as consumer electronics, are imported from the Far East, purchased in U.S. dollars. "It has an impact, generally a negative impact," said Baer.

E&Y estimates that retailers have seen a 4-8% increase in their costs versus the same time last year. And inflation rates are not running anywhere close to that, adds Baer.

"The retailer has not passed on dollar for dollar their increased costs," he says. One of the reasons is because "the trends take a while to work their way through the system." Ten months ago, retailers were ordering their spring goods and likely hedged their purchasing. Today, they know they're dealing with a vastly different foreign currency than last year. So consumers can expect to start noticing price increases.

"I think consumers understand the landscape that retailers are dealing with and are a bit more willing to accept price increases," says Baer. By and large, retailers are being forced to increase their prices, though "not necessarily enough to maintain the margins they've had."

Daniel Baer, Leader of Retail and Consumer Products with Ernst & Young

Late last year, Apple confirmed it would raise its app pricing in Canada and the European Union. In March, Sonos announced its would increase pricing on its products in Canada (while pricing in the U.S. remains the same). And Nest bumped up the price of its thermostat by 30% north of the border.

The loonie is affecting retailers in other ways, too. Canadian Tire reported that the weaker currency (and economic slowdown in Alberta) hurt its work-wear brand Mark's, while Hudson's Bay cut its sales forecasts for 2016, blaming the strong U.S. dollar for less traffic to its U.S.-based Saks Fifth Avenue stores. Dollarama, which once capped items at $3, has started selling products for $3.50 and $4, amid steeper purchasing costs.

"For a good portion of the last year, retailers tried to maintain prices as much as they could," says Tim Brunt, Program Manager for Personal Computing with IDC Canada. Both retailers and distributors took a bite out of their margin to keep prices as stable as possible. "Now we're into a new era with new products and technologies," he said. And CE retailers can no longer survive on clearing inventory, as they did for the past year.

But they may not have to. Consumers noticed price increases on Apple products because prices were jacked up on existing products. But as new products enter the market, there's nothing to compare those prices against.

However, we're still seeing retailers offer CE products under that $500 psychological barrier, says Brunt, "though it means consumers may get lower specs in that same price range. Look at cheese - they don't tell you they're increasing the price of the product, they make it just a bit smaller every time."

It's not all bad news for retailers, though. Until a few years ago, Canadians spent $8 billion of their shopping dollars in the U.S. That's changed dramatically, even in the ecommerce world, as the dollar makes it less compelling to do so.

There's also an influx of Americans coming to shop in Canada: according to LeBlanc, the number of vehicles crossing the border into Canada for same-day trips is in the double digits. So for Canadian retailers with an online presence, "it's not a bad time to think about selling into the U.S. market."

In 2015, E&Y saw a trend where major urban centres located near the U.S.-Canada border outperformed the rest of the province. In Vancouver, for example, retail sales grew by 10.1% last year, while the rest of B.C. grew 6.8%.

Looking at the big picture, the demise of the Canadian loonie is making it easier (and cheaper) for U.S. retailers to buy Canadian retailers. Baer points to two recent acquisitions: U.S. home improvement retailer Lowe's bought its smaller Canadian counterpart Rona, and U.S. healthcare giant McKesson Corp. snapped up Canadian Rexall Health. "Expect to see more M&A activity from U.S. retailers."

What the future holds is "one of the questions that is on the top of every merchant's mind in this country," says LeBlanc. But it will likely mean adjustments throughout the cost chain that will be passed along to retailers and customers alike.

Article Tags:  retailers, loonie, canadian, dollar, economy, price, rise, ernst, young, rcc


Retailers Brace for New Reality With Weak Loonie

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