Canadians face complex challenges
By Michael J. Knell -- Furniture Today, December 26, 2004
Ottawa — Canadian retailers and manufacturers are optimistic about 2005, believing pent-up consumer demand will drive growth, albeit at a somewhat slower pace than in the past few years.
With the industry in a state of rapid change since January 2003, major players acknowledge they'll be competing in an increasingly complex and challenging environment, largely due to three interrelated factors:
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The continuing growing strength of the Canadian dollar vis-à-vis the U.S. greenback.
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The increasing presence of Asian product on retail floors.
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Price deflation in nearly every product category, from metal casual dining to leather stationary upholstery.
The immediate beneficiary of these developments has been the Canadian consumer. Pricing has never been more favorable. But it comes at a cost that neither retailer nor manufacturer may be able to bear in the long term.
"Corporately, our exchange rate is set annually, so much of the windfall of a better Canadian dollar exchange rate this year has been collected 'below the line'," said Bruce Watton, national merchandising manager/furniture and bedding for Sears Canada.
"As we plan 2005, the benefits of our strong dollar will be more evident, from a better price perspective as well as from a planned profit perspective," he continued. "However, our competitors often use the improved value of the dollar to reduce selling prices to a greater degree than increasing margins. Consequently, our potential profit is often washed away in our efforts to stay competitive in the marketplace."
That is the crux of the problem. Retailers are being forced to balance the often-conflicting demands of price and margin. Both factory and store executives currently believe unit sales are probably up, but dollar sales are either flat or lagging behind, putting pressure on margins and profits.
The Canadian dollar has swung from about 67 U.S. cents in January 2003 to between 83 and 84 U.S. cents in the closing weeks of 2004. One noted economist said recently that, since the Canadian dollar in terms of buying power equals about 75 U.S. cents, the looney is now considerably overvalued.
"The swing is more to our advantage than it is to our disadvantage," said Terry Leon, president and chief operating officer of major retailer Leon's Furniture. "But it's also a double-edged sword. You have to be more efficient because you have to sell more units because your costs are based on dollars, not on units."
Most executives believe the dollar will fall back into the 75 U.S. cent range eventually. But the fall will take longer than the gain because the weakness of the U.S. dollar reflects a lack of investor confidence in the world's largest and most important economy.
"The U.S. dollar is in for a rough ride for quite a while yet," Leon said.
Adding to the competitive pressure is what Jean Deveault, executive vice president of casual dining major Canadel, calls "the China Factor."
Those who got to China first had a tremendous advantage in the marketplace, he said, but now almost everyone is importing. "When everyone has it, it becomes a penny business. Retailers have lost a lot of margin," Deveault said, adding he is beginning to discern a swing away from what have now become low-margin commodities.
"People will always need China product to address the price-point issue, but they don't need it to occupy 50% or more of their floors," he said. "I can see the pendulum starting to swing the other way."
John Scarsella, president and CEO of case goods manufacturer Durham Furniture, sounded a similar note.
"I'm beginning to see a swing among many retailers," he said. "They're not as head-over-heels in love with their China product. They aren't getting the big margins they thought they would, and they are looking to put better blends of imported and domestic product on their floors. Because of that, we're going to gain some floor space among several retailers."
Sears Canada is a recent arrival in the world of direct importing.
"Our 2004 introduction strategy was to simply add the direct (imported) product to our floors," Watton said. "We therefore enhanced our assortments with this initiative. The commodity sales were generally an incremental addition to our overall volumes. It is the strategic balancing of these offers that will protect our revenue balances going forward....
"We will seek to grow these import offers intelligently, balancing the instant gratification of in-stock inventory — and the inherent risk of that inventory ownership — with the customer appreciation of selecting their own custom options with a minimal waiting period."
Imports largely have driven the widespread deflation seen throughout the Canadian industry. Leading retailers say average unit selling prices in almost every category have fallen, sometimes considerably, over the past couple of years.
While managing the vagaries of the dollar remains a challenge, it doesn't seem to directly affect consumer behavior. She continues to be influenced more by such factors as housing starts, employment levels, growth in personal and household income and, most importantly, interest rates.
"Consumers have been very free-spending this year," said Michael Graydon, president and CEO of major buying group Mega Group. He said spending has been driven by low interest rates, which are bound to rise.
"In 2005, the economy is going to start to slow down," he said. "Interest rates are going to creep up, so a lot of people will begin a year or two of retrenchment," paying down debts before returning to the market.
Graydon also believes today's under-35 consumer is more comfortable with debt than his or her parents and grandparents, which will change their buying attitudes and habits.
"I see a change in consumer attitudes in terms of how they buy furniture," he said. "Our parents and grandparents bought heirlooms — stuff that could be passed down. Today, many people are on their third and even fourth living room, after selling the previous one in a garage sale. The 25- to 35-year-old consumer is fueling a lot of this spending. They don't see furniture as permanent; they're more fashion-oriented and more willing to change."
Terry Leon pointed out that consumers also remain value driven. "Consumers are pursuing value and I don't see that changing," he said. "They will be more cautious in how they spend their money."
But they will spend it, Leon believes, for real value, which is more than just price.
Also optimistic is Sears Canada's Watton. "Since most of the marketplace performance indicators remain relatively positive, I am optimistic about 2005 and the customer's response to our offers," he said.
Canadian manufacturers are equally confident but face slightly different challenges. They are more dependent on the peaks and valleys of the U.S. economy, especially since more that half of Canadian household furniture is shipped to U.S. retailers. Domestic producers continue to believe the key to their survival is service, or providing custom product on a fast-turnaround basis.
But success will be measured not only by their ability to execute efficient merchandising strategies, but on how well they can adapt to economic forces beyond their control, such as the dollar exchange rate.
As Canadel's Deveault is fond of saying, "Dealing with the dollar is like gambling in Las Vegas." You've got to be smart to stay in the game, but a little luck doesn't hurt either.
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Canadians face complex challenges
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