Rising dollar riles Canada
Puts pressure on manufacturers' margins
By Michael J. Knell -- Furniture Today, January 6, 2008
Ottawa — When the Canadian dollar set a record high in early November, trading at just over $1.10 U.S., there was a palpable shortness of breath throughout Canada's household furniture industry.
The surge in the Canadian dollar, or looney, began in the first quarter of 2003 when it was trading at about 69 cents U.S. Its value really skyrocketed in the summer of 2007, driven by surging global prices for oil and other resources — Canada is a major oil and natural gas exporter — and a sagging U.S. economy. At the end of 2007, the looney was worth about US$1.01.
"It's not just the currency," said Michael Pitman, president and CEO of bedroom specialist Durham Furniture. "If you look at the sluggish retail environment in the U.S. coupled with the troubles in the financial markets, you'll see a merging of several different factors."
Indeed, the looney's rise comes as Canadian manufacturers face escalating costs, including transportation costs, driven by increasing fuel surcharges.
While Canadian furniture executives are concerned, most are confident that, given enough time, they will be able to adapt to the changing reality. They say the keys will be twofold: strong product development and ensuring their organizations are on a sound financial footing, to withstand pressure on profit margins.
More than one furniture executive said that while the value of the Canadian dollar is of burning concern to the industry, government officials don't appear all that worried. "There is nothing we can do about it, and nothing can be done until governments on both sides of the border start to care about it," said Jean Deveault, executive vice president of casual dining powerhouse Canadel.
Canadian furniture exports to the United States peaked in 2002 at C$2.15 billion, when the exchange rate for the Canadian dollar was 63.7 cents U.S. In 2006, with an exchange rate of 88.1 cents, exports fell to $1.45 billion.
Underscoring the currency problem for Canadian manufacturers is increased competition from Asian factories. As U.S. manufacturers and retailers turned to the cheap-labor economies of the Far East, Canadian labor actually grew more expensive in U.S. dollars. The cost is now about US$145 for a typical sofa, compared with US$100 in 2003.
Most Canadian factory executives believe that, if tackled individually, they could overcome any of today's hurdles of higher costs, a rising dollar and increased Asian competition. But the onslaught of all of them in a relatively short time — about three years — has limited their ability to respond.
"The problem with the dollar is everything moved so fast," Deveault said.
While they face the same uncertainties, the immediate problems of upholstery and case goods producers are somewhat different.
Fabric, leather, foam and springs are bought on the global commodities market, which still operates for the most part in U.S. dollars. Canadian upholstery makers are enjoying real savings on the costs of materials, but say that isn't enough to offset higher labor costs.
Coming out with new product is the best way for manufacturers to re-cost/re-price their offerings. Since product development times for upholstery are relatively short, Canadian factories can use their historic strengths — quality construction, just-in-time delivery and extensive customization ability — to bring new goods to market rapidly, priced to reflect the dollar's current value (restrained only by ever-present market forces).
Case goods makers don't enjoy such short product development times. Furthermore, best sellers remain in the line for longer periods. Several star performers have been around for a decade or longer, making it virtually impossible to raise prices to reflect a stronger Canadian dollar without running a real risk of losing valuable U.S. retail floor space.
Many case goods companies say they're losing money with every U.S. order they accept. An example is publicly held Shermag, which regularly reports losses attributed mainly to the rising value of the Canadian dollar.
Different companies have different strategies for weathering the storm.
Canadian stationary upholstery house Sklar Peppler, for example, has some flexibility because it owns the former Alan White factory in Mississippi.
"We're fortunate in that we have a good-sized operation in the southern U.S. We're in a position where we can transfer more and more of our output down there," said Sklar Chairman Bob Tweedy.
Since the plant operates in U.S. dollars, it is insulated from currency effects. The plant even supplies some Canadian retailers, regaining some of the cheaper-currency advantage once linked to the Canadian dollar but now tied to the U.S. greenback.
But Tweedy said the traditional approach to toughing out an economic crisis — improving productivity — is falling short.
"You can't increase productivity anywhere near the rate at which the value of (Canada's) dollar is rising, which is an annual rate of about 12%," he said.
While Palliser Furniture continues to make upholstery at its plant in Winnipeg, Manitoba, most of that plant's output supplies only the Canadian market. Upholstery shipped to U.S. retailers comes from its factory in Saltillo, Mexico, which also supports a growing business in Central and South America.
"Our U.S. business is done out of Mexico, and we're moving towards doing more custom work in Mexico as well," Palliser Group Chairman Art DeFehr said.
He said the company has taken a hard look at its clientele and "walked away from most of the customers we don't do volume with." DeFehr said that, in many respects, Palliser is no longer a Canadian exporter, although Palliser Group's two other divisions — Casana and EQ3 — continue to distribute product in U.S. dollars.
While Canadel still ships most of its volume to the United States, Deveault said its strong financial position helps the family-owned and operated business weather economic storms. "This company continues to be liquid and debt free," he said.
Moreover, the ability to offer custom product has been a key component to Canadel's success in the past 15 years, as has its focus on the "better and best" positions on retail floors. Deveault said the company has always worked to partner with retailers much like itself in their approach to market and financial stability.
"There will be a lot of opportunities for people who are in a good financial position," he said.
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