Declining Canadian Dollar Slowing “US Retailer Invasion”
In 2012 we wrote about how the high Canadian dollar was making our retail sales metrics seem more attractive than reality. Growth in Canadian Mall Sales Performance: Real, or just Currency Fluctuation
We concluded that while Canada has seen real growth in consumer expenditures and sales performance, most of the apparent increase may be attributable to the appreciation of the Canadian dollar in relation to the US dollar. The article was also meant to be a bit of a warning for some of the many US retailers who were eagerly exploring Canada at that time as we thought they may be misreading the market opportunity.
Of course, the situation in 2015 is very different with the Canadian dollar having depreciated significantly since 2012. The latest figures haven’t come out yet, but much of the sales performance premium (which is typically measured in USD) between Canada and the US may have been wiped out. And of course, we have had some notable closure announcements of international retailers in Canada, including Target, the Sony Store, Jones New York, and Smart Set. Yes there are other issues at play than just currency depreciation for these retailers, but it does seem that there has been an overestimation of the potential of the Canadian market.
Although not focused on US retailers, Retail Insider recently wrote about the impacts of the declining Canadian dollar and their analysis is definitely worth a read!
The ongoing increase in the level of competition in the Canadian Retail Market, together with the ongoing shift to “omni-channel retailing” has “raised the bar” on Canadian consumer expectations. The dual impact of these two major factors has pressured many home-grown retailers, in particular those who don’t have strong balance sheets and deep pools of talent, thus inhibiting their ability to effectively compete in this new environment, referred to often as the “new normal”.
If these factors weren’t enough to pressure these retailers, the recent massive decline (more than 25%) in the Canadian dollar relative to the US dollar could be the trigger that will force many of these weaker retailers to restructure or reinvent. Given the sharp increase in the rate of direct importing that is tied to the US currency, this will significantly increase the cost of merchandise for these direct importing retailers. For those with strong brands, we expect that the impact will be more muted as their ability to raise selling prices to offset the increased merchandise cost is much greater. However we expect that the retailers with weaker brands and/or more price-sensitive customers will be hard-pressed to raise prices without the risk of major decreases in volumes sold. For these weaker retailers, merchandise margins will be hard hit and profitability will be impaired, which might be a decisive factor in leading to a restructuring. This typically results in many store closures and job losses. Many of these retailers already borrow on a secured basis to fund their businesses, which will result in closer scrutiny from their lenders. Not a happy situation for the “faint of heart”.
With that settled, we just need to update our past articles on the impact of high oil prices on the retail industry and why Target is so successful.