Strong or Suffering?
By Bill Sendelback
When the U.S. economy gets a cold, Canada sneezes. The economy – and the hearth industry – south of the border may be improving, but Canada still has the sniffles. Although the Canadian economy is struggling a bit, its hearth market is not doing that badly.
That, of course, depends on where you are in Canada.
Urban areas of Vancouver, British Columbia, and Toronto, Ontario, are booming with strong construction, while the Prairie provinces of Alberta, Saskatchewan and Manitoba are suffering from falling oil prices that have triggered oil field layoffs and a huge loss of tax revenue.
In Quebec and the Atlantic provinces, hearth product sales are flat. The very strong U.S. dollar – which has dramatically affected the exchange rate with the Canadian dollar – just may strengthen the Canadian hearth business – unless you’re a Canadian hearth retailer selling U.S. manufactured products. The currency differential is certainly helping Canadian hearth manufacturers selling into the U.S.
While some regions of Canada have enjoyed strong hearth sales, overall Canadian hearth sales have suffered when compared to the U.S. market. Total wood appliance sales for 2014 were flat in Canada, but up 11 percent in the U.S. Wood stoves took the biggest hit in Canada, down five percent, while in the U.S. wood stoves were up 19 percent.
|High-rise buildings under construction in downtown Toronto.|
EPA Phase II wood fireplaces were up two percent in Canada, representing 70 percent of Canada’s total wood fireplace sales, but only eight percent in the U.S.
Pellet appliance sales improved in 2014 in Canada, up 41 percent, but U.S. pellet stove sales were up 79 percent. In both the U.S. and Canada, the eastern markets were the strongest areas for pellet appliances; they represent 70 percent of the Canadian pellet stove market and 49 percent of the U.S. market.
Total gas appliance results were almost a push in both countries, registering about a one percent increase on either side of the border.
“Canada’s overall economy is somewhat suffering from a lack of consumer confidence,” according to Tony Gottschalk, CEO of the HPBA Canada. “Because of the dollars taken out of our economy by the very low oil prices, technically we may soon be in recession. The housing market has been very, very hot, especially in a few markets, but some think this is just a dangerous bubble.
“The hearth market seems to be doing pretty well, but not as well as in the U.S. But all Canadian manufacturers are benefiting from the exchange rate with their U.S. sales, and from the U.S. hearth sales surge.”
“This has been a bizarre year compared to the U.S. hearth market,” says Marc-Antoine Cantin, president of SBI/Stove Builder International. “It’s okay, better than 2011 to 2013, but nowhere near as robust as the U.S. market.
“The Canadian economy is not that well. With the unexpected plunge in oil prices, there have been massive job losses in the oil fields of the Prairie provinces.”
Cantin also points out that the job losses are not the only result of low oil prices. “The federal and provincial governments are not getting the oil production tax revenue they expected, pushing some from being in the black to being in the red.”
“Our Canadian economy is not that great, with the drop in oil prices and the exchange rate,” says Paul Miles, director of Sales for Valor Fireplaces/Miles Industries. “Margins on our U.S. sales are increasing, but it’s hard on U.S. companies selling into Canada. But even with our economy in a bit of a recession, the hearth market is still firing along. Even so, Canadian dealers are not as optimistic as U.S. dealers.”
|Steven Schroeter, senior vice president Sales and Marketing at Napoleon.|
“Overall in Canada we’re up slightly, but it’s not a great year,” says Stephen Schroeter, senior vice president of Sales and Marketing for Napoleon Fireplaces. “Gas and electric products are up, but wood and pellet sales are down. British Columbia is doing very well for us. Ontario is holding its own. The Atlantic provinces are down, and the Prairie provinces are down a lot because of oil falling to $41 a barrel.
“Quebec, too, is down and having a rough time because of its soft economy and the politics. We are hopeful for a repeat of last year’s robust consumer demand to counter an otherwise lackluster Canadian economy.”
If there is one region of Canada that apparently is not being affected by the country’s otherwise slow economy, and is still seeing strong hearth product sales, it’s the West, particularly in the rapidly growing Vancouver, British Columbia, area. That province is home to the greatest number of Canadian hearth products manufacturers, who are benefiting from the exchange rate with their U.S. sales, and it’s home to a good number of retailers who are also doing well.
“We’re doing quite well and are expecting a good year,” says Chris Dickson, owner of Vaglio Fireplace in Vancouver. “We have a strong economy here, and building is strong.” He points out that remodeling is very robust since even low-end homes in Vancouver can top $1 million, causing many homeowners to stay put and remodel. Plus the area is benefiting from the exchange rate, with the nearby Whistler resort area strong again with the return of U.S. tourists and the continued building of large, expensive homes.
Woodburning is “reasonably strong,” says Dickson, but it’s declining even outside of the city since low natural gas prices make gas models very cost effective. “There are not a lot of pellet models sold here and just a bit of electric units,” he says.
The Vancouver market is unique in that heat is not an issue. “We have warm winters here compared to much of Canada,” says Dickson, “so we don’t need 40,000 or 50,000 Btu models. People are not looking for heat. We do better with lower-heat models.” He also points out that contemporary styling is getting stronger and even fireplace inserts are featuring glass and crystals rather than logs. “European stoves are getting consumers to think beyond traditional styling,” he says.
Dickson says 70 percent of his sales are now with contemporary styling.
Vaglio Fireplace is not being affected negatively by the exchange rate because the vast majority of its suppliers are strong, local, Canadian manufacturers such as Pacific Energy, Regency, Valor, Archgard and Sherwood – all are in the area.
|Lorne Komarnisky, owner of Fireplace Stove World in Edmonton, Alberta.|
The Prairie Provinces
With world oil prices dropping from more than $100 a barrel to about $41 a barrel right now, a six-and-a-half year low, the Prairie provinces have been affected the most since that area has been the center of Canada’s oil boom.
“Alberta runs on oil,” says Lorne Komarnisky, owner of Fireplace Stove World in Edmonton, Alberta, “so with oil prices dropping, we’re a bit depressed. With all the oil field layoffs, our business has slowed about a third.”
Alberta consumers tend to burn wood or want a wood-burner as back up, especially because winters there are very cold, he says. Most of Alberta has natural gas available, and homebuilders are putting in gas fireplaces “because it’s an easier installation,” says Komarnisky. “Older people want the ease of gas and just turning a switch, but if the economy continues down, they’ll be back to wood.”
Pellets are not much of a factor for Fireplace Stove World. “Years ago we sold more to the yuppie generation that did not want the inconvenience of wood,” he says. Komarnisky is selling electric models in places where gas is not available, and “when the architect has not thought about venting in his plans.”
Prices from U.S. manufacturers to Komarnisky are “up quite a bit, but that started even before the exchange rate changed so much. However, some U.S. suppliers have held their prices.”
Komarnisky is remodeling his two showrooms. “It’s not all doom and gloom, but it is a challenge,” he says. “We’re making our showrooms more interesting and interactive. This turndown could be short-lived, and when it comes back, this will make us more efficient.”
“Our business has slowed a little,” says Steve Flett, president of distributor Northern Fireplace in Regina, Saskatchewan, “but new home construction here is down 40 percent, and the 30 percent exchange rate doesn’t help.”
|Steve Flett, president of distributor Northern Fireplace in Regina, Saskatchewan.|
Flett has had to add a five percent surcharge on invoices to his dealers for U.S. products. He points out that “a lot of Canadian manufacturers” have raised their prices, too. “It was a slower summer for everybody, but we’re optimistic about the fall because remodeling is up.”
Low oil prices have caused cutbacks in drilling and resulted in layoffs. “Alberta has not been hurt as much as Saskatchewan,” Flett adds, “but fortunately we are not losing retailers. We’re working with our suppliers to soften the blow to our dealers. We have enough construction, farming and mineral mining to hang on.”
Gas hearth product sales are definitely very strong for Northern Fireplace because natural gas is readily available and at a low cost. “Woodburning is slowly dying out,” he says, “and pellets are almost non-existent. Electric fireplace sales are steady with a low percentage of our sales, but still greater than pellets and wood.”
Flett cites the federal elections this fall as another concern. “The current government raised taxes on oil production from 10 to 20 percent, so there is a lot of caution from consumers until after the election.”
Ontario and Quebec
“Hearth sales are going well, and we’ve seen steady sales growth over the last few seasons,” says John LiCausi, manager of Forest Glade Fireplaces, Windsor, Ontario. “The economy in our area, not too far from Toronto, is steady with slight growth and strong new home construction. Unemployment is pretty high, but consumers are buying. And low oil prices are not affecting us like it is in the Prairie provinces.”
LiCausi is already seeing price increases because of the exchange rate. “And not just from U.S. suppliers. Our Canadian suppliers who are buying materials from the U.S. are having to raise prices, too.”
Forest Glade Fireplaces’ major hearth category is natural gas with “a fair bit of wood.” Electric fireplaces are not big with LiCausi because they’re “decorative and you can buy them anywhere.”
|Jacques Gratton, president of distributor Powrmatic
“Business has been okay since January with the brutally cold weather then,” says Jacques Gratton, president of distributor Powrmatic of Canada, with six branches selling to hearth retailers in Quebec, Ontario and New Brunswick. “Dealers are feeling the pinch of the economy, and some are really struggling, but good remodeling activity is helping.”
Housing starts in Quebec and Ontario are steady, but Gratton points out that the vast majority of these starts are condos, where few hearth products are installed. As an example, real single-family housing starts are down 25 percent in Quebec.
Sales of Powrmatic’s wood-burning products are fairly flat while natural gas products are selling “really, really good, up in all our branches,” even in Quebec where there is not a lot of natural gas, because of retrofit activity and custom home building that is fairly stable. Pellets are on the upswing, says Gratton, especially in the Atlantic provinces.
The exchange rate has not hit Powrmatic so far because it deals with many Canadian manufacturers. Gratton is purchasing as much Canadian currency as possible well in advance as a hedge against the effects of the exchange rate.
“In the last 12 months our currency has really taken a beating, down almost 20 points,” he says. “We’ve had to take prices up 10 percent on our U.S. products. The exchange rate has a huge impact on retailers buying direct. We are financially sound as a distributor, so we can afford to offset some of these increases for our customers. But if the exchange rate drops another two to five points, we’ll have to pass it on, and it may cause us to shift all our products to Canadian-made.”
Gratton, too, points to the fall elections for the Canadian government as a reason for the slowing of consumer spending, given the uncertainty of the election outcome.
“The economy in Quebec has been quite slow for the last two or three years,” according to Steve da Silva, president of distributor Impact Distribution, Terrebonne, Quebec. “Quebec has been losing companies to offshore locations. We’re starting to see the economy pick up, but it’s still very soft with construction still off.”
The exchange rate has had a significant impact on da Silva’s dealers. As U.S. products become less price-competitive, he is seeing “a lot of demand for Canadian products.” Some retailers are closing shop, he says, particularly those strong in new home construction, which is down 40 to 50 percent. Retrofit jobs are in greater demand.
“Quebec is quite influenced by what is going on in our big cities,” says da Silva. “Montreal is almost four million of Quebec’s eight million population.” A few years ago, Montreal banned woodburning, and that “put a dent” in da Silva’s wood-burning sales. “Montreal is now discussing allowing wood-burners tested to 2.5 gph emissions or less. The Montreal government needs to okay this change, but it could go into effect this year.”
He also has seen a gradual shift in Quebec toward pellets, particularly in rural areas. “Pellets are strong and growing, with the more contemporary, European-styled models selling well,” he says.
The Atlantic Provinces
Massive power outages two years ago in New Brunswick caused sales in 2013 and 2014 to go “off the charts,” according to Kimberley Davis, store manager for Atlantic Fireplaces, Mount Pearl, Newfoundland, and president of the HPBA Canada. “But sales this year are back in line with our 2012 numbers.”
The economy in the Atlantic provinces dropped with the decrease in oil prices. “Our urban areas are not affected so much,” says Davis, “but rural dealers are greatly affected because of a decrease in the number of ‘fly in, fly out’ customers as the economy softened.” Pellet sales are weak in Davis’ area, but with LP and wood sales strong, she sells 60 percent LP gas models and 40 percent wood-burners. Plus, the exchange rate is a “big deal” for Davis.
“U.S. products are no longer price competitive. We expect the Canadian dollar to stay weak against the U.S. dollar, so we are clearing out all our U.S. products and replacing them with Canadian products.”
The bottom line for the Canadian hearth market is that many U.S. manufacturers are losing market share north of the border, and Canadian manufacturers are increasing their Canadian market share, while also taking advantage of the exchange rate to increase market share in the U.S.
It’s a good time to be a Canadian manufacturer.