Feeling the Pinch
By Tom Lassiter
Canadian specialty retailers say that, all in all, it’s been a decent year for the casual furniture business. The weather in certain eastern provinces was sopping wet for a few weeks, but sunny skies and warm temperatures eventually returned, and with them the shoppers returned as well.
The 2015 buying season actually seemed to be stretching out longer than usual, as consumers made up for the weeks lost to gloomy, rainy skies.
But most retailers interviewed by Hearth & Home are not in a position to relax and savor this season’s successes. They are too concerned with the uncertainties that 2016 will bring.
Economic challenges loom on the horizon like thunderheads late on a summer afternoon. There’s no doubt that a storm is coming; the only question is how bad it will be.
At the root of the uncertainty are two culprits: the growing disparity between the value of the Canadian dollar and the U.S. dollar; and the world petroleum glut, which has depressed demand for Canadian oil extracted from the Alberta oil sands.
Extracting oil from oil sands is an expensive procedure. The current oversupply of cheap crude has dramatically lowered prices and literally made Canadian oil too expensive to produce.
Falling oil prices have sent a chill through Canada’s oil production industry. In May, only 10 percent of the nation’s oil rigs were producing, according to CTV, a private Canadian television network.
|Dean Kjeldgaard, general manager of Beachcomber Hot Tubs & Patio, Edmonton, Alberta.|
Petroleum industry layoffs could put 25,000 people out of work, primarily in the province of Alberta. The effects, however, will ripple throughout the nation.
“If you’re in Alberta, you are probably in recession,” says Paul Waldie, editor of the report on business for The Globe and Mail, a leading national daily newspaper based in Toronto. “The rest of the country is in a slowdown or mild recession. Overall, it’s a murky picture.”
There are exceptions to these generalities, of course, that contradict the general retail analysis.
Dean Kjeldgaard is general manager of Beachcomber, a patio shop in Edmonton, the capital of Alberta. “Surprisingly, it’s been our best year ever,” he reports. “We were cautious with the price of oil coming down that we might feel the pinch, but we haven’t felt it at all.”
Weather took a toll in the East, where June rains were fairly constant.
|Andy Paul, owner of Sun Country Leisure Products, St. Catherines, Ontario.|
“I don’t think it’s been a stellar season for anyone in eastern Canada,” says Gloster sales representative Dave Talboo.
If there was a bright spot in casual sales, it was in British Columbia. Unseasonably warm, dry weather was tough on the forests, wildlife and salmon, but great for outdoor furniture sales.
“Our April, May, June and July were absolutely brilliant,” says Ron Batt, owner of Crystalview Pool & Spa in Vancouver. “We were on a run.”
The currency issues make planning for the 2016 season extremely challenging for outdoor furniture retailers. They anticipate sharp increases in prices, thanks to the reduced purchasing power of the Canadian dollar. The difference in the value of U.S. and Canadian currencies is in constant flux; how it and fuel costs affect the other costs of doing business in Canada create a forecasting maze that surely would confound most U.S. retailers.
|Ron Batt, owner, Crystalview Pool, Spa & Patio in Vancouver.|
Most Canadian patio retailers buy their imported goods in U.S. dollars, whether the products are imported from the United States or Asia. The value of the Canadian dollar remained roughly equal to the value of the U.S. dollar from 2011 through 2013, when it began to slip.
The decline became more precipitous in 2015. As this issue of Hearth & Home went to press, a Canadian dollar was worth about 76 cents U.S.
To buy US$100 worth of goods, a retailer on August 28 had to pay CN$132.
“It’s hurting us,” says Batt, in Vancouver. “Virtually everything we buy is in U.S. dollars. Everything is going up.”
“The economy is not doing real great right now, compared to the U.S. economy,” says Andy Paul, owner of Sun Country, a specialty store in St. Catherines, Ontario.
Exchange-rate realities affect every business dealing in imported goods, and that’s a concern whether business is flat or booming.
Petroleum prices and U.S.-Canadian dollar valuations “impact every aspect of our business. Everything,” says Ingrid Nieman of Nieman Wholesale, which distributes products by Treasure Garden, Kingsley-Bate and Gensun.
The one-two punch hurt retailers this year; some adjusted prices upward, though probably not enough to totally make up for their increased costs. Most retailers absorbed the hit and stuck to the pricing models developed last year.
Prices surely will be pushed up again next season; there’s currently too much uncertainty to predict how much they will rise.
Nieman points out that a modest price increase by a manufacturer, say three percent, is not a big deal. What hurts are price swings of 25 percent or more because of the Canadian dollar’s decline in value and the 15 percent swing in the cost of fuel.
Wicker World Home & Patio in Winnipeg, Manitoba. Inset: Phil Squarie, Jr.; Photos courtesy: ©2015 Sightlines Photography. www.sightlinesphoto.com.
Fuel costs are insidious. “There are so many levels of the onion that are affected,” she says.
In late August, the average cost for a liter of regular gasoline in Canada topped CN$1.07. That’s more than CN$4 per U.S. gallon.
Meanwhile, the average price for a gallon of gas in the United States was $2.51, the lowest price since 2004. Some places enjoyed fuel prices below $2.
The retail price of fuel is just as mysterious to Canadians as it is to U.S. citizens. “I don’t understand why fuel surcharges don’t come down,” says Phil Squarie, Jr., of Wicker World in Winnipeg, Manitoba. “It’s like taxes. Once they’re there, they never go away.”
Steve Gilboe is co-owner and president of Patio Palace, which has three stores in Ontario. The company has sold outdoor furniture since 1984, and he’s seen these currency ups and downs before.
Patio Palace, London, Ontario. Inset: Co-owner and president Steve Gilboe.
“This currency thing is huge,” he says. “We’re really in trouble. We’re looking at some very significant price increases for next year, and most of us have absorbed our price increases for the last year.”
The dollar disparity and fuel costs are the major factors playing havoc with accurate forecasting by Canadian outdoor furniture retailers. Yet other costs must be factored in to retail prices, and storeowners say U.S. manufacturers tend to be unsympathetic.
“I’m amazed and disappointed that most of our American vendors don’t know, didn’t do their homework, and don’t seem to care,” Gilboe says. “They’re almost cavalier.”
For instance, to land a container last year cost about $4,800; the cost now is closer to $6,500. (U.S. merchants also must factor in the cost of landing a container of goods). However, in Canada, goods from China are levied an additional eight percent import duty.
Items crossing into Canada from the U.S. encounter freight charges (characterized by Gilboe as “out of control”), which must be paid in U.S. dollars. Brokerage fees also are assessed when crossing the border.
Here’s how the additional costs and fees affect retail pricing:
|Tom Murray, president of NorthCape.|
An item produced in China that wholesales for US$100 will likely end up with a retail price of CN$350.
The U.S. rule of thumb to keystone, or double, a wholesale price for retail doesn’t work in Canada. A more realistic multiplier is 1.5, retailers say; then add that figure to the wholesale price to approximate the retail value.
“Our importing challenges are pretty straightforward,” says Squarie. “Every hundred grand (in U.S. dollars) is costing me $135,000 “(in Canadian dollars).
To be fair, some Canadian retailers complimented their U.S. suppliers for holding the line on shipping charges to a flat percentage of a shipment’s value. Retailers say that this amounts to the manufacturer subsidizing the cost of sending goods north of the border. Ebel, Homecrest, Patio Renaissance and OW Lee were mentioned as companies that follow this practice (surely there are others).
Tom Murray, president of NorthCape, spoke knowledgeably about Canadian business issues. His company targeted the Canadian market in a big way a couple of years ago. NorthCape now has more than 50 active Canadian dealers and wants more.
“Canada was on a tear” fueled by the Alberta oil boom, Murray says, “and that trickled down throughout the economy. When the dollars were par, one to one, everything was rosy. Today, Canadian retailers are getting hammered on everything that’s not a local, Canadian product.”
Canadians fortunate enough to produce goods for sale in the U.S. find themselves in a much more comfortable situation. “Anybody who can get their inputs from Canada and sell to the U.S. is laughing,” says newspaper editor Waldie.
In Alberta, epicenter of Canada’s financial uncertainty, the casual business seems to be replaying a scenario witnessed in the United States in 2009, following the financial collapse of 2008.
|Les Svindt, manager of Patioline.|
“People with money have money. Those people are still spending,” says Les Svindt, manager of Patioline. “It’s the working guy who’s holding back. A lot of people are scared, and I think it’s going to play a big role next year.”
Shaun Loewen is a sales representative for Gloster in western Canada. He expected the market to soften more than it actually did. Loewen attributes the continuing health of Gloster’s sales to the demographics of its consumer base.
“When you are dealing with a premium line,” he says, “the pocketbook stays open a little longer, and when it does close, it opens a little sooner.”
Nieman, the distributor, expects her retailers to finish 2015 with more unsold inventory on hand than they would prefer. That will affect their buying for 2016. “I’m going to feel it next year,” she says.
As winter looms, those in the patio furniture business are hoping for an early, warm spring and a brighter economic forecast, same as always. And this year, they really mean it.
|Let’s Play collection from Jardin de Ville.|