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Loonie Reaches Par with Dollar; Canada in Fix

Published January 4, 2008

BY JOHN CRENSHAW

VANCOUVER, British Columbia—After slowly gaining strength against the U.S. dollar for five years, the Canadian dollar took off like its namesake loon during the third quarter of 2007, flying high over its U.S. counterpart and flirting with a value of $1.10 U.S. before fluttering back down to just below parity in December.

That high-flying loonie and tumbling eagle caught Canadian suppliers by surprise, hitting their margins as they struggled to maintain domestic and export prices. Norco, a major Canadian bike brand, distributor and exporter, is probably typical: They’d bought their stock and set prices earlier in the year with higher-valued U.S. dollars, and were stuck with the difference as its value fell.

“When we sell into the States, or to export distributors around the world, we sell in U.S. dollars. So take a bike we sold for $1,000 U.S.: We used to convert thatand put $1,300 or $1,400 Canadian into the bank. In early December, we were putting $960 in,” said Peter Stace-Smith, PR and marketing manager for Norco.

Suppliers can’t adjust prices every couple of weeks to match volatile exchange rates. Norco held to its export pricing commitments, but is realizing much less than expected when the company quoted its 2008 product line to international distributors, he said.

“We’re taking an absolute beating at this end as far as the way the (U.S.) dollar’s dropped and what we’re actually getting for that product. The good news is we’re selling more bikes. The bad news is we’re actually making less than before,” Stace-Smith said.

As a distributor shipping big pre-season orders to retailers, Norco has another dollar issue.

Norco purchased the product months ago, when the U.S. dollar was worth about $1.25 to $1.30 Canadian. “But we had to price our ’08 dealer catalog using an exchange rate very close to par, about $1.05 to $1.07. But the inventory in our hands probably cost $1.30, so we’re losing maybe 25 points on everything getting shipped,” Stace-Smith said.

He predicts some respite. “Our fill-in orders for the season will be purchased at a lower exchange rate, so we’ll see some relief over the next four months,” he said.

Meanwhile, Norco has to maintain competitive pricing against U.S. suppliers as it ships items such as its Mace and Axiom brands into the States, and as it competes with U.S. distributors shipping to retailers in Canada.

David Murphy, director of marketing for apparel company Sugoi, faces similar dilemmas. “It does affect us, especially with our custom apparel business. A fair percentage of our product is manufactured here in Vancouver, so it hurts us on the export side. But Sugoi’s a specialty, technical performance brand, so we’re not going to compete on price. We’re not going to start slashing prices or go into panic mode,” he said.

Canadian money managers will probably nudge the loonie down to about 90 cents U.S., he said. Overall, Murphy predicted price increases in almost all cycling products as manufacturers pass on increased costs for raw materials, labor and shipping, coupled with the U.S. dollar’s decline in value.

Jake Heilbron, co-founder of Kona, said that as the Canadian dollar appreciated over the past five years, Kona lowered its retail prices in Canada and brought Canadian retailer margins up to about 42 percent.

“The difficulty for Canadian retailers is that the increase in number of bikes sold has not been in proportion to lower prices. Retailers are selling more bikes, but their gross dollar sales in bikes have remained flat or even decreased,” he said.

Canadian retailers were deeply concerned when the loonie spiked and the Canadian media was full of stories about Canadian consumers crossing into the United States.

Mike Heitpas, Trek’s Canadian sales manager, said, “My phone was ringing off the hook from Canadian retailers worried about people going to the U.S. to buy bikes when the Canadian dollar hit $1.10.”

Although Canadians went for big-ticket items like automobiles and thronged to U.S. malls for Black Friday sales, bicycle purchases didn’t appear to be significantly affected on either side.

“We’re not seeing an immediate impact on our sales to Canada, but the run-up was so sudden and came after a lot of pricing was done, so we wouldn’t have expected to,” Heitpas said.

U.S. suppliers did get pressure to lower prices in Canada, he said.

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