Retailers are expected to hike prices in the coming months as they feel the pinch of a weak Canadian dollar and higher costs for imported goods.
Merchants have largely resisted widespread price hikes and made only “selective” increases to combat the effects of the loonie’s roughly 16-per-cent slide over the past year against the U.S. dollar, according to an internal Retail Council of Canada study. But they may not be able to hold off much longer.
The main effects of the Canadian dollar’s dramatic depreciation are “still to come,” warns the survey of large and mid-sized retailers, conducted Sept. 8 to 11.
Retailers ranging from generalist Canadian Tire Corp. to discounter Dollarama Inc. do much of their inventory purchasing in U.S. dollars, the value of which has soared, making their buying more expensive. The change is forcing domestic players to find other savings, such as chopping staff, or consider raising prices to offset higher costs.
And while retailers have enjoyed a relatively stable business in the spring and summer – except in parts of Alberta, which is feeling the oil crisis pain – the soft dollar will eventually pinch merchants’ profits, the report predicts.
On Friday, Statistics Canada said consumer prices rose 1.3 per cent in August from July, fuelled by higher costs for food, shelter, home furnishings and clothing despite cheaper gasoline.
Some retailers, such as Canadian Tire, are intent on finding efficiencies to avoid raising prices, aiming to steal business from rivals. Currency weakness shaved $35-million from the retailer’s second-quarter foreign-sourced product businesses, chief executive officer Michael Medline said this summer.
“My personal belief is that across all of retail in Canada, because of these risks, there could be a little bit of inflation that we may see in consumer pricing, which I hope we do not see,” Mr. Medline told analysts.
“And we are doing everything in our power not to pass it on to consumers because in many respects that is not true productivity in my books. We’ve got to do things smarter and make our businesses stronger.”
Still, Dollarama CEO Larry Rossy recently signalled his company may need to raise its top prices to $4 from $3 next year if the loonie continues to slip. (He said the stores’ food items would continue to be priced at a maximum of $2.)
“In general, we like to maintain our prices as long as we can, but this is really an exceptional time where the Canadian dollar has gone so poorly against the U.S. dollar and everything is bought in U.S. dollars,” Mr. Rossy said. “So to absorb 25 per cent to 35 per cent [currency shift] is almost impossible” without eventually having to raise prices.
Home-improvement specialist Rona Inc. has so far this year seen just a little inflation – less than 1 per cent, said CEO Robert Sawyer.
“We can see that going down the road there’s going to be a little bit more inflation,” he added. “Especially, coming in 2016 because vendors are at the door because of the value of the Canadian dollar.”
Some retailers’ profit margins have already been squeezed. Second-quarter gross margins at Canadian Tire’s retail division slipped 0.75 per cent, partly because of foreign exchange pressures.
The RCC report found that 49 per cent of retailers said the loonie’s devaluation had increased their costs more than 5 per cent.
“Despite all the tools retailers are deploying to limit the damage, the cost increases are insurmountable and will have to be passed through” to consumers, the study says. “The most likely point for the dam to break will be the New Year when retailers and suppliers lock down their plans for 2016.
“The power of the tools will be exhausted by then and the only recourse will be to bring prices into line with the new cost realities. We can only hope the economy and consumers are sufficiently robust by then to accommodate the price increases.”
Randy Harris, president of apparel researcher Trendex North America, said he expects clothing prices to rise as much as 5 per cent starting as early as the end of 2015.
Major retailers hedge their currency, a practice that has given them breathing room of up to a year or so, he noted. Big retailers also have the clout to push their suppliers to give them breaks to offset the currency pain.
But domestic retailers often don’t have the scale and flexibility to quickly shift overseas sourcing to lower-cost markets to make up for the declining loonie, Mr. Harris said.
Other retailers have turned to domestic suppliers in an attempt to stabilize their costs, the RCC report says.
On the positive side, the drop in the dollar has resulted in less cross-border shopping, resulting in more spending at home, it says.
Apparel prices overall have increased 2 per cent to an average $17.91 (including underwear and socks) for the year to the end of June, according to market researcher NPD Group Canada. Outerwear (coats and jackets) has seen the steepest price hikes – 5 per cent to $57.84 – over that period, it found.
As retailers move to raise prices, “it’s going to be a fine line between not eroding their margins and not eroding customer loyalty,” said Sandy Silva, director of client development at NPD.Report Typo/Error