Executives at hip U.S. fashion purveyor Abercrombie & Fitch have a problem on their hands. Sales in Canada have been soft, as cautious shoppers balk at prices higher than those south of the border – a gap that remains even as the loonie soars above the U.S. dollar.
Abercrombie's price differential caught the eye of Tyler Cumberford when he mulled purchasing a navy winter jacket in a Calgary store recently. He couldn't miss the difference, because the chain's tags display both U.S. and Canadian prices: The jacket was $160 (U.S.) and $200 (Canadian), or 25 per cent pricier here.
"Why are your prices so out of whack?" the 35-year-old complained on Facebook for all users to see. "I like your clothes a lot but that seems a bit unfair to me … By the way, our currency is now on par with yours." The dollar has climbed further since then, but the differential remains in place. "I just don't feel like giving my money to a company like that," he said in an interview this week. "It's insulting."
The strong dollar is prompting Canadian consumers to behave more like Americans – to be more demanding and more willing to raise a fuss about prices. That assertiveness turned to anger this week after popular U.S. clothing retailer J. Crew Group launched its first store in Canada with higher prices than in the U.S. The resulting backlash forced the chain to relent on Thursday and scale back its online rates.
The J. Crew flap may be the tipping point for retailers, pushing them to respond to activist shoppers who can easily monitor cross-border prices via the Internet and social media, and are also stretched by higher debt levels and economic worries. Shifting consumer sentiment means foreign retailers risk operating in a less lucrative landscape than they expected just months ago.
"U.S. retailers are marking up their prices from depressed levels at home," said Michael Gregory, senior economist at Bank of Montreal, who coined the term "loonie swagger" for the post-recessionary consumer behaviour. "Margins are a little leaner than they've historically been in the U.S. They look to Canada to do things more normally."
Even as U.S. chains race to open stores in Canada, the retail environment is losing a bit of its allure. It was the strength of the Canadian market that made it so attractive for U.S. retailers, but in past months, retail sales growth (excluding autos and gasoline) in the U.S. has outpaced the pickup in Canada – the reverse of the trend of past years.
Canadian retail sales (excluding autos and gas) in June rose a meagre 0.6 per cent above year-ago levels, "miles below the U.S. 6.5-per-cent gain," BMO said in a note this week. "While Canadian retailers didn't suffer as much as their U.S. counterparts during the recession, the tables appear to have turned."
Non-anchor stores in U.S. malls have outperformed those in Canadian shopping centres so far this year, data from the International Council of Shopping Centres suggest. In June alone, productivity – measured in sales per square foot – in U.S. mall stores jumped 6.6 per cent to $405 (U.S.), compared with 3.5 per cent growth in Canada, where sales per square foot rose to $582 (U.S.), an ICSC report this month said.
The J. Crew controversy underscores the pressure on retailers to respond to loonie swagger with lower prices. "In the end, people [at retailers]are going to pay more attention," Mickey Drexler, chief executive officer of J. Crew, said in an interview this week after his chain backed down and dropped a roughly 10- to 20-per-cent duty charge on Canadian online purchases. The retailer's base prices are still about 15 per cent higher in Canada than in the U.S. – similar, Mr. Drexler said, to other U.S. apparel retailers' rates.
"We will learn from everyone else's misjudgments," Mr. Drexler said.
Abercrombie is feeling the pain. This month, it reported overall strong second-quarter results but weak sales in Canada.
"The exchange rate has probably had some impact in terms of making the differential between the [prices]in Canada and the U.S. look greater," Jonathan Ramsden, executive vice-president at Abercrombie, said in a conference call. "Our margins in Canada remain pretty strong, so it is not a profitability issue. But the top-line [sales have]been under some pressure in Canada … We think we have a clear path to getting that fixed."
He didn't provide clues to what that might mean, but among the solutions being considered are reducing prices, or displaying only Canadian prices on tags, a source said. The dual pricing allows the retailer to ship products to stores in either of the two countries. Meanwhile, U.S.-based café giant Starbucks Coffee Co. has lowered some prices here in the past six months (although it has increased others). And it is thinking of dropping duo-priced labels.
"Most retailers in Canada only display the Canadian pricing on the labels, which is an option we are exploring now," said Alan Hilowitz at Starbucks, which currently has both U.S. and Canadian prices on some labels and just the Canadian price on others.
U.S. retailers say they need to raise prices here to cover steeper costs in Canada, including duties, taxes and rents, as well as fewer economies of scale. Merchants say they can't constantly change prices in step with a fluctuating dollar.
And they say that suppliers, such as adidas AG, charge them up to 40 per cent higher wholesale rates than they do U.S. retailers. The same happens in other countries. Case in point: adidas sparked outrage in New Zealand recently when its All Blacks rugby team jersey sold for the equivalent of $180 (U.S.) in that market, compared with about half that in Britain and the U.S.
Still, some consumers don't buy the retailers' explanations. Norman Parsons, who travels frequently to the U.S., complained to Starbucks this month after he paid $17.95 (Canadian) for a 16-ounce bag of whole-bean Caffe Verona coffee in Montreal, but just $10.95 (U.S.) for the same package of coffee outside New York City a month earlier. "The Canadian dollar has been close to or over par for more than a year," he said. "Why is Starbucks ripping off its Canadian customers?"
Retailers charge what they think the market will bear, said retail consultant Jan Rogers Kniffen in New York. The Canadian market is less competitive than the U.S. one, allowing U.S. merchants to raise prices here, he said.
But now, with the power of the dollar and online price transparency, retailers will have less wiggle room, he warned. "It will be harder for a retailer to make an investment in a new store."
Khajak Keledjian, CEO of New York-based high-end fashion retailer Intermix, launched his first store in Canada on Friday, with prices roughly 10 per cent higher than in his U.S. outlets. For example, a pair of J. Brand wax-finish red denim jeans costs $270 in Toronto, but just $238 (U.S.) in the U.S.
Mr. Keledjian said his big expense is duties. He pays a duty of 16 to 18 per cent to import silk or cashmere items to Canada from Asia, but only 4 per cent to bring them into the U.S; duties on linen shipped into Canada are 16 to 18 per cent, but just 1 to 3 per cent in the U.S. Still, not all duties are higher here: Duties on cotton set him back 16 to 18 per cent when bringing those products into the U.S. from Asia, but only 12 per cent when shipping them to Canada.
"Instead of being upset with retailers, consumers should be upset with Customs," Mr. Keledjian said.
Intermix's prices here are in line with suppliers' recommendations as well as those at other retailers selling similar upscale brands, he said. If he lowers his Canadian prices, "I'm sure I will be pissing off a lot of retailers here. We're going to come across as an American brand who came in and we're going on a bidding war. I would never do that."