Title: Dealing with a
stronger loonie
Sub-title: Small businesses like Parasuco Jeans have different strategies
for dealing with the stronger loonie
Salvatore Parasuco works hard to stay abreast of key international
business and economic trends. He has to. Although, the company he heads,
high-end fashion marketer Parasuco Jeans, has its head office in Montreal,
two-thirds of its sales come from outside Canada. That means disparate
events -- ranging from labour shortages in southern China to increased
demand for “thin” jeans in Italy -- can represent threats or
opportunities.
But few changes have as great an effect on Parasuco Jeans as fluctuations
in the Canadian currency. “It’s funny. A few years ago we took advantage
of the cheap dollar to wholesale more goods into the U.S. But recently
we’ve moved in the opposite direction,” said Parasuco. “Lately we have
taken advantage of the strong greenback to buy U.S. assets.”
Parasuco isn’t alone. The lonnie’s rise in recent years, from U.S. $0.65
range in early 2003 to the U.S. $0.88 range in recent weeks, has led many
Canadian small businesses to significantly revise the way they manage
operations. For example among Parasuco’s biggest strategy changes was last
year’s purchase of the ground floor of a building in Manhattan’s hip SOHO
district to house a U.S. flagship store.
The $15.5 million that Parasuco invested into the locale and another in
the Westfield Mall in San Francisco, was a big chunk of change to pay for
the opportunity to showcase the brand. But the costs were a lot lower than
they would have been several years ago. “With the stronger dollar it’s
like we got a 25 per cent discount in our investment,” said Parasuco.
According to one expert, Canadian small businesses tend to be less exposed
to currency fluctuations than larger companies. That’s because many,
particularly service oriented businesses such as barbershops and snow
removal contractors, do not deal in international markets. But others,
particularly small businesses that export, have been forced to make
significant adjustments in the way they operate.
“Until recently the cheap Canadian dollar gave many businesses the
illusion they were competitive,” said Benjamin Tal an economist at CIBC
World Markets. “But the cheap dollars was more like a subsidy. As a
result, businesses stopped investing in productivity enhancing equipment.”
The strategies that small businesses need to use to manage their exposure
to the stronger Canadian dollar depend in large part on what business they
are in. Whether a company imports, exports, or has products that compete
against foreign brands, makes a big difference in whether the recent
currency moves are good or bad for a particular firm. Among the more
common strategies:
* Make productivity enhancing investments. In the past many Canadian
businesses used the cheap loonie to invest more on labour, which is priced
in local currency, as opposed to productivity enhancing machinery and
equipment, which is typically priced in U.S. dollars. But the recent
currency fluctuations have changed the balance and local business
investment is on the rise.
* Buy more U.S. made inputs. Not only has the stronger Canadian dollar
made it cheaper to buy U.S. made machinery and equipment, it has also
lowered the relative cost of U.S. products and services ranging from paper
products to paper clips. Many Canadian companies are thus increasingly
looking south to buy U.S. components of all kinds.
* Out-source more. The rising loonie has also made it cheaper for Canadian
companies to buy from a wide range of low cost suppliers whose currency is
tied to the greenback, notably China. While the idea of outsourcing is not
particularly attractive to many Canadian managers, the idea of bankruptcy,
from not reacting fast enough to competitive pressure is even less so.
* Develop new export markets. While the loonie has risen strongly against
the U.S. dollar, it has fallen against many other currencies. Many
Canadian companies are already overly reliant on U.S. customers. The good
news is that experts like Tal believe that export opportunities will
increase more rapidly in coming years, due to better technology,
connectivity and freer markets.
* Adopt a tighter, more specialized production line. Canadian companies
with a high percentage of local labour content (which is priced in an
ever-strengthening local currency) in their products and services are
going to find it increasingly harder to compete. One solution would be to
manufacture fewer products, of a more specialized nature, that can’t
easily be obtained elsewhere.
Ironically one of the biggest challenges facing small business owners is
that part of the recent strength we have seen in the loonie could well be
a temporary phenomenon. The Canadian currency is currently trading well
above its purchasing power parity level.
Much of the strength is based on Canada’s raw materials prowess, for which
demand may slow at some point. The good news is that if that happens,
companies like Parasuco, which acted fast to boost productivity, will be
richly rewarded with higher profit margins.
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