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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