CE and the Dollar

From the desk of Lee Distad's Professional Opinion:

Regarding the recent surge in the strength of the Canadian Dollar: there’s only one place in the daily newspapers where there are more poorly thought out arguments about economics than the editorial pages, and that’s the letters-to-the-editor page.

The pundits, whether professional or amateur, who are crying foul about price disparity on consumer goods north of the border mean well, but I have yet to see a single diatribe where the writer demonstrates an understanding of the consumer marketplace. To be honest, that might be explained by the fact that every day that I skim the editorials and the letters, I invariably come upon a plea along the lines of “shouldn’t the government be legislating price controls to protect us?” Usually, the paper ends up getting hurled across the room, so I might have missed one or two.

To keep this blog entry simple, let’s examine the two primary factors that govern what goods are sold for: volume and time. There’s a whole host of other factors, but these two are the big ones. I recognize that most people reading this have considerable experience in our industry, and know all this already, but I’ve been building up a head of steam for weeks and need to get this off my chest.

Keen eyed readers will have noticed that foreign exchange isn’t one of the top two reasons. That’s because of time. The products on the shelves this fall were ordered and the contracts signed anywhere from six months to a year or more ago; and the distributors and agents agreed to pay a price that was dependant on a Canadian Dollar that was anywhere from 80 to 90 cents U.S. at the time the deals were made. The product sitting on shelves and in the warehouses wasn’t paid for at par, so for prices to line up with what can be seen across the border, it would be Canadian businesses taking it on the chin. Does anybody reading this think that’s fair?

Speaking of fairness, it may not seem fair that goods cost more in Canada, but a large part of that comes down to volume. The bottom line is that the United States has a population of roughly 300 million people, and Canada has only a little more than a tenth of that. Whether retail store buyers are purchasing seasonal programs for apparel, electronics, or anything else, the amount that Canadian retailers and their suppliers will purchase from overseas manufacturers will never, ever come close to the consumption of our neighbour. As a result American companies pay less for their goods than do Canadian companies because of the volume discounts that they receive. It seems pretty simple.

Or maybe it’s not as simple as that. This week Wal-mart fired the first shot by announcing that they would sell HALO3 at the same MSRP in Canada and the U.S. In one stroke, Wal-mart scored bonus points with consumers, and made every other retailer look bad for not jumping to the pump.

I guess that you could say that there’s a third key factor in pricing: power politics. I was talking with a friend yesterday who represents a number of electronics manufacturers. He was keen to find out if I had heard rumblings of any vendors or retailers getting ready to announce exchange-rate related markdowns on electronics. To hear him tell it, our industry is currently in a Spaghetti Western-style showdown in the middle of Main Street, waiting to see who’s going to draw, or blink, first. The holiday selling season is typically a time for pricing silliness anyway: during a two week span back in October 2002, I had to re-price all the DVD players on my shelves seven or eight times as vendor-driven markdowns were communicated to us. I think that the flat-panel bloodbath of last year is still fresh in our memories.

I’ve got a niggling feeling that we may see a price war this Christmas that makes last year look mild by comparison.

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