THE DOLLAR'S SLIDE CAUSED A BURST OF CROSS-BORDER COMMERCE

By Joel Groover

When the Canadian dollar soared against the pallid U.S. greenback to peak at $1.10 last November, observers began spouting off about booming commodities prices, the U.S trade deficit with China and other trends. Canadian shoppers, meanwhile, began suffering the local ripple effects of global macroeconomics.

Given this newfound vigor of the loonie (the nickname derives from the image of the Canadian common loon on the coin's reverse side), consumers wondered why prices in Canada were still so much higher than in the U.S. Outraged, some shoppers threw the book at bookstore clerks, as it were. Others chose to endure three-hour waits at the border to snap up irresistible deals at U.S. malls.

Same-day car trips by Canadians to the U.S., in fact, hit 2.2 million in October, the highest level in nearly seven years, according to Statistics Canada, a government agency. Cars with Canadian license plates packed the parking lots of such border malls as Fashion Outlets of Niagara Falls (N.Y.) and Bellis Fair, in Bellingham, Wash. "We saw about a 10 percent increase in international travelers this fall," said Daniel Jasper, a spokesman for Mall of America, Bloomington, Minn. "Now that the Canadian dollar is so strong, we're really seeing an increase in visits from our Canadian friends."

The hubbub over Canada's currency made Canadians keenly aware of not only the bargains to the south, but also of what they saw as rip-offs at home, says Ian F. Thomas, chairman of Vancouver, British Columbia-based Thomas Consultants. "We have just taken it for granted that our prices were always substantially higher than those in the U.S.," Thomas said. "Then when [the loonie] got to the premium [against the U.S. dollar], everybody said, ‘How could it be that a book could be $20 in the United States and $25 in Canada, when our currency is worth more than the U.S. currency?' "

The resulting damage to Canadian mall traffic has been greatest near the U.S. border, says John Morrison, senior vice president of real estate management at Oxford Properties Group, a Toronto-based real estate firm. "Those that are located closest to the border have been affected the most, and those that I would describe as being more middle-to-lower-market in terms of the merchandise also have suffered."

Indeed, sales in the province of Ontario (which borders Michigan, Minnesota and New York and includes the country's busiest border crossing, at Windsor) were weak enough in October to nearly offset rising sales in eight other provinces, according to Statistics Canada. That left Canadian retail sales virtually unchanged from the previous year, at C$34.5 billion. "Since 2004, retail sales in Canada have grown rapidly but have stagnated for the past several months," the agency said. Given resource-rich Canada's rosy economic health overall, such flat numbers may well be the result of Canadian shoppers' defection to the U.S., says Karen Cordes, an economist at Toronto-based Scotia Capital. Some of the largest domestic declines have been in autos, clothing, electronics and furniture, all of which are cheaper in the U.S. and relatively easy to move across the border, she says. Buying from U.S.-based online retailers, too, is on the rise in Canada, Cordes says.

Just before the holiday season, Canadian retailers and government officials launched a raft of countermeasures aimed at stanching the cross-border bleeding. In October the government announced that it would slash the Goods and Services Tax from 6 percent to 5 percent. And Finance Minister Jim Flaherty urged retailers to "let the market work" and lower their prices. Some chains immediately took the unusual step of slapping U.S. price tags on merchandise sold in Canadian stores. "The big one was Wal-Mart," said Thomas. "It announced it was selling everything in American dollars."

Indeed, part of the reason for the consumer backlash was the inability of many Canadian retailers to slash prices fast enough, Thomas says. "Several have said, ‘Well, we just simply can't do it, because we bought this merchandise six or nine months ago at these greatly inflated prices,' " he said. "They can't sell at a loss."

But by effectively urging retailers to do precisely that, Flaherty may have raised expectations that prices would come down faster than was possible, says one government official, who requested anonymity. "That ended up putting retailers on the defensive," the official said. "They had to explain why prices weren't coming down."

Beyond relaxing prices wherever possible, Canadian retailers launched aggressive marketing campaigns to persuade Canadians to keep to their side of the border. "There has been huge marketing to try to keep Canadian shoppers in Canada," Cordes said, "with advertisements actually highlighting the long lines at the borders and saying, ‘Is it really worth your time to go across the border, or can you actually get the same product in Canada at its discounted rate?' "

Likewise, the Toronto-based Retail Council of Canada has been working to explain to Canadians that domestic retailers face higher costs, including hefty taxes for Canada's health care and educational systems, than U.S. retailers. "The import-tax structure in Canada also is significantly different," said Derek Nighbor, the council's vice president of national affairs. "Our retailers, compared to their American counterparts, are in some cases paying 10 to 20 percent more to import a product from Asia or Europe. Our high-end men's clothiers who import cashmere sweaters from Italy - they're paying a 23 percent import tax in Canada. Their competitors in the U.S. pay 5 percent. Retailers of brand-name running shoes pay an 18 percent duty here. In the U.S. they pay zero."

The council is lobbying for lower import taxes. It also is going after the multinational suppliers who stock Canadian retail stores. Those suppliers have long used Canada's weaker currency as a reason to charge its retailers higher prices, Nighbor says. Many have yet to cut those prices in response to the currency's new strength.

Moving forward, the phenomenon of cross-border shopping will slow, Cordes predicts, owing in part to these collective efforts, but mainly because of larger trends. Indeed, soon after the loonie's peak in November, it fell again; at the beginning of the year it was worth 99 U.S. cents.

Further, with the possible exception of those living right on the border, Canadians need hefty incentives to drive into the U.S. merely to shop. "My time is too precious," said Nancy Defoy, senior adviser for communications and public affairs at Montréal-based mall owner Ivanhoe Cambridge. "Just to pack up the car and wait at the border, once it is all said and done, with tax and duty and all of that, you really have to be after a bargain to commit yourself to that kind of hassle."

Savings on luxury goods in the U.S. have provided precisely this kind of incentive over the past few months. "Canadians might specifically go down to buy a Rolex, for example, because they could save, maybe, $1,500," Morrison said. But the U.S. fire sale on such items, which has drawn not only Canadians but other international shoppers as well in record numbers, will soon end, says Peter D. Schiff, CEO of Euro Pacific Capital, a Darien, Conn.-based brokerage firm. "There was a brief period of time where American retailers still had a lot of products on their shelves that they bought or contracted for a year ago, before the last big drop in the dollar," Schiff said. "But ultimately, as [American retailers] run out of that merchandise and restock their shelves, they will see big price increases from their overseas suppliers."

The stronger loonie also has an upside that helps make some Canadian retailers more competitive, says Karen Flavelle, president and owner of Vancouver-based Purdy's Chocolates, which operates stores in malls and shopping centers across Canada. The company finds itself paying less for imported ingredients such as cocoa.

Perhaps this is why among Canadian mall owners, the loonie is not a white-hot concern, says Sabrina A. Gherbaz, a partner in the commercial real estate and infrastructure group of the Toronto-based Torys law firm. "Everybody seems focused on the impact the commercial-paper markets have had on real estate," said Gherbaz, who is ICSC Canada's government relations chairwoman for Ontario. "There has been much less talk about the Canadian dollar."

Thomas, for one, thinks the loonie's bolstered position may turn out to be an aberration. "We've been through this saga before, and history has a habit of repeating itself," he said. "Our economy is about a tenth of the size [of the U.S. economy]. We just don't have the economies of scale, the efficiencies and the productivity that you get in the U.S."