Dollar Driving Change: How the Exchange Rate is Impacting the Canadian Automotive

March 17, 2016

The Canadian automotive industry is feeling the impact of the Canadian dollar hovering around rates not seen since 2003. With forecasts showing no increase to the exchange rate in sight, dealers across the country are preparing for leaner times ahead.

In the case of auto manufacturers, the shifting landscape may provide opportunities. Over the last ten years, our strong dollar prompted many major manufacturers to move production to the U.S., Mexico, and overseas. While the costs of relocation will keep those plants from returning to Canada anytime soon, the manufacturers that stayed are now benefiting.

However, the story for auto dealers may be very different. Many are anticipating rough roads ahead, and rightly so. But for those willing to prepare for the coming years,
forecasting changes and making smart adjustments to business strategies, the falling dollar won’t mean disaster.

Regional variation in consumer demand driving diversification

Although auto sales increased over the past five years, 2016 won’t continue this trend. Vehicle sales across the country are expected to be flat, or rise marginally; however, demand in different regions of the country will vary considerably. Auto sales in Ontario, Quebec, and British Columbia are likely to remain strong, driven by low interest rates and attractive financing options. In contrast, sales in Alberta and the Maritime provinces are expected to see a significant decline due to regional economic conditions, increased unemployment, and reduced variable spending.

To help manage the impact of this regional variation, Canadian automotive groups are expanding into wider geographical regions. Groups in areas like Alberta are purchasing dealerships in stronger regions of the country to help diversify and mitigate their risk.

U.S.-based automotive groups are also coming to Canada to diversify their portfolios. The exchange rate is an obvious driver for such purchases, but U.S. groups are also eager to buy local dealerships to take advantage of the comparative stability of the Canadian automotive landscape.

Auto prices to rise to offset import costs

Expect vehicle prices to rise within the next six months to compensate for higher import costs. Though manufacturers are slow to adjust pricing, the current rates make increases inevitable. While manufacturers will shoulder most of this cost burden, dealers are likely to see an increase of $300-$500 per vehicle.

In the short term, these costs won’t be passed along to the consumer, meaning slimmer profit margins for many dealers. Though manufacturers are not affected by the exchange rate equally, they will nonetheless have to maintain a consistent MSRP to remain competitive. Longer-term consumer pricing is not yet known and may rise within the next year to help offset increased costs. The low dollar is also impacting the used car market. Whereas Canadian consumers used to look to the U.S. for good deals, the reverse is now true. 2015 was a record year for Canadian used car exports and this trend is likely to continue, with some dealers hoping used car sales to American consumers and auto groups will make up for lost revenue. Yet, because of the volume of used vehicles taken south of the border, there are fewer vehicles available in the local market. The reduced supply is slowly driving up prices in many areas, and dealers need to be cognizant of what the market will bear.

How owner-managed dealers can insulate their businesses

With the lower dollar affecting several areas of the Canadian auto industry, dealers should expect a difficult year. Yet, while approaches may differ depending on location and other factors, dealers can mitigate the effects of the exchange rate through a number of tactics:

  1.  Maximize your absorption ratio: Instead of focusing on “moving the metal,” emphasize service, parts, and collision center business to remain profitable. This is especially important in regions where consumers will be looking to maintain their current vehicles rather than purchasing a new one. Also consider adjusting your margins on these back area services to maintain an healthy income rather than relying only on volume.
  2. Make operational improvements: While you can’t control consumer demand or economic forces, you can control how you run your dealership. Examine your overhead and direct costs to seek ways to trim unnecessary expenditures, adjust your margins, and find ways to operate more efficiently. Look, too, to re-negotiate contracts with your suppliers as those agreements come up for renewal.
  3. Forecast and budget: To successfully weather uncertainty, you need to predict and plan for potential impacts to your business. Look at all of your “what if?” scenarios, such as, “What if our sales volume drops by 20%?” Run the numbers and use the results to set expectations and drive your decision making going forward.
  4. Redirect marketing efforts: Use creative marketing strategies to help support a more robust parts and service business. Customer loyalty programs, which help create a sustainable stream of consumer purchases, should become a focus. Make sure that you track your efforts and emphasize activities that keep customers coming back.
Current forecasts predict that the low dollar isn’t just a short-term anomaly. With some work and smart adjustments now, your business will be well positioned to profit for years to come.

For more information on how BDO can assist owner-managed auto dealers, please contact your local BDO advisor or:

David Hertzog
905 946 5474

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