The Canadian dollar, near parity with the U.S. dollar for the first time since 1976, has serious implications for powersports dealers in Canada; there has been an increase in customers going across the border to purchase new motorcycles and ATVs.  If we look at the automotive dealer industry as a whole in 2007, average new vehicle dealer profits sank to $331,100 from $442,500 in 2004.

There is an economic concept called Purchasing Power Parity (PPP), which means we can take the money we spend on a new Yamaha YZ125 in Canada, exchange it for U.S. dollars, and this would be the exact amount it would cost to buy the same bike in the U.S.  Empirically, PPP holds true in the long run, however, it takes some time to adjust.  During this time, consumers are most likely to seek cross-border deals.  Theoretically, dealers could cross the border as well, seeking lower cost inventory.  However, the relationship between dealers and distributors is very strong in Canada, where some of the most successful dealers remain loyal to their Canadian distributors in both good and bad times.  Canadian businesses need to become more competitive in order to maintain market share.

 
What are some dealers doing in order to stay competitive?  Some dealers are leveraging themselves to benefit from rising fuel prices.  Experts in the industry have claimed that scooters have been a growing part of their business, as it is the perfect low cost mode of transportation for daily commutes to work.  Our analysts are bullish on the price of oil and see it going much higher.  If you define yourself as a supplier of fuel efficient vehicles, this would certainly give you a competitive advantage.  Another avenue that Canadian dealers can take is expanding their dealerships towards maintenance and repairs.  Thousands of powersport vehicles are coming across the border with no warranty from the Canadian dealers.  This is going to be a problem for consumers who don’t necessarily want to cross the border every time their ATV breaks down.  Defining your dealership as a brand that caters to these unprotected consumers can be another way to attract additional revenue to your business.

In light of our currency situation, we are seeing some favourable conditions as well.  Some OEMs are providing rebates for customers who purchase their powersport products in Canada.  This is designed to equalize the prices between Canadian and US offerings, after rebate.  In addition to warranty issues of U.S. bought bikes in Canada, bringing bikes across the border can also be costly, depending on the modification requirements.  With the border hassle, increasing fuel costs, and no warranty, some consumers find it less costly to skip the trip and shop at home. 

Our research tells us that the Canadian dollar prices are 24% higher than U.S. dollar prices on identical goods.  Purchasing power parity tells us that even though it is unrealistic to see these prices to equalize overnight, the price difference is not sustainable.  We anticipate more downward pressure on Canadian prices in the months ahead.  Considering price disparity, Canadian powersports dealers have handled the competition very well so far, while maintaining their relationships with Canadian distributors.  In order to maintain market share, our dealers are going to have to become more competitive.  While this may seem a harsh reality in the short run, in the long run, when prices are closer to equalization, having a more competitive industry may be healthy in the long run. 

Matt has an extensive background in the investment industry.  He graduated from Simon Fraser University with a B.A. in Economics, is a Chartered Financial Analyst (CFA) Level III Candidate, a Certified Financial Planner (CFP) Candidate, and a Financial Management Advisor (FMA). Prior to joining BMO Nesbitt Burns, Matt worked in wealth management at ScotiaMcleod. Matt specializes in providing investment advisory services to high-net-worth individuals, corporations and institutions.  Matt's services range from investment selection to comprehensive wealth management. He can be reached at 800.663.0242 or matt.noel@nbpcd.com. Special thanks to Marq Smith from Western Power
Sports and Mike Greydon from Pacific Yamaha BMW for their input.