Cross-border shopping 'thorn' for retailers

Christmas shoppers walk to stores at the Laurier shopping centre in Quebec City, Thursday, December 16, 2010. Cross-border shopping will remain a “thorn in the side of Canadian retailers” this holiday season and online shopping at U.S.-based websites will also curb sales growth, says a report by the Bank of Montreal. THE CANADIAN PRESS/Jacques Boissinot

Cross-border shopping will remain a "thorn in the side" of Canadian retailers this holiday season and online shopping at U.S.-based websites will also curb some sales growth, a report by the Bank of Montreal says.

"Clearly, for many retailers, especially retailers close to the border, they are facing a loss of sales to cross-border retailers," BMO senior economist Sal Guatieri said Thursday.

Despite a drop in the loonie in recent weeks, daily car trips to the United States in the first eight months of this year are on par with levels seen in the late 1980s and early 1990s when the Canadian dollar was worth as much as nearly 90 cents U.S.

"Cross-border shopping will remain a thorn in the side of retailers," the BMO study said.

Canadian retail sales are expected to be up about 2.5 per cent in November and December, compared with a gain of 3.1 per cent in last year's holiday season, the study said.

The BMO study also noted that retail sales will be restrained by high household debt, modest wage growth and turbulent global markets.

"This erosion in spending power, alongside weaker equities and global recession fears, has already dented consumer confidence," the study said.

Guatieri also said that some Canadian retailers aren't expected to do as well against their online U.S. competitors.

"Goods that can be shipped quite easily or cheaply — books, games, toys online — those retailers will probably face difficulties."

The Canadian dollar likely would have to fall below 90 cents U.S. before Canadians will change their cross-border shopping habits, he said.

Finance Minister Jim Flaherty has said he did not have the answers as to why prices remain stubbornly higher in Canada — on average about 20 per cent more — despite the fact the loonie has steadily risen against the U.S. dollar over the last five years.

Flaherty told a Senate committee this week that he's prepared to look at reducing tariffs and to use "informal persuasive powers'' with retailers if needed to reduce the Canada-U.S. price gap on consumer goods.

BMO's Guatieri also said it's possible that Canadian retailers will start their discounts a bit earlier in the holiday season to compete with their U.S. counterparts.

"I think there's ongoing pressure on Canadian retailers to compete with U.S. retailers because of the strong Canadian dollar. So if there's any way they can get a jump on the holiday season by discounting sooner, I think they will take advantage of that."

In the United States, U.S. retailers are so desperate this holiday season that they're willing to lose money to get consumers to spend theirs.

Online jeweller Stauer is offering a $249 amethyst necklace for free — provided customers pay the $24.95 it costs to ship it. Stauer will lose money on the deal, but it hopes to reel in new customers who will buy other jewelry.

Nordstrom is one of the first U.S. retailers to offer free shipping on most orders, no matter how small, even though it could wind up paying $3 to ship a $7 pair of socks.

And U.S.-based Sears is not only offering to match the cheapest prices customers find online, but the department store chain is giving them an additional 10 per cent off the difference.

Retail consultant Ed Strapagiel said more Canadian retailers could offer deals to prevent shoppers from heading south for sales during the U.S. Thanksgiving holiday in late November and participating in the post-Thanksgiving online sales.

"For the ones that didn't participate in Black Friday last year, they're going to look at what their competitors are doing and they're going to want to be in on the action this time around," said Strapagiel, executive vice-president of KubasPrimedia in Toronto.

Sears Canada and Toys R Us Canada were among retailers who offered discounts last year to counter the U.S. Thanksgiving sales.

Edward Jones analyst Brian Yarbrough said if a couple million Canadian shoppers head to U.S. stores, it will have a worse effect in Canada.

"The negative impact of cross-border shopping for Canadian retailers is probably worse than the positive impact for U.S. retailers because they're so much bigger," Yarbrough said from St. Louis, Mo.

He expects about a three per cent increase in holiday sales in the U.S.