A Canadian supply-chain power play

So here is an interesting bit of supply chain bullying.  Sears Canada is trying to unilaterally force some significant price cuts on its suppliers because of the rise in the exchange rate between the US dollar and the loonie (Strong Loonie Sets Off a Retail Tiff, May 19, Wall Street Journal).

Sears Canada Inc. is battling its suppliers over who should reap the benefits of Canada’s strengthening currency, in a sign of how foreign-exchange fluctuations are squeezing businesses up north.

The Toronto-based retailer, which is publicly traded but majority owned by Sears Holdings Corp. of the U.S., has told many suppliers it is permanently reducing what it pays them by about 10%. It argues that since the stronger Canadian dollar means vendors pay less for a product, be it a grill or a shirt, Sears should pay less too. It also wants some “retroactive recovery” of what it has paid so far, according to an April letter viewed by The Wall Street Journal.

As the figure below shows, the loonie has been soaring relative to the US dollar over the past year and this has led to Sears Canada being at serious disadvantage to US retailers when competing for the business of Canadian shoppers who live close to the US border. Some other example given in the article are that a pair of Levi’s go for $29.99 at an American Sears but cost C$70 at Sears Canada — that translates to $67.50.

Not too surprisingly, suppliers are fighting this move. Many of them claim not to be gaining a windfall because they either source in Canada or had locked in loonie to dollar exchanges before the big run up.

To me, this seems like a poor allocation of risk. Sears Canada signed contracts in Canadian dollars and left whoever was importing Weber grills for them on the hook for any exchange risk. Two things then went wrong for the retailer.  First, with risk comes reward. The suppliers got rewarded (this time — they would have been hurt if the currencies had gone the other way) and Sears Canada realized that they were missing out. The second problem exacerbates the first. Sears Canada was left with risk that US retailers would be at a competitive advantage. So they see the suppliers getting a windfall while they are getting hammered. So it is understandable that Sears Canada is looking for ways to level the playing field.  Still it is hard to feel sorry for them. Writing some price adjustment into the contract based on the exchange rate or hedging the exchange rate or just sourcing some items in American dollars seem like easy fixes. Yes, Sears Canada would have to bear some of the exchange, but they would at least be honest about it upfront. That certainly seems better than resorting to bullying suppliers when you realize the market hasn’t gone your way.