A Boost for Detroit Area Retailers?

Transcription

1 November 16, 2007 A Boost for Detroit Area Retailers? Strong currency, new attractions likely to draw Canadian shoppers Scott D. Watkins, Consultant Tyler Marie Theile, Research Associate AEG Working Paper (c) 2007, Anderson Economic Group LLC. INTRODUCTION Michigan and metro Detroit have in many ways been at the epicenter of bad economic news in recent years. High unemployment rates have grown higher on a monthly basis, and major layoff announcements come all too often. In addition, the region has some of the highest foreclosure rates in the country. All the while, gas prices continue to rise, further squeezing residents in and around the motor city. All of this, combined with some softening in the national economy, has many expecting a slower than usual holiday shopping season. There is, however, at least one economic trend poised to make this holiday shopping season a little merrier for retailers in metro Detroit. The weakening U.S. dollar and the strengthening of the Canadian dollar has given Canadians newfound purchasing power when shopping in the United States. With this paper, we look at five reasons why retailers in Southeast Michigan can expect to see more Canadian shoppers filling their stores this holiday season and beyond. These reasons, in summary, are: 1. The declining value of the U.S. dollar along with the increasing value of the Canadian dollar. 2. Retailers in Canada have traditionally set prices to account for a stronger U.S. dollar value. Many, however, have been slow to adjust prices in step with changes in currency values. 3. Many Canadians live within an hour or less of the Detroit and Port Huron border crossings. 4. Canadians in the greater Windsor area have high median family incomes, making them attractive customers to retailers and other businesses. 5. Attractions like the new MGM Grand Casino and the revamped Detroit Institute of Arts give Canadians even more reason to visit the Detroit area. Anderson Economic Group LLC Watertower Place, Suite 100 East Lansing, MI Tel: (517) Fax: (517) East Lansing Chicago Dallas

2 REASON ONE: U.S. AND CANADIAN CURRENCY VALUES The primary force that is likely to result in more Canadians visiting metro Detroit to shop is the decline in the value of the U.S. dollar relative to the Canadian dollar. As the U.S. dollar has fallen relative to the Canadian dollar, Canadians benefit from an increase in purchasing power when they shop with their Canadian currency in the United States. To illustrate this, consider that currently one Canadian dollar is worth approximately $1.04 USD, which means that a $100 item in the U.S. costs a Canadian visitor the equivalent of $ As recently as 2001, the exchange rate was such that a $100 item in the U.S. cost a Canadian visitor the equivalent of $ USD. As a result of the recent change in currency values Canadians can now buy the same amount of goods or services in the United States, but at a much lower price. This is further illustrated in Table 1 below. 1 TABLE 1. Changes in Canadian Purchasing Power, $1 Canadian dollar equals: $100 item in U.S. costs a Canadian visitor: November-97 $0.68 US$ $ CAN$ November-98 $0.62 US$ $ CAN$ November-99 $0.65 US$ $ CAN$ November-00 $0.63 US$ $ CAN$ November-01 $0.61 US$ $ CAN$ November-02 $0.62 US$ $ CAN$ November-03 $0.73 US$ $ CAN$ November-04 $0.79 US$ $ CAN$ November-05 $0.81 US$ $ CAN$ November-06 $0.86 US$ $ CAN$ November-07 $1.04 US$ $96.15 CAN$ Source: Anderson Economic Group, LLC Exchange Rate: November 6, 2007 from Yahoo Finance CAN$ = 1.08 US$; calculations based on an exchange value of 1.00 CAN$ = 1.04 US$ to account for estimated currency exchange costs. Historical exchange rates collected from the Bank of Canada. REASON TWO: RETAIL PRICES SLOW TO CHANGE In addition to changes in currency values, retailers in Canada have been slow to reduce prices in step with the growing value of Canadian currency, thus making retail prices in the United States more appealing. 1. The actual exchange rate is closer to 1.00 CAN$ = 1.08 US$, but to recognize the cost of currency exchange we factor in an exchange fee of approximately 4%. Strong Loonie Means Deals for Canadian s Shopping in the U.S. 2

3 As a result of fluctuations in currency value and maintained retail prices, many items sold in Canada are now notably more expensive than the exact same item in the U.S. This allows Canadians to realize savings without changing brands or products. To illustrate this, we collected comparable advertisements from retailers who sold identical items in both Windsor and Detroit. For every item we compared savings can easily be found for Canadians shopping on the U.S. side of the border. For example, a double cheeseburger at a Detroit McDonald s would cost $1.00, while the same menu item at a McDonald s in Canada is $1.45 (or $1.39 Canadian). As for bigger ticket items, consider a 60 LCD Sony television advertised by Best Buy in the United States for $2, USD. The same television was listed for a sale price of $2, ($2, Canadian) in a Best Buy of Canada ad. See Table 2 Sample of Savings Realized by Canadian Shoppers in the U.S. for more prices comparisons. TABLE 2. Sample of Savings Realized by Canadian Shoppers in the U.S. Savings if Canadian Buys in U.S. Item and Details Price in US$ Price in CAN$ Canadian Price in US$ Sony 60" SXRD LCD Projection HDTV from Best $2, $2, $2, $ Buy (sale prices) Nikon D40 6.1MP Digital SLR Camera from Best Buy $ $ $ $ $ $ $ $14.78 Two NBA Basketball tickets (upper bowl, center court, first ten rows, Pistons or Raptors) Friday night downtown Hotel (Windsor Hilton, Detroit Marriott, standard king room, all taxes included) $ $ $ $23.70 McDonald's Double Cheeseburger (or other $1.00 $1.00 $1.39 $1.45 $0.44 item) Spider Man 3 DVD (on sale at Wal-Mart) $14.87 $19.63 $20.42 $5.55 Source: Anderson Economic Group, LLC Exchange Rate: November 6, 2007 from Yahoo Finance CAN$ = 1.08 US$; calculations based on an exchange value of 1.00 CAN$ = 1.04 US$ after currency exchange costs. Price information from retailer or service provider web sites or advertisements. All prices are before taxes unless otherwise noted. REASON THREE: SIGNIFICANT POPULATION BASE Competitive retail prices, of course, won t allow retailers to sell more products unless there is an existing customer base. Fortunately, there are significant numbers of potential Canadian shoppers living in close proximity to metro Detroit, as well as most other major U.S. border cities, including Buffalo, NY, and Seattle, WA. To give some idea of just how many people live within a reasonable distance from metro Detroit s major retail centers, we assumed that most shoppers would be willing to make the trip if they lived within an hour or so of the destination. This covers the greater Windsor area, including the Canadian census areas for Strong Loonie Means Deals for Canadian s Shopping in the U.S. 3

4 TABLE 3. Canadian Population Statistics Windsor, Sarnia, and Chatham-Kent. The total population in this area was found to be more than 520,700. This represents more than an 11% increase in total population when added to the overall metro Detroit area, and gives retailers a significant boost in their potential customer base. See Table 3 Canadian Population Statistics for a further look at demographic data for Canadian census areas adjacent to metro Detroit. Total Canadians Near Detroit Metro Area Sarnia Census Area Chatham-Kent Census Area Windsor Census Area area Population in ,724 88, , ,342 Population in ,917 88, , ,877 Median age of the population Total population 15 years and over 424,785 74,180 88, ,820 Total private households 206,350 36,840 43, ,840 Average household size Source: Statistics Canada, REASON FOUR: POTENTIAL CANADIAN SHOPPERS HAVE HIGH INCOMES Metro Detroit retailers not only have an expanded customer base when Canadians have incentive to shop across the border, but they are also likely to be drawing more affluent customers as well. A look at income data reveals that the greater Windsor, Canada area ranks among the top 5 Canadian census regions in terms of median family income. 2 Windsor s median family income, in Canadian dollars, increased from $65,600 in 2001 to $69,700 in With current exchange rates, 3 this 2005 earnings figure equates to over $75,000 in U.S. dollars. By comparison, the 2005 median family income for the State of Michigan was $57,227 and the 2005 median family income in Oakland County, regarded as one of the wealthiest in the country, was $81,239. To further illustrate this comparison, we have compiled the median family incomes for counties which include the metro Detroit area: Macomb County, Oakland County, and Wayne County. See Table 4 Median Family Income, 2. Statistics Canada, 3. Exchange rate as of November 6, 2007 from Yahoo Finance: 1.00 CAN$ = 1.08 US$. Strong Loonie Means Deals for Canadian s Shopping in the U.S. 4

5 for a five year comparison of median family income data in these regions. TABLE 4. Median Family Income, Michigan (US$) Windsor (US$) a Windsor (CAN$) Macomb County, MI (US$) Oakland County, MI (US$) Wayne County, MI (US$) 2001 $53,880 $70,848 $65,600 n/a n/a n/a 2002 $54,054 $72,468 $67,100 $61,557 $76,529 $49, $55,018 $73,224 $67,800 $63,230 $78,229 $48, $55,778 $73,872 $68,400 $65,425 $76,376 $50, $57,227 $75,276 $69,700 $64,676 $81,239 $50,704 Source: Statistics Canada, American Community survey, a. Converted to US$ based on the November 6, 2007 exchange rate of 1.00 CAN$ = 1.08 US$. REASON FIVE: ATTRACTION INCLUDES MORE THAN JUST LOW PRICES Metro Detroit area retailers should also be glad to know that relatively low prices are not the only reason Canadians will have to cross the border. The metro Detroit area is truly a regional destination, offering a range of cultural, entertainment, leisure, sporting, and shopping attractions that draw visitors regardless of currency values. However, with the increased value of Canadian currency and recent additions to the Detroit retail and entertainment scene, there is likely to be a further attraction for Canadian visitors. Shopping centers such as the high-end Somerset Collection (located in Troy, MI) the newly-built Partridge Creek (located in Clinton Township, MI), and Great Lakes Crossing (Auburn Hills, MI) offer unique and diverse shopping experiences. These shopping centers and a number of others offer a store selection not available in the Windsor area. Of the 10 largest malls in Ontario, only The Devonshire Mall (ranked #7) is located in Windsor. New attractions like the recently opened MGM Grand Casino and Resort and the revamped Detroit Institute of Arts give Canadians even more reason to cross the border for a day or weekend of shopping and entertainment. Long time staples of the city such as Detroit Red Wings hockey games and broadway shows at the Fox and Fisher theatres are also notable attractions sure to help draw Canadian visitors to the Detroit area. After the holiday season, annual events like Detroit s Winter Fest and the International Auto Show also have the potential of keeping visitors coming back to visit and shop in the Detroit area well into the new year. Strong Loonie Means Deals for Canadian s Shopping in the U.S. 5

6 CONCLUSION Retailers in the Detroit area, as well as other U.S. border communities, are poised to see significant increases in Canadian shoppers this holiday season as long as current price disparities continues. How long the trend lasts will depend on further changes in currency values, and also on how quick Canadian retailers respond with lower prices of their own. This response is likely to happen sooner than later, so retailers should seize on this opportunity to woo Canadian shoppers while the price is right. ABOUT ANDERSON ECONOMIC GROUP Anderson Economic Group, LLC was founded in 1996 and today has offices in East Lansing, Chicago, and Dallas. The firm specializes in economics, public policy, financial valuation, market research, and land use economics. AEG s past clients include: Governments such as the states of Michigan, North Carolina, and Wisconsin; the cities of Detroit, Cincinnati, Norfolk, and Fort Wayne; counties such as Oakland County, Michigan, and Collier County, Florida; and authorities such as the Detroit-Wayne County Port Authority. Corporations such as GM, Ford, Delphi, Honda, Taubman Centers, The Detroit Lions, PG&E Generating; AT&T, Gambrinus, Labatt USA, and InBev USA; automobile dealers and dealership groups representing Toyota, Honda, Chrysler, Mercedes-Benz, and other brands. Nonprofit organizations such as Service Employees International Union, Michigan State University, Van Andel Institute, the Michigan Manufacturers Association, International Mass Retailers Association, the University Research Corridor, and the American Automobile Manufacturers Association. For additional information see our web site at: Group.com. ABOUT THE AUTHORS Scott D. Watkins. Mr. Watkins is a Consultant and the Director of Marketing and Administration at Anderson Economic Group. His consulting work involves economic and policy analyses. Among the clients for whom he has worked are the Michigan Manufacturers Association, Michigan State University, Wayne State University, Michigan Chamber of Commerce, and the West Virginia High Technology Consortium Foundation. Recent reports by Mr. Watkins include: Economic Impacts from 2006 Detroit Tigers Game Attendance, Automation Alley s Second Annual Technology Industry Report: Driving Southeast Michigan Forward, and Benchmarking for Success: Education Performance among the American States. He has also provided testimony to the Michigan House of Representatives on matters of education finance, and is the editor of the book The State Economic Handbook 2008, as published by Palgrave Macmillan. Strong Loonie Means Deals for Canadian s Shopping in the U.S. 6

7 Mr. Watkins holds an M.B.A. from the Eli Broad College of Business at Michigan State University. He also has a B.A. in marketing from Eli Broad College of Business and a B.A. in international relations from the James Madison College, both at Michigan State University.Mr. Watkins is a graduate of Michigan State University with a B.A. in Marketing from Eli Broad College of Business and a B.A. in International Relations from James Madison College. Tyler Marie Theile. Ms. Theile is a research associate with Anderson Economic Group. She has contributed to previous reports including Automation Alley s Annual Technology Industry Report and Michigan s University Research Corridor: First Annual Economic Impact Report. Ms. Theile is a graduate of Michigan State University, James Madison College, where she received a B.A. in international relations with a specialization in political economy. Strong Loonie Means Deals for Canadian s Shopping in the U.S. 7