Beating the lofty loonie

Written by ProfitGuide Staff

The Canadian dollar’s dramatic runup has been disastrous for many entrepreneurs who rely heavily on sales to the U.S. The loonie’s current value of more than 80¢ is nearly 30% higher than the 63¢ it traded at just two years ago. Never in our history have businesses had to adjust so quickly to such a massive currency swing.

Yet many companies are finding solutions. See how five CEOs rose to the challenge:

Jeffrey Klein, president, Honeybee Technology Inc., Pointe Claire, Que.

Founded in 1997, Honeybee delivers customer relationship management software via the Web. More than 85% of its revenue—over $4.6 million—is from the U.S.

“We saw this coming, so about two years ago we engaged a financial consulting firm to review our cost structure,” says Klein. “We knew our margins would be squeezed. We make our money based on volume, and we had to figure out ways to increase it. They helped us identify bottlenecks in our systems.

“We’ve spent the past year-and-a-half rewriting our software to increase our capacity, re-engineering the database so it can handle many more transactions, which is how we’re remunerated. We have the capacity now to quadruple our volumes over two years ago with only a marginal cost increase—maybe a 10% to 15% increase in staffing. It’s as simple as that. We didn’t change our price; we increased our capacity. And the increased volume protected our margins. We could have lost somewhere between half a million and a million a year, but we will more than offset that with increased volumes.

“In business, you have to react to the environment. This forced us to really examine our cost structure and way of doing business. Canadian dollar aside, we really benefited from the scrutiny we put our company under. From every bad emerges a good.”

Kathryn From, CEO, Bravado Designs Inc., Toronto

This 13-year-old manufacturer of maternity and nursing lingerie had 2004 sales of almost $5.5 million. About 85% are exports, principally to the U.S., and it prices all its exports in American dollars.

“Most people, if they were paying attention, realized the dollar was undervalued,” says From. “So we never based our profitability on a 65¢ or even a 70¢ dollar. We operated with the idea that the dollar is probably better valued in the high-70s or 80¢ range. We would bear that in mind when we looked at product pricing and things like that, so we were somewhat prepared.

“We’ve had some really good years, and were able to stockpile cash reserves. That really helps a lot. In the past, we were able to say, ‘Here’s a new marketing opportunity that costs $30,000. Let’s do it.’ Now we have to be more analytical in calculating what a cost-benefit would be.

“We don’t have room to raise our prices in the end-user market, so we have had to look at other ways to maximize our margin. About 20% of our sales come from online, so we’re looking at how we can maximize that revenue stream without upsetting our wholesale customer base. After all, you get a lot more dollars per bra that way. Instead of selling a bra for $16, we’re selling it for $32, and still making it for $8.

“We’re also looking into forging bigger and better relationships with really important customers, to turn $250,000 accounts into $500,000 accounts. We hope the volume of business would increase as we focus more actively on developing relationships with customers.

“We also have a very active new-product-development stream, which is relatively new for us. We relied on one product for the last 12 years. We have a new product that’s been launched to rave reviews, and another new collection coming out in the fall. Selling more products to the same customer base is another way of growing our revenues.

“But it’s not all bad. This is what, in some ways, an entrepreneur dreams of, because it forces you to make tough decisions—to weigh the benefits, risks and rewards. My partner and I haven’t had to go to the bank for years, but we don’t have as much cash coming in, so we’ve had to do that now. But, frankly, that’s what gets me up in the morning. It’s fun. It’s a challenge. It separates the men from the boys.”

Mark Redmond, president and CEO, Ceapro Inc., Edmonton

This eight-year-old biotech firm does 98% of its business in U.S. dollars. That includes the 40% of its business from direct sales to the U.S., plus sales to Japan and Europe.

“Our business has continued to grow, year after year, but the exchange rate is masking our performance when we record our earnings in Canadian dollars,” says Redmond. “We’ve grown our markets by about 20% over the past year, but investors don’t see that. That certainly has taken some momentum away from us. The SME world is all about capital. People perceive that you’re not growing as fast as you expected, and the shine comes off the investment. So we’ve had to work harder on investor relations.

“Our general administrative costs in Canada have stayed the same in the face of our ability to bring dollars in declining. So we’ve worked to improve our efficiencies and margin rates. We’ve gotten new equipment that operates at a higher efficiency rate. In the last year, we’ve invested probably half a million dollars in equipment, so our growth will be more readily visible to investors. We’re redoubling our efforts in terms of sales, despite the fact that, as we report them in Canadian dollars, the sales look smaller.

“Beyond that, there’s actually been a positive. We may be based in Canada, and manufacture in Canada, but we buy plastic bottles and chemicals from the States. They’ve become cheaper, so when we look at our overall business, the margin rates have remained the same. And in Japan and Europe, their currencies’ buying power has increased against the U.S. dollar, so the cost of our goods is cheaper there. That’s the silver lining.”

Bruce Batchelor, publisher and CEO, Trafford Publishing, Victoria

Last year, exports comprised more than 85% of the on-demand publishing house’s sales of $6.6 million.

“We are doing some hedging to protect against an extreme drop during 2005,” says Batchelor. “And we have diversified away from our great reliance on U.S.-dollar clients by opening subsidiaries in England and Ireland to cater to authors and book buyers paying in pounds sterling and euros, as well as boosting our presence in Central and Eastern Canada, particularly with the francophone market.

“We’ve ramped up our marketing to authors who pay us in other currencies. We’ve translated our marketing materials and hired bilingual-francophone and bilingual-Hispanic staff. We’ve begun promoting in Quebec at the salons du livre [book fairs] and in some publications. We’re also making more intensive follow-ups with prospective authors in English-speaking Canada, and have boosted our Canadian print advertising.

“We haven’t really switched our sales away from the U.S.-those are still increasing steadily. Rather, we’ve grown our non-U.S.-dollar sales at a faster pace.

“Some of our expenses have gone down. Most of our marketing costs are paid in U.S. dollars, even if the media coverage extends to Canada, Europe and beyond. And our paper supply comes from Xerox, which buys from Washington state paper mills. We’ve been able to switch from paper with no post-consumer content to 30% post-consumer recycled paper with only a small change in price when calculated in Canadian dollars.

“Beyond this, we are continually re-engineering our processes to improve efficiencies and enhance the service we provide to authors from over 80 countries. It is important to us to maintain the profit levels we achieved in 2004, so we can again issue dividends to shareholders. Keeping comfortably profitable in the face of currency fluctuations will only happen if we can both steadily grow our revenues and simultaneously widen our margins.

“And we’re thinking about changing our pricing for U.S. customers, though if/when we do this it will be in combination with a tangible increase in the value of our publishing packages. But our latest thinking is that we’ll be able to increase our margins enough, through re-engineering, automation and economies of scale, to not need any price boost. The drop in the U.S. dollar has forced/encouraged us to expedite the process for gaining that efficiency. We’ll end up stronger, since these efficiencies apply for clients’ work in all currencies.”

Gary Darychuk, CEO, Directors’ Choice and CliniCall Patient Recruitment Inc., Saint John, N.B.

A full 95% of sales are in U.S. dollars for Directors’ Choice, a customer-contact centre for the funeral industry, and its small startup ClinicCall, which provides the same service for the clinical-research industry. The drop in the U.S. dollar cost Directors’ Choice $280,000 in profit last year.

“We have just completed a client-by-client analysis of profitability and have found that, with a weak U.S. dollar, some clients barely cover our overhead, let alone contribute to distributable profit,” says Darychuk. “We haven’t had a price increase for a couple of years, because we had technology problems that affected our level of service, and we didn’t feel comfortable having price increases last year. That’s going to be one strategy, and we’ll be able to get away with that because we have a very high level of service. People don’t have the risk of losing a death call, because we can answer their phones better than the other options available to them. We don’t know how much we’ll raise prices by-maybe 10%.

“Secondly, we are going to selectively use a time-based billing system, as opposed to our current transaction-based pricing. In our analysis, we found that many of our clients spend more time talking with our agents than necessary, due to the relationships they have developed over the years. We believe a time-based system will put the responsibility of effectively using our staff on the shoulders of our clients.

“Finally, we are pushing for growth in our top line. With overheads covered, revenue beyond our direct costs will flow to the bottom line. We have increased our client base by 45% since last May, and we expect that growth rate to continue for another 18 months. Hopefully, by then the U.S. dollar will have strengthened.”

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