Oct. 15, 2007 – An exchange rate dilemma

By John Prusak
Contributor
Five years ago, powersports dealers on the south side of the United States/Canadian border were clamoring for sales territory protection from their respective OEMs.
The problem? Some savvy, U.S.-based consumers had realized they could save more than $1,000 by simply crossing the border and purchasing their snowmobiles or ATVs in Canada instead.
Sure, a Mach Z or ZR 900 carried a higher MSRP in Canadian dollars, but when $9,000 worth of U.S. cash was worth more than $14,200 in Canadian money, the large gap in the value of Canadian vs. U.S. currency made the drive across the border worthwhile.
Major OEMs responded to their dealers’ calls for action and let it be known that U.S.-based customers would have trouble with their warranty if they bought their snowmobile in a different country. Rules and disincentives were put in place for dealers selling across national borders as well. The moves didn’t completely stop the cross-border purchases, but they at least created consequences.
Five years later, the tide has turned.
The value of the U.S. dollar has shrunk dramatically in comparison to Canadian dollar. As of Oct. 1, $9,000 worth of U.S. cash is worth just $8,938 in Canadian money. Beyond that, the major snowmobile OEMs have not adjusted their historic higher pricing in Canada, brought on by the one-time large gap in the value of the currency.
For instance, a 2008 Arctic Cat Jaguar Z1 carries an MSRP of $9,999 in the U.S. and $12,999 in Canada. Add in the current exchange rate, and Canadian consumers can get the very same Jaguar Z1 in International Falls, Minn., for $9,930 that they would pay $12,999 for in Fort Frances, Ontario, right across the border.
“Who wouldn’t want a piece of that deal?” one dealer said.

Dealer Beware?
Randy Adamson, owner of RV Sports, an Arctic Cat and Honda dealer in Thief River Falls, Minn., finally decided to keep a log.
Starting in August, Adamson and his staff logged every contact they had with Canadian customers seeking to save money by buying ATVs and snowmobiles from their dealership, which is located about 60 miles south of the Canadian border in Northwestern Minnesota.
The numbers are astounding. In eight weeks, RV Sports received 247 phone calls, 73 e-mails and had 64 walk-in customers from Canada — totaling 384 total contacts.
“If I could have converted even 25 percent, that would have been a lot of money,” Adamson said.
“I would have loved to have sold an extra 90 units during those two months.” It sure would alleviate his inventory issues, he said.
RV Sport didn’t sell those products, Adamson said, because it fears repercussions built into its dealer agreements — and oddly, many of those provisions were originally written up to protect sales from going the other direction. Some manufacturers have created major financial penalties to thwart cross-border sales and protect dealers on the wrong side of the exchange rate. Other OEMs threaten to cancel a dealer’s contract altogether after repeated violations.
One dealership in central Minnesota feels it’s worth the risk. The business has sold about 15 sleds to Canadian customers in recent months.
“It started probably late fall last year,” said the dealership’s sales manager, who asked not to be named. “There was a point where the dollar started to change and at the same time we got stuck with a lot of the non-current sleds. People came to us because our pricing was so aggressive.”
The sales manager said the dealership hasn’t done any advertising to reach Canadian customers, and that most buyers have been referred by other buyers. In the end, the influx of sales to Canadians has helped clear a crowded warehouse, he said.
“The customers do ask questions about warranties and extended warranties, but if they live close enough to the border, for the most part they don’t have a problem going back into the U.S. for warranty service,” he said.

Deal, Or No Deal?
This sales pressure, and the decisions on whether to accept Canadian business despite factory disincentives, is being repeated in varying degrees in near-border cities and towns from Maine to Washington state.
The rapid change in the exchange rate has put dealers within a couple hundred miles of either side of the U.S./Canadian border in an odd situation of changing their argument.
In 2002, American dealers were vocal in saying the manufacturers needed to find ways to stop people from crossing the border to buy snowmobiles and ATVs, while Canadian dealers begged for free trade. Today, it’s the American dealers that are saying cross-border trade shouldn’t be as restricted by the OEMs, while Canadian dealers fear for their business’ future if the practice is not held in check.
For manufacturers like Arctic Cat, it’s a matter of having a long-term plan that protects dealers no matter what the exchange rate is doing, according to John Tranby, Arctic Cat’s marketing manager.
“At the end of the day, it comes down to protecting your dealer base,” Tranby said. “If that collapses, we’re all screwed, us [the manufacturers], the dealers and even the consumers who bought a sled 500 miles from where he lives.”
To address the high pricing in Canada, Tranby said Arctic Cat and some other OEMs are offering aggressive rebate programs and other incentives in Canada to keep buyers in their own country.
While the OEMs try to stem the tide of new machine sales across federal borders, sales of used machines, as well as parts, garments and accessories, are charging full-speed ahead. Adamson said more than half of his used snowmobiles, motorcycles and ATVs sales have gone to Canadians this year.
Beyond that, dealers, manufacturers and suppliers are keeping an eye on the ever-changing exchange rate between the two countries, not knowing who will have the big advantage five years from now.