Canada’s limping retail industry
January is typically a tough month in Canada. The weather tends to be nasty and the arrival of post-holiday bills tends to put a damper on spirits and wallets.
This year, that annual retail-induced slump has been worsened by the announcement of significant layoffs at Sears Canada (2,200 employees) and Best Buy Canada (950 employees) — as well as the very real prospect of more cuts to come.
There are a number of reasons why things are looking grim on the retail front.
First, the drop in value of the Canadian dollar — and some forecasts that it could drop as low as 85 cents U.S. over the course of 2014 — means that imported merchandise costs consumers more. Then, there’s increasingly intense competition in the sector as more U.S. retailers enter the market. The pressure from U.S. retailers has led to consolidation and greater bottom-line scrutiny. Finally, e-commerce is taking a toll on traditional brick-and-mortar retailers who have relatively expensive long-term leases and related fixed costs.
Those issues were reflected in weak retail sales figures for the fourth quarter of 2013. Consumer spending was up just 1.95 per cent from a year earlier and tellingly, December sales were slowest — up just 1.6 per cent.
More specifically, the ice storm in Ontario precipitated a 2.6 per cent drop in consumer spending in the period between December 20 and 24. Even online purchases decline by 26 per cent, reflecting the lack of electricity and the dislocation of families across the province.
With so many hurdles to top-line growth, the need to cut costs is intensifying. And that means eliminating more jobs down the road — especially in Ontario where an increase in the minimum wage has already been flagged as a concern by small business employers, many of which are retailers.
Retailers also have to contend with the fact that Canadian households are already so debt-encumbered, there’s relatively little threshold left to keep shopping. Third-quarter credit market data indicated that household debt averages 163.7 per cent of disposable income, up from 163 per cent in the prior three-month period.
Mortgage debt was also 1.8 per cent higher in the third quarter of last year — despite repeated efforts by Finance Minister Jim Flaherty to tighten the rules and deflate real estate markets gradually. That, combined with a stubbornly weak economy and tepid job creation, also puts a damper on discretionary retail spending.
Despite the fact that many retailers are small, locally owned operations in Canada, the 124 largest retail organizations control 75 per cent of non-automotive retail sales, according to Industry Canada. And those are the organizations that are feeling the greatest pinch from fundamental changes in the sector.
In the grocery business, the arrival of Target and Amazon’s expansion into the grocery aisles has prompted a round of consolidations. Loblaws acquired Shoppers Drug Mart and Sobeys bought Safeway Canada. And although there haven’t been massive layoffs related to the transactions, it’s inevitable that new “synergies” will lead to duplication and the need to pare back over time.
The Metro grocery chain has already seen its revenue slip and has, in response, embarked on a cost-cutting initiative. It took a $40 million hit to cover the cost of store closings and conversions to the Food Basics sub-brand.
In the higher-end segment of the Canadian retail market, the pending arrival of Nordstrom later this year and Saks Fifth Avenue over the next two years is also likely to cause more upheaval. Holt Renfrew has already announced aggressive expansion plans in response, but Hudson’s Bay, which has tried valiantly to position itself in the high-end category, is expected to suffer collateral damage. All the more because the mid-range department store market segment to which it would be forced to retreat has already been ravaged.
All of these developments are playing out against the backdrop of explosive growth in online shopping.
Although brick-and-mortar retailers still dominate the industry, the shift to e-commerce is well underway. For 2012, Statistics Canada reports the value of e-commerce hit $19 billion, up 24 per cent from 2010 levels. Some 56 per cent of Internet users in Canada shopped online and 77 per cent used websites to comparison shop and find the best prices.
Given the unusually cold and stormy weather in many parts of Canada in January, retail sales figures are likely to remain soft when they’re added up. And that could give new meaning to the term “retail therapy.”
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