TD Fall Investing GuideTD Fall Investing Guide
Mon, 04 Nov 2013 21:30:00 GMT | By Deirdre McMurdy, MSN Money

Retail pain in Canada

Intense competition, cautious consumers and a not-so-festive shopping season seem to be the new reality in the retail sector.


Deirdre McMurdy

Even as goblins and ghouls were still making their trick or treat rounds along dark streets, the Christmas elves had begun their seasonal offensive.

The day after Halloween, stores had been stripped clean and retailers had replaced zombie masks and bloody daggers with a full array of festive tree ornaments and rolls of wrapping paper. Even Starbucks had switched to its red Christmas cups by November 1.

As a consumer, it’s always a bit jarring to find the holiday season thrust in your face so many weeks before it arrives. But in light of recent retail sales figures and the increasingly intense competition for business, it’s hardly surprising.

Even in an increasingly multicultural society, the Christmas spending season remains the single most important one for retailers. And last year, retail sales in December fell more than forecast, declining by 0.7 per cent from the same month in 2011. Furthermore, that compared with a 4.8 per cent increase in the U.S.

Recent sales figures don’t bode especially well for the 2013 holiday outlook either.

There is mounting evidence that debt-burdened Canadian consumers are holding back their spending. According to Statistics Canada, retail sales fell by 0.6 per cent in June 2013 from a month earlier, a drop greater than analysts’ forecast of 0.4 per cent.

In fact, what retail growth exists seems to be concentrated in the online space. Canadians currently do about four per cent of their shopping — worth about $4 billion annually — online.

As a result, many retailers are attempting to gain ground by levering technology and massive amounts of collected data on shopping habits. They’re also looking ahead to an aging population that, over time, will likely opt increasingly for the convenience of online shopping and home delivery options.

Although only 0.25 per cent of Canadian groceries are purchased online (compared to three per cent in the U.S.), Amazon, for example, recently announced plans to extend its online grocery business into an already crowded and fiercely competitive Canadian market.

The online retail giant — which has sold groceries in the U.S. for several years — has launched a grocery and gourmet food section on its website, initially offering 15,000 brand name, dry food items.

Amazon has also added departments for office supplies, toys and major auto parts to its Canadian site in the past few months.

In its battle to claw market share away from others, Amazon will use something it calls "dynamic pricing." This program allows Amazon to analyze market data to adjust prices in real time, giving the company an edge over its competition.

That competition includes established — and expanded — grocery chains such as Sobeys and Loblaws as well as Wal-Mart, Costco and Target. Significantly, Wal-Mart is lagging Amazon in the online grocery sector, with just 2,000 grocery items on its Canadian website.

Against that backdrop, some major retail sector adjustments have already taken place.

After a few years of steady retrenchment, Sears Canada is closing five of its department stores, including its flagship location in Toronto's Eaton Centre where it’s been since 2000.

Sears Canada recently reported a 9.6 per cent drop in second quarter revenue from the same period a year earlier and a 2.5 per cent decline in same store sales.

A more recent arrival, Target, is also struggling in its early days.

Just over halfway through its first year in Canada, sales at its 124 stores have fallen well below initial expectations, something that company management blames on excessively high consumer expectations and a stubborn perception that it is pricier than Wal-Mart and other rivals.

Rather than adapting to the Canadian market or lowering prices, however, Target appears determined to “re-educate” consumers in this country. That includes getting them to accept that their U.S. experience — and prices — will not be replicated here.

Furthermore, at a time when Canadian consumers are already struggling with record household debt, Target’s efforts to introduce another in-store credit card have — not surprisingly — also fallen short of the mark.

Another challenge for Canadian retailers is Black Friday — the traditional start of the U.S. holiday shopping season on the day after Thanksgiving. With the dollar at par or close to it, many Canadians now flock across the border to take advantage of special, seasonal sales.

That has taken a toll on domestic retailers of all sizes. In response, small, independent merchants have launched “buy local” campaigns to attract customers.

At the rate things are going for even the biggest U.S. chains in Canada, they may want to join in too.

Scroll upScroll down

Recently recommended stories