Debt-conscious, deal-addicted Canadians a boon for discount department stores:
Increasing competition will challenge retailers but make it a good time to be
TORONTO, March 28, 2013 /CNW/ - Discount department stores are poised to take
more market share in the year ahead as debt-conscious consumers and tame wage
growth weigh on Canadian retail spending, according to CIBC World Markets Inc.
"Canadians have heard the message from Ottawa: be careful what you borrow for.
But turning more prudent on debt accumulation has meant leaner times for
retail spending growth over the last year," says Avery Shenfeld, Chief
Economist at CIBC, in a note published for CIBC's Retail and Consumer
Conference happening today in Toronto.
With a weak finish to the 2012 holiday season, retail sales grew at lean rate
of 2.5 per cent last year, marking "the second year of deceleration from a
heady 5.6 per cent pace in 2010, when households were much more eager to
borrow at low rates to finance their shopping spree," notes Mr. Shenfeld.
With job growth expected to decelerate in 2013 and wages remaining "fairly
tame" in 2013, disposable income gains will likely remain modest this year.
"In that climate, discount stores will continue to grab market share,
particularly given the entry of a major U.S.-based player this year," says Mr.
In another conference note, Perry Caicco, a CIBC Equity Analyst who covers the
consumer and merchandising industry, identifies two other consumer trends
likely to exert competitive pressure on the retail sector.
One is the increasing tendency by Canadian consumers to "purchase on
promotion." Mr. Caicco says that "over the last three years, a material
amount of the windfall from a strong Canadian dollar was passed through as
increased deals." This has made Canadian consumers, who are already
debt-conscious, "increasingly addicted to deals" and "more sceptical than ever
about regular prices," he says.
Another consumer trend is "the rising power of Asian and South Asian
consumers." Over the next 10 years, approximately 70% of all growth in
Canadian consumer spending will come from these groups, he says. This is
likely to spur the growth of large-format ethnic grocery stores, which are
increasingly competing for market share with established grocers.
Mr. Caicco highlights several other market events that will test Canadian
retailers in the coming years.
"It has been a largely peaceful and prosperous decade for Canadian
retailers. But that type of environment inevitably invites disruption.
Disruption has certainly arrived," says Mr. Caicco.
"The most notable challenge is the arrival of a number of 'strangers' to the
Canadian retail scene. Target is the obvious entrant," he says. Others include
Nordstrom and international specialty retailers. Increased development of
brand-focused clearance outlets and Walmart's acquisition of 39 former
Zeller's stores will also increase competition.
These developments "will test the resolve and resiliency of Canadian
retailers, large and small" for the next few years, says Mr. Caicco. On the
flip side, the competition will "make it a good time to be a consumer as
choices will continue to expand and prices will come down."
Other market trends that Mr. Caicco says will shape retail industry include:
-- Loyalty Programs: "These types of programs are usually funded
by suppliers," notes Mr. Caicco. "Unfortunately, dollars
allocated to support these new programs are generally shifted
from more focused promotional and pricing programs."
-- E-commerce: Retail e-sales are a fraction of the merchandise
market in Canada but that could soon change, says Mr. Caicco.
Investments by Amazon, Walmart and others could "see sales in
e-commerce grow to $50 billion in 10 years," he says. However,
with online sales growth, there's the question "about what
happens to all that square footage" currently occupied by
-- Real Estate: While commercial real estate space is "growing
rapidly in Canada," Mr. Caicco notes that "a large number of
Canadian retailers probably have too much space and would
happily re-purpose millions of square feet. This certainly
opens the door, and gives plenty of options, for multinational
merchants or brands looking for an inexpensive foothold in
-- The Loonie: This year's weaker Canadian dollar is increasing
purchasing costs on goods bought in U.S. dollars. In a highly
competitive market, "it is much more difficult to turn cost
increases into price increases," says Mr. Caicco, adding that
this will put gross margins under pressure.
-- Consolidation: "Eroding margins will cause traditional
domestic retailers to consider consolidation," says Mr.
Caicco. "Although Canada is already a heavily consolidated
market, there are possibilities for more." Possible targets for
acquisition are: ethnic grocers and small regional grocers;
drugstore operators suffering under the drug reform headwinds;
chains of domestic apparel retailers; and retailers sitting on
The complete conference notes from Mr. Shenfeld and Mr. Caicco are available
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Tom Wallis, Communications and Public Affairs at
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SOURCE: CIBC World Markets
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-0- Mar/28/2013 12:00 GMT
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