Debt-conscious, deal-addicted Canadians a boon for discount department stores: CIBC

Debt-conscious, deal-addicted Canadians a boon for discount department stores: 
CIBC 
Increasing competition will challenge retailers but make it a good time to be 
a consumer 
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. 
Shenfeld 
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
        retailers.
    --  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
        Canada."
    --  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
        below-market leases.

The complete conference notes from Mr. Shenfeld and Mr. Caicco are available 
at: http://files.newswire.ca/256/CIBCRetailConferenceNotes.pdf.

CIBC's wholesale banking business provides a range of integrated credit and 
capital markets products, and investment banking to clients in key financial 
markets in North America and around the world. We provide innovative capital 
solutions and advisory expertise across a wide range of industries as well as 
top-ranked research for our corporate, government and institutional clients.

Tom Wallis, Communications and Public Affairs at 
416-980-4048,tom.wallis@cibc.com

PDF available at:  
http://stream1.newswire.ca/media/2013/03/28/20130328_C8786_DOC_EN_24898.pdf

SOURCE: CIBC World Markets

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CO: Canadian Imperial Bank of Commerce
ST: Ontario
NI: FIN ECOSURV 

-0- Mar/28/2013 12:00 GMT