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
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
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
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
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
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.
PDF available at: http://stream1.newswire.ca/media/2013/03/28/20130328_C8786_DOC_EN_24898.pdf
SOURCE: CIBC World Markets
For further information:
Tom Wallis, Communications and Public Affairs at 416-980-4048, firstname.lastname@example.org