Consumer Trends Update Canada’s Changing Retail Market

Consumer Trends Update Canada's Changing Retail Market

Date: Summer 2013

Consumer Trends Update

This update highlights the structural changes experienced in the Canadian retail landscape since The Consumer Trends Report was released in 2005. The major actors operating within this retail sector and the impact of shifting consumer behaviour on the evolution of retail operations in Canada are also discussed.

The Consumer Trends Update is published by the Office of Consumer Affairs, Industry Canada. It provides brief reports on research or policy developments related to themes explored in the 2005 Consumer Trends Report, which is available at:

consumer.ic.gc.ca/trends.

1. Canadian Retail Market Overview

Since the 2005 Consumer Trends Report, the retail sector1 has continued to play an increasingly vital role in the Canadian marketplace, given its contribution to the Canadian economy and its impact on consumers and their consumption activities. In 2011, the sector generated $457.4 billion in retail sales and represented approximately 12 percent of the Canadian workforce (Statistics Canada, 2012c). Despite experiencing falling demand during the recession in 2009, the sector's sales grew by 17.1 percent between 2006 and 2011 ($457.4 billion in sales in 2011, an increase of $66.9 billion compared to 2006). Even at its lowest ebb in 2009 ($416.6 billion in sales), the sector represented 6.2 percent of Canada's gross domestic product, an increase of 0.2 percent compared to 2001 (Industry Canada, 2010; Statistics Canada, 2012c). The gains in sales since the recession have been relatively healthy, rising to $457.4 billion for all of 2011, reflecting an increase of 4.0 percent from the previous year (Statistics Canada, 2012c). Sales in the retail sector were dominated by the motor vehicle and parts dealer sub-sector, which totalled $100 billion in sales in 2011, or 21.9 percent of market share, and the food and beverage stores sub- sector, which totalled $104.1 billion, or 22.8 percent of market share. For a list of total sales by the retail subsectors in Canadian, please see Table 1.

1 For the purpose of this report, the retail sector is defined as: motor vehicle and parts dealers, furniture and home furnishings stores, electronics and appliance stores, building material and garden equipment and supplies dealers, food and beverage stores, health and personal care stores, gasoline stations, clothing and clothing accessories stores, sporting goods, hobby, book and music stores, general merchandise stores, and miscellaneous store retailers.

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Consumer Trends Update

Annual Retail Sales in Canada (20062011)

Dollars in Billions (CDN )

500

400

300 Retail Sales

2006 390.5

2007 413.7

2008 429.1

2009 2010 2011 416.7 439.57 457.4

Source: Statistics Canada CANSIM data, Table 080-0022

The sector has grown by other measures as well. In April 2011, retail sales in Canada were equivalent to retail sales in the U.S. on a per capita basis for the first time (Ladurantaye, 2011) reaching US$13,000 per person (Cooper, 2011). As recently as 2004, sales per capita in Canada had only been US$8,000 versus US$12,000 in the U.S. (Colliers International [CI], 2011a). This reveals that while sales growth in the U.S. has slowed, growth in Canada has continued to accelerate. It's important to note the shift in sales per capita between Canada and the United States may not be fully attributable to strong productivity gains or increasing consumer debt burden in Canada, but instead, due to poor performance by the American retail sector heavily influenced by the 2008-09 economic recession.

Table 1: Sub-Sectors of the Canadian Retail Marketplace (In Terms of Sales) (2011)

SubSectors of the Retail Market Place in Canada

Motor Vehicle and Parts Dealers Furniture and Home Furnishing Stores Electronics and Appliance Stores Building Material and Garden Equipment and Supplies Dealers Food and Beverage Stores Health and Personal Care Stores Gasoline Stations Clothing and Clothing Accessories Stores Sporting Goods, Hobby, Book and Music Stores General Merchandise Stores Miscellaneous Store Retailers Source: Statistics Canada CANSIM data, Table 080-0022

Retail Sales in 2011 (dollars x 1,000) $100,005,680 $15,027,138 $14,983,443 $27,038,063

$104,134,083 $32,847,751 $57,682,168 $26,049,959 $11,153,804 $57,785,413 $10,695,657

Percent of Market Share 21.9 3.3 3.3 5.9

22.8 7.2 12.6 5.7 2.4 12.6 2.3

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Consumer Trends Update

Impact of the Global Recession on Consumer Confidence in Canada

The 2008-09 global recession had a mixed impact on consumer sentiment in Canada. Although the Canadian retail sector has recovered from the global economic downturn, a segment of the Canadian population still felt wary and conflicted over the economic environment. In late 2010, 14 percent of the Canadian population believed the economy would weaken in 2011. This figure increased significantly in late 2011, as 33 percent of Canadians thought the economy would weaken in 2012 (Deloitte, 2011).

This is consistent with similar measures of consumer sentiment, such as the Conference Board of Canada's Consumer Confidence Index (CCI). With Canada's CCI reaching a high of 89.0 following the 2010 holiday season (January 2011), the CCI started to fall in March of 2011 and hit a low of 69.9 in December of 2011 -- the lowest level since 2009 when the Canadian economy started to recover from the 2008-09 recession (Canadian Press, 2011; Deloitte, 2011; Conference Board of Canada, December 2011). As of December 2012, Canada's CCI had recovered slightly from the dip experienced in late 2011 and sat at 77.9 (Conference Board of Canada, 2012).

It's important to note that Canadians, in general, have remained more positive about the Canadian economic climate when compared to American consumers respecting their marketplace. In the same time frame, the American CCI dropped from 62 (in December 2010) to 45 (in September 2011) (Deloitte, 2011). As of December 2012, the United States' CCI stands at 65.1, a slight improvement from the lackluster levels experienced 12 months earlier (Conference Board, 2012).

2. Structural Changes in the Retail Landscape:

The Canadian retail marketplace continues to evolve: some types of retail outlets have grown, while other more traditional retail outlets have stagnated. More recently, retailers are expanding beyond their traditional distribution channels to better deliver goods and/or services in an environment of changing consumer behaviour and market segmentation. This section examines the shifting nature of the physical retail marketplace in Canada, and its impact on Canadian consumers.

i) Bricks and Mortar Retail Outlets in Canada

Canadian Malls:

Shopping malls have been a staple of the Canadian retail landscape since their emergence in the 1960s and 1970s. Although malls in Canada occupy 39 percent less space per capita than American malls, Canadian malls, on average, have attracted higher sales per square foot of retail space. Since matching sales outputs of American malls in 2004 (US$380, per square foot), Canadian malls have outperformed American malls by an increasing margin (CI, 2012b). As of 2011, Canadian malls have generated nearly US$600 in retail sales per square foot per year, compared with the American average of slightly above US$400 in retail sales per square foot (CI,

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Consumer Trends Update

2012a). The Yorkdale Mall in Toronto draws the largest retail sales per square foot in Canada ? approximately $1,200 per square foot ? and ranks second in retail sales per square foot in North America, after the Forum Shops at Caesars Palace in Las Vegas ($1,400 in retail sales per square foot) (Bula, 2011a).

In spite of this success, the growth of malls in Canada has been curtailed by the limited amount of commercial space available for retail development in traditional retail urban spaces along with retailers' desire to diversify their locations and retail outlets. Canadian municipalities have reduced the allocation of urban land for new retail space in favour of industrial and office space, which has reduced the number of large regional shopping centres being built (Bula, 2011a). Since 1989, only two major enclosed shopping malls have been built in Canada: Vaughan Mills in Toronto and Cross Iron Mills in Calgary. To cope with the limited retail space available in downtown areas, existing shopping centres are renovating and expanding within their allocated space, usually building upwards and adding additional floors. Retailers have also established new retail outlets outside of the city centre to accommodate big box retailers, such as in power centres2, to overcome the limited space available in more traditional shopping malls and improve accessibility to serve larger regions (Simmons and Kamikihara, 2011).

The Demise of Strip Malls

Strip malls are becoming less relevant in the Canadian retail landscape, although they are still a ubiquitous presence in most suburban landscapes, as consumers' preferences have shifted to shopping at large, multi-levelled shopping centres and/or power centres. Many strip malls across Canada are in need of significant restoration, and vacancy rates are soaring (Hopper, 2011). The curtailment of strip malls can have a substantial impact on small communities in Canada. These small, open malls are a major source of employment for many small communities and are a key provider of part-time work for students and young people (Beckman, 2011). Strip malls also provide easy accessibility to goods and services for small, surrounding communities that may not have the means or time to travel to shopping malls or power centres outside the core.

Power Centres:

Since their entry into the Canadian market in the late 1980s, there has been "widespread development and clustering of big box stores into a broad range of power centre venues" (Hernandez, 2011). Between 2006 and 2010, the number of power centres in Canada increased from 451 to 487, a rise of 8 percent (Hernandez, 2011). Although the growth rate of power centres slowed between 2009 and 2010 due to the poor economic climate, the growth rate remained steady due to previously committed retail developments by retailers. Canada also experienced an increase in power centre vacancy rates between 2006 and 2009; however, there

2 According to the Centre for the Study of Commercial Activity, power centres are a group of three or more big box stores arranged around a central parking pad, with ancillary commercial activities.

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Consumer Trends Update

was still a dramatic growth in tenants from 8,627 in 2006 to 12,086 in 2010, a rise of 40.1 percent, as the number of big box stores per power centre increased along with the increase in power centres (Hernandez, 2011).

Table 2: Canadian Power Centres, 20062010

Year 2006

Number of Power Centres

451

2007

461

2008

474

2009

484

2010

487

Change from 2006 to 2010

Number

36

Total Number of Tenants

8,627 9,622 10,545 11,548 12,086

3459

Number of Big Box Stores

2,929 3,139 3,305 3,429 3,511

582

Average Number of Tenants per Power Centre

19.1 20.9 22.2 23.9 24.8

5.7

Percent

8.0%

40.1%

19.9%

29.7%

Source: Hernandez (2011)

However, the development of power centres has varied considerably from region to region across the country, leaving the retail landscape concentrated and uneven. In 2010, Ontario had the most power centres in Canada (211), almost triple the number of centres found in Quebec (74), Alberta (73) and British Columbia (70) (Hernandez, Erguden and Svindal, 2011). Hernandez, Ergunden and Svindal (2011) posit several factors that could contribute to this uneven development, including

"restricted land availability and associated development costs, land-use planning issues, the existing retail infrastructure and cultural-competitive concerns of US and other international retailers with regard to entering French-speaking Canada or smaller markets across Canada".

Even though power centre development has been uneven, these retail structures have provided stronger inventories (e.g. more product variety and selection) across all major urban markets (CI, 2011b). In contrast to the past, where power centres were "anchored by large grocery, general merchandise, hardware and electrical retailers", they now have a diverse mix of new players, including sporting goods stores, fashion stores, pharmacies and ancillary services (e.g. restaurants, financial institutions and entertainment services) (Hernandez, Erguden and Svindal, 2011). Power centres have adopted more aesthetic and consumer-friendly designs, including bus stops, bicycle lock-ups and racks, pedestrian walkways and seating areas). Overall, this provides a highly functional retail space for Canadian consumers. However, it's important to note socio-

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Consumer Trends Update

economic downsides arise for vulnerable segments of the population, which will be outlined later in the report.

Independent Retailers:

Small businesses3 are often identified as the backbone of the Canadian economy. As of July 2012, small businesses accounted for ninety-eight percent of businesses operating in Canada (Industry Canada, 2012). These firms contribute more than 30 percent to Canada's gross domestic product, and employ nearly five million Canadians, or 48 percent of the total labour force in the private sector (Industry Canada, 2012). Of all industries, the retail industry represents the largest segment of small businesses in Canada with more than 146,000 firms employing more than 795,000 individuals4 (Industry Canada, 2012). While there are a large number of small retail businesses operating in Canada, the top 124 retail organizations still control 75% of the non- automotive retail sales (Daniel and Hernandez, 2012). Nevertheless, small businesses play an integral role in Canada by establishing and maintaining employment opportunities, serving consumers and driving and shaping local economies and communities (Gulluce and Parent, 2011).

3 Industry Canada defines small business as firms that have fewer than 100 employees 4 The majority of small retail businesses operating in Canada are concentrated within the "grocery and convenience stores, car dealerships, pharmacies, gasoline stations, clothing stores and appliance retailers" (RBC, 2008).

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Consumer Trends Update

Canadian Small Business during the Economic Downturn

From 2000 to 2007, small businesses in Canada "experienced a roller coaster of strong growth", which heavily subsided in 2008 with the proliferation of the 2008-09 global economic downturn (Cooper, 2009). The national economy suffered from a decrease in gross domestic product, an "increase in unemployment", and a "decline in business activity and consumer confidence" (Gulluce and Parent, 2011). Canadian small businesses in the retail sector faced the same challenges as all small businesses operating in Canada (i.e. decline in demand for products and services, debt), and had to shift and adjust their business practices to maintain their competitiveness within the Canadian economy (Gulluce and Parent, 2011).

A survey completed by the Canadian Federation of Independent Business revealed that small businesses, in general, for example, adjusted their sales and marketing techniques, including introducing new products and services, reducing prices and increasing their advertising and promotional efforts, to remain competitive during the global economic downturn (Gullace and Parent, 2011).

Canadian small businesses had several advantages in the marketplace to aid their operations through the global economic downturn. Most notably, a strong and stable banking system provided small businesses with the opportunity to secure credit at a relatively low cost (Cooper, 2009). Secondly, Canada's domestic economy and financial markets remained relatively stable when compared to other parts of the world allowing an environment for small businesses to continue to thrive (Cooper, 2009). Lastly, a strong Canadian dollar also reduced the costs for small businesses on imported materials, finished goods, new technologies and in recruiting talented employees (Cooper, 2009). Overall, the stable Canadian markets coupled with the flexible and adaptive business practices of small businesses contributed to small businesses "helping Canada move forward from the 2008-2009 recession" (Brodie, 2011).

ii) MultiChannel Retail Outlets:

Retailers are adopting new forms of business in response to shifts in the macro-economic environment and in consumer behaviour.

"New technologies, global access, enhanced mobility, social media: each of these has had a profound impact on how consumers gather information and make purchase decisions. This, in turn, has shifted how retailers target, attract, maintain and engage with their customers" (PricewaterhouseCoopers [PWC], 2012).

To cope with the increasingly fragmented consumer demographic5, retailers are embracing multiple distribution channels (multi-channel retailer6), and rethinking traditional models to

5 The changing and evolving economic climate mixed with diverging consumer sentiment, determined by an individual's education, employment status, viability and household status, has influenced consumers' purchasing habits and behaviour, and, consequently, fragmented the consumer economy (Melnick, 2011)

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