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People shop at a produce stand at the St. Lawrence Market in downtown Toronto, on Jan 17.Fred Lum/the Globe and Mail

Julie Cyr loves to eat fish, fresh produce and good quality cheeses. But when she goes grocery shopping these days, what fills her cart is not decided by her appetite.

As prices for basic necessities have shot up, Ms. Cyr is buying fewer items overall, and planning her meals around whichever ingredients she finds on sale. And the 42-year-old Montrealer, who works as a project manager, is cutting back on other things, too: beauty products, hair care and clothing are all categories in which she is keeping a sharp eye on her budget.

“I’m more careful with my spending,” she says. “I just buy what I need now.”

Consumers across the country are making similar decisions. Inflation has been eating into Canadians’ buying power for the past two years, causing people to shop more at discount grocery stores, or make the switch to private-label products over name brands. More recently, consumer sentiment has taken a sharper turn down.

Your personal inflation rate: Calculate how you compare to the Canadian average

In the past two weeks, retailers including Target Corp., Home Depot Inc. and Canadian Tire Corp. Ltd. CTC-A-T have all noted that customers are pulling back on discretionary purchases. It’s not just about higher prices. Fears of a recession are creating caution and dampening spending on non-essential goods, as are higher interest rates for people who hold mortgages and other loans.

That is a lot of Canadians. This week, the Canada Mortgage and Housing Corp. warned that Canada’s household debt has surged to the highest level of any Group of Seven country.

“Consumers are almost at this breaking point,” said Carman Allison, vice-president of thought leadership for North America with NielsenIQ. In April, the research firm surveyed roughly 10,000 Canadian households and found that, while the country is not technically in a recession (defined as a decline in gross domestic product over two successive quarters,) 53 per cent of respondents think we are already there. And they do not anticipate relief any time soon: 55 per cent believe it will last for more than a year, hardly a soft landing.

“That means there’s a lot of uncertainty for the months ahead,” Mr. Allison said. “And Canadians are probably going to hold on tighter to their dollars.”

After stocking up on tech during COVID-19 – to study or work from home, and to upgrade entertainment systems – it stands to reason that many people are not in the market for laptops or big-screen TVs right now.

Vancouver-based London Drugs Ltd. is, in part, a major electronics retailer, and while it has seen waning demand for those items, another arm of the business is up slightly: repair.

“Anecdotally, the comments are, ‘I’ve got to make this last longer,’” president and chief operating officer Clint Mahlman says of customers bringing in items such as laptops and iPhones to be fixed.

Mr. Mahlman has seen changes in behaviour “in almost every category” as shoppers have felt inflation’s sting. Most recently, he has noticed smaller-format items moving off store shelves – lower-count bottles of pain reliever, for example – faster relative to larger sizes that offer better prices per millilitre or per pill.

“It tells me that the consumer, even though they recognize there may be value, they’re trying to make their dollar stretch farther,” he says.

While the cost of everyday necessities has been rising for months, retailers across North America have noted further shifts lately.

Last week, Target reported continuing sales declines in non-essential products such as clothing and home goods in March and April. During a conference call to discuss the company’s quarterly earnings, chair and CEO Brian Cornell referred to “a deterioration in consumer confidence, reflecting recent events such as the banking crisis that emerged in March” with the collapse of Silicon Valley Bank and the near-meltdown of Credit Suisse.

Also last week, Home Depot HD-N reported falling sales for big-ticket discretionary purchases, with pressure across its business intensifying in the past few months. In addition, executives said people are scaling back on big renovations in favour of smaller home improvement projects.

“If you’re in the retail business right now selling extremely discretionary stuff – anything that was flying off the shelf during the pandemic, for your backyard, renovating your home, exercise, all those categories … you’ve got to watch your inventory levels and how much you buy, watch how you price it, be sharp on promotions,” said Marty Weintraub, national retail consulting leader at Deloitte Canada. “Because a lot of that money is going to go to food and housing.”

The cumulative stress of interest rate increases is also taking a toll, Bank of Nova Scotia chief risk officer Phil Thomas said on a conference call Wednesday to discuss the bank’s quarterly earnings.

For example, he noted that among bank customers with variable-rate mortgages, discretionary spending in categories such as retail and entertainment fell 10 per cent in the second quarter compared with the same period last year. “Our customers are managing through this period of heightened interest rates by making trade-offs,” Mr. Thomas said.

Where consumers do have some money left over, much of that spending is shifting away from discretionary products to experiences, such as travel and restaurant dining, that were severely limited during COVID lockdowns, Canadian Tire CEO Greg Hicks said during an earnings call earlier this month.

“I think people are looking for more affordable options,” Aldo Group CEO David Bensadoun said in an interview. Globo, the company’s store chain that focuses in family footwear, is particularly attuned to a price-sensitive consumer, he added. “Our job there is to keep prices as sharp as we can, because families are not in a position to splurge right now.”

Not surprisingly, discount retailers are faring well in this environment. Canada’s largest grocer, Loblaw Companies Ltd. L-PR-B-T, has noted the strength of its discount banners such as No Frills. Last week, Walmart Inc. WMT-N boosted its sales and profit targets for the year as it draws in shoppers looking for lower-priced essentials – even as it also noted weak demand for discretionary goods.

Grocery prices are a major strain on households. While the pace of food inflation has slowed – grocery prices rose 9.1 per cent in April compared with a year earlier, down from a 9.7 per cent annual increase in March – it is still more than double the general rate of inflation in Canada. Last year, visits to food banks rose by 35 per cent compared with 2019, according to Food Banks Canada.

But rising sales mask a larger trend: Canadians in many cases are actually buying, and eating, less.

According to NielsenIQ, which tracks consumer packaged goods using point-of-sale data it gets from major retailers, many categories are moving a lower volume of products. For example, bakery sales rose by 11 per cent on a dollar basis in the first quarter, but were down 1 per cent in volume; produce was up 4 per cent on a dollar basis, but down 3 per cent by volume.

NielsenIQ has been tracking buying behaviour to look for signs of a “consumer recession,” which means people have shifted their habits significantly enough that they are acting as though a recession has arrived. Those habits include buying items on promotion, buying less, and favouring store brands and discount stores.

The company compiles these in a “sensitivity score”: Anything above 80 out of 100 indicates a consumer recession is in effect. That score has now reached 77 out of 100 in Canada, up from 71 six months ago.

The one disconnect in this picture is the job market, which remains strong in Canada. But even for people with a steady job, the erosion in the buying power of each paycheque is a persistent concern.

“We’re a long way from any relief, because incomes are not keeping pace with inflation,” Mr. Allison said. “Consumers are really, really being pressured right now.”

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