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A Couche-Tard store

John Morstad/The Globe and Mail

Canada's convenience stores are in a perilous position as rising sales taxes expand the lure of contraband cigarettes, which could force the closing of thousands of additional convenience stores across Canada, the industry's association said Tuesday.

More than 2,300 neighbourhood stores closed down last year, pushed in large part by falling sales of legal tobacco.

Illegal tobacco sales continued to cost stores more than $2.5-billion in annual sales and $260-million in profits last year, said an industry-sponsored report prepared by PricewaterhouseCoopers.

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The industry is heavily dependent on cigarette sales. Two out of every three cigarettes sold legally in Canada are purchased in convenience stores.

"It is a major loss for a retailer. He can sustain for a year of two but what we see starting last year is there's no way out, they have to close," said Michel Gadbois, executive vice-president of the Canadian Convenience Store Association.

The organization fears rising provincial sales taxes will continue the current trend of three retailers closing each day.

About 75 per cent of the closings last year were in Ontario and Quebec, the two key markets for contraband cigarettes.

The Quebec government last week announced that the provincial sales tax will increase by two percentage points over two years.

Rising taxes in Saskatchewan and Nova Scotia should expand illegal activity in those areas of the country, Mr. Gadbois added.

"At the moment we don't see how the trend is going to slow down," he said in an interview from the association's annual meeting in Laval, Que.

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The sale of beer and wine in Quebec helped to offset some of the impact. The province's rate of store closings was nearly half that of Ontario.

In addition to contraband, Canada's convenience stores were hammered last year by higher credit card fees and the effects of the economic recession.

Credit card fees accounted for $200-million in costs, some $50-million of that as a result of a recent increase in processing fees by major card companies.

The industry's profitability was also hurt by an average 5 per cent increase in the minimum wage.

Overall, the net profitability of convenience stores was barely holding at about 1 per cent, about half the level in 2008.

The steady erosion of profits forced companies to control costs and generate traffic through the introduction of fresh food.

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The future is expected to remain challenging as the maturing industry faces slowing sales growth, the study said.

That has forced consolidation as many independent retailers joined large chains or buying groups.

Suncor Energy Inc. acquired Petro-Canada and Quickie Convenience Stores purchased the 7-Eleven network in the Ottawa area.

Alimentation Couche-Tard Inc., Canada's largest convenience store chain, continued its U.S. expansion.

The recession also took its toll on the industry, with gasoline sales were virtually flat, affecting traffic in stores. The industry also faced heightened competition with other food retailers.

Hurt by falling gasoline prices, convenience store sales fell by 3.6 per cent in 2009 after rising by 12.2 per cent in 2008. Supermarket sales increased by 4.4 and 4.2 per cent in each of the last two years.

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Canadians purchased $31.9-billion worth of goods and gasoline from convenience stores last year. More than 10.4 million visits are made daily to the country's 23,228 neighbourhood stores.

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