Price wars, skittish consumers and e-commerce heavyweights threaten to squeeze retailers as they head into the all-important holiday shopping season.
The November-December period, which can account for up to 30 per cent of merchant annual revenue, is shaping up to be a tough one in a market that is becoming more crowded with discounters and luxury players alike.
U.S. discount titan Wal-Mart Stores Inc. set the tone for the season last week when it lowered its sales outlook for 2014, warning of a "tougher sales environment" in its global markets.
The trends point to September having been "a pretty tough month around the globe across every retailer," said David Cheesewright, president of Wal-Mart's international division and a former head of its Canadian stores. "I think that's the environment we're going to keep operating" in.
Many factors are conspiring against retailers for the upcoming holiday season. They face an onslaught from U.S.-owned Amazon.ca and other e-tailers, relentless price skirmishes and now rocky, confidence-sapping stock markets.
And while a lower Canadian dollar may help discourage consumers from cross-border shopping, the sinking loonie also drives up costs as retailers purchase merchandise with a stronger U.S. greenback.
"The market is tough and challenging," said Diane Brisebois, president of the trade group Retail Council of Canada. "It's tough because it's one of the few sectors where every time you turn around there's a new competitor."
To be sure, industry watchers don't anticipate a disaster. Retail sales (excluding autos and gas) are expected to rise a modest 3.5 per cent to almost $90-billion in the fourth quarter, an improvement from the 2.8-per-cent gain in 2013 when central Canada was hit by an ice storm just before Christmas, said retail consultant Ed Strapagiel. While margins are bruised in the cutthroat environment, retailers are working to protect them with cost cuts, he said.
After grappling with extreme weather this year, which kept customers away, many retailers now feel more confident about an improved holiday performance, Ms. Brisebois said.
As a recent internal retail council survey points out, shopper traffic to stores remains weak, especially for mall retailers, although "other customer behaviour metrics are all broadly positive. The big story is the explosive growth of mobile commerce – both for site visits and for transactions."
Amazon.ca is the bigfoot that threatens to siphon customers away from incumbents as it increasingly adds more product categories to its offerings, including groceries and toys. Wal-Mart also is ramping up its e-commerce but is far behind Amazon.ca, said Peter Sklar, retail analyst at BMO Nesbitt Burns. The latter carved out 5 to 7 per cent of Canada's $1– to $1.5-billion online sales market in 2013 compared with Wal-Mart's 1.5-per-cent share, according to his estimates.
Wal-Mart Canada is pouring money into rapidly expanding its stores and e-commerce, but the investments have taken their toll. Its operating profit slipped in three of the last seven quarters; its same-store sales at outlets open a year or more, a key retail measure, fell in six of the last seven quarters.
In the broader landscape, signs of holiday price battles have emerged.
During the Thanksgiving weekend, a few major players, including Sears Canada Inc. and Lowe's Canada, ran early "Black Friday" and "Cyber Monday" sales. Those are U.S. holiday promotions at the end of November – Black Friday is a day after U.S. Thanksgiving – to kick off the crucial shopping rush. Those American discounting events have migrated to Canada with a vengeance over the past few years, forcing retailers to slash prices .
"We have to steal market share and be aggressive," said Sylvain Prud'homme, president of Lowe's Canada.
In the ultra-competitive home improvement segment, his tactics are paying off, he said. The retailer's same-store sales grew in the double digits in each of the past five quarters although it remains in the red after almost seven years in Canada.
To add to the promotional fever, retailers feel the heat of a string of faltering chains that are liquidating stores as they move through court-supervised proceedings, offering deep discounts.
Then there are others, such as fashion chain Smart Set, which is owned by Reitmans (Canada) Ltd., that are closing underperforming stores or seeking buyers, touting price markdowns to clear merchandise.
Jeremy Reitman, chief executive officer of Reitmans, said selling Smart Set is "a possibility" but the company is more inclined to downsize the chain. It is "looking for offers" to unload about 70 of its 113 Smart Set store leases, including in prominent locations such as the Toronto Eaton Centre. It also wants to shut roughly 10 of its 68 standalone Thyme maternity clothing stores, he said.
Reitmans, which is racing to turn around its weak results, struggles with a cautious consumer and uncertain economy, he said. As for the holiday selling period, "it's too early to tell. Call me in a month."
Retailers also have to take on Target Canada, whose arrival in this country last year shook up the market despite its troubles. Now under new leadership, the U.S. discounter is pushing to slash prices, improve stocking and lure customers. "We've got work to do and we've got to do it quickly because we all know how important the holiday season is," said Brian Cornell, new CEO of parent Target Corp.