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Target has heightened retail competition after it opened its first stores in Canada in March.

Tim Fraser/The Globe and Mail

Retail sales are sluggish, as debt-ridden shoppers hold out for bargains. Retail sales are rebounding smartly, as consumers snap up an increasing volume of domestic goods.

Both of those statements are true. Amid fierce price competition, the dollar value of retail purchases is rising only slightly even as the volume of goods that Canadians bought rises by a higher margin.

In the 12 months ended in March, retail sales volumes rose 1.6 per cent while retail sales – in dollars – rose just 1.1 per cent to $39.5-billion, according to data released on Wednesday by Statistics Canada. The difference implies that retail prices, excluding restaurants and housing, slipped about 0.5 per cent in that period, said Douglas Porter, chief economist at BMO Nesbitt Burns.

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That gap was even more pronounced in the final month of that period: In March, 2013, retail sales (in dollars) were unchanged from the previous month, while sales volumes managed to gain 0.7 per cent, Statscan said.

Retail consultant Ed Strapagiel warned that the latest retail sales figures suggest the sector could be heading for a double-dip recession. "Over all, the song remains the same," he said. "The only thing that's really growing in Canadian retail is the level of competition."

Amid sluggish retail sales growth, retailers are feeling the heat of price competition even as their sales volumes pick up, underlining a curious inflationary trend of prices actually falling. Retailers are being forced to keep prices low to lure debt-ridden consumers who are being tempted by new low-cost U.S. retailers, including discounter Target Corp., and higher duty-free limits for cross-border shoppers in an uncertain economy.

"Everybody has to compete with cross-border shopping now," Mr. Porter said. "That's having a big effect – that's forcing all retailers to sharpen their blades, to keep prices in check – even to cut them."

At the same time, merchants are competing with a flood of cross-border shopping since Ottawa raised the spending limits for out-of-country trips last year.

"The Canadian marketplace is competitive – it's very aggressive," said Calvin McDonald, chief executive officer at Sears Canada Inc. It reported on Wednesday that its first-quarter sales at stores open a year or more dropped 2.6 per cent, although its transformation efforts showed positive results in some categories including apparel. "A lot of retailers are obviously fighting for the share of the wallet of the consumer. Retail sales aren't growing."

Other chains here, ranging from powerhouse Wal-Mart Stores Inc.'s Canadian division to fashion discounters Winners and Marshalls, owned by TJX Cos., also have reported first-quarter sales declines at outlets open a year or more, partly because of cool weather that hurt seasonal sales.

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They also faced Target, which started to open its first stores in Canada in March. The discounter said its stores here rang up sales of $86-million in its first quarter, which ended May 4. Sales were strongest in apparel and home goods, which are departments that shoppers tend to head to on their first trip to a Target, its executives said.

"We experienced an unexpectedly strong surge in sales as guests [customers] were eager to see their newly opened Target stores," Gregg Steinhafel, Target's CEO, told analysts. Still, the Minneapolis-based company reported an overall 26-per-cent drop in profit and lowered its annual profit outlook, sending its stock down 3 per cent.

Along with the pressures from new entrants, retailers have struggled with more Canadian shoppers heading to U.S. stores to do their shopping. But cross-border shopping may ease as the loonie continues to weaken, Mr. Porter said.

The Canadian dollar slipped more than 1 per cent on Wednesday to nearly 96.41 cents (U.S.) amid broad-based U.S. dollar strength, BMO said. That leaves the loonie's year-to-date losses at more than 4 per cent.

Doug McMillon, president of Wal-Mart's international division, said last week that its business in Canada faced a challenging first quarter as consumer spending weakened due to higher household debt levels. Same-store sales dropped 1.3 per cent and traffic declined 2 per cent, although the average purchase rose 0.7 per cent and its market share improved 1.20 percentage points.

"The underlying trend is that retail pricing power is exceptionally weak," BMO's Mr. Porter said.

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