Bank of Canada Governor Mark Carney has repeatedly warned Canadians to ease up on their spending and begin paring back their debt. It looks like Canadians are finally paying heed.
Grappling with rising debt costs and volatile fuel prices, consumers are showing signs of fatigue. Retailers ranging from the popular discounter Winners, to grocery titan Loblaw, to electronics specialist Best Buy, all report that they are struggling to get shoppers to open their wallets.
And fresh consumer data indicate that Canadians are becoming increasingly anxious amid growing uncertainty over everything from global inflation and other crises to the prospect of interest rate hikes. "Consumers are holding back," said Cliff Grevler, partner and managing director of retail strategist Boston Consulting Group in Toronto. "You see many of the same behaviours that we saw during the downturn."
Ironically, the consumer funk comes as the economy shows signs of improvement. Canadians are returning to the work force and the jobless rate is dropping, matching a two-year low at 7.6 per cent last month. But Mr. Carney's message is sinking in, and the rising price at the pumps is cutting deeper into other spending.
After consumer spending picked up 4 per cent in January and February, it stayed flat in March and April from a year earlier, according to market researcher Fusion Retail Analytics.
Other evidence reflects consumer skittishness: 90 per cent of Canadians intend to spend the same or less in the next year, compared with the previous 12 months - while 44 per cent plan to lower their spending over the next year, according to a new study from Boston Consulting Group.
Of further concern to retailers: 70 per cent of consumers are looking to scale back on non-essential purchases in the next 12 months, the survey, conducted in March, found.
Even though the recession ended well over a year ago, "Canadians still remain apprehensive," Mr. Grevler said.
The numbers point to choppy waters for retailers in the coming months after a cool, wet start to spring kept many shoppers away from stores. The situation could perk up later this year if consumers' discretionary income improves.
But the wild card will be the Bank of Canada's decisions on raising interest rates. Economists expect a rate hike in July but if consumers face further rapid increases, shoppers could remain tight-fisted.
First-quarter results from retailers in Canada so far suggest they are feeling the pinch of sluggish consumer spending. Discounter Winners, usually a strong performer, had a disappointing 13 weeks to the end of April. Parent TJX Cos. reported last week that same-store sales at Winners and its sister Home Sense chain fell 3 per cent in the quarter, and 4 per cent in April alone. Cold and rainy weather was a big factor in holding back customers from snapping up spring apparel, TJX senior vice-president Sherry Lang said.
Same-store sales, an important retail measure which excludes effects of store openings and closings during the year, slipped 0.1 per cent at Loblaw Cos. Ltd., the country's top grocer, in its first quarter. "With consumer confidence still low and household debt still high, we remain cautious about our outlook," executive chairman Galen G. Weston said. Fuel costs also are biting heavily, company executives warned.
Sears Canada Inc., which has suffered from sales declines in past quarters, saw an even sharper drop in its first quarter. Its same-store sales slid 9.2 per cent, compared with 2 per cent a year earlier and 3.3 per cent in the previous quarter.
Beyond Sears' ongoing market-share erosion, its waning first-quarter results underline "weak overall discretionary retail sales in Canada," said Keith Howlett, retail analyst at Desjardins Securities. The weakness will be reflected in results of other retailers, including home improvement specialist Rona Inc. and generalist Canadian Tire Corp., which both report quarterly numbers this week, he predicted.
Rona and Canadian Tire have scrambled to draw more customers to their stores, hurt partly by unseasonable weather. But Manu Sarna, partner at Fusion Retail, said bad weather doesn't tell the entire story. Consumers worry about spiralling gas prices, he said.
In reality, gas price increases make a relatively small dent in consumers' income, although they squeeze discretionary income more, he said. Their shelling-out at the pumps eats into 9 per cent of their discretionary income today, up from 7 per cent at the beginning of 2009, his firm's data show. And while their discretionary wealth is actually picking up - driven by higher wages and employment - it's rising just 2 per cent now compared with 4 per cent in the first quarter, he said.
What is more, middle-class Canadians strain to pay down debt, prompting them to cut back on spending, Mr. Grevler added. "They're cutting back more than they need to."
In response, retailers are racing to offer an unprecedented array of promotions and discounts, which cut into profit margins. At Shoppers Drug Mart, for example, flyers touting deals have expanded to broadsheets from thin tablet-sized leaflets in the past. Overall, the level of discounts at non-grocers has risen to 38 per cent of sales today from an estimated 34 per cent a year ago, according to Fusion.
Merchants are adjusting prices as their own costs climb, sometimes by shrinking packages and keeping the price the same or ramping it up. They're stocking cheaper products, including private labels, as customers trade down to less expensive alternatives.
"Consumers on the whole will remain cautious and conservative," Mr. Grevler said. "Retailers can expect a similar trend to continue."