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Shoppers walk by the large Christmas tree inside the Eaton Centre in Toronto, Saturday December 3, 2016.

Mark Blinch/The Globe and Mail

The coming year will be one of transformation for retailers as they're forced to adapt to the new reality of more online shopping and fewer visits to the mall.

Amid the shift, retailers will need to invest in upgrading their digital and e-commerce capabilities even as they feel the pinch of a weaker Canadian dollar, which bolsters their costs of purchasing imported goods and pushes them to raise some prices or trim expenses.

And while many merchants are counting on a stronger economy in 2017 to lure customers, in some segments – particularly in luxury fashion and groceries – they will operate in an increasingly crowded market while facing the burgeoning threat of the 800-pound gorilla: Amazon.com Inc.

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"You can't deny the impact of Amazon in Canada," said Diane Brisebois, president of the Retail Council of Canada. "It served as a motivator for many retailers to invest" in their e-commerce and top stores.

As retailers end 2016 with what is expected to be only modest sales growth, they face the prospect of moderate gains in 2017 amid less traffic in physical stores and more digital disruption.

Online shopping "has reached the tipping point," says a December report for members of the Retail Council of Canada. "The change in customer research and buying behaviour is now so great that retailers have to re-think their whole operations model – logistics, [distribution centre] fulfilment, stores. In particular, what role do stores have when online sales comprise 15, 20, 25 per cent of the total?"

It found that retailers continue to experience "dramatic" drops in the number of customers visiting their stores. Declines in store traffic run as high as double digits compared with a year earlier, the report says.

The increasingly steep traffic declines are forcing some retailers to consider shutting or shrinking underperforming stores, touching off a reshaping of the industry, it says.

Most retailers are projecting that sales in 2017 will pick up in the low single digits – between 1 and 3 per cent – according to the report, entitled: "Ho Ho Ho-Hum Holidays: Traffic is the Main Reason for Soft Sales."

Still, even with fewer consumers heading to stores, the ones who do show up are motivated shoppers and apt to make purchases, retail consultant Ed Strapagiel said.

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Online retailing represented only 2 per cent of total retail sales (including automobiles and gas) or $8.1-billion in the first nine months of 2016, Statistics Canada reported recently. But that number does not include online retailers outside of Canada or travel, accommodation and entertainment sites, Mr. Strapagiel said. And annual e-commerce sales gains are in the double digits, he said.

The Retail Council's Ms. Brisebois said online sales are actually closer to 6 per cent of traditional retailing, excluding gas and automobile sales, for instance. "The challenge in 2017 will be: how to get consumers to transact through your mobile site and your e-commerce site and at the same time entice them to the store."

Hudson's Bay Co. and Canadian Tire Corp. Ltd. are among retailers pouring money into updating brick-and-mortar and digital stores. Still, Stephen Wetmore, Canadian Tire's new chief executive officer, suggested recently that it is scaling back new physical store expansion after the retailer, which also owns Sport Chek and other sporting goods chains, built bigger, fancier outlets over the past few years.

"We will be more strategic with our real estate decisions, with an eye to making our existing assets more efficient while ensuring that we keep our network current," Mr. Wetmore told analysts in November.

And as grocery wars rage across the country, supermarkets are testing the e-commerce waters by offering a "click and collect" model that entails customers ordering online and picking up their purchases at stores. At the same time, the low-cost U.S. giants Wal-Mart Stores Inc. and Costco Wholesale Corp. keep adding more food to their aisles, putting the heat on traditional players.

Loblaw Cos. Ltd. is leading the way with its click and collect online business, which will be rolled out at more than 100 stores by the end of 2016. But to break even in its online business it needs to generate more "incremental" sales as it steals away existing customers from its physical stores while adding costs to the operations, Loblaw executives have said.

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"You can understand how difficult it is to make it work because you are actually adding cost to the system," Galen G. Weston, executive chairman of Loblaw, said in November. "We have some stores that are showing some very promising results. It takes time for them to scale up to the right level and we do not know at this point how many stores are actually capable of achieving that kind of incremental performance."

In luxury retail in Canada, Harry Rosen Inc. has been an early adopter of e-commerce, having launched it about seven years ago. While it makes up only 2.5 per cent of the chain's total $300-million-plus annual sales, it is expected to have grown 22 per cent in 2016, compared with the retailer's anticipated 2 per cent overall sales increase, CEO Larry Rosen said.

"Canada is still underdeveloped in e-commerce," Mr. Rosen said. "It gives us lots of time to catch up."

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