Retail Optimism Gets Canadian Malls into the Holiday Spirit

Canadian malls are set to have a happy 2018 holiday season with promising retail trends. Many preliminary studies suggest that consumers plan to spend more money than last year and, while e-commerce is still expected to trend upward, shopping attitudes during the holidays are driving much-needed foot traffic back into traditional retail space. In this report, DBRS dives into shoppers’ intentions and trends this holiday season as well as their impact on mall owners from a real estate perspective.

Consumer Spending Uptick

To make predictions for the holidays, industry watchers look first to consumer spending habits. These patterns inform the enthusiasm behind spending and can point to higher sales and better profit margins for retailers if the economy is thriving. This year, Canadians are not exactly tightening their purse strings; in fact, a large portion of the population (42.0%) is eager to spend more on presents for friends and family compared with last year, according to Field Agent Canada. Only 21.0% of those surveyed are cutting costs this season by spending less on gifts, which may indicate growth for retailers across the country (see Exhibit 1).

Source: Field Agent Canada, A Very Canadian, Omnichannel Christmas: 2018 Holiday Insights Report (2018).

Favoured Shopping Methods

In a surprising development, Canadians’ increased spending may support traditional big-box retail stores. In a recent PwC Canada report, 63.0% of surveyed Canadians chose “in store” as their primary shopping channel (see Exhibit 2). More surprising still, millennials are fairly balanced in their shopping preferences — 49.0% of those surveyed prefer to shop in store while 51.0% prefer e-commerce options (see Exhibit 3). Given the technology-driven generation, though, the two options are remarkably neck and neck.

There are a few speculative reasons for this:

  1. Walking store to store and finding a perfect gift for a loved one is more exciting than scrolling endlessly through browser pages.
  2. Seeing a product in person before committing to the purchase will always be more reliable than ordering online and hoping for the best.
  3. Shipping could pose an issue without guarantees that presents will arrive in time for the holidays, especially with postage disruptions (see “Ongoing Post Disruptions” section). This would be a consideration for procrastinating shoppers, who cross names off their lists in the days leading up to the holidays.

Other shopping channels (see Exhibits 2 and 3) could also indicate a hybrid model that is rising in popularity: ordering online and picking up in store. This trend demonstrates a retailer’s ability to capitalize on its online store and physical retail space. There are also retailers investing more in the infrastructure surrounding this tactic, like Walmart Inc.’s (Walmart; rated AA with a Stable trend by DBRS) pickup stations at their store locations after customers order online. This investment can give these retailers a leg up over companies that are falling behind in this hybrid integration strategy.

Source: PwC, 2018 Canadian Holiday Outlook (2018).
Source: PwC, 2018 Canadian Holiday Outlook (2018).

Impact on Canadian Retail Industry

With shoppers spending more overall and more in the store, what does this mean for Canadian retailers, department stores and mall owners? Large-scale retail franchises like Walmart — cited by 52.0% of consumers as a top-three retail destination according to Field Agent Canada’s A Very Canadian, Omnichannel Christmas: 2018 Holiday Insights Report — will likely report strong figures in the fourth quarter. As of its Q3 F2019, the company was already up 3.3% year over year (YOY), which shows that Walmart is still reporting revenue increases. Field Agent Canada’s report also mentioned other major physical retailers that can expect a boost by the end of the year based on consumer preferences, including Costco Wholesale Corporation (rated A (high) with a Stable trend by DBRS; revenue growth of 9.7%); TJX Companies Inc. (parent company of Winners and HomeSense; 11.3% as of February 2018); Indigo Books and Music Inc. (2.7%); Toys “R” Us, Inc. (-5.0%); and Canadian Tire Corporation, Limited (rated BBB (high) with a Stable trend by DBRS; 5.4%). The growth outlined here represents overall revenue growth from all shopping channels. This growth, whether its online or offline, can help companies counter the “retailpocalypse” that has caused many big-box stores to shut their doors. For mall owners, growth means that retail tenants will be able to effectively pay their rents, which lowers the likelihood of vacancies.

E-Commerce Boom Continues

Since its introduction into the North American economy, e-commerce has quickly gained ground. According to Statista’s figures, e-commerce in Canada is projected to generate approximately USD 53.74 billion in 2022 in sales (see Exhibit 4), growing at a four-year compound annual growth rate of 7.7% between 2018 and 2022. Another Statista report forecasts that e-commerce could account for about 10.0% of total retail sales in Canada by 2022 (see Exhibit 5).

Source: Statista, “Retail e-commerce revenue in Canada from 2016 to 2022 (in billion U.S. dollars)” (2018).
Source: Statista, “E-commerce as percentage of total retail sales in Canada from 2013 to 2020” (2018).

Black Friday and Cyber Monday, which generate the most retail sales in the holiday shopping season, will decide how well retail performs this year. According to Business Wire, eShopWorld found that Canada’s sales revenues for Black Friday through Cyber Monday rose by 23.0%. This growth is consistent with last year’s Statistics Canada estimates which showed that, in November 2017, retail e-commerce sales reached $1.8 billion, representing 3.5% of total retail trade and the highest portion of total retail sales over the course of 2017. This also presented an increase of 25.5% in e-commerce retail sales YOY based on estimates.

Ongoing Post Disruptions

While e-commerce revenue growth is expected to continue outpacing traditional in-store sales growth, labour disputes may dampen e-commerce performance this holiday season. Canada Post Corporation (rated AAA with a Stable trend by DBRS) and its postal service workforce, currently on strike, have not been able to reach an agreement. This stalemate has caused a parcel backlog, which has consumers wondering if their parcels will arrive on time. The mail disruption also makes traditional brick-and-mortar retailers more popular as shoppers can purchase items to bring home that same day. In early December, back-to-work legislation was imposed to end weeks of rotating strikes and to prevent losses in the Canadian economy. Although postal workers will be back on the job, the implied delivery delays and backlog may have an impact on e-commerce sales this year.

Despite Challenges, Canadian Consumerism on the Rise

While the U.S. experienced record-breaking holiday sales, Canada may tell a different story. Traditional retail is not expected to surpass the ease and convenience of e-commerce, but renewed interest in physical retail space is good news to mall owners looking to increase their foot traffic and improve fourth-quarter sales. This is also supported by a strong stage in the market cycle that strengthens shopping attitudes. As well, shuttered retailers will bring concentrated foot traffic to stores that managed to survive the bankruptcy onslaught, showing a “survival of the fittest” attitude in the consumer market. In the event of an economic downturn, the retailers that are most in-tune with consumer trends — especially during the make-or-break holiday season — may prevail. Until then, a booming economy with growing consumerism means that everyone can have a happy holiday.

A copy of this report is available on the DBRS website or by contacting info@dbrs.com.

Follow Stephanie Hughes on Twitter @StephHughes95.

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