Outlook 2008 (9 sectors to watch): Retail

Consumer confidence and buying power are both expected to remain far stronger in Canada than in the U.S.

When it comes to shopping, Canadians will be able to lord it over their U.S. neighbours in 2008. The loonie, which in September hit par with the U.S. greenback for the first time in three decades, has given Canadians a sense of retail superiority. Consumer confidence and buying power are both expected to remain far stronger in Canada than in the U.S., where a slowing economy in 2008 may slip into a recession. What’s more, as more of us head across the border to flaunt our above-par loonies, we’ll in the process take advantage of price reductions meant to attract the downtrodden American consumer. Says the Conference Board of Canada in a recent report: “Canadians are finding themselves flush with cash and eager to spend.”

Though retail spending in Canada in 2008 will likely be a lot healthier than in the United States, “it’s not as if it’s going to be a barn-burner of a year,” says Ed Strapagiel, executive vice-president at Toronto-based Kubas Consultants. After three years of annual retail sales growth in the 6% range (the figure for 2007 will likely end up about 5.5%, compared with 6.2% in 2006), Strapagiel is expecting overall sales to grow to $432.8 billion in 2008 — an increase of 4.9% over the $412.8 billion he expects for 2007. That is still healthy growth, he says; in the United States, sales are expected to grow by only 3.4% in 2007 and 3.9% in 2008.

Strapagiel points out that a lot depends on how the U.S. economy actually performs. Canadian economists are already adjusting growth forecasts for 2008, in part because of the expectation of slower growth in the States. The Conference Board also predicts Canadian consumer spending will decelerate in 2008. It says real growth in consumer expenditures (taking inflation into account) will come in at 3.2% after growing by 3.9% in 2007, and slow down further in 2009, to 3.1%.

On the other hand, Strapagiel says, low unemployment rates for most of the country, and especially in Western Canada, mean most Canadians are in an upbeat mood and will take that feeling with them to the malls. As it has over the past few years, Alberta will still lead retail sales growth, at 9.2% — about double the national average, says Strapagiel. What’s interesting, though, is that other parts of the country will also see strong growth: Saskatchewan (8.8%); Manitoba (6.3%); Newfoundland and Labrador (8.1%), the territories (9%) and Prince Edward Island (6.9%). The main laggards are expected to be Ontario (3.2%) and Quebec (3.3%), hurt by downturns in manufacturing and forestry. These two provinces comprise more than half the retail sales in Canada.

The one uncertainty is how much of an impact the cross-border shopping phenomenon will have on sales in Canada. “It’s the unknown Factor X,” says Peter Woolford, vice-president of policy development and research for the Retail Council of Canada. Strapagiel says that it is probably still “more noise than substance,” though that’s not to say it won’t have some impact. Indeed, the threat of cross-border shopping has forced many Canadian retailers to lower prices. That could have a huge effect on margins, unless retailers can extract concessions from manufacturers and distributors to pass down the savings that will come from the stronger Canadian dollar.

But Woolford says retailers will have to work hard to meet Canadians’ growing expectation that they will pay lower prices. “Canadians are smart shoppers, and they will keep the pressure up,” he says. Long lineups to cross the border suggest that Canadians are quite prepared to go to extraordinary lengths for what they consider to be good deals. “That staring contest between the retailer and the consumer always exists,” says Woolford, “and it’s the consumer who in the end always wins.”