The Canadian retail sector was battered and beaten coming into 2020. The effects of online shopping, high household debt and reduced consumer spending had the sector contracting by an estimated 1,000 retail locations and this was before pandemic related issues. The COVID-19 pandemic has brought a series of additional challenges: many retailers endured forced closure, reduced operating hours, restricted customer capacity all while covering rent payments, severance and increased cleaning costs. 

The sector is in the midst of the largest change since general stores made way for department stores. Despite record grocery sales, retail sales in Canada plunged 10 per cent in March 2020 compared to February 2020 – and March did not have a full month of forced pandemic closures. Overall, Canadians spent just $47 billion at retailers in March, it was the worst sales in one month since 2016. Statistics Canada expects April’s numbers will be worse, much worse. Current expectations are for a further 15 per cent decline in April. It could bring the spending level down to 2013 levels, according to TD Economics, as presented in the chart below. 

Not all sectors are being punished. While pretty much all retailers deemed non-essential are on their heels and taking losses – the “essential services” retailers that remain open are benefiting big time. Food & beverage and general merchandise (non-food grocery and drug store items) experienced near record positive numbers in March. Grocery related food and beverage shot up over 23 per cent while clothing was down over 50 per cent.   

But the Sector is Hanging On

The general economic data is catastrophic. It now appears likely that the Canadian economy will retreat by about 20 per cent (annualized) in the Q2-2020 and the national unemployment rate spiked to just under 14 per cent in April, compared to eight per cent in March and about triple the 12-month average of 5.7 per cent. 

Industry experts suspect nearly all “non-essential” retailers have sustained significant losses over the last couple of months and are expected to continue to manage puny profits for many months to come. Authorities are slowly easing restrictions across the economy and many provinces have cautiously reopened retail establishments but at reduced capacity and with increased costs for cleaning and staffing. All retailers will need to adapt to survive. Since mid-March, many firms have been forced to cut their employee base, close locations and some using bankruptcy protection to hold off their creditors. Experts believe these formal announcements are the “tip of the iceberg” and most major retailers are currently planning “restructuring” of some kind. 

What’s Next for Retailers

What has been an unprecedented few months are likely to continue through the summer and into the Christmas season for many Canadian retailers. The next chapter for Canadian retail looks to have red ink, lots of work for insolvency professionals and changes like we have not witnessed. The sector has weathered many a storm over the past few decades and ultimately it will survive this one as well. While these times will pose many challenges, they will also present enormous opportunities.

What Can a Retailer do to Survive and Thrive?

1.      Get Online

Online platforms have been important for many years, but they are no longer ancillary. All retailers need an efficient online platform that is consistent with their brand and physical shopping experience to remain engaged with customers. If your online experience is second rated, customers are likely to try elsewhere. Hence, the recent stock market success of Shopify. Its e-commerce platform and channels are critical to retail success today and is no longer a secondary sales strategy. 

2.      Make Changes to Improve Efficiency

Retail business have limited resources, now more than ever. They need to have good people, excellent systems and a measurement and review process in place that provide instant reviews and feedback to the management of the business. Are sales associates dealing directly with customers (online and in the store)? Are customers visiting your site buying product? How does the inventory look – what is selling for a profit? Any “boat anchors”?  Sometimes the answers to these questions are not always easy but now is the time to embrace change and implement innovative systems and management tools to optimize the business. 

3.      Consolidation

The sector is dominated by a handful of conglomerates. Many of these groups hold grocery and “essential retail” at their core. While portions of their business are undoubtedly hurting, it would appear their core businesses are thriving. When certain sectors of an industry thrive while others stagnate or decline – the door for M&A opens wide. See this bubble chart prepared by the Canadian Retail Counsel outlining the major players in the Canadian retail space by gross revenue. 

Almost all of the top 20 entrants in the chart above have been very acquisitive in their corporate history. It is near certain the current period of change will be followed by significant M&A activity. The large players in the sector have cash and strong businesses. They will seek to bolster their market share and add businesses they see as good value with positive long-term prospects.

In The End - Are You a Buyer or Seller?

Times of uncertainty and reduced profits are rarely the right time to sell your business. However, sometimes the best time to sell is when the owners are ready. If you are not embracing the current challenges, let’s have a call. We can give you an unbiased opinion on your prospects in the market. 

On the other hand, perhaps you see opportunity at every turn and do not have the capital or the resources to act on them all. Let’s have a call. We can support you to ensure the next big opportunity is not missed. 

We wish you and your business the best during this remarkable transition period. We are here to help now or whenever you need support with a transaction or just managing through some financing, projections, banking or other challenges.

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