The ongoing increase in the level of competition in the Canadian Retail Market, together with the ongoing shift to “omni-channel retailing” has “raised the bar” on Canadian consumer expectations. The dual impact of these two major factors has pressured many home-grown retailers, in particular those who don’t have strong balance sheets and deep pools of talent, thus inhibiting their ability to effectively compete in this new environment, referred to often as the "new normal".
If these factors weren’t enough to pressure these retailers, the recent massive decline (more than 25%) in the Canadian dollar relative to the US dollar could be the trigger that will force many of these weaker retailers to restructure or reinvent. Given the sharp increase in the rate of direct importing that is tied to the US currency, this will significantly increase the cost of merchandise for these direct importing retailers. For those with strong brands, we expect that the impact will be more muted as their ability to raise selling prices to offset the increased merchandise cost is much greater. However we expect that the retailers with weaker brands and/or more price-sensitive customers will be hard-pressed to raise prices without the risk of major decreases in volumes sold. For these weaker retailers, merchandise margins will be hard hit and profitability will be impaired, which might be a decisive factor in leading to a restructuring. This typically results in many store closures and job losses. Many of these retailers already borrow on a secured basis to fund their businesses, which will result in closer scrutiny from their lenders. Not a happy situation for the “faint of heart”
According to our industry expert Antony Karabus, CEO, HRC Advisory, a leading retail advisory firm, the combined effect of these factors will be significant for many retailers who are already struggling to retain their market share.
According to Mr. Karabus, the Canadian retail market 'pie' is only so large. As international retailers continue to enter the Canadian market and as stronger Canadian retailers continue to win market share, a number of weaker Canadian retailers may languish or even worse, shutter. The overall Canadian retail market will see modest growth over the next year, other than possibly a windfall from reducing the extent of cross border shopping (Canadians have a long history in driving across the border to the US for shopping, currently estimated at $8 billion). Mr. Karabus believes that cross border shopping will decline due to the weaker Canadian dollar (thus making it more expensive to shop in the US) and the increased presence of world-class retailers in Canadian malls.
In summary, the declining Canadian dollar could prove to be yet another source of stress for the weaker direct importing retailers, particularly for those unable to raise prices due to lack of brand strength. For those unable to raise prices or to hedge their inventory, margins will decline significantly. Mr. Karabus suggests that those retailers who cater to less price-sensitive customers and have strong brands and differentiated value propositions will successfully weather the low exchange rate storm without major impact to their profitability.
Mr. Karabus commented that a number of Canadian retailers are already seeing much success from their transformations and investments in stores, digital and talent, including Hudson's Bay Company, Sport Chek, Canadian Tire, Aldo, Loblaw, Shoppers Drug Mart, Harry Rosen, Holt Renfrew, Indigo and others. These retailers have strong balance sheets, deep talent pools and strong brand assets. They have been able to afford to invest in their growth and/or transformation strategies and are able to weather the storms created by the decline in the Canadian dollar.
Mr. Karabus notes that in addition to the above investments in the retailers’ bricks-and-mortar operations, the additional investment needed to enable omni-channel and mobile shopping is significant and the payback will not be swift, thanks to the pressure imposed by Amazon.com from free shipping and free returns. However these investments fall into the category of “table stakes”---they are mandatory as consumers increasingly seek omni-channel experiences, to shop on their smart phones and the like.
What it will come down to is the increasing gap between the 'winners' and 'losers' within the industry. Although Canada has many world class retailers, there are many others who will face an uphill battle to survive and thrive.
About Our Expert:
Mr. Karabus became CEO of HRC Advisory in January of 2013. He has been a trusted and passionate advisor to retailers on strategic and financial performance issues for over 25 years. He has assisted numerous North American retailers to create significant shareholder value during this time. He has worked with numerous well known retail chains in key sectors such as department store, specialty apparel and hard lines, big box chains and food and convenience.
Antony began his career at Arthur Andersen in Cape Town, South Africa and moved with the firm to Toronto, where he founded Karabus Management as a Canadian retail advisory firm in 1990. In 2001, Karabus Management expanded into the United States, where the firm became a leading North American specialist retail consulting firm. In 2008 he sold the firm to an International Accounting/Consulting firm where he served as the leader of that firm’s Retail Consulting Services practice until he left the firm in December 2011.
Antony conducts annual surveys of Retail CFO and CEOs to determine key priorities in assisting their business to enable substantive value creation.
Antony is a recognized speaker and a published author providing thought leadership at industry forums, including the National Retail Federation, Retail Council of Canada, World Retail Congress and the Fashion Institute of Technology and providing content to The Wall Street Journal, The New York Times, Stores Magazine, The Globe & Mail, Chain Store Age, National Post, Toronto Star and Women’s Wear Daily, among others.
About HRC: HRC Advisory is a specialist boutique retail advisory firm. Together with its predecessor firms, it has been assisting Canadian and US Retail Chains to improve their profitability and strategic positioning for more than 25 years. Many of HRC’s senior advisors were previously at Senn Delaney Retail Consultants and Karabus Management following retail leadership roles. Other senior advisors at HRC have a mix of retail leadership and retail consulting experience gained with other leading firms
HRC has significant retail depth in strategic planning, buying, merchandise planning and inventory management, indirect procurement, store operations and omni-channel processes, supply chain/logistics and fulfillment, and comprehensive cost optimization services. HRC has worked extensively with both healthy top performing chains as well as developing and executing turnaround mandates at a number of retailers in difficult situations. For more information, please visit www.HRCadvisory.com.