Industry News
Target Arrival to Impact Several Key Canadian Retailers
A report from Barclays Capital on Monday says the arrival of Target in Canada next year will take a bite out of the sales of several key retailers, while others that don’t overlap in their offerings may benefit from the increased traffic generated by the new stores.
In the report, the investment firm says Walmart, Sears Canada, Old Navy, Loblaw’s Joe Fresh brand and Canadian Tire are the retailers most at risk.
Barclays says Sears is the most at risk of the general retailers with significant overlap in its offerings and 37% of its locations less than a kilometer away from a Target location.
The report says Dollarama Inc., which offers something different from Target, will benefit when a Target opens nearby.
Canadian Tire is expected to take a hit, but Barclays analyst Jim Durran noted that when Walmart first launched in Canada, Canadian Tire was able to recover by the following year.
“There is no doubt that Canadian Tire will suffer some sales erosion to Target, particularly in Target’s perceived ‘go to’ categories such as housewares, apparel and seasonal merchandise,” the report said.
However Barclays noted that Canadian Tire’s most loyal customers generate a majority of its sales and just 30% of the Canadian retailer’s stores will be within five kilometers of a Target.
Target is expected to generate as much as 200% to 300% more sales-per-square-foot than Zellers, whose estimated average is about $150, RioCan Real Estate Investment Trust reported recently.
Meanwhile, Canadian retailers are taking steps to prepare for Target’s arrival. They’re investing millions of dollars in marketing, renovations, new stores and banners as well as updating their fashion and home décor lines, areas where Target is strong.
Sears Canada overlaps with Target in about 70% of its categories, including fashions and home goods, CEO Calvin McDonald has said.
Sears is in the midst of a three-year transformation plan, which it would have undergone with or without Target, the company says. This entails beefing up its fashion edge, including launching this month its Jessica women’s wear brand with a younger, more stylish look. It is also concentrating on “hero” departments, such as appliances and mattresses, where it can differentiate itself.
Canadian Tire has started running a new ad campaign to celebrate its 90th anniversary in the lead-up to Target store openings next spring. The ads will attempt to bolster the retailer’s connection with its consumers and play upon viewers’ emotions. Retail experts also say CTC is wisely trying to focus on its strong core businesses.
Canadian Tire has evolved significantly over its 90 years in Canada, said Allan McDonald, senior vice-president of marketing and automotive, from a brand that sold tires to consumers to a business selling in multiple categories including housewares, décor, sporting goods, apparel, camping equipment, electronics and seasonal items.
A new commercial chronicles the retailer’s roots and links the brand to important moments in the lives of Canadians – a child’s first ride on a bicycle, skating on a frozen pond, camping, tending the lawn or having a backyard gathering with friends.
“You may not know what you’ll need tomorrow, but you’ll know where to get it,” says the voice-over at the close of the nostalgic spot.
“The 90th ad is not meant to be a product spot, and it’s not meant to be really about the corporation,” Mr. McDonald said in the Financial Post. “If you think about everything from kids tobogganing and the memories you have of that as a child to barbecues and camping and cookouts, Canadian Tire has been there along the way and we are hoping to be there for a lot longer going forward. We are pretty proud to have been a part of Canadians’ lives for that long.”
However, he said the company does not believe consumers will be loyal to the company just because of its roots or nationality.
“Over the course of 90 years we have evolved to become a destination in certain categories and we have carved a unique niche.” McDonald added. “We are going to challenge ourselves to continue to evolve to be the most relevant company in those categories. We don’t expect Canadians to go easy on us in choosing a retailer because we happen to be Canadian.”
Economic News
Canadian Economy Ekes Out Modest Growth in July
Canada’s economy continued to eke out modest gains in July, although slightly better than expected, as the manufacturing sector rebounded from a decline in the previous month along with retail and wholesale activity.
Statistics Canada reported last Friday that real GDP grew by 0.2%, in July, better than June’s revised 0.1% and the 0.1% that economists had expected.
It was the fifth consecutive monthly gain in GDP.
July’s gains were driven by the manufacturing and utilities sectors, while mining, oil and gas, and construction suffered setbacks.
Manufacturing bounced back by 0.6% on the heel’s of June’s 0.7% drop. Production of durable goods was higher, led by computers and electronics, and non-durable goods also rose on the strength of petroleum and coal products.
Utilities grew 0.2%, the fourth monthly increase, as both electricity production and natural gas distribution advanced.
Retail trade climbed 0.6%, after declining 0.1% in June. Purchases at vehicle and auto-parts dealerships lifted the sector in July, as did sales at general merchandise stores, and health and personal care outlets. In contrast, retailing activity at food and beverage stores was down.
Wholesale trade was up 0.2%, recovering from a 0.9% decline in June, with petroleum products, and personal and household goods accounting for much of the rebound.
The finance and insurance sector rose 0.5% in July, the fourth consecutive monthly gain, on increased output from banks and security brokerages.
Meanwhile, mining and oil and gas extraction declined by 0.3% overall in July, following a 0.1% decline a month earlier.
The construction sector registered a 0.1% drop, after gaining 0.4% in June, led by declines in the residential and non-residential building sectors.
The output of real estate agents and brokers declined 1.5%, down for a third consecutive month, as activity in the home resale market decreased in July.
The public sector (education, health and public administration combined) was essentially unchanged in July.
What the analysts had to say:
Robert Kavcic, economist at BMO Nesbitt Burns:
“While July’s real GDP results were somewhat better than expected, the Canadian economy will still be hard pressed to hit the Bank of Canada’s 2% growth forecast in Q3.”
Matthieu Arseneau, senior economist, National Bank of Canada:
“Do not extrapolate this performance into the future as we already know that production has probably led to an inventory overhang in light of declining shipments (down a whopping 2 per cent in July!).”
“As a result, we already have indications that firms are cutting back on production with manufacturing jobs having declined for a third month in a row in August. This development combined with slowing activity in construction points to declining production in the goods sector.”
TD Bank senior economist Sonya Gulati agreed that manufacturing will have little “staying power” and pointed toward an overall cooling.
“The world remains a risk-filled one and this uncertain global economic environment should weigh on the trajectory for those areas linked to international trade,” she said. “Manufacturing and transportation are two areas that come to mind. With tired consumers and housing markets beginning to cool, the domestic front is running out of gas and energy to steer the Canadian growth engine.”
Statistics Canada Rolling Out Recalculated Data Going Back More Than 30 Years
Canada’s official number cruncher has gone back more than 30 years to recalculate key economic data used for decades by governments and companies to plan and set policies.
On Monday, Statistics Canada began rolling out revisions to many of its major reports — ranging from quarterly gross domestic product, to labour productivity and balance of payments.
“The revised data are the result of a project to more closely align the Canadian system with new international standards released in 2009 by international bodies, including the United Nations and International Monetary Fund,” the federal agency said on its website.
The new revisions showed Canada’s economy was sturdier than previously thought just before the last downturn but when the fall came, it was more painful than earlier data had indicated.
Though Canadian growth in the second and third quarters of 2008 has been revised upwards, the economy’s slide in the next half year was worse than prior estimates.
However, the big picture shows little change after the revisions, with GDP growth and economic cycles looking more or less the same. The details, though, sharpen our understanding of the economy, in particular in the last downturn.
The economic contractions that happened in 1982 and 1991 were little changed, Statscan said, while the drop in the past recession was more “pronounced” than previously estimated.
Revisions to GDP growth over the whole period were “not substantial,” the agency said. On balance, the economy was a little stronger than prior estimates, with a mean revision to the annual real GDP growth rate of 0.14 percentage points.
Changes show household savings were slightly weaker than previously reported, declining from 1981 to 2005 although since inching higher.
Revisions imply slightly faster GDP growth in recent quarters, which could prompt some upward revisions to 2012 GDP forecasts from various economists.
The changes go back to 1981. Statscan is now working on GDP revisions back to 1961.
On Oct. 12, revised data will be released on labour productivity, from 1981 to the second quarter of 2012.
National balance sheets from 1990 to the second quarter of 2012 will be published Oct. 15, followed on Nov. 19 by provincial and territorial economic accounts for 2007 to 2011.
The final scheduled release will be financial flow accounts between 1990 and the fourth quarter of 2011.
U.S. Economic Growth Reduced to 1.3% in Second Quarter
U.S. economic growth was much weaker than previously estimated in the second quarter as drought conditions cut into inventories, setting the platform for even more sluggish performance in the third quarter.
U.S. GDP expanded at a 1.3% annual rate, the slowest pace since the third quarter of 2011 and down from last month’s 1.7% projection, the Commerce Department said in its final estimate last Thursday.
The U.S. economy grew at a 2.0% pace in the first quarter.
Output was also revised down to reflect weaker rates of consumer and business spending than previously estimated. Outlays on residential construction and export growth were also not as strong as had previously been thought.
The worst drought in half a century, which gripped large parts of the country in the summer, saw farm inventories drop $5.3 billion in the second quarter after slipping $1 billion in the first three months of the year.
Some initial data for the third quarter points to little improvement, even as the housing market digs out of a six-year slump. Manufacturing is cooling, hurt by fears of tighter U.S. fiscal policy in January and slower global demand.
The GDP report also showed that after-tax corporate profits unexpectedly rose at a 2.2% rate instead of the previously reported 1.1% increase. After-tax profits fell 8.6% in the first quarter.
TD Bank Lowers Economic Growth Forecasts for Canada
Last week, TD Bank lowered its estimates for economic growth this year in most of Canada’s provinces — saying the U.S., Europe and Asia are weaker than expected and households are more cautious than before.
It says Alberta and Saskatchewan will continue to lead the other provinces in economic growth this year, but the pace will fall below 3%.
In the other eight provinces, TD is estimating 2012 growth will be less than 2%.
In most provinces, the new TD estimate is below the outlook it issued in July, with the exception of Manitoba and Prince Edward Island.
“In Europe, while a dramatic escalation in the financial crisis has been avoided and mechanisms aimed at preventing such an outcome have been agreed upon, risk levels remain high,” the report says.
It adds that the U.S. economy has been recovering at a “disappointing pace” and exports to Canada’s largest foreign customer have been constrained by the high value of Canada’s dollar relative to the U.S. currency.
“Moreover, China’s soft landing and the maturation of growth in many emerging market countries have set limits to what had appeared to be almost boundless demand — a development that has not been lost on commodity markets.”
In Canada, TD notes the federal and provincial governments have launched extensive efforts to restrain their spending and home prices has begun to come down in after years of rapid growth in some markets.
It suggested Canadian households across the country — particularly in Ontario — are being more cautious than previously expected.
“Construction of commercial properties (in Ontario) is brimming and the housing market has maintained its upward path despite signs of some overvaluation in its major markets, especially in the Greater Toronto Area.”
“At the same time, however, households have shown increased caution, as evidenced by weakening retail sales gains and a reduction in the pace of debt accumulation.”
The report says housing markets will face different outlooks depending on the region, with the Prairies likely to be “largely unscathed” and the major markets in Toronto, Montreal and Vancouver to show declines.
“The varying residential market conditions will exacerbate growth differentials given that housing is a large driver of consumer spending,” the report says.
TD adds that its forecasts for 2013 and 2014 are looking more positive, although it expects growth will continue to be modest.
The revised forecast calls for Saskatchewan to have the fastest economic growth of any province, with an increase of 2.9% over last year. Alberta is in the No. 2 spot at 2.8% projected growth this year.
Newfoundland and Labrador is at the other end of the spectrum, with its growth falling dramatically from 2.8% last year to 0.9% in 2012 — the lowest among the 10 provinces.
Ontario, Quebec and British Columbia — the three most populous provinces — are now projected to have 2012 growth of 1.9%, 1.5% and 1.7% respectively.
Manitoba’s growth is projected to be 1.9% — matching Ontario’s — while P.E.I. will lead the Atlantic provinces at 1.8%, followed by Nova Scotia (1.3%) and New Brunswick (1.0%) and Newfoundland (0.9%).
For most provinces, TD is forecasting stronger growth in 2013 than this year and further improvement in 2014.
Newfoundland’s growth in 2013, bolstered by its oil and gas resources, is projected to be 2.3% followed by 2.5% in 2014. The growth in the other three energy-rich provinces — Alberta, Saskatchewan and British Columbia — is estimated at 3.1%, 3.0% and 1.9% respectively.
Ontario is one of only two provinces that’s expected to see slower economic growth next year, falling to 1.8% from 1.9%. The other laggard is expected to be P.E.I., with 1.4% growth down from 1.8%.
The projected 2013 growth rates for the other provinces are: Nova Scotia, 2.0%; New Brunswick, 1.4%, Quebec, 1.7%; Manitoba, 2.1%.
Source: Canadian Press
