Caution Ahead: Canadian Consumer Businesses Ring in the New Year with Worry

March 12, 2015

Canada is off to a shaky start in 2015, with falling oil prices roiling markets everywhere.
As consumer businesses wrangle with an increasingly delicate economy, they'll also feel deepening pains from global competition, and from getting their e-commerce sales and distribution strategies in order. The following seven key issues are likely to have a major impact on consumer businesses as they navigate the year ahead:

A Wobbly Economy = Jittery Consumers

Canada's economy has been bolstered by the energy sector, but as oil prices tumble downward and stay depressed, a ripple effect is starting to take hold. In January, the Bank of Canada cut interest rates in response to declining oil prices, and may lower them even further in the coming months. The Bloomberg Nanos Canadian Confidence Index, a weekly measure of the economic mood in Canada, has been trending downward, and in early February hit its lowest point since May 2013. More consumers are expecting to see a weaker economy in the next six months, and fewer expect to see home prices rise during that period. In Calgary, Bloomberg reports that sales of existing homes already fell 25 percent in December, the most since the 2008 credit crunch.

In the meantime, Canadians are carrying record debt levels. Statistics Canada reports that household total credit-market debt rose to 162.6 percent of disposable income during the third quarter of 2014, triggering concerns from the Bank of Canada that high household debt is creating a significant risk to the country's financial stability. Much of the borrowing stems from mortgages.

Adding to Canada's economic worries is a softening loonie, which has dropped 3.4 percent since late November. In the past two years, it has fallen more than 16 percent against the U.S. dollar, and following news of the rate cut, it reached a six-year low, according to The Star. Bottom line: Canadian consumers will be paying more for anything imported or priced in U.S. dollars including food, clothing and automobiles. In the first week of January, CBC News reported price increases from major auto makers such as Toyota and Honda, and The Star has suggested that further price hikes for consumer goods—including food—may be looming. Price-sensitive consumers may be more leery to spend.


Bottom line: Canadian consumers will be paying more for anything imported or priced in U.S. dollars including food, clothing and automobiles. Price-sensitive consumers may be leery to spend.


Alleviating Trade Gridlock

Canada's exports continue to waver amid a shaky economy, posting anemic gains of only about 1.5 percent between November and December of 2014, according to Statistics Canada. Despite this slow growth, traffic at Canada's ports is near maximum capacity, particularly along the West Coast, where some shippers are looking to alleviate major delays they are experiencing at U.S. West Coast ports. Reuters reports that Port Metro Vancouver, Canada's largest port, has limited capacity and faces the possibility of a repeat of the March 2014 truck driver strike over unresolved pay issues, which created problems for the industry. It also highlights expansion plans that are underway for Port Metro Vancouver and the port of Prince Rupert, British Columbia, which would double container traffic over the next decade, but much of that capacity is still years away.

Consumer goods companies are also watching infrastructure developments planned for the bi-national great Lakes-St. Lawrence shipping system, where more than $7 billion is being invested on improvements, the most significant upgrade in 50 years. Canadian and American ship owners are updating fleets, and both governments are invested in updating the St. Lawrence Seaway's lock technology and expanding the ports and terminals. The Montreal Gazette reports that the seaways had its best season in six years, with cargo volumes reaching 40 million tonnes at the end of 2014.

The American Influx?

The Canadian market has seen a flurry of American retail and consumer goods companies target the country for growth in recent years, but Target's rapid exit from the market seemed to overshadow all other news as the year began. Reports have pointed to a range of issues that led to the downfall—from huge upfront costs for lease agreements to supply chain issues to a lack of e-commerce—but their fast and furious expansion pace seemed to be the biggest drag.

American companies are taking notes while looking intently at the great White North as a land of opportunity. Many experts see 2015 as a battle year for luxury retail as more U.S. retailers move in. Nordstrom will open several more stores in the coming year, and Saks Fifth Avenue plans to enter the market in 2016.They hope to capture a share of Canada's growing segment of high income earners; the number of households with income of more than $250,000 jumped 34.2 percent since 2008, according to Environics Analytics.

Omni in Action

Omnichannel was the top buzzword in the retail industry in 2014, and consumer businesses are waking up to the new reality of reaching and engaging consumers seamlessly across all channels. The challenge: How do we actually do omnichannel? What are the implications for organizational structure, supply chain and distribution, technology systems, in-store experience and marketing?

Ahead of the 2014 holiday season, our colleagues at BDO USA polled 100 retail chief marketing officers about how omnichannel strategy has impacted their holiday plans. A full 71 percent of retail CMOs said they are familiar with the concept of an enhanced omnichannel shopping experience, and of those, one-in-four say that they changed their holiday marketing strategy in response to consumers' demand for a more seamless experience across channels. Most common changes were using consistent pricing and promotional strategies across channels, and expanding product delivery options for customers. While retailers are taking steps in the right direction, particularly in areas consumers see and feel every day, it's clear there's still much to do within the organizations.

The Big Try Getting Bigger

Canada has been of keen interest to U.S. and global retailers, and cross-border transactions are likely in 2015. Data compiled by Bloomberg found that 77 percent of the deal transactions that Canadian firms were involved in during 2014 were cross-border deals, including one of the biggest deals of the year: Burger King Worldwide Inc.'s $13.2 billion (U.S.) merger with Tim Hortons Inc. The Bloomberg article notes that smaller companies will be prime targets for larger global companies, while the bigger players in Canada will increasingly look outside of Canada for growth. While U.S.-based retailers may feel some hesitation after Target's challenges in Canada, the recently announced merger between Staples and Office Depot is proof of the maturation in the U.S. market. U.S. retailers are likely to turn to M&A and look overseas as two options in a smaller pool of growth opportunities.

As global competitors look to gain a foothold in Canada, it's expected to prompt a wave of mergers and acquisitions among home-grown companies trying to fend them off.

Retirement Drain

Political debates have surfaced in several provinces, including Ontario and Manitoba, about creating a new mandatory pension plan system to address concerns about the growing number of Canadians who are ill-prepared for retirement. A recent global poll from HSBC found that four-in-ten Canadians do not feel confident about their ability to maintain a comfortable retirement, and only 24 percent have managed to save more for retirement this past year than in the year before, compared to the global average of 40 percent. Still, Ontario's provincial government introduced a Retirement Pension Plan in the fall, which met concerns that it would be challenging for small businesses and do more harm than good to the economy. It remains to be seen what other provinces will do, and while the debate may eventually fade to the background, the issue of managing an increasingly aging workforce will linger for some time.

Consumer businesses: What's the right move in 2015?

2015 resolutions

In response to the issues noted, Canadian consumer businesses would be wise to do some goal setting.

First, take a close look at your costs. Consider how the impact of the lower Canadian dollar could either help or hinder your business. If your operating costs are in Canadian dollars, and selling prices are in U.S. dollars, it could be a boon. Still, it may be more costly for your company to bring in goods and raw materials. It never hurts to monitor those controllable costs and adjust your strategy accordingly.

Second, get to know your consumers of today and tomorrow. Given current economic trends, it's difficult to forecast and predict buying behaviour. Think about what you know of your customer, what their key priorities are, and whether they are aging or may be constrained by the lower value of the dollar or their pensions. Then, consider what changes you can make today—in your cost structure, marketing efforts or product pipeline—to better meet your customers' needs tomorrow. Consumers will often drive the direction of the company. Why not listen to what they are telling you?

Third, and longer term, consider the right move for your company in response to current strategic moves in the industry around M&A and the omnichannel organization. Perhaps you need to hedge your dependency on major customers in response to increasing consolidation, or maybe you are a good candidate for a sale or exit given that multiples are high and the market is positive. Consider whether your company, brand and logistics network could benefit from an expanded omnichannel strategy; alternatively, a strategic acquisition or partnership could help strengthen your position and company value when it is time to exit.

Consumer businesses that take these measures into account when setting their strategic plans for 2015 and beyond will be well-positioned to secure their organizations for the future.

To learn more about how BDO can help your company with these and other challenges, contact your local BDO office or one of our Retail & Consumer Business Practice Leaders below:

Bob McMahon
National Retail & Consumer Business Leader
905 272 7818
Kais Aziz
Partner, International Tax
905 272 7813
Jeff Chapman
Partner, Valuations
416 369 6122
Miguel Amaral
Managing Director,
Transaction Advisory Services
416 775 7810
Jeff Noble
Partner, BDO Successcare
905 272 6247
Michael Stranz
Partner, BDO Solutions
519 772 0334
Ken Karakashian
Partner, Taxation
905 272 7807

About BDO: BDO is one of the largest national accounting and advisory partnerships in Canada with over 100 offices nationwide. Our professionals have the expertise to serve owner-managed businesses, large enterprises, public companies, the public sector, and communities and not-for-profit organizations in a broad range of industries. As a member firm of the international BDO network, we also have access to advisors around the globe with over 1,300 offices in more than 150 countries.

About BDO's Retail & Consumer Business Practice: BDO recognizes that it is critical to both build and protect your brand, as well as to take advantage of recent developments in innovation and technology. Our industry professionals understand the varying priorities and concerns for retail and consumer businesses in Canada. We help our clients across the industry prosper in both good and challenging times, grow their revenue in new markets, build their brands, and control costs to maximize profitability.

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