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Yikes! Canada is turning into a discount nation

Canadians got hooked on deals during the recession.

Canadian investors probably know this better than anyone, but in case you hadn’t noticed, Canada has become king of the discount. The country’s best retail stock, Dollarama Inc., returned 207.2% in the four years prior to Sept. 17.

By comparison, the next-best performer in the consumer discretionary sector was Canadian Tire Corp., at 71.1%.  Not bad, but only one-third of Dollarama’s gain. Then came the grocers, trailing well behind, with Metro Inc. top- ping the Big Three at 52.3%. At the bottom: Reitman’s at -49.1% and Rona Inc. at -11.7%, two retailers not exactly known for offering deep discounts.

There are, of course, plenty of other indicators pointing to Canadians’ general love of a bargain.

According to Nielsen data, 37% of all retail sales in Canada are made with a temporary price reduction, compared to 27% prior to the most-recent recession. In the U.S., the current figure is just 30%.

Likewise, three-quarters of Canadians read flyers–far more than any of the 11 other countries studied by BrandSpark International’s 2013 Global Shopper study.

But our love of a bargain goes much deeper than flipping through the weekly flyers. Canadians now are willing to work to save money. Coupon clipping, visiting multiple stores and purchasing private label–this is how we shop.

“Look at the strength of Walmart and Target coming , and the discount banners,” says Robert Levy, CEO of BrandSpark. “Then look at the amount of time people are spending on flyers and the penetration of private labels. Discount is part of our DNA.”

It sure seems so. Carman Allison, director of consumer insight at Nielsen Canada, says discount sales are growing at 6% while regular-priced merchandise is down 1%, for an overall growth of 2%.

In comparison, the U.S. market, home to the beloved discount “outlet” malls–where parking lots often brim with provincial plates–is also growing at 2%. Meanwhile, promoted sales are up 1% and non-promoted products are up 2%.

The difference? American figures are largely static, whereas back home, we keep boosting our bargain hunting.

“Discount is where the growth is happening in the Canadian consumer marketplace,” Allison says.

“They’re capturing more of the consumer’s wallet every year. However, if you look at conventional retail, it’s the middle ground where the battle is being lost right now, while the premium side is doing incredibly well.”

For example, Hudson’s Bay Co. plans to open seven high-end Saks stores and 25 discount stores in Canada once its US$2.9-billion deal for the U.S. department store chain closes.

On the grocery side, Whole Foods now has eight stores in Canada, all of them surrounding Toronto and Vancouver, with plans to open 40 more, enough to become a $1-billion retailer in Canada.

Meanwhile, Sobeys’ newish discount imprint, FreshCo, is gaining market share in Ontario and even forcing Metro Inc. to convert some of its corporate stores to its Food Basics discount banner.

Allison agrees a polarization is happening in retail. But he points out there’s also one occurring more broadly in society.

Nielsen’s most recent quarterly consumer confidence survey figure of 98 (with 100 being the baseline) means Canadians overall are feeling pretty neutral about the economy. That number drops to a pessimistic 78 for those making less than $30,000 a year, a number that rises to 109 for those making more than $70,000.

In other words, the rich are feeling richer and the poor are feeling poorer, but both shop discount, albeit for different reasons.

“Low incomes need the low prices, but high incomes love the low prices,” Allison says.

Unfortunately for margin-strapped Canadian retailers, things are only going to get worse. Canadians are swimming in debt with an average debt-to-income ratio of 163.4% (for every dollar they earn, Canadians owe $1.63.)

We’re also getting older and, as noted by Sal Guatieri, a senior economist at BMO Capital Markets, seniors spend a lot less on almost everything but health care and reading materials.

Another headwind is that interest rates will rise at some point. As they do, so will mortgage rates and the cost of living, especially for first-time, millennial-aged homebuyers.

“You can’t default on your mortgage, but you can sure figure out ways to save when it comes to your weekly grocery shopping,” Allison says.

Nielsen data shows that a mere 1% rise in interest rates will put the squeeze on up to 40% of household budgets.

That doesn’t necessarily mean our food bills will get smaller, he says. In the most recent recession, health and beauty products took more of a hit than food, though people were more likely to move down the quality chain and did more pantry loading.

So far, this extra push on price hasn’t hurt as much as it could, thanks largely to a stronger Canadian dollar, which, believes CIBC World Markets retail analyst Perry Caicco, has allowed retailers to increase their price-cutting ways without mangling their margins.

Nevertheless, he says, “Canadian consumers have become increasingly addicted to deals and are more skeptical than ever about regular prices.” A possible end result? Further retail consolidation, Caicco predicts.

But whether retailers decide to compete on price or service, the one thing they can’t afford to be is average, Levy says.

Mainstream retailers can try to fight against the discounters with loyalty programs, more private-label, profitable offerings, diversification (such as Loblaw’s housewares and Joe Fresh apparel), promoting higher-margin categories and generally pushing the manufacturers harder on price.

Then there’s innovation, a word often thrown around without much care. But take a look at Sobeys’ recent rebranding–“Better food for all”–and its partnering with famed British chef and health nut Jamie Oliver.

Perhaps this is a way around the discount wars. After all, health is a constant driver of consumer behaviour, even if convenience is still No. 1.

“The danger for any brand in any segment,” says Levy, “is trying to be all things to all people.”

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