Strong sales but lower profits for many local businesses, retail reports suggest

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Strong consumer spending patterns across Canada and particularly in Ottawa seem promising, but the data show only part of the picture, experts agree.

Data from various sources show that consumer spending is on the rise across Canada, with retail sales in Ottawa outperforming most other major Canadian cities. However, higher inflation and labour costs mean profit margins for businesses are shrinking.

Barry Nabatian, director of market research at Tanner-Shore & Associates, said he estimates that annual retail spending in Ottawa will increase by $1 billion over the pandemic years, from $14 billion to $15 billion, but it’s a double-edged sword.

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“In Ottawa, generally, incomes are high, which is good for business, and tourists are coming back and business travellers,” said Nabatian. “We can be happy there’s improvement and businesses are doing better than last year, but this does not mean it’s good. Because of inflation, there’s more being spent, but profitability is lower. Chain stores can absorb higher wages, but independent and mom-and-pop shops are in deep trouble.

“All of them have a hard time finding workers and have to pay more for wages and product, so less profitability.”

While some retailers such as Canadian Tire saw some of their best years during COVID, when people were stuck inside and focused on activities like home improvement, experiential bricks-and-mortar retail is now on the rise, Nabatian said. Pharmacies also continue to be popular as people battle the “direct and indirect impacts” of the pandemic, he explained.

Data from the Canadian Chamber of Commerce show that spending in Ottawa in May was up almost 10 per cent year over year, placing the capital at the top of the rankings for consumer spending for cities across the country.

“Most major cities’ spending is turning negative,” said Stephen Tapp, the chamber’s chief economist.

Ottawa is an “outlier” when it comes to its “resilient” local economy, Tapp continued, partially due to a steady job market and stabilizing housing market. The chamber’s Canadian Survey on Business Conditions Report found that businesses are “optimistic” and “doing better than before,” he added. “Economic optimism” was found to actually increase spending among Ottawans, the chamber found.

“When people have stable jobs and homes, it’s a pretty good outlook. Ottawa’s economy has been pretty robust,” Tapp explained. “The story for Ottawa is pretty positive.”

But as inflation rises, “profit margins will be squeezed,” he added, saying the chamber’s survey respondents said they expect profitability to fall.

A recent Colliers 2023 Retail Outlook found consumers are still spending, even though retail sales have cooled slightly from last year when prices spiked and interest rates began to rise. 

Canadian retail sales climbed 2.4 per cent in March compared with the same month a year earlier, outperforming most developed markets around the world, the report noted. By comparison, U.S. retail sales edged up 1.6 per cent and dropped in the U.K., France and Germany, the report said.

Overall, Canada’s strong population growth compared to other developed countries has continued to act as a tailwind for retail sales in Canada, the report said. Sales have been highest in provinces that recorded a significant influx of Canadians from other parts of the country during the pandemic, it added. Sales have also been strongest in regions with a lower cost of living.

“The extreme drop during COVID lockdowns led to years of ‘pent-up’ demand for everything from international flights to cars to live sports to music events and the economy is only just now adjusting to these new levels of demand for ‘experiential’ retail,” the report said.

New retail sales figures to be released by Statistics Canada this week could show signs of softening consumer spending and demand as borrowing costs rise and the labour market weakens, economists predict.

“Consumer spending was surprisingly resilient early in 2023, with a 5.7-per-cent annualized increase in the first quarter,” Royal Bank of Canada assistant chief economist Nathan Janzen and economist Carrie Freestone said in a client note on Friday.

Yet much of that boost came from strong spending in January and more recent monthly readings have been softer, they said.

“We continue to expect spending to flag over the second half of this year, even with surprising resilience year-to-date,” they said.

Despite the high-profile shuttering of U.S. retailers such as Bed Bath and Beyond and Nordstrom, the vacant space has been rapidly absorbed in most markets, the Colliers report said.

“Retail has nine lives,” said Adam Jacobs, senior national director of research with Colliers Canada. “There’s a lot of focus on some big store closures in Canada, but if we zoom out and look at the overall nationwide trends, those are positive.”

– With files from The Canadian Press

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