Retail holiday season to ring a little less loudly: Ernst & Young

November 03, 2008
Written by Ernst & Young
Despite a challenging economy, slumping consumer confidence and negative headlines, Canadian retailers will still see a steady flow of customers this holiday season. But those customers will be picking up more modest gifts than in previous years, Ernst & Young says.

“The retail forecast in Canada is sobering, and we don’t expect the year-on-year growth we’ve seen in previous holiday seasons,” explains Daniel A. Baer, Partner, Ernst & Young. “People will still buy, especially given the strong emotions that motivate holiday shopping. But the real story will be where they shop and what they buy.”

Baer says supercentres and warehouse clubs are primed to win in this market. “Still, the gifts people choose will be different given today’s market downturn. Big-ticket electronics will again top Canadians’ wish lists — but the question is, will they actually buy them? Without heavy promotions, the answer is likely not.”

Although retail sales were actually up 3.2% in August, the growth is linked to inflation and not necessarily higher volume. Baer expects that selective shopping to carry over into the holiday season, further weakening companies’ bottom lines.

“Consumer electronics will still be the best category in terms of retail sales. But people will be questioning whether this year’s “must-have items” really are must-haves. Instead of buying expensive LCD TVs or high-end cell phones, consumers will likely lean toward more affordable options, like DVD players or GPS systems, which will be heavily discounted,” Baer says.

Discounting items is a trend Baer expects to continue throughout the holiday season and into the new year. “Retailers are already stocking shelves with holiday gift options — it’s too late for them to adjust their orders. Discounts and other promotions are the best way to get customers into the stores and hopefully move inventory.”

Last year, Canadian retailers announced holiday price cuts to battle the loonie’s quick year-end climb to dollar parity. With the Canadian dollar falling fast in recent weeks, and gas prices limiting consumers’ will to drive far, Baer expects more consumers to shop locally this year despite deep discounts south of the border. “They may also opt for the convenience of online shopping with free delivery. But we’ll likely see the minimum order for free delivery increase to combat rising transportation costs.”

“Gift cards are another hot trend,” Baer says. “We’ve seen explosive growth in gift card popularity over the past 10 years. Because gift cards can be used for both non-essential and essential items, we’re going to see a lot of them in this type of economy.”

Because purchasers set the price, gift cards allow greater flexibility. By purchasing smaller denominations, consumers can still offer gift cards to just as many people as they did last year — which keeps them at the top of shoppers’ lists for 2008.

From a regional perspective, Baer expects sales numbers to differ from one Canadian province to the next. In the Prairies, year-to-date retail spending has already increased 10.8% over 2007, leading the country, while 2008 has seen a cooling off of growth in Alberta and British Columbia. Year-to-date, Quebec and Ontario are in line with national growth rates. Baer expects these trends to continue into the holiday season

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