Canada's Changing Retail Market
Consumer Trends Update - Summer 2013
2. Structural Changes in the Retail Landscape
The Canadian retail marketplace continues to evolve: some types of retail outlets have grown, while other more traditional retail outlets have stagnated. More recently, retailers are expanding beyond their traditional distribution channels to better deliver goods and/or services in an environment of changing consumer behaviour and market segmentation. This section examines the shifting nature of the physical retail marketplace in Canada, and its impact on Canadian consumers.
i) Bricks and Mortar Retail Outlets in Canada
Shopping malls have been a staple of the Canadian retail landscape since their emergence in the 1960s and 1970s. Although malls in Canada occupy 39 percent less space per capita than American malls, Canadian malls, on average, have attracted higher sales per square foot of retail space. Since matching sales outputs of American malls in 2004 (US$380, per square foot), Canadian malls have outperformed American malls by an increasing margin (CI, 2012b). As of 2011, Canadian malls have generated nearly US$600 in retail sales per square foot per year, compared with the American average of slightly above US$400 in retail sales per square foot (CI, 2012a). The Yorkdale Mall in Toronto draws the largest retail sales per square foot in Canada—approximately $1,200 per square foot—and ranks second in retail sales per square foot in North America, after the Forum Shops at Caesars Palace in Las Vegas ($1,400 in retail sales per square foot) (Bula, 2011a).
In spite of this success, the growth of malls in Canada has been curtailed by the limited amount of commercial space available for retail development in traditional retail urban spaces along with retailers' desire to diversify their locations and retail outlets. Canadian municipalities have reduced the allocation of urban land for new retail space in favour of industrial and office space, which has reduced the number of large regional shopping centres being built (Bula, 2011a). Since 1989, only two major enclosed shopping malls have been built in Canada: Vaughan Mills in Toronto and Cross Iron Mills in Calgary. To cope with the limited retail space available in downtown areas, existing shopping centres are renovating and expanding within their allocated space, usually building upwards and adding additional floors. Retailers have also established new retail outlets outside of the city centre to accommodate big box retailers, such as in power centresFootnote 2, to overcome the limited space available in more traditional shopping malls and improve accessibility to serve larger regions (Simmons and Kamikihara, 2011).
The Demise of Strip Malls
Strip malls are becoming less relevant in the Canadian retail landscape, although they are still a ubiquitous presence in most suburban landscapes, as consumers' preferences have shifted to shopping at large, multi-levelled shopping centres and/or power centres. Many strip malls across Canada are in need of significant restoration, and vacancy rates are soaring (Hopper, 2011). The curtailment of strip malls can have a substantial impact on small communities in Canada. These small, open malls are a major source of employment for many small communities and are a key provider of part-time work for students and young people (Beckman, 2011). Strip malls also provide easy accessibility to goods and services for small, surrounding communities that may not have the means or time to travel to shopping malls or power centres outside the core.
Since their entry into the Canadian market in the late 1980s, there has been "widespread development and clustering of big box stores into a broad range of power centre venues" (Hernandez, 2011). Between 2006 and 2010, the number of power centres in Canada increased from 451 to 487, a rise of 8 percent (Hernandez, 2011). Although the growth rate of power centres slowed between 2009 and 2010 due to the poor economic climate, the growth rate remained steady due to previously committed retail developments by retailers. Canada also experienced an increase in power centre vacancy rates between 2006 and 2009; however, there was still a dramatic growth in tenants from 8,627 in 2006 to 12,086 in 2010, a rise of 40.1 percent, as the number of big box stores per power centre increased along with the increase in power centres (Hernandez, 2011).
|Year||Number of Power Centres||Total Number of Tenants||Number of Big Box Stores||Average Number of Tenants per Power Centre|
|Source: Hernandez (2011)|
|Change from 2006 to 2010|
However, the development of power centres has varied considerably from region to region across the country, leaving the retail landscape concentrated and uneven. In 2010, Ontario had the most power centres in Canada (211), almost triple the number of centres found in Quebec (74), Alberta (73) and British Columbia (70) (Hernandez, Erguden and Svindal, 2011). Hernandez, Ergunden and Svindal (2011) posit several factors that could contribute to this uneven development, including
"restricted land availability and associated development costs, land-use planning issues, the existing retail infrastructure and cultural-competitive concerns of US and other international retailers with regard to entering French-speaking Canada or smaller markets across Canada".
Even though power centre development has been uneven, these retail structures have provided stronger inventories (e.g. more product variety and selection) across all major urban markets (CI, 2011b). In contrast to the past, where power centres were "anchored by large grocery, general merchandise, hardware and electrical retailers", they now have a diverse mix of new players, including sporting goods stores, fashion stores, pharmacies and ancillary services (e.g. restaurants, financial institutions and entertainment services) (Hernandez, Erguden and Svindal, 2011). Power centres have adopted more aesthetic and consumer-friendly designs, including bus stops, bicycle lock-ups and racks, pedestrian walkways and seating areas). Overall, this provides a highly functional retail space for Canadian consumers. However, it's important to note socio-economic downsides arise for vulnerable segments of the population, which will be outlined later in the report.
Small businessesFootnote 3 are often identified as the backbone of the Canadian economy. As of July 2012, small businesses accounted for ninety-eight percent of businesses operating in Canada (Industry Canada, 2012). These firms contribute more than 30 percent to Canada's gross domestic product, and employ nearly five million Canadians, or 48 percent of the total labour force in the private sector (Industry Canada, 2012). Of all industries, the retail industry represents the largest segment of small businesses in Canada with more than 146,000 firms employing more than 795,000 individualsFootnote 4 (Industry Canada, 2012). While there are a large number of small retail businesses operating in Canada, the top 124 retail organizations still control 75% of the non-automotive retail sales (Daniel and Hernandez, 2012). Nevertheless, small businesses play an integral role in Canada by establishing and maintaining employment opportunities, serving consumers and driving and shaping local economies and communities (Gulluce and Parent, 2011).
Canadian Small Business during the Economic Downturn
From 2000 to 2007, small businesses in Canada "experienced a roller coaster of strong growth", which heavily subsided in 2008 with the proliferation of the 2008–09 global economic downturn (Cooper, 2009). The national economy suffered from a decrease in gross domestic product, an "increase in unemployment", and a "decline in business activity and consumer confidence" (Gulluce and Parent, 2011). Canadian small businesses in the retail sector faced the same challenges as all small businesses operating in Canada (i.e. decline in demand for products and services, debt), and had to shift and adjust their business practices to maintain their competitiveness within the Canadian economy (Gulluce and Parent, 2011).
A survey completed by the Canadian Federation of Independent Business revealed that small businesses, in general, for example, adjusted their sales and marketing techniques, including introducing new products and services, reducing prices and increasing their advertising and promotional efforts, to remain competitive during the global economic downturn (Gullace and Parent, 2011).
Canadian small businesses had several advantages in the marketplace to aid their operations through the global economic downturn. Most notably, a strong and stable banking system provided small businesses with the opportunity to secure credit at a relatively low cost (Cooper, 2009). Secondly, Canada's domestic economy and financial markets remained relatively stable when compared to other parts of the world allowing an environment for small businesses to continue to thrive (Cooper, 2009). Lastly, a strong Canadian dollar also reduced the costs for small businesses on imported materials, finished goods, new technologies and in recruiting talented employees (Cooper, 2009). Overall, the stable Canadian markets coupled with the flexible and adaptive business practices of small businesses contributed to small businesses "helping Canada move forward from the 2008–2009 recession" (Brodie, 2011).
ii) Multi-Channel Retail Outlets:
Retailers are adopting new forms of business in response to shifts in the macro-economic environment and in consumer behaviour.
"New technologies, global access, enhanced mobility, social media: each of these has had a profound impact on how consumers gather information and make purchase decisions. This, in turn, has shifted how retailers target, attract, maintain and engage with their customers" (PricewaterhouseCoopers [PWC], 2012).
To cope with the increasingly fragmented consumer demographicFootnote 5, retailers are embracing multiple distribution channels (multi-channel retailerFootnote 6), and rethinking traditional models to offer their consumers a variety of ways to purchase products and services. Furthermore, PricewaterhouseCoopers' Demystifying the Online Shopper – 10 Myths of Multi-channel Retailing reports consumers are not shifting their purchases from one channel to another, but, in fact, embracing multiple-channel retail outlets and "spending more" with these retailers (PWC, 2012).
Although brick and mortar stores still account for approximately 95% of all non-automotive retail sales, the proliferation of retail electronic commerce continues in Canada. In 2010, Canadians purchased $15.3 billion in goods and services using the internet, up from $12.8 billion in 2007, and nearly double 2005 levels (7.9 billion) (Statistics Canada, 2008; Statistics Canada, 2011c; Standing Committee on Industry, Science and Technology, 2012). More so, between 2007 and 2010, the number of orders placed online increased from 70 million to 113.1 million per year, with the "average value of internet orders per person" totalling $1,362 in 2010. (Statistics Canada, 2011a; Statistics Canada, 2011c).Footnote 7
This growth in electronic commerce is attributable to the advancement of consumer technologies, coupled with a largely web-connected society that is stressed for time (Cooper, 2011). Despite this, Canadian retailers are still lagging behind the United States in terms of electronic commerce capabilities as the online retail environment in Canada is considered a "huge and largely missed opportunity in Canada" (Cooper, 2011). Factors contributing to the lag include: a "lack of access to capital" to fund new technological development, the high investment costs of technological upgrades for small and medium-sized businesses, and "concerns with security and consumer protection", amongst others (Standing Committee on Industry, Science and Technology, 2012; Nowak, 2012). Nevertheless, the potential market for electronic commerce is vast in Canada with approximately 79 percent of Canadian households connected to the Internet in 2010, and smart phone penetration expected to reach 100 percent by 2014 (Standing Committee on Industry, Science and Technology, 2012).Footnote 8
The Re-emergence of Catalogues
Beyond brick and mortar and internet-based distribution channels, retailers are exploring other channels to expand their business into new segments of the market. For instance, print and in-store catalogues have re-emerged as a popular staple for stores such as Ikea, Anthropologie and H&M. The catalogue, once considered costly and outdated, is now considered a dynamic tool for targeting niche markets.
"The most innovative catalogue practitioners are pursuing expanded versioning, targeted messaging and special tactile elements designed to capture attention and provoke response through any channel. Many are reinventing the catalogue as a premium marketing tool, deploying high quality materials and creative content to connect with audiences who value such detail" (Australian Direct Marketing Association, 2012).
Although catalogues have lost the traction they once held in the retail marketplace, they serve as an important tool for informing consumers of new products as well as directing purchases into niche markets through brick and mortar stores, internet-based distribution channels and mail order & call centres. (Beasty, 2012).
iii) What does it mean for consumers?
The Canadian retail marketplace continues to adapt and evolve as it attempts to better meet the needs and demands of Canadian consumers. As some types of retail outlets, such as power centres, have become more prevalent in the retail marketplace, others, such as strip malls, have become less relevant. Shopping malls continue to be a staple of the Canadian retail landscape; however, the lack of commercial space for retail development in city centres has further pushed retailers to shift their retail outlets towards more efficient and innovative store formats, such as power centres, "to easily reach their critical mass". (Daniel and Henderson, 2012).
Many consumers will benefit from the growth and development of power centres, as they provide convenient one stop-shop experiences that are easily accessible off major transportation routes, and are normally located close to large housing developments in suburban areas (Parlette and Cowen, 2010). However, some consumers may be negatively impacted by the lack of preservation and/or development of retail outlets in central locations. Some demographic segments may face accessibility issues with respect to power centres as they do not own a vehicle nor do they have other means to easily travel to such locations. This may also limit an individual's choice in terms of products and prices available in retail outlets that are close in geographic proximity. Some vulnerable population segments, including seniors and disabled individuals, may also face problems in navigating around the large spaces that dominate the power centre landscape, or transporting their purchases from the power centres back to their residences, particularly if they do not have access to a vehicle.
Consumer Stories of Accessibility and Vulnerability
Hammond (2012) and Sanders (2012) both noted the closure of several grocery stores in downtown locations of Winnipeg, and the impact on seniors, students and low income consumers who resided in the area. Often referred to as food deserts, neighbourhoods with poor access to grocery stores that offer fresh and affordable food create accessibility issues for local residents who are required to spend extra time and money to take a bus or a cab to reach a grocery store outside of their community. Both authors also acknowledged individuals, out of ease, normally turn to shopping for their groceries at local convenience stores, which normally only offer high-energy, low-nutrition packaged foods with limited options for real, fresh food (Hammond, 2012; Sanders, 2012). This, in turn, may also cause negative health issues in these communities as individuals are not eating a healthy, recommended diet.
Also, see Discount Retailer Fields to Close (McKenna, 2012): Article speaks of the planned closure of Fields Department Stores, a major retailer in western Canada, and the potential impact on small towns to purchase basic goods.
The expansion of retailers into different distribution channels, most notably internet-based electronic commerce, provides a variety of advantages to the consumer. First, electronic commerce allows a time-constrained consumer the convenience of shopping at any time of the day rather than adhering to the operating hours of brick and mortar outlets. Online retail outlets also provide consumers with a large variety of products to select from, often unmatched by traditional retail outlets, as well as the ability to research, review and price match products from a variety of retailers.Footnote 9 These new distribution channels aid consumers in making confident and informed purchasing decisions in the retail marketplace. Multi-channel retailers also provide consumers with a variety of means and options to purchase products and services from retailers, such as ordering a product online and picking it up in store, or ordering a product in store and having the item shipped directly to your address. Lastly, multichannel retail outlets provide a competitive advantage over online-only retail outlets as consumers facing customer service issues (e.g.: returns). For example, if a consumer purchases a product online from a multichannel retailer, and an issue arises with the product, the consumer can redress the problem in a brick and mortar location of the multichannel retailer. However, it's important to note that some distribution channels within a multichannel retail organization remain distinct and only loosely connected or operat[e] as separate silos, which may raise issues amongst some consumers in terms of inconsistent product offerings or prices throughout a retailer's different channels or when attempting redress through a channel different from the original purchase (IBM, 2009; PWC, 2012).
Several shortfalls exist with electronic commerce. First, despite significant harmonization efforts, consumer protection laws in Canada at the provincial and federal level are still not uniform across the country, especially as they relate to new concepts like e-commerce [and] social media (Standing Committee on Industry, Science and Technology, 2012). Here, governments have identified a need to revise and update the current consumer protection framework to ensure the rules [are] clear for all stakeholders across the board (Standing Committee on Industry, Science and Technology, 2012). Also, the issue of consumer safety online is a fundamental issue in e-commerce as individuals are not confident releasing their personal information or processing secure financial transactions onlineFootnote 10 (Standing Committee on Industry, Science and Technology, 2012). As well, when making a purchase online, it's difficult for a consumer to know how reliable the merchant may be if it's an unfamiliar brand name, or to determine the quality or physical attributes of the product.Footnote 11
- Footnote 2
According to the Centre for the Study of Commercial Activity, power centres are a group of three or more big box stores arranged around a central parking pad, with ancillary commercial activities.
- Footnote 3
Industry Canada defines small business as firms that have fewer than 100 employees.
- Footnote 4
The majority of small retail businesses operating in Canada are concentrated within the "grocery and convenience stores, car dealerships, pharmacies, gasoline stations, clothing stores and appliance retailers" (RBC, 2008).
- Footnote 5
The changing and evolving economic climate mixed with diverging consumer sentiment, determined by an individual's education, employment status, viability and household status, has influenced consumers' purchasing habits and behaviour, and, consequently, fragmented the consumer economy (Melnick, 2011).
- Footnote 6
A retailer that sells products and/or services directly to the public through more than one distribution channel (e.g. bricks and mortar, electronic commerce, catalogue ordering, etc.).
- Footnote 7
It's important to note that retail organizations have faced "significant challenges in integrating their online, catalogue and in-store operations", which,in turn, has made it complex to track and capture reliable data on multi-channel operations (PWC, 2012; Hernandez, 2013). For example, if a consumer orders a product online and picks-up the product in store, or purchases a product online and returns the product in store, retailers face difficulties in determining where to allocate the sales and returns within their financial statements.
- Footnote 8
For more information on mobile commerce in Canada, please see Industry Canada's Consumer Trends Update on Mobile Commerce – New Experiences, Emerging Consumer Issues.
- Footnote 9
Online shopping is also important for driving competition in speciality products. In speciality retail markets, the internet allows these retailers to aggregate markets and offer better selection and prices to customers across a broad geographic area. Traditionally, speciality retailers existed only in large metropolitan areas where a sufficiently large enough population base existed that could visit their retail outlets.
- Footnote 10
"One estimate is that over 35% of Internet users will not give their credit card information online because of security concerns. That's a large chunk of people who are just not engaging in e-commerce and who could be." (Standing Committee on Industry, Science and Technology, 2012).
- Footnote 11
In 1999, the OECD developed guidelines for consumer protection in the context of electronic commerce to ensure that consumers are no less protected when shopping online. The guidelines reflect existing legal protection available to consumer representatives, and are intended to help eliminate some of the uncertainties that both consumers and business encounter when buying and selling online. The guidelines have played a major role in assisting governments, business and consumer representatives to develop and implement online consumer protection mechanisms without erecting barriers to trade. For more information, please see:
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