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TMX POV - Technology, Economy and Household Debt: 3 Factors That May Impact Canadian Retail in 2019

March 1, 2019

By Ryan Thomas, Head of Business Development - Diversified Industries

Few industries have been as impacted by technological change as retail and consumer goods. To cope with the rapid rise of e-commerce and other changes in shopper habits, many brands and store chains have invested significantly to digitize their business models, from new websites, apps and point-of-sale technology to using analytics and automation in distribution centres.

At the same time, Canada's economy is expected to slow in 2019, with the Conference Board of Canada predicting growth of 1.9%, compared to approximately 2.1% in 2018. Consumers are also feeling the pinch of high household debt levels. As of the third quarter of 2018, Canadians owed almost $1.78 in debt for every dollar of disposable income. That much debt limits consumers' ability to spend more, especially if rates creep higher.

Against this challenging and uncertain backdrop, what does the year ahead have in store for the Canadian consumer sector?

From a capital markets perspective, the sector continues to attract increased interest from investors. It has accounted for 20% of all TSX initial public offerings since 2016, more than any other sector. And despite increased volatility during the latter half of 2018, shares of consumer sector companies have experienced growth in trade activity on TSX over the past year. Shares of retailers saw trade value increase 44% year over year, while consumer products rose 33%, and restaurants were up 31%. That strong level of investor interest suggests there may be a positive sentiment for consumer stocks.

The other dynamic playing out in the consumer sector is that private equity investors continue to find liquidity in the public markets. In the past three years alone, consumer IPOs and secondary offerings have provided more than $3.6 billion in liquidity for private equity shareholders.

To get a more complete picture of what's ahead for consumer companies, it's also important to weigh the business trends impacting retailers, consumer goods companies and restauranteurs.

I spoke with Marty Weintraub, Deloitte's national retail leader, to get his perspective. He said he expects a fair amount of caution in the year ahead, as consumer companies batten down the hatches to prepare for the likelihood of a slowing economy.

His view is that brands on the two ends of the value spectrum – the luxury brands and retailers on the one end, and the deep discounters on the other – will perform relatively well. After all, the wealthy customer who buys luxury goods or shops at a high-end retailer typically doesn't change shopping habits drastically during a slowdown. And the discounters should see growth from the debt-laden middle-class consumer who will likely become more cost-conscious in a slowing economy.

Weintraub is more worried about the "mushy middle." Those are the brands, products, stores and restaurants that have a commoditized and undifferentiated offering and that are trying to be all things to all consumers, rather than carving out a more focused niche. Weintraub sees them as the most vulnerable – especially those who haven't embraced technology and digitization, expensive as those investments may be.

E-commerce still only accounts for about 10% of shopping in Canada, he said. However, the more important metric is the degree to which digitization is influencing sales, or prompting shoppers to choose one product or store over another. That figure is more than 50%, meaning that digital capabilities factor into consumer decision-making more than half of the time.

"It has never been more important to know your customers better, use data and analytics and take a strategic approach to digitization," Weintraub says.

In addition to benefiting consumers, artificial intelligence, analytics and robotics all have another dimension that appeals to retail and consumer goods players: cost containment. Automating and digitizing routine tasks can free up employees for higher-value work and lets the company in question keep a tighter lid on expenses.

Many in the industry are trying to find ways to reduce the amount of human labour through the use of innovative technologies like automated shelf pickers and robots that help manage inventory, for example. However, Weintraub doesn't expect massive job losses. Instead, he foresees an evolution of what will be required of employees in the future. He pointed to analytics as an example. To fully capitalize on the opportunity that analytics provide, retailers will have to contend with massive amounts of data which has to be interpreted before it yields any actionable insights. That means demand for people with data science experience – either hired from the outside, or retrained from within.

There's no doubt the year ahead promises to be a dynamic one for Canada's consumer sector, both in terms of opportunities and challenges. What's clear is that the financial health of the consumer, the broader economic picture and the unrelenting pace of technological change will be focal themes in 2019 and beyond.

This article is provided for information purposes only and is not intended to provide any type of advice. This article is not an endorsement or recommendation of any specific securities in any industry nor is it an invitation to purchase securities listed on TSX Venture Exchange or Toronto Stock Exchange. Listing on TSX Venture Exchange or Toronto Stock Exchange does not guarantee the future performance of a security or an issuer.

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