Canadian retailers dogged by aggressive U.S. rivals' online offerings

Canadian retailers are struggling to fortify their defences against aggressively expanding U.S. e-commerce operators in an effort to stave off further loss of market share and erosion of profit margins in a brutal retail market.

Moves over the past year include Hudson’s Bay Co’s C$60 million (35.6 million pound) investment in robotic technology at a Toronto distribution centre, and second-largest grocery chain Metro Inc’s C$400 million investment to automate its warehouses.

Four of the top five firms in Canadian e-commerce are from the United States, led by Amazon.com Inc and Wal-Mart Stores, according to a 2017 ranking of 45 retailers that operate in Canada done by digital analytics company Chasm.

In contrast, four of the bottom five are Canadian, including Empire Company’s Sobeys, grocery operator Loblaw Co Ltd and its pharmacy chain Shoppers Drug Mart.

Metro declined to comment, while Empire did not respond to a request for comment.

Canadian retailers risk missing out on strong consumer demand at a time of economic prosperity, and ending up with a fate similar to Sears Canada, T Eaton Co and Zellers Inc, all of whom collapsed after failing to adapt to customer needs, analysts say.

Analysts point to corporate cultures that are reluctant to expand digital capabilities, fear that online operations could cannibalize in-store sales, and the scale already built up by U.S. players that makes them hard to dislodge.

“Most of the Canadian companies are fundamentally the same types of businesses they’ve always been, while the world around them is changing,” said Ashish Anand, chief executive at Vancouver-based Chasm, which specialises in the retail sector.

The aggressive expansion of U.S. companies also makes it harder for Canadian operators to hire the best talent, putting them even further behind, Anand said.

Amazon, eBay Inc, Apple Inc, Wal-Mart Stores, Costco Wholesale Corp and Home Depot Inc account for about 40 percent of annual Canadian e-commerce revenues of almost $20 billion, according to Boston Consulting Group (BCG), which predicts more than 35 percent of all Canadian retail sales growth will come from online in the coming decade.

ERODING PROFIT MARGINS

Retailers who do not move aggressively risk further erosion in operating profit margins, already below 5 percent, analysts said.

Canadian consumers research and make online purchases as frequently as U.S. shoppers, said Dan Bodley, principal, and Matt MacKenzie, partner, at BCG.

Even so, their eventual purchase baskets are about half the size of their U.S. counterparts, likely due to the smaller selection available online in Canada, they said.

As a result, Canadian retailers are losing consumers not just to the U.S. retailers’ local operations but to U.S. websites, where Canadians now do more than a third of their online spending, according to BCG.

“Customers now have more choice and they can buy globally,” said Sonia Boisvert, partner at PriceWaterhouseCoopers in Montreal, which found that Amazon is the top choice for 77 percent of Canadians who plan to shop online this holiday season. “That makes the customer attractive but difficult to get into your own store.”

Canada’s biggest grocery chain Loblaw has introduced five e-commerce businesses, expanded its click-and-collect service to almost 200 stores and engaged several “e-commerce innovators” including Instacart, said Jeremy Pee, the company’s senior vice president for e-commerce.

Despite such moves, “those that are adopting digital technologies and transforming are doing so very slowly,” Chasm’s Anand said. “They have significant challenges ahead.”