Stiffer competition and a softening economy are expected to work in tandem to make
2007 a more challenging year for Canadian retailers.

The pressures may force merchants to cut prices to draw shoppers, thus pinching their profit margins, predicted Don Povilaitis, as well as retail analysts and Standard & Poor’s.

Driving a lot of the price slashing will be Wal-Mart Canada Corp., which is aggressively expanding its store base as well as its product offerings. As a sign of what’s to come, this month it fired a salvo by slicing prices on an array of items just as the crucial holiday shopping season was getting under way.

Those influences, along with a slowing housing market, don’t bode well for retailers in 2007, many analysts say.

“It won’t be a banner year,” Mr. Povilaitis said. “It will be a neutral performing year.”

Added John Chamberlain, retail analyst at Dominion Bond Rating Service Ltd.: “There’s probably a little more negative going into 2007 than there is positive.” Retailers, emerging from a relatively healthy year in 2006, have only to look south of the border for a signal of tougher times to come.

U.S.-based Wal-Mart Stores Inc., the planet’s largest retailer, is struggling to make gains as it redesigns its operations. In November, same-store sales fell for the first time in more than a decade, down 0.1 per cent from 2006. It quickly started to cut its prices, and the drastic action has moved to Canada. “It’s not going to be pretty” for anyone in its way, Mr. Chamberlain said.

Also struggling to make gains will be Home Depot Inc., the leading home improvement chain. It has been hurt by a downturn in the U.S. housing market, and the situation isn’t expected to get much better next year. “I don’t think we’ve seen the bottom yet, and I don’t see anything that says it’s going to get significantly better in 2007,” Bob Nardelli, Home Depot chairman and chief executive officer, warned last month.

Canada’s home-improvement sector will feel the crunch in 2007, and not just because of a softening housing market. U.S. giant Lowe’s Cos. plans to open its first stores in Canada next year and Rona Inc., of Boucherville, Que., will be particularly vulnerable, observers said.

Despite the pain, there are some brighter U.S. prospects. Target Corp., the U.S. discounter that caters to less price-sensitive shoppers than Wal-Mart, will probably weather the retail uncertainty a little better, analysts say. And U.S. traditional department stores, past perennial losers in the retail landscape, are beginning to experience a turnaround that will likely continue next year, analysts say.

In Canada, however, traditional department stores are losing ground to more nimble specialty stores and Wal-Mart, and that situation isn’t expected to change in 2007. Jerry Zucker, the new U.S. owner of Hudson’s Bay Co., has taken it private and is quietly working on re-engineering the operation. Sears Canada Inc. is making financial gains against the backdrop of controlling shareholder Edward Lampert trying, so far unsuccessfully, to take its Canadian division private.

And as Wal-Mart Canada moves aggressively to add a full array of groceries in new Supercentres, grocers will feel the heat. Loblaw Cos. Ltd., the country’s largest supermarket retailer, may suffer the most, analysts say.

Over the past two years, Loblaw has stumbled badly as it tried to prepare for the Wal-Mart assault. It added more non-food items and built more superstores. It will be a challenging year in 2007 as Loblaw, with new top executives in place, has warned that it will take up to three years for a turnaround.

Despite the challenging outlook, analysts are bullish about Toronto-based Canadian Tire Corp. Ltd. It is improving its stores and upgrading much of its merchandise. Another good bet is drugstore merchants, and Shoppers Drug Mart Corp., which is catering to an aging population, is high on the list.

On the fashion front, Le Château and Reitmans are top picks of Neil Lindsdell, retail analyst at Versant Partners Inc. They are carefully delivering stylish apparel at reasonable prices, and controlling their costs. As Mr. Lindsdell summed up in a recent report: “While we continue to like Le Château and Reitmans, we continue to be cautious about consumer spending growth levels in North America, although we are more confident in Canadian growth.”