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Cash registers' ring sounding hollow

One way retailers are coping with bad times is through promotions and sales.

Peter MacDiarmid/Getty Images

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Cash registers' ring sounding hollow

Major retailers can expect sales to drop even as they cut prices to lure shoppers in the door

By Marina Strauss

Store closings. Gift cards in jeopardy. That's the subject of an ominous e-mail that has been widely making the rounds over the past few weeks. It mentions a long list of high-profile retailers, ranging from home goods chain Linens 'N Things (now in bankruptcy protection) to clothier Gap Inc. (which is shutting some stores but, as the e-mail fails to point out, opening others).

The cyber-message's suggestion that all the listed retailers will be out of business by the new year is far from the truth. But the mere existence of the anonymous e-mail, dropped into the inboxes of potentially millions of people, underlines the daunting challenge facing merchants. They're struggling to make gains during the peak holiday shopping season in the midst of a global financial meltdown and sagging consumer confidence.

Business is worse in the United States, but rapidly deteriorating in Canada. Holiday retail sales are now expected to drop 1.5 per cent from a year earlier (including automobiles), the first fourth-quarter decline since Ottawa began its system of data collection in the early 1990s, according to retail specialist Kubas Consultants. Last year, those fourth-quarter sales rose 5.8 per cent, to $109-billion.

Even worse this year, profit margins are being squeezed as merchants slash prices to entice cash-strapped shoppers.

"The one way that retailers are keeping sales up is through promotions - appreciation days for friends and family, coupons, e-mails," says Peter Farkas, vice-president of RSM Richter Inc., an insolvency specialist and retail adviser. "The ones that haven't implemented that are going to struggle."

Grim times ahead

January and February are traditionally peak months for retail bankruptcies and restructurings, and 2009 could see an unusually large batch of them. Ailing chains that are counting on the holiday shopping rush to turn around their faltering operations could be forced to throw in the towel early in the new year.

By then, the ranks of the unemployed could swell as the economy weakens and more companies let go workers. That means fewer people in the stores. They will be trimming their spending on discretionary items, such as furniture and clothing, and trading down to cheaper versions of food and other necessities.

Retail sales, which grew 5.4 per cent in 2007 to about $412-billion, will drop 0.5 per cent in 2009, after rising just an estimated 2.7 per cent this year, according to Kubas's forecast.

"I think the worst is yet to come," says George Hartman, a partner at investment banking firm Capital Canada, which deals with retailers. "I've been in depressed times like this before. I think the estimates and outlooks are way too optimistic," he adds. "When things go bad, they go real bad."

Already companies are scaling back their expansion plans - and inventory levels - for 2009. Reitmans (Canada) Ltd., which is budgeting for no sales growth in 2009, will delay some merchandise purchases until it gets a better reading of the consumer, says chief executive Jeremy Reitman. It has reduced its inventory levels and will open fewer stores than usual in 2009.

"In some of the fringe areas where we've gone into in the past, we will be taking a look at them with a much more restrictive view," Mr. Reitman says.

Miele (Canada) Ltd. is targeting sales growth of 5 per cent next year, down from the annual 20-per-cent lift that the high-end appliance maker is accustomed to in Canada, says president Jan Heck. It's starting to trim its inventory levels by as much as 15 per cent.

Nobody can say for sure how bleak the picture will get. "It very much depends on if we see significant layoffs in some industries," says Mr. Heck. "A lot of retailers are concerned right now. . We will have to work harder and smarter next year."

Tighten your belts

Consumers have been tightening their belts this fall, with disappointing results at retailers ranging from Reitmans to home-improvement chain Rona Inc. and furniture retailer the Brick Group Income Fund. Others, such as ShoppersÖ Drug Mart Corp., continue to make gains but have to offer more deals to draw customers.

In 2009, consumers will become even more price-conscious. They'll increasingly ditch Starbucks for Tim Hortons or McDonald's; or they'll drop restaurant meals for home-prepared fare.

To serve these customers, retailers are stocking up on private labels, which are priced about 25-per-cent less than well-known brand names. Store brands can ring up 15-per-cent more profit for retailers, due to lower marketing and other costs.

Retailers that carry the necessities of life - food and drugs - will fare better than those that specialize in jewellery, home decor and other discretionary items.

Even so, there can be a silver lining for retailers that can keep prices low. As Mr. Reitman says: "[Reitmans] may profit in the economic downturn, to the extent that people trade down to us."

But a weakening loonie will make it tougher next year for merchants to keep prices low. A number of retailers purchase supplies overseas with what are now more-expensive U.S. dollars. London Drugs, for example, may have to raise some product prices in 2009 if the loonie remains at current levels, chief executive Wynne Powell says. Grocers are already increasing their prices for U.S. fruits and vegetables.

As consumers rein in spending, retailers such as the Brick are delaying store openings. Landlords are putting off some of their retail developments.

Foreign retailers, suffering in their home territory, will shy away from launching stores, or expanding, in Canada in the next year. "There's a general feeling that Canada is not as much on their radar screen as it was six months ago," Mr. Farkas says.

Some may retreat altogether. Linens 'N Things is closing its 40 stores in Canada even though they were the only profitable part of the failed U.S.-based parent. But the operations here were dependent on the parent for product purchasing and logistics.

Circuit City is in a similar situation. It went into bankruptcy protection last month, dragging down its profitable Canadian subsidiary. It had to pledge as security all the assets and property owned by its chain of 772 stores, known as the Source by Circuit City.

Winners and losers

Retail winners in recessionary times are discounters and dollar stores that satisfy bargain-hungry consumers. They are able to steal market share away from rivals, including traditional department stores such as the Bay, even if their financial gains are weaker than in previous years.

Discount giant Wal-Mart Canada Corp. should come out ahead, as well as bulk merchandise seller Costco Wholesale and discount fashion chain Winners. Low-priced grocers, such as Loblaw's No Frills, should also be able to lure more customers.

Drug-store operators that do a steady business in core health-care items are in a stronger position, although their non-pharmacy products, such as paper products and greeting cards, may suffer. Quebec's Jean Coutu chain stands in good stead in this respect, with 61 per cent of its overall sales in prescription drugs. Shoppers Drug Mart, the country's largest drugstore chain, generates just 47 per cent of its sales at the prescription counter.

Even so, Shoppers weathered the recession of the early 1990s "with few visible wounds," retail analyst Keith Howlett noted recently. Shoppers managed to bolster its results - including "vigorous" prescription sales gains - while adding new stores.

"We may feel a slowdown but we don't feel it as badly as others," says Wynne Powell, chief executive of London Drugs, whose stores in Western Canada sell everything from television sets and furniture to high-end cosmetics.

But retailers offering products that consumers can do without in tough times will feel the squeeze. Among them are luxury fashion chain Holt Renfrew, the Bay and other traditional department stores, along with furniture and electronics specialists, such as the Brick and Best Buy.

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