TORONTO (Reuters) - Canadian retailers face a tough choice this holiday season: either hold the line on prices and risk scaring off consumers, or cut prices and trigger a downward spiral of profit-smothering discounts.
Ed Strapagiel, executive vice president at KubasPrimedia, a market research firm in Toronto, said the price slide has already started, and could accelerate this weekend.
The Canadian operations of Wal-Mart Stores Inc are planning their first “Black Friday” promotion at the end of this week. Strapagiel said rivals will likely follow suit, mimicking the big sales featured by their U.S. counterparts on the day after U.S. Thanksgiving.
“Other retailers are going to try, too,” he said. “Regardless of any evidence that this is a good thing to do, they’re going to feel like they have to compete.”
Retailers may have little choice if they want to lure Canadians into malls. The mood among shoppers has soured since this year’s stronger-than-expected back-to-school season.
In October the Conference Board of Canada’s index of consumer confidence slumped to its lowest since May 2009 as negative economic headlines gave Canadians reasons to worry about the future.
Holiday budgets are tight, and consumers will likely choose basic gifts over luxury goods, the experts say.
According to Deloitte’s holiday shopping survey, 40 percent of Canadians plan to spend less this holiday season than they did last year, and only 5 percent plan to spend more.
Ernst & Young is forecasting 2 percent sales growth over last year, in a “heavily promotional and highly competitive market.” Last year it forecast a 2 to 3 percent gain.
“If ... it’s not that cold - it doesn’t feel like the winter is here yet - that’s going to be a problem, and retailers are going to start panicking,” said Jean-Philippe Vorsanger, retail consulting lead with Deloitte Canada, who said colder weather puts consumers in the mood for Christmas.
That said, Vorsanger doesn’t necessarily see big discounts, because many retailers are carrying modest inventories. But that could change if consumers don’t start spending in November and early December, he said.
Sal Guatieri, senior economist at BMO Capital Markets, sees U.S. competition driving moderate discounts only.
“We’re not in recession territory yet, so I don’t think Canadian retailers will hit the panic button and slash prices,” he said. “But at the a same time they need to be mindful of cross-border shopping, and they will try to keep sales here.”
Analysts disagree over how many shoppers will trek south in search of lower prices this holiday season. The strength of the Canadian dollar, which boosts the buying power of Canadian shoppers, has fueled the trend in recent years.
Deloitte found 32 percent of respondents would shop in the United States this year, down from 40 percent last year, reflecting high gasoline prices and border hassles.
But BMO’s research suggested an increase in cross-border shopping, with 18 percent of respondents planning to travel, up from 13 percent.
The lure of American stores is particularly strong on Black Friday. The traditional start of the U.S. shopping season has never been much of an event in Canada, which celebrates Thanksgiving in October, but that may change as retailers woo Canadian consumers.
Walmart Canada has run sales on that weekend in the past, but will brand the sale “Black Friday” for the first time this year. Sears Canada, which ran a Black Friday price-matching promotion last year, is planning a similar event this year as well.
Target Corp’s first Canadian stores will not open until 2013, but the second-largest U.S. discount chain could still have an impact this season.
With Target buying leasehold interests in up to 220 Zellers locations from Hudson’s Bay Co, this Christmas gives Zellers a chance liquidate inventory, Strapagiel said. That could force other discount stores to lower their prices.
“They were probably a little circumspect early in the year,” said Strapagiel. “But they do have a lot of stores out there with a lot of merchandise.”
A Zellers spokeswoman said the company is not planning any special sales, but many stores will close before next Christmas. The chain is even running a promotional campaign called “Festive Finale.”
To be sure, all is not doom and gloom for Canadian retailers. Daniel Baer, national retail industry leader at Ernst & Young, said weak sales growth so far this year means pent-up demand could surface during the holiday season.
“In the back-to-school and the holiday season, the emotion does take over a little bit,” said Baer.
Canadian Tire Corp, one of the country’s biggest retailers, said it is pushing kitchenware this season.
Deloitte’s survey also suggested gains in electronics sales, with 34 percent of consumers planning to buy a technology gift, compared with 28 percent last year.
Big-box electronics retailer Best Buy said it is expecting sales in Canada to improve over last year, driven by cell phones and tablet computers, but also gaming, thanks to big launches like “Call of Duty: Modern Warfare 3.”
Editing by Frank McGurty and Janet Guttsman