Canadians with extra spending cash right now might find they can score deals on clothing, some discretionary items and higher-ticket purchases as experts say retailers are fighting harder for consumers’ dollars.
February’s inflation report released Tuesday shows that not only is the pace of price hikes cooling across a range of household expenses, but some products are even seeing costs decline year over year, offering consumers much-needed relief in some categories.
The clothing and footwear component of Statistics Canada’s consumer price index saw a 4.2 per cent decline year over year last month, steeper than the 1.3 per cent drop seen in January. The section including household furnishings also saw annual price declines accelerate in February.
Shelly Kaushik, economist with BMO, said in a note to clients on Wednesday that “it’s clear prices for discretionary goods are falling” in Canada.
She highlighted that jewelry prices saw the biggest drop on record in non-seasonally adjusted terms last month. While she noted that an increase in the supply of lab-grown diamonds or alternative stones could have driven prices lower for sweethearts shopping over Valentine’s Day, the simpler explanation is that the Bank of Canada’s interest rate hikes are working well to tamp down price pressures in this area.
“Consumers are pulling back on non-essential items amid elevated rates, pushing the prices of those items down. Monetary policy in action,” she said.
Retail analyst Bruce Winder tells Global News the softening economy is indeed hampering consumer spending demand, which is forcing many retailers to drop prices to make sales.
“There is discounting that’s happening right now, because retail is all about supply and demand,” he says.
Discretionary items like jewelry and clothing and higher-ticket durable goods like electronics, furniture and appliances are “softer right now” because higher interest rates are forcing households to spend more on shelter costs, Winder says.
While food inflation cooled significantly in February, the cumulative impact of price hikes over the past few years means grocery bills are still eating up a big chunk of Canadians’ budgets, he adds.
“It’s still expensive out there. So consumers have had to make trade-offs,” he says.
And retailers are taking notice of their cash-strapped customers.
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Winder says some businesses might be changing out their product lines with cheaper goods, making sacrifices on materials or size to offer less expensive options to buyers on a budget.
The Shein and Temu effect
On the clothing side of things, Winder says some retailers of outdoor apparel have had to resort to steep discounts to offload jackets and other cold-weather clothing amid an unseasonably mild winter. A lack of demand drives up unsold inventories that will often need to be offloaded for stores to make room for spring collections.
“Overall, the winter has been a lot warmer, which has been a disaster for companies that sell winter apparel and footwear,” he says.
Clothing prices have also been disrupted by new entrants into the market such as Temu and Shein. These online retailers offer very low prices at the expense of longer shipping times from production typically based in China.
Winder says Shein has been particularly popular with gen-Z youth who order “Shein hauls” of clothes that come in bulk deliveries. Temu, which sells a wider assortment of goods, also made a splash in February with multiple ads airing during the Super Bowl.
While Shein in particular has raised the ire of environmental and labour advocates who are critical of the company’s supply chain, Winder says customers who have “their backs to the wall” are more likely to buy from retailers that offer them the lowest price, period.
“They’re making massive inroads in Canada,” Winder says of the overseas retailers. “That, by definition, is changing the product mix – the price mix – where you’re seeing people buy on average lower-ticket items.”
Winder says the supply chain kinks that marked the early days of the most recent inflationary bout and drove up prices on new vehicles, electronics and appliances are mostly resolved at this point, save for certain products affected by ongoing conflicts in the Red Sea. That’s also helping to relieve supply constraints and drive down prices, he says.
But Winder notes that Temu and Shein are also causing shipping snags in their own right as they take a growing share of air freight from other producers.
Rising insolvencies as businesses under pressure
Furniture makers are finding less demand for their products amid a two-year-long downturn in the housing market tied to the Bank of Canada’s higher rates.
Furnishings are a common first step for homebuyers after their purchase goes through, but with fewer Canadians buying homes than during the height of the pandemic, Winder says companies are left trying to convince existing buyers to upgrade their appliances and furniture.
“Retailers realize that they have to really add a big sweetener on price in order for consumers to transact right now,” he says.
The rough economic environment has also pushed many retailers, including Toronto-based Bad Boy Furniture, Mastermind Toys and the Body Shop, to explore bankruptcy filings in recent months.
Business insolvencies in 2023 were up 41.4 per cent compared with 2022, according to data from the Office of the Superintendent of Bankruptcy.
Winder says it’s not just the big names who are facing liquidation sales, but smaller mom-and-pop retailers as well. Higher interest rates and “obsolete” business models might mean owners can’t secure a loan to refinance their debt and stay afloat, he says.
“They just can’t find a path to profitability. So they have to liquidate,” he says.
While layoffs have been somewhat concentrated in sectors such as tech in the past year, Winder says a growing number of small businesses and retailers going out of business means that consumer-focused sectors could also see a rise in job losses. That doesn’t bode well for an improvement in consumer spending, either, as Canadians’ incomes take a hit.
Winder predicts there will be more store closures through the first half of 2024, but that some relief might come when the Bank of Canada starts to lower interest rates, a move most economists expect sometime mid-year.
But even then, interest rates will likely not drop rapidly, nor will they likely return to their pandemic-era lows, he says.
Canada’s retail landscape will have to find a new “equilibrium” past the current macroeconomic turbulence, Winder says. He doesn’t expect the industry to find its footing until mid-2025 at the earliest.
“I think we’re going through a bit of a shakeout again,” he says.
– with files from The Canadian Press
