The holiday season is critical for retailers as many receive much of their annual revenue during the period from Black Friday in late November through to the new year.manonallard/iStockPhoto / Getty Images
As Canadians struggle to buy essentials, many consumer discretionary stocks are less attractive to investors – and the federal government’s GST holiday likely won’t help.
Even with the Bank of Canada cutting its key interest by another 50 basis points this month and the holiday shopping season in full swing, Canadians aren’t rushing to open their wallets. A recent Angus Reid study found that 46 per cent of Canadians plan to spend less for the holidays than last year, while only 8 per cent say they’ll spend more.
The holiday season is critical for retailers as many receive much of their annual revenue during the period from Black Friday in late November through to the new year. But many small business retailers say they face weak consumer demand, according to the Canadian Federation of Independent Business.
Izabel Flis, a portfolio manager at ClearBridge Investments in Calgary, says it’s not surprising consumers are feeling strained. She cites labour markets “that are displaying signs of slowing down, with the pace of new hires moderating, wage growth abating and jobless claims on the rise.”
“The consumer is cautious, price-sensitive and value-seeking,” she adds. But it’s not bad news across the board. “There are pockets out there where, even though the backdrop is challenging and the consumer is strained, retailers are benefiting.”
Grocers are well positioned, Ms. Flis says, especially those such as Loblaw Cos. Ltd. L-T and Metro Inc. MRU-T that have “very well-developed discount channels.”
Discount chain Dollarama Inc. DOL-T is another standout retailer as consumers get more frugal and spend with purpose, says Ali Pervez, vice-president, portfolio manager and research lead of equities at CI Global Asset Management.
The company posted a 5.7-per-cent increase in third-quarter sales over the previous year and boosted its expansion plan to include 2,200 locations by 2034.
“Dollarama is a poster child for offering tremendous value to consumers,” Mr. Pervez says.
On the flip side, he points to more discretionary businesses such as Canadian Tire Corp. Ltd. CTC-T. “That business has been under pressure.”
Mr. Pervez says he expects consumers will continue to prioritize necessities in 2025 and that U.S. president-elect Donald Trump’s tariff talk will create more economic headwinds.
“The businesses that will continue to benefit are the ones that provide tremendous value,” Mr. Pervez says. “It’s been a great environment to be a food retailer on a relative basis. People have to eat, so those businesses have offered enduring growth.”
The pressure on consumers is reflected in staggeringly high consumer debt levels. Last month, TransUnion reported consumer debt in Canada rose to a record high of $2.5-trillion in the third quarter.
The federal government’s two-month GST holiday, set to take effect Dec. 14, applies to consumer discretionary items such as children’s toys and clothes, snacks and books.
Christine Tan, portfolio manager at Sun Life Global Investments, says any relief is likely welcomed by consumers feeling the strain, but the GST break will only help those who haven’t finished their holiday shopping.
“The real savings is on toys, puzzles – anything that was going to be under the tree, assuming it hasn’t already been bought,” she says. “It’s hard to say what the actual impact is [going to be] because you have a Canadian consumer that, again, is still cautious, still worried about the economy and interest rates being high.”
The one subsector within retail that might see an uptick in spending from the GST holiday is restaurants. Industry group Restaurants Canada says the GST relief is expected to bring in $1.5-billion in additional revenue.
“That little bit of discounting will help at a time when, normally, Canadians dine out less,” Ms. Tan says, as they’re spending on other things.
Mr. Perez and Ms. Flis say the GST discount is likely too late in the holiday season and covers too few categories to make a big impact on retail sales. Instead, there are bigger forces at work in the coming year that could shift the consumer into a more discretionary spending mood and move the needle for companies.
“It’s the decisions out of the Bank of Canada … and the magnitude of interest rate cuts that are going to shape the overall consumer sentiment at least throughout 2025,” Ms. Flis says.