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ICSC 2003 - Toronto:
The More Things Change...

By Stu Wells                 October 3, 2003 

The economy I mean. It is Wednesday, and I am at the Toronto Metro Convention Centre. I have just come from the morning session of the International Council of Shopping Centres ("ICSC") deal making and trade exposition where conflicting messages and uncertainty abound.

Michael Kercheval, President and CEO of ICSC, who presented the state of the industry address yesterday at lunch, gave us a hint of what is to come. He noted that attendance at the convention this year is comparable to last year. Michael suggested that this is quite an accomplishment, all things considered. Asking around though, it seems the consensus is that registration is down, maybe a lot. There seems to be a lot fewer booths and a whole lot less energy than last year, which wasnít a stellar year either. Word on the trade floor ranges from "itís quiet" to "itís dead".

In contrast to Canadaís surprisingly vibrant economic performance last year, which ran counter to that experienced by most of the western economies, Canadaís economy has lost momentum in 2003. GDP is actually down in the first few quarters. Factors such as SARS, the lone but devastating case of mad cow, the perceived economic risks of the Iraq war, the black-out, forest fires, considerable inflation in the Canadian dollar (significantly reducing export profits), and a slower build-up in inventories (Michael declined to mention Jean Chretien Ė maybe he was being polite) have caused considerable weakening in growth. In general there has been a very small increase in business investment and job creation relative to last year and the rate is falling. He did point out that more jobs were created in Canada in 2002 than at any time in history, so we should not get too pessimistic when comparisons are made to last year. Inflation has declined to less than 2%. The message is not an overly optimistic one.

In the words of David Dodge, 2003 has been the "year of the shocks" in Canada.

Sales in Canada are generally doing well, but most analysts expect reduced growth in the later part of 2003. Very strong auto sales and housing and related product sales have led the way in the meantime. Excluding auto sales and inflation, there has been a general decrease in retail sales in the first 8 months of the year relative to last year. While many indicators seem to be pointing the wrong way, Michael says that many commentators are nevertheless predicting generally better performance in the U.S. and Canada, starting by year end. Disposable income is going up, interest rates remain at record lows and a remarkably strong housing market persists. The retail industry continues to innovate. Unfortunately, it seems more than ever, it has to. Challenges abound.

Todayís Economic Retail Revue panel was moderated by Michael Vaughan, host of ROB TVís, the Bottom Line.

Keith Howlett, analyst of Desjardins Securities, Dr. Ken Jones, Director, Centre for the Study of Commercial Activity at Ryerson University and John Williams, Senior Partner of John C. Williams Consultants Limited, rounded out the panel and reviewed the present Canadian retail economy and shared their insights on the year to come.

John Williams observed that retail sales overall havenít gone down over the last number of years, just the shares of many individual retailers. Competition has increased like never before. Boomers have been the consumer engine for decades but are now spending less time shopping and a lot less money on products. It is an age thing. Boomers are less inclined to keep abreast of fashion and interest in fashion is dropping. On the positive side, Boomers are shifting spending to services and entertainment, the delivery of which can fit well into the mall setting. Traditional centres need to freshen up to capitalize.

Ken Jones identified some factors which are driving the direction of retail in Canada. He noted that almost 40% of Canadians live in the 4 largest cities. This enables U.S. and offshore retailers to test the market in Canada and reach a very large number of consumers without huge capital expenditure. As a result, increased competition from new retailers is increasing rapidly in the major markets. He noted that there were 400 European retailers in the U.S. that are not yet in Canada. Many will come here, and that is good for consumers.

High levels of consumer debt remain a debilitating factor for retail. Some deflation is evident and some sectors have really suffered in the last decade. Sporting goods, for example, have lost huge momentum. This may be another function of the aging population.

The traditional method of relying on population projections and traffic studies to find out where to build are no longer sufficient tools. Micro management is required whereby the specific needs of the target area are identified and addressed, including the needs of an aging population and burgeoning ethnic communities.

Super regional properties with good access should remain strong. Regional malls are at risk and community centres are in decline generally and suffer from high vacancy. Power centres will continue to develop, according to these commentators, because the mall builders are gone, replaced by owners who are asset managers, not developers. Except for a few bright spots, like Vancouver, Victoria and Montreal, there is concern about the future of downtown core retail, as sales continue to spin out to the suburbs. With the exceptions noted above, sales have dropped 10% to 20% or worse in most downtowns over the past decade.

Keith Howlett expressed concern about the rising Canadian dollar and how it will negatively impact next year. He expects that the Canadian economy will lag behind the U.S. in the next 6 to 9 months.

Convergence of product mix in superstores remains a major theme and it seems to be accelerating (e.g. food stores are selling clothing and gasoline, drugstores are selling food, home improvement stores are selling furniture and appliances). Retailers are spending more effort in smaller communities as well. Home related purchases will continue to dominate. There seems to have been a societal shift towards investing in the home and its ambiance.

Latest numbers suggest that the U.S. is still losing jobs. The U.S. dollar continues to be devalued. Consumer confidence remains "terrible" in the U.S. The panel wonders what impact this will have on Canada during the next year. They question whether the huge monetary stimulus in the U.S. is working. The exports, the auto sector and tourism in Canada are very dependant on the dollar and there is concern that even if the U.S. recovery takes hold, Canada will lag. Auto sales are already falling off.

Most predict that Christmas sales will be decent for some, and poor for many. The old concentration thing again. There seems, at the moment, a general reluctance to spend. Consumer confidence remains soft and debt levels remain high.

The Wal-Mart syndrome will continue to prevail in most markets Ė underscoring the need to drive costs down, react to consumer needs and improve quality and value to consumers. This approach has delivered to Wal-Mart 50% of department store sales in Canada.

Wal-Martís future in the food business is huge. Their innovative approaches have enabled Wal-Mart to become the number one retailer of groceries in the U.S. in just 10 years. Wal-Mart is now considered attractive to communities in Canada as an economic engine, where a few years ago there was a widespread anti Wal-Mart sentiment. Real Canadian Super Store is apparently competing very well with Wal-Mart in Western Canada and is moving into Eastern Canada. It may be more difficult for Wal-Mart to capture a commanding share of the grocery store business in Canada.

Off mall stores are proving to be a viable concept for the value oriented retailers, and Sears is heading in that direction. Super regional malls are becoming fashion oriented. This is not withstanding that in the last 15 years there has been a huge shift away from fashion, especially menís fashion. It is partly the age thing again.

Dr. Jones reiterated the notion that asset-manager owners, not being developers, are allowing the power centres and free standing stores to take over the business even though demographics suggest a preference among many consumers for regional malls. He attributes this to a lack of willingness in the development community to capitalize on the opportunity.

It is widely accepted that people are stressed and donít have the time or inclination to shop as they once did. Shopping has to become fun again. The panel seemed to agree that community oriented, street style shopping should be the model for future mall development. With innovation, more choice and a pleasurable shopping experience, people will choose comfortable malls over big boxes in the long run.

In summary, it seems to be pretty much a repeat of last year. A lot of uncertainty, a lack of consensus on direction and a simmering pessimism. The more things change Ö.

- Stu Wells

Previous ICSC Convention Reports:

ICSC - 2003 Western Canada Idea Exchange in Calgary

Economic Forecast from ICSC 2002 - Toronto


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