MNI REALITY CHECK: Canada Recovery Elusive Amid Retail Surge

The surge in retail spending as Covid lockdowns ease likely won't last as consumers settle into more conservative shopping routines, while profit margins are eroded by the cost of protective equipment and social distancing rules, industry experts told MNI.

Statistics Canada will probably report Friday that retail sales jumped a record 25% in June according to an MNI economist consensus. Automobiles will lead the rise, with sales excluding that category up 16% on the month. Sales are only moving back towards where they were before the pandemic hit in March, and consumer demand may remain dependent on government relief checks and mortgage deferment programs that are being scaled back soon.

Key points from industry leaders ahead of the August 21 retail sales report:

• Gains reflect pent-up demand in the hardest-hit industries during the lockdown. Some industries that have been hardest hit are still depressed
• Gasoline demand is returning but not fully up to historical averages for the summer vacation driving season
• Stores face added costs as a result of the COVID-19 pandemic
• Health restrictions are working well enough to bring sales back towards pre-COVID levels, but a second wave remains a major risk

Oumar Dicko, chief economist at Canadian Automobile Dealers Association:

The industry is still seeing volatility following the 75% YOY sales drop in April, when some dealers tried online sales to overcome store closings and social distancing rules. Some households are still holding back on big-ticket purchases because they are worried about losing their jobs.

"There are concerns for the second wave and the recovery period, in which the economy is fragile at the moment" Dicko said.

In June, sales were still down 30% but they made up a lot of ground in July and were down only by 4.9%. Sales should recover over the next couple of months, he said.

"Test drives are continuing in a very safe manner in dealerships across Canada."

"There is an indirect concern of how the U.S. is going to control the Covid-19 pandemic, since the U.S. is our largest trade partner," he said. Another concern is another health shutdown of auto factories that could trigger a shortage in inventories, he said.

Kathleen Sullivan, CEO of Food and Beverage Canada:

Food and beverage stores have remained strong with sales still being diverted from restaurants to grocers, while profit margins at food processors have been hurt by costs to adapt to COVID-19.

"In food manufacturing there is less opportunity to increase prices, so when the costs increase you have to absorb or pass that to the supplier but it is hard to pass that to the retail sector in Canada," she said. "This industry is at the point that they would expect historically at the sales standpoint, but that the income standpoint no, because of the costs."

The surge in demand during the full lockdown has eased for flour, bread, and meat.

Craig Alexander, chief economist at Deloitte Canada:

"The StatsCan advanced reading on retail sales, if their flash reading for the last month is right, retail sales will be almost back at their pre-COVID level in July," he said in an interview. Statistics Canada reported last month its flash estimate of June sales was +25%.

"But if you think of the composition of where the sales have been, it's been dramatically altered," he said. "Just looking at percentage increases will give you some false readings" and investors must also look at total spending and on what items to judge the recovery, he said.

Michael Ervin, Vice-President at Kent Group energy consultants:

"Gas stations rely on revenue from gasoline but they also very heavily rely on the revenue from the convenience store sales, and those were impacted more than gasoline itself, because the convenience stores markups cannot increase as the gasoline mark-up increase during the pandemic," he told MNI.

Future demand depends largely on whether a vaccine is found that allows people to commute to their offices again, or if many employees continue to work from home, Ervin said.