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B.C. consumer spending shifts to services, essentials, travel

Shoppers trade down to house brands from name brands as retail spending declines
Odlum Brown executive vice-president Murray Leith: "We have great inequity and lower income people who really are struggling"

B.C. consumer-spending trends continue to stem from the COVID-19 pandemic.

Society has opened up, and government restrictions that temporarily kept people from dining out, gathering in large groups and travelling have all long ended.

The lingering effects of the pandemic, however, include inflation (fuelled in part by government spending), interest-rate hikes (to control inflation) and a consumer eager to spend on services and experiences, particularly travel.

Reports differ on how strong the Canadian and B.C. consumers are, but indications are that there is a slowdown in spending, particularly in B.C.

Statistics Canada released retail data in June that showed B.C. and Newfoundland as the only two provinces where retail spending declined in April, compared with the same month in 2022.

Canada overall saw a 2.9-per-cent rise in dollars spent on retail goods, including restaurant services, in April, compared with April 2022.

In B.C., however, consumers spent $8.953 billion in April on those goods and services, or about 0.1 per cent less than in the same month in 2022.

When inflation is factored in, it is clear that B.C consumers are buying much less. They spending less and getting less for each dollar spent.

Canadian inflation spiked to a 39-year high of 8.1 per cent in June 2022, and has since settled down to 2.8 per cent in June.

Perhaps it is because inflation remains higher than retail-spending growth that Nielsen Consumer LLC research shows Canadian consumers have adopted spending patterns indicative of a recession.

"A consumer recession is when the core habits of traditional consumption have shifted, forcing shoppers to behave as though a recession is already here," Neilsen's NIQ unit said in a June 28 report. "They consume less, shift their spending to value retailers and brands, and buy more products on promotion."

NIQ has what it calls a "sensitivity index" to chart consumer recessions. A point rank of 80 on that index indicates that the country is in a consumer recession.  In the first quarter of 2023, NIQ's sensitivity index for the Canadian consumer was 77.

Odlum Brown executive vice-president and director of investment research Murray Leith told BIV that there is a bifurcation in consumer resilience that stems from how people fared during the pandemic.

Home owners and those with lots of money in the stock market watched their asset values soar, he said.

Others, he added, are hurting.

"It's been wonderful for my business, and our clients, with inflating asset values, but it's really fuelled huge inequality across the country and that is a problem," Leith said.

Indeed, Statistics Canada released data July 4 that showed that the gap between rich and poor in Canada is widening at the fastest annual rate since the nation's number cruncher started keeping data on that metric in 2010. The gap is, however, slightly smaller than it was pre-pandemic, when comparing the wealthiest quintile of the population with the least wealthy quintile.

Other data showing that the least wealthy quintile of the population is struggling comes from MNP Ltd.

Its July 10 survey found 52 per cent of Canadians said that they were $200 away, or less, from not being able to pay all of their bills at the end of the month – up six percentage points from a similar survey MNP did in April.

Leith's concern for the Canadian economy and consumer spending is that even those who own high-priced homes are going to start to feel less wealthy, and consequently reduce spending.

This is even as the Canadian job market remains strong. The country added 60,000 jobs in June, which was more than most analysts expected.

Canadians have more debt than Americans do, in part because many Americans scaled back their debt during the 2009 Global Financial Crisis, Leith said.

Canadians also proportionally have more variable-rate mortgages than do Americans, he added.

Variable-rate mortgages' interest payments rise immediately when the Bank of Canada hikes interest rates, such as it did on July 12, to five per cent.

Canadian inflation is also likely to keep rising in part because of government handouts, such as Ottawa's so-called "grocery rebate." That program aims to help families that earn up to $64,946 with rebates up to $628 to help them deal with rising prices.

"Inflation isn't the only problem that we have in society," Leith said. "We have great inequality and lower income people who are really struggling."

Spending shifts to services, essentials and travel

Retail analysts and studies have identified several big-picture trends for how consumers are spending money.

The main shifts are:
• toward experiences and away from goods;
• toward essentials and away from discretionary items; and
• toward travel to make up for lost years during the pandemic when travel had restrictions.

"The pandemic helped consumers realize that while material goods are fine, there's a life out there," said Retail Insider owner Craig Patterson.

"People are now searching more for experiences. They got a bit of a taste of mortality, through hearing about death constantly."

Blackrock research, starting in the 1950s, shows steady growth in the percentage of spending that American consumers allot to experiences and services versus goods. The pandemic prompted a brief reversal of that trend but the shift back to spending on experiences has returned even though it has yet to surpass what it was in 2019.

Consumers increasingly view travel as an essential item, and not discretionary, because they experienced travel bans during the pandemic, Patterson said.

Corporate earnings reports support the theory that the consumer is spending more essentials.

Aritzia's (TSX:ATZ) share price fell 24 per cent on July 12, after it revealed a declining profit margin and slowing sales growth that indicated that consumers are shifting spending toward essential items and away from discretionary goods, such as clothing.

Home Depot Inc. (NYSE:HD) noted recently that big-ticket optional purchases, for items such as appliances, have declined.

This may in part be because consumers are scaling down home renovation projects that were in vogue during the pandemic.

"High inflation rates have led customers to prioritize essential products over higher ticket discretionary ones," Canadian Tire (TSX:CTC-A) CEO Greg Hicks said on his company's May conference call.

He added that customers are also shifting to house brands from premier name brands.

"Customers moved away from best-level products in certain categories, such as tires and household consumables, towards our better and good-level products," Hicks said. Inc. (Nasdaq:AMZN) CEO Andy Jassy earlier this month echoed those thoughts in a CNBC interview.

"People are trading down whenever they can," Jassy said. "They’re buying but they’re very conscious about price. It’s an uncertain economy."

Patterson said the trend of trading down to by less expensive products is helping dollar stores.

"Dollarama (TSX:DOL) is opening new stores and is doing quite well," he said.

Luxury retailers are also affected.

While the ultra-wealthy may see no need to cut back on spending, there are many shoppers at stores such as Holt Renfrew who save up to splurge on a special item that they have long coveted.

"I've spoken to people who do sales at Holt Renfrew who have said that the aspirational shopper, to a degree, has dried up, and that [the aspirational shopper is] now trying to put food on the table as opposed to buying a Prada bag," he said.

Spending at restaurants is part of the shift toward spending on experiences but the boom in that spending may be short lived, DIG360 owner and retail analyst David Gray told BIV.

"I am surprised to see restaurant spending continuing, menu price inflation and the spike in gratuities that seem to be growing higher while grocery inflation is slowly cooling," he said.

"I am concerned that dining out will be an early casualty of any fall downturn." •

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