Canadian retailers to face tough sales and more layoffs this year, say analysts

TORONTO - Thousands of Canadian retail workers have been told they'll be getting pink slips as both Sears Canada and Best Buy Canada make dramatic cuts to their workforces this month.

It's a sign of intensifying competition in the retail sector, which is already under pressure from a weaker Canadian dollar and the fallout of lacklustre sales over the holiday season.

And the job cuts could intensify in the coming months if the retail market doesn't show improvement, analysts suggest.

"If your topline isn't growing, there's only one way to continue to increase profits," said Daniel Baer, a retail analyst at Ernst and Young.

It comes back to costs, he said, including labour costs.

Best Buy Canada said Thursday that about 950 full-time employees would lose their jobs as it tries to rework its operations.

The job reductions would reduce layers of management at Best Buy and Future Shop locations across the country, though the company said it wouldn't close any stores.

Earlier in the week, Sears Canada delivered its own bad news to employees, increasing the number of layoffs it has announced this month to more than 2,200. The retailer is making massive cuts to management, call centres and warehouses, as it tries to rescue money-losing operations by lowering expenses and selling off leases.

While the situation at Best Buy is nowhere near as dire as Sears Canada, the two companies illustrate a Canadian retail landscape that will be under massive pressure this year.

"A lot of these retailers have certain sales expectations and they have a cost base that lines up with those sales," said Brian Yarbrough, research analyst at Edward Jones in St. Louis.

"If those sales don't start materializing — and it happens quarter in and quarter out — at some point they feel like there's an opportunity to become more efficient."

Retailers have had it good for several years in Canada, operating through the economic downturn with fewer pressures than in the United States. But, as the loonie slides further from parity, the cost of importing goods will become more expensive.

Two economists now expect the Canadian dollar to slip as low as 85 cents US, a level it hasn't reached since mid-2009.

TD Economic chief economist Craig Alexander is predicting an 85 cents US dollar by mid-year if the current economic environment persists, while BMO Capital Markets economist Benjamin Reitzes believes it will fall to 87 cents this year.

Regardless of how deep the decline, a weaker currency is certain to be felt at cash registers.

"Either pricing will have to go up, or cost cutting measures will have to continue to make up for the lower Canadian dollar," said Baer.

"I don't think we'll see a buoyant retail market in the next little while at least," he added.

Also biting into each retailer's market share is the entry of Target Corp. into Canada and the rapid expansion of superstores operated by Wal-Mart Stores Inc. that stock everything from electronics to groceries.

Online retailer Amazon.com Inc. has also started to build its operations north of the border.

Retailers like Best Buy have responded with a selection of health products on its website under the Viva brand and a wider selection of kids' toys.

Best Buy Canada's president, Ron Wilson, emphasized the momentum behind the company's website business in the layoff announcement.

"We have seen our online sales grow by more than 50 per cent in the past year and new services, such as in-store reserve and pickup, more than doubling," he said in a release.

"These changes in the way our customers are interacting with us have led us to look at how to best deploy our staff to meet those evolving needs."

Last year, Best Buy Canada closed at least 15 underperforming big-box locations across the country and laid off about 900 employees.

While the troubles at retailers may appear negative to outsiders, they can also offer companies an opportunity to better themselves, said Mark Satov, founder of management consulting firm Satov Consultants Inc.

"When you have financial pressures on the topline they force you to be more efficient in the operations," he said.

"They cut fat that otherwise wouldn't get cut."