Retail

Retailer sentiment going into the new year remains positive, however, factors influencing the market will further entrench current trends and push change in the sector. Being forward looking and resilient will always be rewarded, and this has never been more true than in today’s competitive landscape.

Trends to Watch

1. A supply-constrained retail landscape is expected to persist and reshape the typical store format in Canada. Retailers will ultimately be strategic, expanding into secondary markets or modifying the scale of their typical store.
2. Sentiment going into 2025 remains positive, however, we are starting to see more normal growth levels following the boom pandemic years. Retailers that tap into savings, provide entertainment, or are innovative/experiential will continue to thrive during this time.
3. Expanding where and how retailers access consumers may be what it takes to remain relevant in the year ahead. Diversifying sales methods may play a significant role in revenue generation, even if primarily used for branding.

Spillover effect from supply-constrained markets

As noted over the last few years, dwindling levels of new construction have resulted in a supply-constrained retail landscape in Canada with low vacancy and rising rents, especially among fixtured units. Unlike other property types, the main limiting factor has been elevated construction costs and not demand. With a restricted new supply pipeline expected to persist, anticipate these themes to continue in 2025 with robust demand putting pressure on vacancy and rents, although on a healthier growth trajectory.

Large-scale developments like the recently opened Royalmount in Montreal are few and far between. In fact, it has been a few decades since an enclosed mall has been built in Canada. Significantly leased on opening, the success of this property further proves levels of demand and that other properties of scale can be supported. Among current active construction, however, the average project or phase is 35,000 sq. ft. which is nearly 50% smaller than three years ago. This smaller-format offering, which is predominantly mixed-use with retail at grade, will reshape what the typical store looks like in the years to come.

We have seen activity spill down to lower-quality product amidst lower vacancy, and in the year ahead, will see that continue with retailers expanding over wider geographies, either tapping into secondary markets or going south to the U.S. Retailers will ultimately be strategic during this time selecting spaces that still promote growth while working toward their long-term strategy. Domestically, an increasing number of brands will modify the scale of their typical store, for example Loblaws is currently rolling out smaller-format No Frills; Sephora meanwhile also opened their smallest location to date at The Well. Being forward looking and resilient will always be rewarded, and this has never been truer than in today’s competitive landscape.

Retailers tapping into successes

Record levels of immigration and population growth have been a boon for the sector, which when paired with inflation and elevated interest rates, has resulted in exceptional growth, especially among necessity-based and discount categories. This confluence of factors is changing however, with recent announcements from the Government of Canada indicating they will curtail immigration targets. This could result in a challenging upcoming year for retailers, especially when layering in a potential recession and an associated pullback in consumer spending. Expect growth to continue, however in a more conservative manner.

Shoppers will remain cautious and keep household budgets tight against this backdrop in 2025. Correspondingly, value or discount channels, including second-hand or consignment stores, will continue to be popular. Value Village has even expanded on this success with its boutique-branded locations. According to Trendex, cost savings are the biggest motivator for re-sell apparel shopping, the number one item purchased in second-hand stores, followed by books and furniture.

Entertainment is another category that has been in expansion mode over the last 12 months and is poised for future growth in 2025. These operators are proven to be a destination for consumers and, much like necessity-based retail, can boost centre performance. Beauty is acting similarly and is now being recategorized as an everyday need. New to market entrants and acquisition of brands will push this category towards continued growth.

As has been the case, churn is anticipated among middle of the pack or stagnant retailers without a differentiated offering. Bankruptcies and closures in the year ahead won’t be viewed as detrimental or as an indicator of poor market health. Instead, we’ve seen openings outpace closings, with well-located spaces quickly leased, in some cases even before being vacated by the exiting tenant.

Channels for capturing market share

While business sentiment going into the new year has remained positive, recession fears will influence decision making, both on the retailer and consumer front. Future proofing business models will be top of mind, however changing consumer behaviours will challenge retailers with Forrester noting that 74% of retailers believe their organization will struggle to adapt to consumer expectations in 2025.

We typically see Canadians stick to known brands and that has never been more true with EY noting that the percentage of customers willing to pay more for a brand they trust has increased significantly since 2023; this may be tested however in favour of finding a deal. Building off of the recent success of discount retailers, AIR MILES’ research found that 82% of survey respondents were more likely to shop at stores with a loyalty program; further, 66% will modify where and when they make a purchase to maximize points. Rolling out or expanding loyalty programs may be what it takes to attract and retain existing customers.

Additionally, according to Deloitte’s 2024 Holiday Retail Outlook, a growing number of consumers are willing to shop directly through social media channels such as Instagram and TikTok, especially those aged 18-34. This was backed by the Retail Council of Canada’s Navigating the Future: A Study of Sales Strategies and Challenges for Canada’s Retail SMBs where it was noted that other sales methods play a significant role in revenue generation, even though some are still primarily used for branding rather than direct sales. Further from this study, the more sales channels businesses employ, the more optimistic they are about their business prospects, highlighting the importance of diversification. Expanding where and how you access consumers may be what it takes to remain competitive in the year ahead.