Market Monitor - Consumer durables - Canada

• Lower holiday sales likely to result in payment delays and insolvencies in 2016
• Longer payment terms requested by retailers
• Payments take 90-120 days on average

In 2015, Canadian retail trade grew 2.6% (to CAD 505.5 billion), following growth of 4.6% in 2014. However, profit margins decreased last year, and Canadian consumer confidence fell to its lowest level in two years in December 2015, as concerns grew over the state of the Canadian economy (GDP is expected to increase only 1.4% in 2016). That said, low inflation and low interest rates should sustain retail sales growth.

The globalisation of procurement has opened up many segments to international and cloud/online retailers, especially with Canada's proximity to the US. This has increased competition, put pressure on profits and harmed businesses with inefficient infrastructures and weak capitalization.

Payments in the Canadian consumer durables retail industry take 90-120 days on average. Payment delays have stabilised in H2 of 2015 – but with retail sales dropping in December 2015, inventory levels are likely elevated, and therefore increases in delinquencies are expected. Retailers are moving away from requesting cash discounts (advanced payments) from suppliers and are requesting longer terms of payment, e.g. ‘pay when sold’ terms of sale. This could lead to increased payment delays; however, as many retailers tightly manage their inventory levels (preventing oversupply issues), payment re-scheduling is not yet (that) problematic.

According to the Office of the Superintendent of Bankruptcy, retail insolvencies decreased 3.9% year-on-year in the period January-November 2015; from 511 to 491 cases. At the same time, some larger multi-location chain-stores filed for creditor protection/bankruptcy or announced store closures in early to mid-2015. It is expected that the number of consumer durables retail insolvencies will level off in 2016, as many businesses´ profit margins are under pressure, competition is high and the pressure on brick-and-mortar stores from online retailers increases. Weaker players who cannot adjust to the changing market conditions will face major problems. Retail insolvencies compromised debt amounts are expected to increase with the failures of larger retailers.

Given those developments and the volatility in consumer confidence, our underwriting stance remains neutral to cautious. In the home appliances segment most retailers are large, well-capitalized entities. In the furniture subsector we are more cautious with smaller players, as financial information is hard to get. In the textile retail segment we observe that businesses with a narrow specialisation are vulnerable to larger multi-line competitors as well as online retailers. We have seen a number of failures in this subsector over the past two years, and we expect the remaining market participants to be more resilient and to show higher credit quality.

We are closely monitoring economic issues that could negatively impact the industry’s performance, e.g. increases in unemployment, the volatility of the Canadian dollar, rising inflation and/or other adverse economic trends resulting in weaker consumer confidence.