While there have been calls for the death of traditional retail for some time, new fortunes have been created as e-commerce emerges. Kim Parlee speaks with Leslie Preston, Senior Economist, TD Bank Group, about retail disruptions, the biggest e-commerce trends and how the Canadian market compares with the U.S.
Well, we've been hearing calls for the death of traditional retail for quite a while now. While it's a scary time for retailers, especially perhaps commercial real estate holders, with so many stocks down so much, new fortunes have been created as the new face of retail emerges. Here to discuss some of the biggest e-commerce trends is Leslie Preston. She's Senior Economist at TD Bank Group. Great to have you here.
You wrote a piece, Delivering Disruption-- The Impact of Online Shopping in the US and Canada. Really great piece, by the way. I really enjoyed it. How much are we shopping online? I'll say "we" as in North American "we," and then we'll get to the Canadian "we." But I tend to think it's everything, and it's not yet.
No, it's not. Even in the US, which is further along than Canada, online sales were 9% of retail sales in 2017.
It seems small to me, when you say that. I'm like, oh my gosh! Only 9%!
Well, you do need to think about what's getting measured there. And if you, say, book a trip online, that's not a retail sale. Things like buying clothes, buying furniture. So not all online transactions qualify as being online retail sales.
Yeah. I think one thing that I thought was interesting you brought up here, and I'm not going to get the order of the report. I'll warn you ahead of time-- is the difference between Canada and the States. I mean, because you said Canada-- you said the States was 9%?
Yeah, the US is 9%. Canada's 3%.
Now, there may be some undercounting there. Statistics Canada has only recently broken out online sales specifically in their monthly retail report. But in 2017, it grew 30% year-on-year, whereas the US has been tracking about 15% growth year-on-year in online sales. So Canada's-- we're certainly poised to catch up.
Yeah. Let's bring up the chart. I think we've got a chart here just showing how quickly we're seeing the growth come in there. What's the disparity between-- is that a measurement thing? Because, I mean, you mentioned-- you and I were chatting beforehand-- that maybe if I'm buying things from the States online, but I'm Canadian, that's a US sale.
Yeah. You know, there likely is under-reporting, particularly for Canadians who shop from a US site and pay the duty to bring it into Canada. But even adding that back, we are likely still behind the US market.
You know, anyone who's traveled to the US, or online-shopped from an American's perspective, has seen that there's been more available. I think Canada's really catching up, in terms of a lot of the big US retailers having a .ca website so you don't have to ship it in from the US. That's really picked up in the past few years. But we are behind. We're a smaller market. So I think retailers have been slower to invest in their online presence here. But I think it's really changing.
I'm doing my best. Now I am doing everything I can to support this as quickly as possible. You also bring up a point, and I think it's interesting, talking about real estate. And I know from covering this kind of thing, and you hear when a major retailer, like a Sears, are leaving, that can't be good for the commercial real estate sector. But it seems as though there's been some adjustment that's been taking place.
Yeah, it's interesting. If you look at a measure like cap rates, which is a return on a commercial real estate investment, those are down. But a lot of returns are down, and interest rates are lower. We're in a lower-rate environment.
But vacancy rates are also low. So you can see that the industry, particularly the US, has adjusted. I mean, online shopping's not new. It's been going on for-- developing for 20 years.
So basically, the industry brought fewer square feet online over the past 10 years. So the growth in added retail space has gone down in line with demand, so that overall, the vacancy rate in the industry is still fairly low. A lot of malls are adjusting, finding new tenants, maybe more services businesses-- gyms, things like that-- where they're losing square footage from traditional retailers.
That's interesting. And also you mentioned the idea that displaced retail workers, and I think that's-- because people always kind of scream and cry when you hear about some sort of automation that changes an industry. But we're not seeing it show up in unemployment rates.
Yeah, that was one of the biggest surprises for me looking into this, was you see-- I mean, employment growth in the retail sector in the US has slowed the most outside of a recession over the past year and a half. It was in negative territory year-on-year. It's picked up. It's barely positive now. But you just haven't seen that outside of a recession.
But if you flip that and say, OK, so there's a lot fewer workers in the traditional retail sector. But if you look at unemployment in the sector, it's near an all-time low. So clearly, these workers are A, either retiring-- and with the baby boomer demographic, that could be a big part of it-- or they're finding jobs easily in other sectors, because especially in the US, the economy is strong. The unemployment rate's at a 17-year low. So there are strong job gains in other sectors.
They're packing boxes at Amazon warehouses. Maybe that's what's going on.
I mean, there's some pretty strong employment growth in the logistics sector, for sure. So maybe it's not one for one. But I would have expected to see a bigger uptick in the number of people who are unemployed retail workers, and you don't see it.
Yeah, it's surprising. You also mentioned a note that the outcome of NAFTA could have an impact on how Canadians shop. Explain that one.
That is one of the negotiating demands the US has made, is the US has what's called a de minimis threshold. The amount of goods an American could buy in Canada online and ship back without having to pay any duties is $800. For Canada, it's $20.
So if you want to shop online and not pay duty, the minute you spend over $20, you're going to pay that. I mean, who's going to spend less than $20? You have to pay shipping. But, so the US has demanded that we raise ours, you know, to be fair, to $800. So that would open up a lot more of the world of US online shopping to Canadians. So that could be a big change for the industry.
And it's ironic, because I mean, when I think about your world of measuring these things, the amount of online shopping could go up in Canada. But the amount of shopping done in Canada could go down, at the same time. Or you wouldn't see that full-- you wouldn't get the benefit of all of that. Yeah?
Yeah, and it's interesting too, because online shopping in Canada has developed, to a degree. As I say, a lot of the US retailers now have .ca websites, so what's available to Canadians has improved a fair bit in recent years. Amazon's fulfillment warehouses are in Toronto. It might not change--
Maybe headquarters soon, too.
Yeah. But certainly, there is more available in the US. And it will become more economical if you're not paying duty on, say, the first $200.
Leslie, thanks so much. Really interesting study.
Leslie Preston, Senior Economist at TD Bank.