Economic Performance and Trends

Recession Takes a Toll on Profitability in Many Canadian Industries

Michael Burt, Associate Director, Industrial Economic Trends

November 9, 2009

Profits are forecast to decline by over 20 per cent this year in five of the six industries covered by the Conference Board’s Canadian Industrial Profile Autumn 2009, produced in collaboration with the Business Development Bank of Canada (BDC). Reduced demand and downward pressure on prices have cut both sales and profitability in most Canadian industries; the lone exception in this group is the food and beverage industry.

The Canadian economy is forecast to grow in the second half of 2009 and to continue to recover modestly in 2010, which will improve the prospects for the hard-hit transportation and warehousing industry, as well as the wholesale trade and retail trade industries. The food services and accommodation industries, however, must contend with the additional risk that the H1N1 flu will negatively influence consumers’ decisions to travel or dine out.

Transportation and Warehousing

Canada’s transportation and warehousing industry has been battered by lower travel demand, along with diminishing global trade and manufacturing production. Most segments of the industry—including air, rail, water, and road transportation—suffered badly in 2009. Profit levels fell 29 per cent, from $7.3 billion in 2008 to $5.2 billion in 2009. Looking forward, the industry is expected to experience a robust recovery once the recession is past.

Wholesale Trade

This industry’s performance is closely linked to the performance of the overall economy. Wholesalers that are dependent on the auto sector and the construction industry have suffered badly. However, sectors such as food, apparel, and pharmaceuticals are less sensitive to business cycles and actually expanded during the recession. Profits are expected to fall for the second consecutive year in 2009, from $14.5 billion in 2008 to $11.2 billion this year. As the recovery takes hold, profit growth will resume in 2010.

Retail Trade

Weak consumer demand—combined with price cuts—slashed industry profits by 32 per cent, from $12.6 billion last year to $8.6 billion in 2009. In contrast to many other industries, retailers benefit from a strong dollar because it lowers the cost of imports. As employment and incomes recover throughout the economy, the retail outlook is expected to improve in the next few years.

Food Services

Lower-cost establishments have held up well during the downturn, leaving full-service restaurants to bear the brunt of the recession. After making $1.2 billion in 2008, the industry is expected to see profit levels dip to $826 million in 2009, a 32 per cent reduction.

Accommodation

Canadians are staying closer to home, but domestic demand has not been enough to offset the sharp decline in U.S. and foreign travellers. The strong dollar has also made Canada a more expensive destination. After a 25 per cent decline last year, industry profits are expected to fall a further 8 per cent in 2009, to just below $500 million. Hotel operators could face a shaky recovery, as the experience with SARS in 2003 shows that an H1N1 outbreak would put additional pressure on the industry.

Food and Beverage

In contrast to the situation in many other industries, domestic food demand remained steady and exports to new markets grew in spite of the strong dollar. Meanwhile, lower commodity prices pushed costs down. The industry made $3.3 billion in 2008 and profits are expected to rise modestly to $3.4 billion in 2009.

The Canadian Industrial Profile is part of The Conference Board of Canada’s Industrial Economic Trends research. In all, five-year outlooks for 23 industries are completed each year.

BDC is Canada’s business development bank. From more than 100 offices across the country, BDC promotes entrepreneurship by providing highly tailored financing, venture capital, and consulting services to entrepreneurs.