The Canadian Retail Sector in Turbulent Times: Navigating Downturns and Opportunities in 2025

The Canadian retail sector in 2025 is a study in contrasts. While trade tensions, fluctuating fuel prices, and shifting consumer priorities have created headwinds, pockets of resilience and innovation persist. For investors, the key lies in identifying underperforming subsectors and capitalizing on those with structural growth potential. This article dissects the current landscape, focusing on automotive retail's challenges and the enduring strength of e-commerce and home furnishings.

The Automotive Subsector: A Sector in Transition

The automotive retail subsector, once a cornerstone of Canadian retail, has shown mixed performance in 2025. March 2025 marked a 4.8% increase in sales for motor vehicle and parts dealers, driven by pent-up demand for new cars as consumers anticipated U.S. tariff hikes. However, this momentum faltered in May, with a 2.1% contraction attributed to cyberattacks disrupting supply chains and a broader cooling of trade-related urgency.

Used vehicle dealers face a more complex environment. The sharp decline in used car prices in Q1 2024 created a weak baseline for comparisons in 2025. While eco-friendly used EVs like the Toyota Prius and Tesla Model 3 maintain strong resale values, the removal of federal EV incentives in early 2025 led to a 8.2% drop in BEV sales in February. This volatility underscores the sector's vulnerability to policy shifts.

Investors should approach automotive retail with caution. While new car dealers in Ontario and Quebec have capitalized on regional demand, the looming threat of U.S. tariffs and the transition to EVs pose long-term risks. For those with a contrarian edge, underweighted positions in gasoline stations and fuel vendors—down 6.5% in March—could offer opportunities as the sector restructures.

E-Commerce: Resilience Amid Downturns

Despite a 2.1% decline in Canadian e-commerce sales in March 2025, the sector's underlying strength is evident. Essential categories like food & grocery and beauty & wellness have remained resilient, with average order values of $74 and $89, respectively. These categories benefit from low return rates (3.2% and 9.3%) and a shift toward value-driven purchases.

Mobile commerce continues to drive growth, accounting for 66% of online orders in Q1 2025. Platforms like Well.ca and Walmart.ca have leveraged localized pricing and subscription models to retain customers. Meanwhile, the omnichannel strategy—blending online and in-store experiences—is gaining traction. For example, 64% of consumers still prefer in-store shopping for electronics and furniture, yet 76% use physical stores to evaluate products before purchasing online.

Investors should focus on e-commerce players integrating AI-driven personalization and logistics optimization. The projected 22.4% growth in subscription e-commerce by 2026 further highlights the potential for recurring revenue models. However, underperforming categories like fashion and beauty face challenges due to high return rates and price sensitivity.

Home Furnishings: A Bright Spot in a Downturn

The home furnishings sector has emerged as a standout performer in 2025. Core retail sales in furniture, home furnishings, and electronics rose by 2.1% in March, driven by demand for durable goods and home improvement projects. This resilience is partly due to low vacancy rates and rising rents, which have pushed consumers to invest in long-term assets rather than disposable goods.

Dealers adapting to digital tools—such as virtual showrooms and click-and-collect services—are outpacing competitors. The sector's ability to blend physical and digital experiences aligns with broader consumer preferences for convenience and personalization. Additionally, the rise of AI-powered interior design tools and partnerships with platforms like Pinterest are unlocking new revenue streams.

For investors, home furnishings retailers with a strong omnichannel presence and a focus on sustainability are prime candidates. The sector's low return rates (14.9% for home & furniture) and high average order values ($272) further justify its appeal.

Strategic Investment Recommendations

1. Underweighted Positions:
2. Gasoline Stations: With a 6.5% decline in March and falling crude prices, this subsector is likely to remain underperforming.

3. Used Vehicle Dealers: While eco-friendly models show promise, the sector's dependence on policy incentives and shifting consumer priorities makes it a high-risk play.

4. Overweighted Positions:

5. Home Furnishings Retailers: Prioritize companies integrating AI-driven personalization and omnichannel logistics.

6. Essential E-Commerce Platforms: Target platforms with strong subscription models and localized supply chains, such as grocery and wellness services.

7. Contrarian Opportunities:

8. Automotive Parts Dealers: As EV adoption accelerates, companies specializing in battery health inspections and EV charging solutions could benefit.

Conclusion

The Canadian retail sector in 2025 is navigating a landscape of volatility and opportunity. While automotive retail and gasoline stations face headwinds, e-commerce and home furnishings are demonstrating structural resilience. By underweighting vulnerable subsectors and overweighting those with adaptive strategies, investors can position themselves to thrive in turbulent times. The key is to balance caution with conviction, leveraging data-driven insights to capitalize on the sector's evolving dynamics.