The Implications of Declining Canadian Retail Sales for Consumer Discretionary Sectors

The Canadian retail sector is navigating a turbulent landscape in 2025, marked by sharp declines in discretionary spending and a fragile rebound in staples. Retail sales fell by 0.8% month-on-month in July 2025, driven by steep declines in food and beverage (-1.3%) and clothing subsectorsStatistics Canada Reports Retail Sales Drop^[1]. While August data showed a 1.0% reboundCanada Retail Sales Rebound in August - TRADING ECONOMICS^[2], the broader trend underscores a shift in consumer behavior toward essentials, driven by trade tensions, inflation, and economic uncertainty. For investors, this divergence between discretionary and staples sectors demands a strategic reallocation of capital.

The Discretionary Sector: A Tale of Mixed Resilience

Discretionary spending categories have shown uneven performance. Dining, for instance, defied expectations with a 7.7% quarterly gain, reflecting pent-up demand for in-person experiencesRetail Conditions Report – Spring 2025 - Retail Council of Canada^[3]. However, travel spending—particularly cross-border U.S. travel—has contracted consistently, with 55% of consumers expressing reluctance to fly for vacations in Q3 2025Canadian Consumers Pull Back on Spending in April^[4]. Apparel and air travel face additional headwinds: spending intentions for apparel hit a five-quarter low, while air travel demand softened as price sensitivity roseCanadian (TSX) Consumer Discretionary Sector Analysis^[5].

The Stifel consumer survey further highlights the sector's fragility: only 50% of Canadians plan to increase discretionary spending in the next 12 months, a 600-basis-point drop from January 2025Canadian Consumers Pull Back on Spending in April^[6]. This decline spans all age groups and income levels, signaling widespread economic caution. Even resilient categories like pet care and dollar stores are outliers; 76% of consumers plan to boost pet-related spending, while discount retailers attract 74% of respondentsCanadian Consumers Pull Back on Spending in April^[7].

Staples Outperform as Defensive Play

In contrast, the consumer staples sector has demonstrated resilience. Core staples sales—excluding gas and autos—fell by 1.2% in JulyStatistics Canada Reports Retail Sales Drop^[1], but annualized earnings growth for the sector is projected at 8.3%Canadian (TSX) Consumer Staples Sector Analysis^[8]. Companies like Alimentation Couche-Tard and The North West Company (TSX:NWC) have outperformed, with the latter reporting 4.9% same-store sales growth in Q3 20253 Top Consumer Staples Sector Stocks for Canadian Investors in 2025^[9]. The sector's market cap of CA$229.3 billion as of September 2025 reflects investor confidence in its defensive natureCanadian (TSX) Consumer Staples Sector Analysis^[10].

Trade tensions have accelerated a "Buy Canadian" shift, particularly in fast-moving consumer goods (FMCG). Nearly half of Canadian consumers now prioritize domestic productsTariffs, Tensions, and the Rise of the “Buy Canadian” Consumer^[11], a trend amplified by U.S. tariffs on Canadian exports. While exports to the U.S. fell 12.5% year-over-year in JuneImpact of tariffs on businesses in Canada: Expectations and …^[12], domestic demand for staples has remained robust. This dynamic is evident in grocery sales, which grew 6.78% year-over-year in Q3 2025Canadian Retail Sales Show Shifts in Consumer Behaviour^[13], despite convenience stores declining by 7.7%Canadian Retail Sales Show Shifts in Consumer Behaviour^[14].

Capital Reallocation: A Strategic Imperative

Investment flows in Q3 2025 underscore a clear shift toward staples. The Vanguard Consumer Staples ETF gained over 5% in 2025Consumer staples outperform in 2025, but here's why …^[15], while the Consumer Discretionary Select Sector SPDR ETF fell nearly 7%Consumer Discretionary Select Sector SPDR ETF Performance^[16]. Analysts at BMO Private Wealth recommend underweighting staples due to stretched valuations but caution that discretionary sectors remain vulnerable to macroeconomic volatility2025 Canadian Market Outlook - BMO Private Wealth^[17].

Corporate strategies also reflect this reallocation. Retailers like Canadian Tire and Loblaw are leveraging their dominance in essential goods and health services to offset discretionary declines3 Top Consumer Discretionary Sector Stocks for Canadian Investors in 2025^[18]. Meanwhile, discount retailers are capitalizing on shifting demographics, with higher-income households increasingly driving dollar store spendingCanadian Consumers Pull Back on Spending in April^[19].

Conclusion: Prioritizing Defensive Exposure

The Canadian retail landscape in 2025 is defined by divergent trajectories. While discretionary sectors face headwinds from trade tensions and consumer caution, staples offer a buffer against macroeconomic shocks. For investors, the case for reallocating capital to defensive staples is compelling—particularly as the Bank of Canada projects a 2.6% GDP drag from U.S. tariffsUS-Canada Trade Statistics: New Tariffs & Impact^[20]. As the Retail Council of Canada notes, 83% of retailers achieved margin gains through inventory discipline in 2025Retail Conditions Quarterly - Summer 2025 - Retail Council of Canada^[21], a trend likely to favor staples over discretionary plays.

In this environment, a strategic tilt toward staples—while monitoring for valuation extremes—appears well-positioned to navigate the uncertainties of 2025 and beyond.