Canada / Industry Insights
Fastest Growing Canadian Industries Based on Size
by Taylor Palmer, Jon DeCarlo and Darshan Kalyani
Jun 05 2017

When it comes to industry performance, size may not be the most important factor, but it can certainly have a major effect on how an industry achieves growth. IBISWorld estimates that in 2017, there are only five companies operating in Canada’s Iron Ore Mining industry, which is about 73,502 times fewer enterprises than in Canada’s Apartment Rental industry. Both of these industries are important parts of the Canadian economy, but the factors that affect each industry’s growth and composition are vastly different. Over the five years to 2017, industries within all size brackets have managed to achieve growth in their unique operating environments. IBISWorld has broken down the Canadian economy into three groups based on industry enterprise numbers and from there looked into the driving factors for revenue growth in each group’s most promising industries as well as why they have the enterprise levels they do.

One to 199 enterprises

Industries that comprise fewer than 200 enterprise figures generally have high barriers to either entry or success, which often dissuades new entrants. For example, high dominance of a few major players can make it hard for new companies to compete. High levels of regulation or capital expenditures can drive up costs for potential entrants, keeping enterprise levels low.

Real Estate Investment Trusts industry

Real Estate Investment Trusts (REITs) are companies that pool large sums of investors to purchase income-bearing real estate. When money comes in through these properties, it gets distributed back to its investors. In 2017, there are only 98 REITs operating in Canada. The high price of real estate in the country is a substantial barrier for many entrants as potential companies need access to a significant amount of capital to purchase large swathes of commercial real estate. Additionally, high regulatory barriers are another factor keeping operators from entering the industry. In Canada, to qualify as a REIT, a company must have at least 150 owners and must derive a minimum of 90.0% of gross revenue from dividends, interest or property incomes. Having such a large backing and high earnings ratio makes it difficult for smaller businesses to enter the industry.

Over the five years to 2017, industry revenue is expected to grow an annualized 8.1%. Property markets boomed toward the beginning of the period as aggregate demand returned to Canada after the recession. Construction expanded and operators had more potential real estate at high prices available to them, which they quickly turned around into high-priced, revenue-gathering rental properties. Performance dipped during the recession in 2015, but continued low interest rates and rebounding investment activity have helped the industry bounce back with expected growth of 8.8% in 2017.

200 to 999 enterprises

Moderate barriers to entry or success can often lead to a midrange level of enterprises. Industry that often end up in this group include manufacturing industries with low concentration as well as wholesaling industries with higher costs but lower regulations or production. Industries with high levels of fragmentation, demand and regulation also tend to cluster in this enterprise range because of a mixed competitive landscape.

Heating and Air Conditioning Equipment Manufacturing industry 

Canada’s Heating and Air Conditioning Equipment Manufacturing industry holds a moderate level of enterprises due to low external competition, moderate capital costs and low. Industry operators face only a few real external competitors due to the ubiquitous nature of the products they manufacture. Additionally, the level of regulation that operators are subject to is roughly in line with the sector at large, which puts downward pressure on barriers to entry.  However, the Canadian Heating and Air Conditioning Equipment Manufacturing industry has faced rising external competitive pressure from technologically advanced and innovative manufacturers in the United States, as well as producers in developing countries, such as Mexico and China, which can leverage low labour costs and relaxed governmental regulation. As a result, import penetration into the domestic market is high, which limits new companies’ ability to enter the industry and compete. As a result of these conferring factors, IBISWorld estimates that in 2017 this industry comprises 695 operators.

Over the five years to 2017, revenue generated by the Heating and Air Conditioning Equipment Manufacturing industry in Canada is expected to increase at an annualized rate of 7.2% to $4.1 billion. Over the five-year period, the domestic population is expected to expand and become increasingly urbanized and progressively wealthier, which is anticipated to stimulate growth in Canada’s residential construction market. Since heating, air conditioning, ventilation and refrigeration (HVACR) equipment is typically installed in residential units, this market’s expansion will bolster industry sales. Driven by rising disposable income and stable employment, the Canadian HVACR equipment market is also expected to expand over the five-year period, contributing to industry revenue gains. Additionally, industry operators have benefited from the strong depreciation of the Canadian dollar compared with the currencies of Canada’s major trading partners, such as the United States. As a result, industry exports are anticipated to increase rapidly over five-year period.

1000 or more  enterprises

Industries with low barriers to entry and low concentration are the most prone to the entrance of nonemployers. Additionally, these industries, which primarily include retailers and service providers, are more likely to be fragmented, which further promotes the entry of smaller businesses.

Dollar and Variety Stores industry 

Within the Dollar and Variety Stores industry in Canada barriers to entry are relatively limited, concentration is extraordinarily low and fragmentation is high. The industry has thrived over the five years to 2017, growing at an annualized rate of 4.3% to reach $5.1 billion. As a result, together these factors have enticed a high number of operators to enter the industry.

To sustain their high growth rates, industry operators have made several changes to their operational strategies. For example, some operators have expanded their target audiences, which initially only included low-income earners. However, over the past five years, the industry has increasingly targeted earners in both the middle-class and high-income ranges. Shopping trends among all consumer classes have shifted over the past five years as low- and middle-class consumers have increasingly opted for bargain deals. Conversely, price-savvy deals have gradually become a bigger point of pride for wealthy consumers. Since the industry has been able to successfully meet the needs of consumers across all income classes, industry revenue has grown consistently over the five-year period. Such industry growth has driven increases in the number of enterprises, which rose at an annualized rate of 1.4% over the five-year period to total 2,050 companies in 2017.