Canada / Industry Insights
Five Canadian Industries to Rise and Fall in 2017
by David Witter, Stephen Morea, Madeline LeClair, Jon DeCarlo, Dmitry Diment and Chrystalleni Stivaros
Feb 03 2017

From high-profile mergers and acquisitions to the Olympics, 2016 was a whirlwind of a year. Along with larger political and cultural trends, decade low oil and steel prices, rising unemployment and strong technological advancements have contributed sizably to both the growth and decay of a wide variety of Canadian industries this past year. Demographic shifts and changing consumer preferences have also influenced the business environment, especially as the population ages and tech-savvy millennials gain more purchasing power. This year is expected to be similarly exciting and challenging for Canadian industries, as new regulations, innovations and shifting consumer preferences yield new opportunities and roadblocks. IBISWorld has compiled a list of Canadian industries expected to grow and decline in 2017.

Industries poised for growth

Oil & Gas Field Services in Canada

Commodity-focused industries across North America, specifically those related to oil and gas activities, endured trying times over the five years to 2017, though a respite appears likely over 2017. In particular, the Oil and Gas Field Services industry in Canada is anticipated to rebound. The industry provides support services for oil drilling, gas extraction and mineral mining operations, including predrilling testing and exploration, development drilling, well cementing, fracturing and perforation services, among many others.

Beginning in late 2014 and lasting through mid-2016, the world price of natural gas dropped an astounding 55.4%. Moreover, the world price of crude oil dropped 58.8% over the period. As a result, IBISWorld expects revenue for the Oil and Gas Field Services industry to fall an annualized 2.0% to $33.8 billion over the five years to 2017; however this average masks true industry conditions. From 2012 through 2014, industry revenue grew over 10.0% each year, peaking at $48.7 billion in 2014; however, revenue plummeted 37.8% in 2015 as companies slashed exploration and production budgets in response to ever-lower sales prices. Rig counts dropped drastically, bottoming out at a paltry 36 (only 5.1% of the 2012 high) in May 2016.

While imbalances in natural gas markets are expected to take much longer to sort out, crude oil drilling and extraction activity over 2017 is expected to reverse the sharp downward trend in the industry. As of early January 2017, the number of active oil and gas rigs is up 23.4% year-over-year. Rebounding demand and slowing production growth, partially due to planned production cuts agreed to by members of the Organization of Petroleum Exporting Countries, will support rising prices, with the world price of crude oil expected to rise 21.5% in 2017. As a result, IBISWorld expects industry revenue to rise 18.8% to $33.8 billion over the current year. While industry participants will welcome any positive movement in demand, industry revenue will likely remain below historical levels until 2018.

E-Commerce and Online Auctions in Canada

Companies in the E-Commerce and Online Auctions industry in Canada sell merchandise via the internet. Items frequently purchased through the industry include books, clothing, electronics, toys, games, furniture, household appliances and a variety of other goods. The industry has been growing strongly due to the convenience of purchasing goods online and the variety of items offered. Since operators are not constrained by shelf space, they are able to sell a wider variety of items than in traditional brick-and-mortar locations. In 2017, industry revenue is expected to increase 12.4%, compared with an 11.5% increase in 2016, and an overall 11.7% annualized growth over the five years to 2022. Due to the discretionary nature of industry products, demand depends heavily on per capita disposable income. In 2017, Canadian per capita disposable income is expected to accelerate and rise 3.1%. Additionally, the number of fixed broadband connections is expected to rise 2.3% in 2017. As the number of fixed broadband connections increases, more consumers will have access to the internet and the items sold through the industry.

Software Publishing in Canada

The Software Publishing industry in Canada consists of companies that create software and sell licenses for the software to consumers, businesses and government entities. Businesses and government agencies make up the vast majority of customers. Due to the industry’s high reliance on businesses, corporate profit greatly influences demand. When corporate profit is high, downstream customers are more willing to purchase software. In 2017, corporate profit is expected to rebound significantly and rise 14.4%, compared with a 5.8% decrease in 2016. Due to rebounding corporate profit, industry revenue is expected to rise 5.9% in 2017, compared with a 5.6% decline in 2016. The industry will also benefit from accelerated per capita income growth in 2017, which will allow consumers to purchase more discretionary software, such as video games and design, editing and rendering software. Additionally, the industry will further benefit from the increasing use of software in 2017. For example, data analytic software allows users to analyze large sets of data to identify trends and improve a company’s revenue and profit. As these types of software become easier to use and data analytics becomes more engrained into business, demand for software will continue to rise.

Home Care Providers in Canada

The Home Care Providers industry in Canada has experienced rising demand from an aging population, though the expiration of critical government funding has limited the pace of industry expansion. Industry operators provide skilled nursing services in the home, combined with a range of other home services. While the vast majority of home care services in Canada are provided by publicly managed agencies, only those services delivered by private operators are included in this industry.

As the Canadian population has aged and people have increasingly preferred home care over institutional care, industry operators have expanded their role in the healthcare sector. Over the past decade, the number of Canadians aged 65 and older has expanded at a faster rate than the general population, signifying that the elderly will account for an increasingly large share of the total Canadian population. As a result, total industry revenue is expected to grow at an annualized rate of 2.8% to $4.5 billion over the five years to 2017, which includes a 6.1% jump in 2017 alone.

However, the industry has been hampered by the expiration of the Canada Health Accord in March 2014, which provided consistent funding for healthcare across all Canadian provinces since 2004. The expiration of this funding source has limited healthcare spending from government payers, and while Prime Minister Trudeau has promised a new five-year accord, nothing has been passed as of the beginning of 2017. Ultimately, failure to enact a new accord will limit the industry’s growth over the five years to 2022.

Accounting Services in Canada

While the Canadian economy stalled, the Accounting Services industry in Canada has been able to steadily expand, with revenue expected to increase at an annualized rate of 2.5% over the five years to 2017, which includes a 4.4% jump in 2017 alone. Much of this growth has been the result of structural changes, as the industry has shucked a reliance on cyclical audit and assurance services and garnered more business from higher-margin advisory practices. Over the past five years, the largest accounting firms have recognized the complexities of a changing Canadian business environment and found new opportunities in helping their clients navigate an increasingly complex corporate world.

According to IBISWorld estimates, corporate tax advisory and consulting services account for 13.8% and 11.6% of industry revenue, respectively. Moreover, both segments’ share of industry revenue has increased steadily over the past five years. Rising demand for tax advisory services has been largely driven by Canada’s favorable nominal corporate tax rate of 26.0% compared with 40.0% (federal, state and local) in the United States, which has led to the emergence of corporate inversions. Navigating the complex tax laws associated with this relatively new phenomenon has increased demand for tax advisory services, especially for Canada’s largest accounting firms, which have a multinational presence.

The industry has also been able navigate a sharp contraction in the Canadian initial public offering (IPO) market by increasing its emphasis on mergers and acquisitions (M&A) advisory work, which remains strong, especially in Alberta, where Canada’s distressed oil companies grapple with balance sheet pressure. Moreover, the weaker Canadian dollar increased the purchasing power of international corporations, and will continue to encourage cross-border M&A through 2017, bolstering demand for professional accounting services.

Industries Set to Decline

Textile Mills in Canada

The Textile Mills industry in Canada has declined over the past five years, driven primarily by shrinking demand from the downstream domestic apparel market. Demand from apparel manufacturers has been declining for decades, with domestic apparel companies, faced with intense price-based import competition, opting to offshore production to developing countries to leverage low labour costs and decrease selling prices. To keep shipping costs low, apparel manufacturers tend to source their inputs from nearby, abandoning their previous business engagements with domestic textile providers. Consequently, the exodus of apparel manufacturers has had a negative effect on this industry. Given the deterioration of a primary downstream market, IBISWorld expects that the industry’s revenue has contracted at an annualized rate of 2.5% to $2.8 billion over the five years to 2017.

In 2017, industry revenue is anticipated to decline 2.6%, as the domestic apparel market continues to shrink and textile manufacturers move production abroad. These losses will be compounded by a substantial decline in industry exports, driven by the anticipated appreciation of the Canadian dollar over the year. The decline in industry revenue is expected to constrict industry profit margins, causing unprofitable companies to exit the industry. In 2017, the number of industry operators is expected to decline 4.3% to 1,307 companies. The remaining industry operators are expected to cut costs to stay afloat. As a result, industry wages are projected to decline 3.7% to total $527.7 million in 2017.

Office Supply Stores in Canada

The Office Supply Stores industry in Canada has struggled to adapt to a changing digital landscape for more than a decade. The digitalization of the economy and a change in the way information is consumed and disseminated have led to declining demand for many of the industry’s core products, such as pens, paper, toner and print and copy services. The internet and the increasing popularity of tablet computers and smartphones have rendered many of the industry’s products to be redundant. Moreover, intense competition from discount department stores and online retailers selling many of the same products as specialty office supply stores, have further hampered the industry’s growth. Consequently, industry revenue is expected to fall at an annualized rate of 4.7% to $1.6 billion over the five years to 2017. During the current year, spending on industry products and services is projected to decline 2.2%. Further, industry revenue will continue to contract over the next five years, and operators will increasingly close underperforming locations.

Hardware Manufacturing in Canada

The Hardware Manufacturing industry in Canada produces a variety of metal hardware products including hinges, handles, keys and locks primarily for the construction, furniture and automotive sectors. Despite growth over the past five years, industry revenue has yet to reach its prerecessionary levels. This is partly because increasing import competition and the ongoing relocation of industry players and downstream manufacturers abroad have hampered domestic revenue. Moreover, import penetration will continue to pose a threat to the industry, as foreign-produced goods are expected to satisfy 94.9% of domestic demand for hardware in 2017. Another key driver of industry revenue is the level of activity and investment in the residential housing construction market, which has fluctuated significantly over the past five years. Significantly, the value of residential construction is expected to decrease 0.5% and housing starts are expected to decline 6.2% in 2017. As a result, industry revenue is anticipated to fall 1.3% in 2017.

Soda Production in Canada

The Soda Production industry produces carbonated soft drinks (CSDs) as well as energy drinks and sports drinks. Amid growing health concerns of consuming sugary beverages, demand for CSDs has steadily declined over the past five years. An increasing number of individuals will likely substitute regular and diet CSDs for carbonated and still bottled water and ready-to-drink tea, which provide caffeine and refreshment like soda. In fact, per capita soft drink consumption decreased at an annualized rate of 2.8% over the five years to 2017. Previously, the industry’s energy drink segment has kept the industry afloat. However, in 2013, Health Canada transitioned energy drinks from being considered as a natural health product to food. As a result of this transition, Health Canada now restricts the level of caffeine in energy drinks, requires clearer labelling and prohibits the sale of premixed alcoholic beverages with caffeinated energy drinks. Due to rising regulations and total health expenditure rising an estimated 3.3% in 2017, IBISWorld expects industry revenue to contract 0.9% over the year.

Shoe & Footwear Manufacturing in Canada

The Shoe and Footwear Manufacturing industry in Canada has experienced favorable operating conditions over the past five years. Both per capita disposable income and consumer expenditure are expected to have risen in Canada over the period, boosting domestic demand for industry products. Additionally, the Canadian dollar’s depreciation has fueled rising international demand for increasingly affordable industry exports, while decreasing the price-competitiveness of footwear imports domestically.

However, the Canadian dollar is expected to appreciate in 2017, reducing international demand for industry products, while simultaneously intensifying competitive pressures from low-priced footwear imports. As a result, industry revenue is forecast to contract 0.4% in 2017. This decline is expected to adversely impact industry profitability during the year, making the industry less attractive for potential participants. Therefore, IBISWorld anticipates the number of industry operators to grow at a modest 0.8% to 121 companies in 2017. Weak growth in the number of industry operators is anticipated to stunt the industry’s demand for labour, causing industry employment to decline 1.3% to 1,493 workers.