A look ahead to 2025: friend or foe of small- and medium-sized retail businesses?

Independent retail operations in Canada challenged by continued weak demand and limitations on growth

// By Andreea Bourgeois, Director of Economics, Canadian Federation of Independent Business

The new year began on a positive note for most retailers. In January 2025, long-term optimism among retailers grew by 6.9 points. While this is good news, it’s important to note that the current optimism level (58.5) is only around the historical average for the sector (58.0). Before the pandemic, the 10-year average confidence level was higher at 61.1.

Optimism often gets a boost early in the year, since December is the busiest month for about 25 per cent of retailers and they tend to carry over some of the year-end confidence. However, it’s still uncertain if this upward trend will continue throughout the year. Around 40 per cent of retailers experience their peak sales in the spring and summer months (May to August), while January and February are the slowest months for about 60 per cent of retail outlets.

Careful employment and wage plans

Employment plans for most in 2025 are cautious. The expected net change in full-time jobs is negative, with only 12 per cent of retailers planning to hire more full-time staff, while 17 per cent expect layoffs. This is similar to trends seen in January 2024. With fewer businesses hiring, planned wage increases are modest, averaging 2.1per cent—close to pre-pandemic levels. For comparison, average wage increases were higher in recent years: 2.8 per cent in 2022, 2.6 per cent in 2023, and 2.3per cent in 2024. It’s worth noting that not all retailers will follow this average; some may offer larger raises, while others might freeze wages, especially if they made significant adjustments in recent years. Wage trends tend to follow labor shortages—fewer workers mean higher wages.

Still struggling with weak demand

Retailers also face challenges from weak demand for products and services. The CFIB’s indicator tracking low demand is still high at 56 per cent, although it has improved since its February 2024 peak of 66 per cent. Insufficient demand directly affects revenues and makes it harder for businesses to plan ahead. Recent rate cuts by the Bank of Canada have helped boost spending slightly, but after three years of rising prices, it will take time for consumers to adjust.

Retailers plan smaller price increases in 2025, averaging 2.7 per cent, compared to previous years. However, there’s a big unknown: the potential impact of U.S. tariffs on Canadian products and Canada’s retaliatory measures. These tariffs could increase costs for Canadian retailers, even those focused on domestic goods, as higher expenses for raw materials and equipment would affect supply chains. This could lead to higher prices for many products, disrupt distribution networks, and force some small and mid-sized businesses to change their product lines.

Limitations on business growth still abound

Other obstacles to growth include limited working capital (32% of retailers), labor shortages (30%), and lack of physical space (29%). Many businesses struggle to find the funds to invest in stock, equipment, or technology, delaying their growth plans. Labor shortages, while less severe than in the past two years, remain an issue. For small and medium-sized businesses, high rents and property taxes also make it difficult to expand their operations.

Will 2025 be better than the tough years of 2023 and 2024? It started with hope—lower interest rates, inflation under control, fewer labor shortages, and a temporary GST/HST holiday on select items. However, the final weeks of 2024 brought new challenges, like the Canada Post strike disrupting shipping, the looming threat of U.S. tariffs and retaliatory Canadian tariffs, and rising political uncertainty at the federal level. To succeed in 2025, retailers will need to stay flexible and ready to adapt to changing market conditions.

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Andreea Bourgeois is the Director of Economics at the Canadian Federation of Independent Business (CFIB), Canada’s largest association of small and medium-sized businesses with 100,000 members across every industry and region, 23,000 of whom are operating in retail.