Quarterly financial statistics for enterprises, third quarter 2019

Inventories growing at a slower pace than overall assets in the Canadian corporate sector

Total assets in the Canadian corporate sector are four times larger in 2019 than in 2000, while inventories are twice as large.

The level of inventories is a useful indicator for industries' economic performance and is often used as a measure of consumer confidence. High levels of inventories in comparison with previous periods suggest that consumers are not spending as much. When considered as a proportion of total assets, inventories also shed light on the efficiency of the Canadian economy.

Inventory's share of total assets in the corporate sector fell from 5.6% in the first quarter of 2000 to 3.4% in the third quarter of 2019.

The share of total assets owned by the manufacturing industry in the Canadian corporate sector fell from 15.8% in the first quarter of 2000 to 8.4% in the third quarter of 2019. Total assets in the Canadian corporate sector owned by the retail and wholesale industries have remained around the same levels since 2000 (see Chart 2).

Manufacturing inventories as a percentage of total assets for the corporate sector fell from 2.1% in 2000 to 0.8% in the third quarter of 2019, a drop of 61.9% (see Chart 3).

Wholesale's inventories as a percentage of total assets for the corporate sector fell from 1.1% in 2000 to 0.7% in the third quarter of 2019, while retailers' inventory share fell from 1.0% to 0.7% in the same period (see Chart 3).

Fixed assets owned by the Canadian corporate sector grew at a faster pace than inventories in the period from 2000 to 2019. The slower growth in inventories could suggest that some businesses have effectively implemented new technologies which help improve their supply chain, like just-in-time inventory management, and improved enterprise software which facilitates smaller inventory stocks.

Although the drop in inventories as a proportion of total assets for the corporate sector is explained by the change in the industries' size within the Canadian economy, the magnitude of the change is not equal for all industries as each one is subject to the demands of their particular business model.

Inventories represent a high proportion of retailers' total assets

Despite slower growth in inventories in the Canadian corporate sector, the retail industry remains highly dependent on inventories for generating revenue.

Retail industry's inventories as a percentage of their total assets were eight times higher than in the overall Canadian corporate sector at the end of the third quarter.

The nature of the retail industry might be the primary reason for higher levels of inventories. Customers typically prefer a variety of choices when shopping, and so retailers offer a wide selection in their stores to attract clients. This leads to higher stocks of inventories held. Until recently, one of the ways traditional brick and mortar retailers have competed with online retailers is by providing immediate access to products. This advantage requires physical inventories in store for consumers to purchase, which puts upward pressure on inventory.

On the other hand, higher inventories have a trade-off in the form of increased storage costs. Additionally, there are opportunity costs associated with inventories—since the funds spent to purchase additional inventories cannot be used to advance other business opportunities. Retail enterprises that are able to compete with lower stocks of inventories are generally more efficient.

The portion of inventory in total assets fell by one-fifth in the retail industry, from 34.9% in the first quarter of 2000 to 27.7% in the third quarter of 2019 (Chart 4).

The ratio of inventories to operating profit—a measure of a company's efficiency in managing inventory—trended down during the same period, falling from 21.6% in first quarter of 2000 to 14.1% in the third quarter of 2019 for the retail industry. This suggests the industry is able to generate higher profit with lower stocks of inventory.

Since 2000, the stocks of inventory have been trending down, which suggests that retailers are able to more effectively manage their inventories and apply excess capital towards more productive business ventures.