For retailers swarming into Canada from the U.S. and Europe, most are discovering a steeper-than-expected learning curve. Yet, market dynamics suggest greater payoffs down the road.
Commercial venues such as Queen Street in Toronto and Vancouver’s Gastown neighborhood are getting hipper with relative newcomers like Zara, Uniqlo, Warby Parker and Shinola. Internet sales penetration is only 2 to 3 percent of total retail sales, meaning there’s plenty of opportunity online. Amazon is aggressively opening distribution centers. Developers have poured money into enhancing their best mall properties, and Canadians who have been in the habit of shopping south of the border are spending more at home due to the strength of the U.S. dollar and the country’s fresh crop of retailers bringing greater variety of products.
The door has swung open for retail outsiders, as homegrown retailing in Canada shakes out. This year Reitmans is closing 40 stores and Le Chateau is closing 18. Sears Canada has raised the possibility of liquidation, and shoe retailer Ingledew declared bankruptcy and will shut down. Last year, Reitmans shuttered 104 stores, including its Smart Set chain which had 29 locations and 42 Reitmans stores, and the Danier Leather chain folded.
“Either they did not keep pace with the way the market was changing as new entrants raised the bar, or it took them [too long] to recognize the whole e-commerce phenomena, which eliminated the need for many stores,” said Antony Karabus, chief executive officer of HRC Advisory and a native of Canada. “Also, the cost of real estate has gone way over the top. In places like Eaton Centre, Yorkdale Centre and Pacific Centre, a lot of low productivity chains just can’t make it. If you are paying $250 a foot rent and generating sales of $400 or $500 a foot, you can’t survive paying 50 percent rent.”
In Canada, the market is filling up fast. “I don’t think there is a lot of room for new entrants,” Karabus said. “U.S. players [in Canada] like Petsmart and TJX are getting stronger and stronger. I believe Nordstrom has such a compelling offering and will get its rightful market share in time.”
Overall, Canada’s retail sales in the first quarter were robust but a good chunk of that was vehicle and gasoline sales. Automotive was up 12 percent but retail stores selling apparel and accessories were just 2.7 percent ahead and only marginally better than in the U.S., according to Statistics Canada, an arm of the Canadian government.
“We have situations where business is kind of bursting forward in one sector, then another sector just drops off the cliff. There’s never a whole lot of traction overall,” observed Ed Strapagiel, a Toronto-based independent retail consultant.
According to a Euromonitor International report from February, “Despite rising household debt and real estate prices, Canadian consumers are unlocking their buying power to meet their consumption needs. Overall, more Canadians are entering the real estate market and are increasing their spending on food and local vacations. Health-conscious attitudes and a rising demand for healthy and local foods continue to dominate the mind-set of consumers. The most significant demographic trend facing Canadians is a rapidly aging population and a falling birth rate.”
Meanwhile, sales at many apparel stores have been slowing, partly because of shifts in how consumers are spending and partly due to the new players now taking a piece of the pie. Canada’s clothing stores were up an average 7.8 percent in 2015 but last year their gains dropped to 3.9 percent. “In terms of department stores and specialty clothing, jewelry and shoes things have slowed down,” said Strapagiel. “Electronics, home improvement, garden centers — that is where the money is going right now.”
Wal-Mart was the first in the wave of retailers entering the country about two-and-a-half decades ago, and in the past 10 years, there’s been a second wave of entries into the market, including Zara and H&M and more recently Saks Fifth Avenue, Nordstrom and Nordstrom Rack. Luxury retailers, such as Cartier, are still entering the market, but they are limiting the number of stores opening and the size of each. Asked if the market has reached the point of being overstored, Strapagiel said, “I don’t think so. I think we are about right.”
The demise of Target in Canada in 2015 has been a cautionary tale for expansion-minded retailers. Nordstrom, for example, which has six full line stores in Canada, is ready to sit back and see how stores already opened perform before opening more sites. It’s best-performing store is believed to be the Vancouver flagship, fueled by well-to-do Asian customers. The Seattle-based retailer’s Vancouver and Toronto flagships are fully rigged with Nordstrom’s newest selling floors concepts such as the men’s clubhouse for personal styling and relaxing, a centrally located bar, and the Pop-In pop-up format featuring unique products. “We heard from customers, “Don’t bring Nordstrom light,” said Erik Nordstrom, copresident of Nordstrom Inc., at this month’s World Department Store Forum in Toronto.
To capture more business online and offline, Hudson’s Bay Co. last year opened a state-of-the-art robotic fulfillment system in Scarborough, a suburb of Toronto, and has been installing new in-store formats including a Pusateri’s food hall at Saks Fifth Avenue on Queen Street and large Topshop and Topman shops inside certain Hudson’s Bay department stores. With the market filling up with new entries, priorities shift to generating greater business through existing doors rather than by opening new doors.
Canada, though vast in size, is a country with an economy about the size of Texas’, with about $1.7 trillion in GDP. The population is small, at 35.2 million as of 2016. It has increased by 1.7 million since 2011. The unemployment rate stands at 6.8 percent and services employ about three-quarters of the workforce. In 2016, Canadians averaged more than $44 billion in retail sales every month, according to Statistics Canada.
Despite the proximity to the U.S., “Canada has been hard operationally,” said Nordstrom, citing different labor laws, technology, climate conditions and the logistics of getting products across the border which often involve moving small quantities great distances. With Canada being bilingual, packaging and labeling has to be in English and French.
“Globalization is no panacea. Success rates vary widely,” said Andrew Jennings, whose career has taken him to the helm of several retailers around the world including Holt Renfrew, Karstadt and Woolworths SA. “Transporting successful retail concepts from one country to another is anything but clear-cut, as many retailers have discovered. No matter how successful a brand is on its home turf you cannot simply transplant it from one country and begin to count the profits — it does not work like that.…It all comes down to one over-arching priority — the customer. Understand your customer, get the offering right and everything else will follow — and at the same time ensure that the local management team understands the brand culture and translates it into that new market place.”
According to PwC Canada, for U.S. retailers “Canada is attractive because of its proximity, cultural similarities and strong economic performance through the recent global economic challenges. But while there are many similarities between doing business in Canada and the U.S., there are also several differences that require up-front planning to comply with Canadian regulations and ensure you operate effectively. How prepared is your business for cross-border expansion?”
Retail experts say Canadians are getting increasingly value-oriented, shopping more off-pricers and discounters such as Wal-Mart and TJX, and are not that different from U.S. consumers, though as Karabus suggested, “Canadians are not as openly flamboyant. They generally don’t make a loud statement. Discretionary spending by Canadians isn’t anywhere near the same rate as in the U.S.,” though spending on homes and autos has been robust. “Consumer debt is extremely high. Mortgage rates are extremely low. What if the rates go up a point? That will impact consumers’ ability to spend. That’s the one thing that worries me,” Karabus said.