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Retail: Who will target Canada next?

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Canadian Business

American companies are invading Canada’s malls. Target is just the start. What comes next, and how it will forever change retail in both countries.

Originally published in Canadian Business, Feb. 2011

Cross–border shopping once offered a multitude of thrills for Canadians: trawling for brand names at Macy’s, ogling cheap–chic housewares at Target, bargain hunting for factory discounts at a massive Tanger Outlet mall. But one by one, the American brands that once seemed so exotic to Canadian shoppers have expanded north. Victoria’s Secret and Crate and Barrel — both former pilgrimage destinations — opened flagship stores in Canadian malls in recent years. The pace accelerated this January, as TJX Cos., which owns the discount clothing store Marshalls, and Tanger both announced northern expansion plans. Analysts predict that J. Crew, Macy’s, Nordstrom, Kohl’s and JC Penny are also on their way.

None of these names drew more glee than when Target announced its purchase of 220 Zellers stores in a $1.8–billion deal with the American owner of the Hudson’s Bay Co. Target, which entices thousands of shoppers across the border, will finally cross the border itself. And Target’s just the advance party for an American retail invasion. As U.S. retailers search for markets outside of their own stagnant economy, they’ve set their sights on Canada. And that may mean trouble for homegrown retailers.

“Twenty years ago there were 20 U.S. retailers up here,” says Toronto–based retail consultant Wendy Evans. “Today there are, soon to be, over 200.” Canada is now in the midst of “a really big wave” of U.S. companies moving in, says Evans, and it should be enough to worry major Canadian retailers, such as Canadian Tire and Loblaws. “There is going to be a lot more competition,” Evans says. “There are nine or 10 U.S. retailers right now that have announced plans to enter this market, or are actively looking. That’s a lot.” Evans predicts that 70% of the Canadian retail landscape will be foreign controlled by 2015, up from the about 50% that is foreign controlled today.

Many of the retailers now leaping the border contemplated the move for years, but were finally spurred to action by the weak U.S. economy. Limited American opportunities in the medium term mean Canadian retailers will likely see competition increase steadily over the next five years, as their American counterparts turn to globalization for growth. There was no real incentive for retailers to look beyond America’s borders when its economy was thriving. The entire population of Canada is roughly the same as the population of California, points out retail consultant John C. Williams. While it makes sense for American companies to consider a Canadian move, a lot of U.S. companies, including Target, have been expanding in the States first. “Strategically, you’ve got to protect where you are before you start going somewhere you’re not,” Williams says. To put things into context, Target already has nearly 1,750 stores in the U.S., and it plans to add, at most, 200 stores in Canada. But as American retailers see few chances for expansion at home, Canada’s comparatively strong economy makes a move north of the border all the more lucrative. And, says Williams, when capital isn’t tied up in domestic expansion projects, it leaves money free for the startup costs associated with crossing the border. For these retailers, Canada is the perfect test market for a first foray into international expansion: there is a mainly English–speaking population, Canada’s close to existing supply chains, and its consumers already know U.S brands.

Furthermore, analysts note that U.S. retail chains have been here for nearly 100 years already. Safeway, a notable early player, opened its first five Canadian stores in 1929. In the mid–20th century, Sears Roebuck signed an agreement with the Robert Simpson company of Toronto, forming Simpson–Sears in 1952. These early American retailers moved slowly, in stark contrast to what would come next.

The first proliferation of U.S. retailers really took off after NAFTA in 1994. That was the year Walmart acquired 122 Woolco stores from Woolworth Canada, allowing it to open dozens of stores at once, in much the same manner Target is planning with its Zellers acquisition. Though Target’s move into the Canadian market was rumoured for the past five years, up until now the company said it was focusing on its U.S. operations, including the conversion of Targets into SuperTargets — a combination grocer and discount goods retailer. When the Hudson’s Bay Co. wanted to sell the lease rights for all Zellers locations, Target had an opportunity it couldn’t resist. The purchase allowed the company to move forward with its plans for international expansion, says Target spokesperson Amy Reilly.

“The timing is really about the excitement about this opportunity, which will allow us to open a meaningful number of stores in Canada,” she says.

Target will begin its Canadian move by converting 100 to 150 Zellers stores, with the first Target stores opening in 2013 in the Toronto and Vancouver markets. From there, the company plans to expand to as many as 200 locations across the country. If Walmart Canada’s entrance into the Canadian market is any indication, expansion won’t be a problem. Walmart Canada has more than doubled its number of stores since 1994, with 300 locations across the country.

But Target won’t be the only new American retailer vying for dollars from frugal shoppers in the near future. TJX, which already owns Winners and HomeSense in Canada, will open six Marshalls locations in 2011, bringing another of its U.S. brands north of the border. The Marshalls stores will be similar to Winners, focusing on brand–name products at reduced prices. TJX confirmed three of these store locations in Toronto. Another Marshalls will open in the city’s downtown club district in a former 50,000–square–foot night club, according to its property manager. “The timing is right for the company, and it’s right for our Canadian group,” says company spokesperson Sherry Lang. “It adds another growth vehicle for us.” Beyond those first six locations, Lang says TJX has plans to add up to 100 Marshalls stores in Canada.

Also in the discount–brand market, Canada will see its first U.S.–style factory outlet stores open in 2012. In another January announcement, Canadian real estate investor RioCan announced a $1–billion deal with American Tanger Outlets that will bring 10 to 15 Tanger Outlet Centers to Canada. In the U.S., each one of Tanger’s 33 outlet centres sprawls on between 40 and 50 acres of land, enough space to accommodate a massive parking lot and 60 to 75 retailers. The Canadian stores will follow the same model as their U.S. counterparts, says RioCan CEO Edward Sonshine. “Tanger, in particular, it’s quite unique,” he says. “It’s very unlike a power centre or a mall in the format that they’ve done.” Unlike a traditional mall, where walkways are enclosed, each retailer at a Tanger Outlet has its own outdoor storefront, and stores are arranged in a long row, L–shape or semicircle.

Another unique factor is the sheer size, about 350,000 square feet per centre, which means RioCan and Tanger have to build from the ground up. “For us to take a mall and redo it and make it work, it would be more trouble than it’s worth,” Sonshine says. The first Tanger Outlets in Canada will likely be near the Toronto market, somewhere on the edge of the city, where land is cheaper and where bargain hunters don’t mind a 30– or 45–minute drive to find off–price brand–name goods from the likes of Saks Fifth Avenue, Polo Ralph Lauren and Tommy Hilfiger. Sonshine says he hopes the first locations will open in 2012, with RioCan providing property management and development, and Tanger Centers taking the lead on marketing and leasing.

Yorkdale Shopping Centre, a sprawling mass of concrete and neon on the outskirts of Toronto, knows very well that there is demand for premium mall space, particularly from foreign–owned companies looking for a home for their flagship Canadian store. The wait time from the first conversation with a new retailer to a store opening at the Yorkdale Centre can be as long as three years, says general manager Anthony Casalanguida. But it’s worth the wait for companies looking to make their Canadian expansion pay off. In the past few years, Victoria’s Secret and Crate and Barrel both set up flagship stores in the mall, which boasted a 10% increase in sales in 2010 and where retail sales of $1,207 per square foot are more than double that of the average American shopping mall.

In January, Yorkdale took steps to ease the space crunch, announcing a $220–million expansion that will add 40 new stores to the mall and will help meet the demand from foreign retailers in the United States, Europe and Asia. “We believe the market is right,” says Casalanguida. “By the time we’re finished, we believe the economy will be well beyond its recovery mode and into, almost, an upward cycle.”

Casalanguida says the expansion means the mall will be able to accommodate more foreign–owned first–to–market retailers, and as more foreign retailers find success in Canada, even more will follow. “I think the reality is that they have tapped out their market in the U.S., and to continue the growth, they need to see expansion opportunities,” says Casalanguida. While this increased foreign competition is good news for the shopping centre, it also means some Canadian retailers will struggle to remain competitive. “The Canadian retailing chains that are here need to make sure they are ready for the influx of foreign retailers who are coming in,” says Casalanguida. “They have to make sure their product is the best it can be, it’s merchandised well and that they have great customer service.”

There will be no space for stereotypical Canadian niceties in a retail landscape dominated by big brands under foreign ownership, says University of Manitoba retail marketing professor Rob Warren. “Canadian retailers are going to be forced to be more competitive, or they are going to be forced out of business,” says Warren. “The retail pie is only so big, and it’s going to be the firms that are much more successful in identifying and servicing customer needs that will be successful, and that tends to be the bigger chains.” Warren doesn’t expect much of this competitiveness to be based on deep price cuts, since Walmart already dominates that market on both sides of the border. Instead, the companies that survive will be the ones who offer reasonable prices while upping their service level, ensuring they have the best products on the market and conducting more consumer research than they have in the past.

Warren predicts that in the next five years even more U.S. firms will take over or buy existing Canadian retailers for quick market entry, as was the case when American–owned Best Buy bought Future Shop, or when lingerie retailer Victoria’s Secret bought La Senza. And there is also increasing competition from European retailers, says Warren. British retailers Topshop, Ted Baker and AllSaints, along with companies from France and Germany, are also eyeing Canada for expansion as growth potential in their current markets stagnates.

The increased pressure comes as many of Canada’s best–known retailers, like the Bay and Canadian Tire, are themselves struggling to define themselves for the modern consumer. If there is a Canadian brand well positioned to weather Target’s northern march, it’s likely Joe Fresh, the clothing and makeup label owned by Loblaws. In October 2010, Loblaws opened its first stand–alone Joe Fresh store in downtown Vancouver. The 14,000–square–foot flagship Vancouver store takes Joe Fresh fashions out of the supermarket and into a trendy shopping district. With a store on popular Granville Street, where its neighbours include H&M, Holt Renfrew and Aritzia, Joe Fresh is declaring itself as a fashion brand unto itself, not just a purveyor of cheap polo shirts to be bought alongside kitty litter and oranges. The store opened with much fanfare; the company closed off the entire street for a rock concert with headliners Marianas Trench and Divine Brown. The location, and the opening party, reflects the company’s desire to reach a new, younger demographic with the 20 stand–alone Joe Fresh stores that are slated to open across Canada in the coming years. Vancouver is the epicentre of this demographic, with “an amazing number of condo dwellers and fashionistas,” says Craig Hutchison, senior vice–president of marketing for Joe Fresh and PC Home.

Next up for the company: four more stand–alone stores opening in Ontario and Alberta in 2011, and new combination Loblaws–Joe Fresh stores at high–profile downtown Toronto locations on Queen Street West and in the refurbished Maple Leafs Gardens. “I’d love to say that these stores were a reaction to Target, but clearly we’ve had these in planning for a long time,” says Hutchison. “There’s tons of competition in the apparel business, and we welcome the competition.”

Also reducing the risk for American retailers is the fact that Canadian consumers already recognize U.S. brands. Research conducted by Target before coming to Canada showed that 70% of Canadians recognized the brand and 10% already crossed the border to shop at Target. With these factors combined, Canada’s relatively small market becomes an excellent test for American companies that are looking to globalize operations. “They have to practise going to a foreign country, and this is a consumer–friendly foreign country where they are known,” says retail consultant John C. Williams. If business is good in Canada, then it’s on to the really big markets: Brazil and South America, India, China or the EU — locations where greater cultural and regulatory differences are challenging, but huge population bases provide greater potential for profits.

Companies that have already crossed the border, particularly the “big box” stores with 100,000 square feet and up, have found great success in Canadian expansion, says Desjardins merchandising analyst Keith Howlett. Walmart Canada leads the way in expansion success stories, as one of the first large–format stores to enter the Canadian market in 1994. “Walmart has been about as successful in Canada as in the U.S.,” says Howlett. The company’s Canadian arm has potential to add even more success to its track record. In a January announcement, Walmart Canada said it is investing in a $500–million expansion to add 40 new supercentres — the combination grocer and general retailers — to its Canadian operations, beginning in February 2011. Some of these supercentre additions will be built from scratch, while others will involved renovating or relocating existing stores.

Adding to the large American retailer success story are Costco, Best Buy, Home Depot and now Lowe’s. At Lowe’s, the newest player of the bunch, average sales per store in Canada are higher than in any U.S. region. The only flop, says Howlett, was Sam’s Club. The Walmart–owned warehouse retailer had a five–year foray into Canada, but it closed its Canadian stores 2009, due to tough competition from Costco. When Costco saw the Sam’s Club move coming, it ramped up its Canadian efforts, opening even more stores to serve its already loyal customer base. “As soon as Sam’s Club came, they began to pick up the pace of store openings,” Howlett says. Canadians continue to love Costco. Today, it’s about 50% bigger in Canada than it is in the U.S. on a per capita basis.

Given the multiple success stories from large–scale American retailers, Howlett says Target actually seemed slow on the uptake. “I thought Target would come to Canada for six years,” says Howlett. “I thought they were kind of slow to do it, I would say. They felt they had lots of room to grow in the U.S.”

As these “big boys” move in and U.S. competitors add more square feet per capita of retail space, Canadian shoppers will have more and more options when they need a little retail therapy. Zellers may be the first casualty on the block as U.S. retails push north and others, including Canadian Tire, and Loblaws, are going to have to re–examine their business strategies if they hope to survive and thrive in what will be an increasingly crowded Canadian retail market. Canadian shoppers will no longer need to cross the border to find their favourite brands, but for Canadian retailers, the competition is about to get a whole lot closer

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