More Limited Opportunities

Canada no longer top priority for U.S. retail expansion

During the past few years, U.S. and international retailers have flocked to Canada in the hunt for top-line growth as store portfolios matured in the United States and there were fewer opportunities for expansion. In fact, many U.S. retailers considered Canada to be an extension of their domestic businesses due to the similarities and close proximity to their home offices.

Aside from the well-publicized issues experienced by Target and Big Lots in Canada in 2013, the Canadian retail industry suddenly slowed in 2013, with comparable-store sales only up 0.3% over 2012. (This included all sectors other than food and auto, according to Retail Council of Canada’s “Retail Fast Facts Report” in February 2014.)

From all accounts, Canada has moved lower in growth priorities for U.S. and international retailers in the past few months — particularly given its saturated market in most retail sectors. Looking at the discount broadline sector, there isn’t much opportunity for a major new entrant given the dominance of Walmart and Costco in the Canadian market, coupled with the 2013 launch of Target Canada and continued strong growth of TJX Canada.

Similarly, the strength of Dollarama in Canada and the recent growth of Dollar Tree following its entry into Canada by acquisition, make it unlikely for another extreme value chain to enter Canada on a large scale.

Even the Canadian food retail sector is hyper-competitive, with strong players (Loblaw, Sobeys, Metro, Overwaitea, Longos) in all key regions. This, coupled with the addition of significant growth in square footage in the past few years, makes it difficult for a new entrant of any scale.

In the drug sector, the recent sale of the leading Canadian national drug chain, Shoppers Drug Mart, to Loblaw, the leading Canadian food retailer, leaves the stronger regionals (Rexall, London Drugs, Pharmasave and Jean Coutu) as the key large independent players.

The recent deal announced for DSW to enter the Canadian market through the purchase of a 44% stake in the leading Canadian branded footwear retailer, Town Shoes Limited, is excellent. It follows the strategy employed by strategic buyers Best Buy and Dollar Tree when they entered Canada through the purchase of Canadian retailers Future Shop and Dollar Giant respectively, in contrast with the numerous other market entrants who have pursued a greenfield strategy.

However, the issues being experienced in Canada are not uniform across all sectors. There is still significant opportunity for new entrants in some sectors into the Canadian retail market, particularly in luxury and specialty apparel, where there is limited competition.

The anticipated arrival of Nordstrom and Saks will be welcomed by Canadians, as they are world-class retailers that Canadians know well from their shopping in the U.S. and from online purchasing.

Further, the existing number of choices in the Canadian luxury space is limited, with only two national chains — Holt Renfrew and Harry Rosen — and a number of independent operators.

There is also significant opportunity in the fashion apparel, fast fashion, plus-size apparel, moderate women’s apparel and related sectors, as there are no clear owners of these sectors in Canada.

There will continue to be room for strong retailers to expand into Canada, provided they have a clear value proposition with a well-differentiated store and assortment offering. Canadians are experienced cross-border shoppers (cross-border shopping is a way of life for numerous Canadians). As such, they are well aware of pricing and have high expectations for U.S. chains opening in Canada. This sets a high bar for U.S. entrants into Canada, which has caused some well-known U.S. retailers to stub their toes on entry with prices and assortments that were out of line with their U.S. domestic stores, resulting in negative publicity and price modifications post launch.

Entrants into the Canadian retail industry need to be aware of the complexities of operating in Canada. These include a weaker Canadian dollar putting pressure on margins in a low inflationary environment, dual-language packaging needs and the higher distribution costs resulting from a small population in a large geographic area.

The higher inflationary costs coming out of China will continue to put pressure on input costs, not all of which can be passed onto consumers in the form of higher prices in a very competitive retail industry.

Also, the Canadian online retail sector has finally come of age and is going to continue to take market share from brick-and-mortar stores, putting further pressure on brick-and-mortar retailers in Canada. Last but not least, a solid understanding of the costs of doing business, the different nature of consumers and the widely different drivers of the regional economies in Canada are crucial to success.

Antony Karabus is CEO of Hilco Retail Consulting and has been advising Canadian and U.S. retailers for 25 years.

Despite a saturated market, there are still strong opportunities for luxury, fast fashion and plus-size apparel. But there isn’t much opportunity for major new entrants in the discount broadline sector. And the food retail sector is already hyper-competitive, with strong players.

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