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After Years of Robust Growth, Canada No Longer Top Priority for U.S. Retailer Expansion

May 05, 2014

Canadian Retail Market Increasingly Competitive -- Selective Opportunities for New Entrants Include Luxury, Fashion & Plus Size Apparel

By Antony Karabus, CEO of HRC Advisory, LLC, and advisor to Canadian and U.S. retailers for the last 25 years

Over 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 U.S. 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-known 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 Retail Fast Facts Report in February 2014).

From many 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.

The discount broadline sector is pretty crowded given the significant penetration of Walmart and Costco and the exceptionally strong presence of Giant Tiger 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 an extreme value chain to enter Canada on a large scale.  

The Canadian food retail sector is hyper-competitive with strong players (Loblaw, Sobeys, Metro, Overwaitea, Longos) in all key regions and the addition of significant growth in square footage in the past few years, which make it difficult for a new entrant of any scale.
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, and 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 opportunity to enter  Canada is 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 which Canadians know well from their shopping in the US and from online purchasing. Further, the existing number of choices in the Canadian luxury space is limited, with only two strong national chains in Holt Renfrew and Harry Rosen, as well as 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”), 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 into Canada 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, including a weaker Canadian dollar putting pressure on margins in a low inflationary environment, dual language packaging needs, taxes 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. 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 bricks and mortar retailers in Canada. Lastly 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 is crucial to success.