Is Canada the 51st state for US retail?

blog photo retail mallProbably not.

At first glance, it appears that both countries have similar cultures.  In the years following the 2008 recession, several US retailers looked to expansion north of the border as lower risk for international expansion and reviving sales, in part because Canadian economy had not been as devastated as that in the US. 

But in recent years, the Canadian economy has slowed, there is increased competition both through other US retailers expanding into the country as well as domestic retailers plus exchange rates are close to par which means that Canadians are more likely to cross-border shop.   

This post will review some of the high profile US retailers who have expanded into Canada including those who have succeeded, and those who have not.  We’ll also look at the established Canadian retailers and their strategies for battling the increase competition in the market as well as some facts that any retailer should consider when expanding their operations to Canada.  As a recent Canadian expat living in the US, I hope that I may be able to provide some further insights into the country’s retail scene from an avid shopper’s perspective.

Sears has just announced they were contemplating the sale of Sears Canada.  As is the practice with Sears US, the company has been selling valuable real estate and prime store leases including their Toronto Eaton Centre flagship store and several other high-profile properties.  There is speculation that Sears has stripped away a lot of the company value by selling its most valuable real estate.  In fact, many of these high profile locations were purchased by Nordstrom providing them with a footprint in major urban centers.  

Sears entered the Canadian market in 1952 by a joint venture with The Robert Simpson Company, operator of Simpsons department stores.  The ‘Simpsons-Sears’ venture included catalogues, mail order business, smaller format stores and ultimately the opening of Sears stores.  Unfortunately Sears has changed its store little over the past 20 years and has been unable to keep pace with more innovative retailers. 

Target entered the Canadian market in 2013 with their purchase of 120 Zellers stores from The Hudsons Bay Company.  The debut was much anticipated for years prior and Zellers seemed to be a logical fit as not only did they carry many of the same brands, including Mossimo and Cherokee, but they also branded their stores throughout in the same red and white as Target – in effect, a lower-end Target format.  From a personal perspective, I think that this acquisition should have happened in the early 2000’s when both economies were stronger and there was less cross-border shopping because the Canadian dollar was weaker at the time.  Having visited a Toronto-area Target store in mid-2013, I found it to be a cleaner, brighter Zellers store with higher prices than the US locations.         

‘Target’s problems may have started with its first step – deciding to occupy the premises of a failed discount chain didn’t have the panache Canadians anticipated they would find in a retailer renowned for its cheap chic’, reports a recent Reuters article.  In addition to being an average of 18% smaller than their US counterparts, many of the former Zellers locations which Target Canada purchased are in down-market malls rather than upmarket retail destinations. 

Target Canada’s woes may be summed up as follows:

Distribution:  Shelves are empty.  Target built 3 new distribution centers reportedly with state-of-the-art systems.   

Selection:  As Target’s Canadian stores on average are 18% smaller than their US counterparts, they cannot carry the full range of products many shoppers expect in a Target store.

Prices:  Because most Canadians live within 100 miles of the border, they are likely to cross-border shop or compare prices.  What they’re finding is that Target Canada’s prices are much higher than what they find in the US.  

Perception:  For many shoppers Target Canada is perceived as Target Lite or worse, ‘Zellers with lipstick’. 

Target paid $1.8 billion for the stores and invested an average of $10 million into renovating each store.  Fiscal 2013 generated a loss of $941 million.  A loss of $314 million is anticipated for the current fiscal year.  Target announced it plans to open 9 more stores in Canada for a total of 133 locations expected for the end of 2014. 

Big Lots entered the Canadian market in 2011 with its purchase of Liquidation World but did little to change the stores which it acquired.  Recently Big Lots announced that it would be closing all of its Canadian stores. 

Successful US retail expansions into Canada

In contrast to the well-publicized failures, let’s review some of the high profile US retailers who have successfully expanded north of the border.  In addition to Starbucks, The Gap, Costco, Home Depot and Bed Bath & Beyond:  

WalMart expanded into Canada in 1994 with the purchase of Woolco department stores from F.W. Woolworth.  WalMart moved quickly to remodel the existing 120 stores and distribution centers it purchased.  Today, WalMart is considered Canada’s largest department store retailer, based on sales.  They plan to invest $500-million in Canada this fiscal year including upgrading stores, adding food selections, enhancing its fresh food distribution network and e-commerce division.  By January 31, 2015 the company will operate a total of 395 locations across Canada. 

TJX Companies entered the Canadian market in 1990 with its purchase of Winners.  Today TJX has 227 Winners stores across the country offering merchandise comparable to that offered at TJ Maxx in the US.  HomeSense, now at 91 stores, opened in Canada with a product assortment similar to that of HomeGoods US.  Marshalls entered Canada in 2011 and now operates 27 stores in Canada differentiated from Winners by an expanded footwear department and The Cube junior’s department.  

As recently reported by CNBC’s Krystina Gustafson, while the Canadian discount sector is over-penetrated by US competitors like WalMart and Costco, the luxury space still has room to grow.  Canada’s venerable Holt Renfrew can expect to see competition from both SAKS and Nordstrom. 

Nordstrom plans to open 6 stores in Canada by 2016, several of which are high-profile urban locations purchased from Sears.  The company is currently preparing the opening of its first full-line department store in Calgary scheduled for fall 2014.  In a recent article by Marina Strauss of Canada’s Globe and Mail, Nordstrom’s spokesperson indicated that they did not anticipate the complexities of expansion into Canada and were learning lessons from Target’s struggles including the differences in distribution system requirements between the 2 countries.  As such, Nordstrom recently announced that they would defer opening their discount Rack stores to 2017 (from 2015). 

In December 2013, Amazon launched its Amazon Fresh grocery deliver service in Canada for dry goods and beverages, no fresh or frozen.  AmazonFresh was launched in an area close to Seattle about 6 years ago and has been slowing expanding into other regions.      


Successful Canadian retailers

In response to increased competitive pressure, some established Canadian chains have consolidated to lower costs and improve their buying power as they prepare to compete in an increasingly competitive Canadian market. 

Loblaws is Canada’s largest food retailer operating over 1000 corporate and franchised stores throughout the country.  In addition to food, it is a leading provider of drug store, general merchandise and financial products and services.  In March 2014 Loblaws closed its $12.4 billion deal to buy the country’s largest drug store chain, Shoppers Drug Mart (Shoppers’), operator of 1242 full-service retail drug stores.   The combination of the 2 companies is expected to generate $300 million in savings over the next 3 years and help it battle fierce competition.  Loblaws plans to stock Shoppers with more of its high-margin, President’s Choice private-label products and fresh produce, while the grocery stores will carry Shoppers’ health and beauty lines.  

Nova Scotia-based Sobey’s purchased Canada Safeway in mid-2013.  Sobey’s today is Canada’s 2nd largest supermarket chain operating 1500 stores under various banners and footprints throughout Canada in addition to 330 retail fuel locations.

Founded in 1670 as a fur trading outpost, Hudson’s Bay Company (HBC), is North America’s longest continually operated company.  HBC operates department stores (The Bay, Hudson’s Bay) and home stores (Home Outfitters).  The company was purchased in 2008 for $1.1 billion by US real estate tycoon, Richard Baker.  Shortly afterwards Baker sold HBC’s troubled Zellers chain and its real estate to Target.  Mr Baker had also purchased Lord & Taylor (2006) from Federated.  In 2013, HBC purchased Saks Inc. the corporate entity of Saks Fifth Avenue.   All 320 stores now operate under the Hudson’s Bay Company including 170 department stores, 72 outlet stores, 69 home stores and 2 e-commerce sites. 

The diversity in brands and formats enables HBC to convert some locations to sister banners that are better positioned to succeed in the local market.  In addition, the company will be opening its first Saks stores in the Toronto area in 2015.  In another smart move, HBC sold its downtown Toronto flagship store and adjacent office tower to Cadillac Fairview Corp for $650 million with the proceeds being reinvested in stores and used to pay down debt.  HBC will lease the space from Cadillac Fairview.  As Marina Strauss of Canada’s Globe and Mail reports, ‘Mr. Baker can find value in HBC where most didn’t see it.’

Plans are to combine Saks into the current downtown Toronto flagship and add a ‘food hall’ fashioned after Harrods.  With launch planned for fall 2015, it will open 1 year prior to its neighbor and fellow luxury department store, Nordstrom, in the Toronto Eaton Center. 

Not only is Baker revitalizing HBC, he is also preserving the company’s history including the re-launch of its iconic, art-deco Arcadian Court restaurant in the Toronto flagship.    

Canadian Tire was established in 1922 by the Billes family.  Today it operates 500 stores across Canada that feature everything from living (home organization, cleaning, pet care, kitchen) to hardware (including tools and paint), fitness and sporting goods to driving (auto parts, tires, auto service, gas, roadside assistance).  What makes Canadian Tire unique is that each store is operated by a dealer or independent merchant who has the ability to tailor the merchandise assortment to its local market.  A recent Huffington Post Canada article estimates that 90% of Canadians live within 15 minutes of a Canadian Tire Store. 


About the Canadian market

The Canadian market is typically 1/10th the size of that in the US and because most of the population is located within 100 miles of the US border they are used to crossing the border to compare deals.  Fewer shopping malls in Canada means they generate an average 20% more sales per square foot than their US counterparts.    Some other considerations for US retailers looking to expand into Canada:

US products need to be tailored for Canada:  Food and drug regulations require that some US products be reformulated for the Canadian market. 

Higher costs & prices:  Employee benefit laws are costlier and more tightly controlled than in the US.  In addition Ontario’s minimum wage will increase in June 2014 to $11 (up 75 cents).   On average, prices are usually 10 to 15% higher in Canada than they are in the US

Language regulations:  As Canada has 2 official languages product packaging must be in both English and French.  Language regulations are even greater in the province of Quebec where French must be featured more prominently in marketing as well as signage

Size of the country:  Canada is the world’s 2nd largest country in terms of land mass with 9,976,140 square kilometers and a population density of 3.3 per square kilometer.  Compare that to the US with a land mass of 9,629,091 sq. km. and a 31.6 population density.  

Multiculturalism:  Having embraced multiculturalism since 1971, Canada has a diverse ethnic makeup.  In the city of Toronto alone, over 140 languages and dialects are spoken and just over 30% of its 2.79 million residents speak a language other than French or English at home  

Canada really can’t be considered the 51st state.  It’s different enough from the US so that retail concepts can’t be easily transferred.  But the rewards can be great for those retailers who do their homework and take a prudent approach to expansion into Canada. 

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