Event: Queen's University ESCIRE Seminar
Panel: The American Retail Invasion and its Impact on Canadian Real Estate
Moderator: Neil Smiley, Fasken Martineau DuMoulin LLP
Panelists: Tony Grossi (Grossi NorthBound Strategic Business), Brent Houlden (Deloitte), Josh Kaufman (SmartCentres)
The following are some key points that came out of last week’s ESCIRE panel on the influx of American retailers into Canada:
Why US Retailers Are Coming to Canada
National US retailers are finding themselves overstored domestically due to aggressive prior expansion, weak consumer spending, and growing online competition. To offset stagnant or declining domestic sales, retailers are looking to international markets as a way to generate growth for investors. Canada is a great testing ground for US retailers, as it gives them an opportunity to figure out all the operational and merchandising details before taking a plunge overseas. US retailers were described as having “cautious enthusiasm” for opportunities in Canada with some concern about a potential market bubble. It used to be said that no US retailer could fail in Canada – but examples such as Sam's Club show it is possible.
Barriers to Entry
The number one constraint for retailers looking to enter Canada is access to real estate. Landlords are much more organized in Canada compared to the US which makes it challenging for retailers to squeeze out concessions. US companies have explored buying out existing retailers in Canada to get access to favourable lease rates, but lease agreements often give landlords the right to raise rents in these circumstances. Target’s initial refusal to publicly announce its preferred store locations was a smart negotiation tactic as landlords were forced to be competitive. US retailers are also dealing with this access to real estate issue by getting more creative in their store prototypes in order to be flexible in the types of spaces they can go into.
Impact on Canadian Retailers
US retailers are much more competitive than their Canadian counterparts. The typical US retailer coming into Canada often has +/-1,000 stores behind it, while Canadian brands may have only 150 locations. In addition, the average US retailer dedicates 11% of its gross sales to supporting its head office. However, when these retailers come to Canada they generally still rely on their US headquarters, leaving them with an extra 11% which can be spent on marketing.
Online Sales Helps Test Markets in Advance
Thanks to their online presence, retailers no longer need to guess about their brand recognition before entering Canada. Retailers can see exactly where people in Canada are buying their products – a great tool for determining which markets to enter.
Lease Contract Complexity Increasing
US retailers are bringing new conditions to their leasing contracts that were previously uncommon in Canada, such as capped CAM charge increases and opt-out clauses tied to the presence of other key brands.
Changing Store Location Strategies
In the past, the magic number of store locations across Canada for fashion retailers was 75. With strong online sales, some retailers are opting to open fewer locations, but choosing flagship sized stores in high profile real estate. Similarly, brands like Apple are using a “hub and spoke model”, supplementing flagship locations with kiosks and store-in-store formats.
Over the next few years, outlet centres will be one of the most significant new development opportunities for retail in Canada –although panelists disagreed on how many would be built. Outlet centres target locations with 1 million people in a 30 minute driving time, but also look at 45 minute drive time figures as they are considered a super-regional draw. Despite the apparent discounts, outlet stores are actually the most profitable channel available to many retailers. Much of the merchandise is specifically produced for outlets rather than being unsold leftovers from full price stores. Full price stores help create an illusion among customers about the level of sales they are achieving at outlets. In reality, this ‘savings’ is often an artificially engineered margin that retailers purposely created.
Urban Retail Developments
Both Target and Walmart are exploring urban markets and will be looking to find ways to enter these markets more aggressively in the future. In addition, there is the potential that major mixed-use retail development could occur in the Port Lands area in Toronto. A development in the Port Lands would have a regional market draw (it was noted that Toronto is underserved in regional retail centres).