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Tuesday, February 12, 2013

Canadian Retail Landscape to Change, Observations from ICSC, Whistler 2013

By Amy Erixon, Toronto

Spirits are high when the snow is falling in Whistler.  Despite record attendance at this year’s International Council of Shopping Centers conference, it was striking how few retailers were present.  Equally noticeable was the shift from a 40%/60% split between investment and leasing professionals to about 80% leasing professionals at this year’s gathering.  The absence of buyers was ironic considering this meeting coincided with a bidding war to take over Primaris, a major shopping center REIT at significant premium to NAV (something commonly seen just as a sector peaks).     

There was a dazzling array of planned retail development showcased at the conference, all looking for tenants. Cadillac and Oxford continue to expand all of their best malls across Canada.  Ivanhoe Cambridge is planning billions of dollars of construction of myriad outlet malls in both the US and Canada.   RioCan has entered into a billion dollar Joint Venture with Tanger Outlets to sell some of its Canadian assets and develop discount malls together across Canada.   Dozens of regional players (including a number of advisors traditionally more active in industrial product) were rolling out multiple development projects.   Major changes lie ahead.    It is old news that a large number of prominent US retailers are planning expansions into the Canadian market, and that the per capita square footage of retail space today is lower north of the border.   Venerated names such as Victoria’s Secret, Gap, Coach; Staples, Lowe’s and Home Depot; Apple, Starbucks, Crate and Barrel, Body Shop, Williams Sonoma and Nine West, among others are firmly ensconced in the Canadian landscape.  Nordstrom and Target are opening their first stores in the spring.   These retailers are the best of the best, and will raise the bar on service and merchandising in Canada.  If the American experience is indicative, significant fallout among smaller players is likely.    

Those who got here first have found a very fertile ground north of the 49th parallel; in fact some are continuing to expand, confident that despite increasing competition their market share can be greater.   For example, Walmart’s response to more competition from Target is to launch 4.3 million square feet of planned expansion, of both existing stores and by adding nearly 30 new stores, detailed here: (http://www.thestar.com/business/2012/04/12/walmarts_plan_to_battle_target_dollarama_in_canada.html).   The CBC and Globe and Mail recently highlighted the reason why this market is so good: retail prices average 10 to 50 percent higher in Canada than prices for the same goods in the United States.  But when we look at the impact of internet shopping combined with the fact millions of Canadians cross the border every year to buy everyday goods, school supplies, specialty goods, coats, sporting goods, shoes and just about everything else(besides pharmaceuticals, which remain astonishingly cheaper in Canada), it raises the question, just how much more retail space do we need?     

Target wisely decided that the most sensible way to enter the market was to acquire stores of the failing Canadian discount chain, Zellers (Great merchandise, no staff, long lines, best locations).   Target brings to this market its uniquely effective customer targeting and micromarketing systems that enable it to compete so effectively with WalMart.   (For more information about this system and how it manipulates consumer behaviour pick up the book - The Power of Habit: Why We Do What We Do in Life and Business by Charles Duhigg, February, 2012).   Bloomingdales is trying to strike a deal with The Bay who still holds the anchor position in most high end Canadian malls, recognizing the department store format is garnering smaller and smaller overall market share.  Lowe’s is trying to take out Canadian competitor Rona over the Province of Quebec’s strenuous objections.  But this will not help, they are coming, either way. 

Takeaways, 1) not all of the planned space will be delivered.  2) much of the space being planned is discount oriented, what is referred to in the US as “category killer” retail.  3)  Vastly better capitalized, and accustomed to thriving in an environment of much tighter margins, these multi-national companies will change the landscape of Canadian retailing, 4)  if you are holding marginal retail assets you might want to begin to think strongly about bringing them to market, the playing field is about to get a lot tougher. 

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