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.
