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Friday, December 13, 2013

Large U.S. Retailers Blazing Trails in Canada

By: Darren Snider (Edmonton)

U.S. retailers have long viewed Canada as an attractive market which shares similar culture, real estate and a common border. More than just a “midnight snack of poutine,” Canada has been a tar¬get for large U.S. retailers for several years: Canada Safeway (est. 1929), Simpsons Sears (est.1953), Costco (est. 1985) and Woolco (est.1962) which was later acquired by Walmart Canada (est.1994).

Activity amongst large retailers has grown to unprecedented lev¬els. At the beginning of 2013, half of the top 20 Canadian retailers were American-owned, but the lines are blurring with a wave of recent M & A activity.

The retail landscape is changing in many positive ways. Competition is forcing many of the Canadian-owned retailers to consolidate and acquire other Canadian firms in an attempt to become more efficient. U.S. retailers, such as Target and Walmart, have acquired under-performing leases that will create real traffic in centres previously anchored by a lackluster Zellers. Even the American owner of the iconic Hudson’s Bay Company, Richard Baker, has re-invested the proceeds from the sale of the Zellers leases into the purchase of Saks Inc. which will be brought to 32 locations in Canada.

The profitable recycling of former department store space is a recent phenomenon. Demand from anchors such as Nordstrom has permitted landlords and retailers to profit from, and rejuvenate, older real estate. Most of the Canadian department stores completed deals in the 1960s and 1970s, securing terms at nominal rates with advantageous renewal terms. Fast forward 50 years and these undervalued leases have become extremely valuable to their owners.

Relative to the U.S., Canada’s consumers emerged from the financial meltdown in 2008 largely unscathed, and Canada’s retail market has maintained its strong fundamentals.

A Comparison of U.S. and Canadian Market Fundamentals (psf denotes per square foot)
                                                            CANADA                  US                   ADVANTAGE

Sales Productivity (sales psf)                       $605 psf*             $466 psf*               Canada 

Supply of Retail Space Per Capita              14 sf /person*       23 sf /person*        Canada 

Retail Vacancy Rate                                     4%**                   8.2%**               Canada 

Rental Rates and Occupancy Costs              Higher                   Lower                U.S. 

Construction and Land Costs                        Higher                    Lower                U.S. 

Labour and Distribution Costs                      Higher                   Lower                U.S. 

   *ICSC regional interior mall statistics 2012/2013 
   **Estimate for regional mall vacancy in Canada in third-quarter 2013 

Offsetting Canada’s higher retail productivity are the higher costs of doing business in Canada. Higher rental rates and occupancy costs are partially explained by higher construction, labor, servicing and land costs. A tighter market with a limited supply of space and strong demand explains the rest.

Canada has much of its population of 35 million spread out from coast to coast, increasing distribution and transportation costs along with additional marketing, management and advertising spent on serving far-flung Canadian markets. Many of the larger retailers looking at Canada try to minimize these costs by focusing on the most populated markets of Toronto, Vancouver, Calgary, Edmonton, Ottawa and Montreal.

Other nuances unique to Canada include different legal and land-title systems, bilingual language laws (in Quebec) and zoning rules that vary from province to province. For example, in the U.S., a lease deal is not binding until the lease is executed. Caution must be exercised in Canada as a deal is binding once an unconditional offer is executed.

Many U.S. retailers negotiating their first deal in Canada are surprised by the limited supply of options, higher rental rates and the concentration of ownership amongst a small group of landlords. U.S. tenants that are used to negotiating special clauses benefiting the tenant, such as rights to terminate or rights to reduce rent based upon occupancy, will find it difficult sometimes to negotiate these items into the deal in Canada. With the right concept, however, and with the help of a capable broker, the landlord can usually be persuaded to complete a reasonable deal. Opportunities and space are always available in Canada for retailers with the best concepts and brands.

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