A REVIVAL IN RETAIL
Industry eyes reinvention
The traditional retail sector is hurtling down a path toward inevitable destruction — at least, it seems that way if you read the headlines.
Large industry players such as HMV Canada Ltd. and Sears Canada Inc. gave up the ghost after more than a decade of pundits calling for their demise. Other veteran Canadian retailers continued to shrink the size of their store bases, including Reitmans Ltd. and Le Château Inc.
And Hudson’s Bay Co., the country’s oldest and sole remaining traditional department store, announced a deal with New Yorkbased WeWork that will convert unproductive floor space in key downtown locations into temporary office space.
In the grocery sector, the major Canadian players have been steadily updating market analysts about their online home delivery capabilities in the wake of Amazon.com Inc.’s seismic purchase of Whole Foods Market in August.
But despite fears that Amazon will siphon sales from traditional retailers until they are weakened to the point of irrelevance, there are signs of new store growth that have many retailers, landlords and industry analysts believing the market is not in the midst of a steady decline, but rather a creative reinvention.
Multiple players opened stores in Canada for the first time in 2017, including brands such as the Cheesecake Factory, Moose Knuckles, Woolrich, Hunter and Miniso. Scores of others continued with their cross-Canadian expansion plans: H&M, Uniqlo, Muji, Canada Goose, Mackage, Aritzia and Ecco.
“Transformation is a better word than turmoil,” said Edward Sonshine, chief executive of Canadian shopping centre developer RioCan REIT. “Unfortunately, the basic story you hear about is ‘retail apocalypse,’ but the fact is, our (2017) numbers are going to be very good, our occupancy rates are good. And while I don’t know what the major impact on the overall market of Sears will be, certainly, for the leading REITs and landlords in Canada, it took a couple of years to recover from (the exit of ) Target. But it has worked out OK.”
Retail optimists believe the Canadian scene may be getting tarred with the same brush as the U.S., where department store operators have closed hundreds of stores and average mall sales per square foot have fallen for three consecutive years.
Industry data appears to back up their belief. CoStar Canada, which tracks market vacancy rates in Toronto, Calgary and Vancouver, reported that the overall retail vacancy rate in the Greater Toronto Area was 3.2 per cent in the third quarter of 2017, compared with 3.7 per cent in 2013. The vacancy rate was also lower in the first three quarters of 2017 than it was in 2015 and 2016, which covers the period following Target’s announced exit from Canada and the subsequent flood of available retail space.
Roelof van Dijk, senior research manager at CoStar Group, believes the Canadian industry is in good shape despite the pending exit of Sears. “I don’t think it’s a dire thing that’s happening, even with Sears and the approximately 15 million square feet that they are going to vacate. It’s going to be the same magnitude (of space) that Target left and it will likely increase vacancy across the board for all types of retail by about one per cent,” he said. “But for most markets in Canada that are at about three or four per cent vacancy, if you go up a per cent, it’s not an apocalypse.”
Some malls in small markets will be worse off than others, he said, “but the whole market is not going to capsize.”
In Vancouver, total retail vacancies fell to 3.2 per cent in the third quarter of 2017 from 3.4 per cent in the first quarter of 2015, when CoStar began tracking vacancies in that city and Calgary. Overall retail vacancies in Calgary went up to 2.8 per cent in the third quarter of 2017 from 1.4 per cent in the first quarter of 2015, which can be chalked up to fallout from oil’s prolonged price slump and the opening of 800,000 square feet of retail space.
“If things keep going where they are going with the Canadian dollar and the price of oil, I think you will see retail sales pick up there faster than in other markets (in 2018), because you see employment and wage growth starting to increase there,” Van Dijk said.
Further bolstering the case for optimism is that Canadian mall sales averaged $766 per square foot in the year ending June 30, 2017, up from $761 per square foot in 2016 and $743 in 2015, according to data from the International Council of Shopping Centres by the Retail Council of Canada.
In the U.S., average mall sales per square foot fell to US$466 in the year ending June 30, down from US$467 in 2016 and US$474 in 2015.
Craig Patterson, a special projects consultant at Retail Council of Canada, said the retail shift online is more profound in the U.S. due to its higher online shopping penetration rate and mall space per capita.
But Canada’s top-line retail performance figures might obscure what is happening in small towns, or tertiary and secondary markets where landlords have not yet filled the spots vacated by Target and now face the closure of Sears.
“We are seeing a demographic move around the whole world of people moving into cities or closer to major cities,” Sonshine said, adding Canada has been in the midst of the trend for several years. “In those (urban) markets, the business is fine.”
Patterson agreed, saying many retailers bullish about expanding in Canada are happy to work with landlords in big Canadian cities.
One of those retailers is Denmark-based Ecco Sko A/S, which began opening shoe stores in Canada in 2003. Ecco now has 31 stores across the country and plans to have 42 to 45 stores by 2020.
“Canadian (mall) owners and developers are very good merchants and good at ensuring a good merchandise mix,” said Jordan Searle, president of Ecco Shoes Canada.
He said there is still competition among retailers to find good mall space, and landlords can be choosy about who they take on as tenants. “I don’t get the sense that malls are looking to fill themselves.”
Patterson believes two retail trends that arose in 2017 will continue to power the Canadian market in 2018. The first is pop-up stores on street fronts and in malls, in either vacant small spaces or inside larger carved-up spots once occupied by tenants such as Sears.
The second is the increased presence of brands: businesses that once exclusively sold in a wholesale capacity to department stores or higher-end, multi-brand boutiques are now opening their own bricks-and-mortar stores.
“In Canadian retail, we are seeing a trend of brands opening their own stores — Canada Goose, Mackage,” Patterson said.
He also cited U.K.-based jewelry brand Links of London, which since 2016 has opened five stores in Canada and is phasing out its sales in Holt Renfrew as it opens more standalone stores across the country. “Brands can diversify their selection and create a fun retail environment and it amounts to them becoming more controlling over where their brand is being distributed,” Patterson said.
At the opening of the first Moose Knuckles store in Toronto’s Yorkdale shopping centre this fall, the outerwear brand’s president Noah Stern said a standalone store allows the company to showcase a breadth of alternative styles and promote the brand in a way that is different than what its traditional retailers such as Nordstrom, Simons and Sporting Life do.
“Our partners are excellent at what they do and they do an excellent job with our brand, but they have to do an excellent job for all the other brands that they have,” Stern said. “What we do in this store is put in very exclusive products, kind of one-offs. It gives us a way to take our most fashionable pieces that we may have some fear about putting into our regular stores. We can test it and see what our consumer thinks.”
Traditional multi-brand retailers also see the importance of brands and are improving and boosting their assortment of private labels. Prior to Amazon’s rise and the growth of retail e-commerce networks, a maxim of the sector was that strong private labels would draw customers to your stores thereby improving retail margins and deepening customer loyalty.
The same dynamic is now playing out online, with companies such as Canada Goose Inc. and Lululemon Athletica Inc. exercising tight controls over who can sell their goods online. Neither brand, for example, is on Amazon.ca.
Canadian Tire Corp. Ltd. has also steadily grown its private-label business over the past five years, improving the assortment of its veteran brands such as Noma and Mastercraft, creating new brands like the Canvas home décor brand, and acquiring others, such as the outdoor brand Woods and kitchenware brand Paderno.
Private-label goods now account for 30 per cent of revenue at Canadian Tire stores, up from 20 per cent in 2012. That figure rises to 70 per cent at its Mark’s clothing chain.
“I would say the ‘Amazon effect’ on Canadian Tire, and the effect of overall e-commerce, has motivated us to get very serious about our private-brand capability,” said Allan MacDonald, Canadian Tire president.
The private-label brands also increase the value of the CanadianTire.ca website and provide a launching pad for the business outside Canada through Amazon or other e-commerce players.
“It’s actually setting us up for a whole new foray should we choose to pursue it,” MacDonald said.