Now’s the time for foreign chains to enter Canada, panel says

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Publish Date: September 03, 2014

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Canada’s retail real estate market is becoming more and more like the U.S., though some factors such as taxes, wages, and pricing will seem foreign to U.S.-based retailers seeking to set up shop there. So said a panel of top industry players at an SCTLive event titled “Catering to Canada,” in Toronto, yesterday.

The country is ripe for new retailers, panelists said, as it undergoes a redevelopment boom, with most major regional centers adding square footage and/or revamping existing space. The amount of retail per capita is 60 percent less in Canada than in the U.S., and the sales per square foot average is about 30 percent higher than in the U.S., said Roman Drohomirecki, co-COO and executive vice president for the central and western region of Calgary–based Ivanhoé Cambridge.

The country had its first American-style Black Friday on Nov. 29 last year, with doorbuster promotions and midnight sales. Retailers reported a sales boom for that day, but saw sales plunge afterward. For better or worse, the trend is teaching Canadian consumers to wait for discounts and sales just as American consumers do. “People are learning to buy on sale,” said Harley Oberfeld, CEO of Montréal-based Oberfeld Snowcap, a retailer advisory firm represents a host of big-name chains.

Canadian landlords and retailers are also adjusting to e-commerce’s effect on consumer behavior. The impact has been somewhat less strong in Canada, with only 3 percent of overall sales coming from e-commerce there, versus 9 percent in the U.S., Drohomirecki said. Canadian landlords are starting to embrace e-commerce and use it more to market and help tenants promote themselves, he added. Ivanhoé Cambridge is adding Wifi capability to all of its malls. “Our traffic is flat, but sales are continuing to grow,” he said. “People are browsing online and in coming in more focused on buying.”

Canadians are adopting other practices from their American peers: most notably the annual rent increase. This is uncommon in Canada, but more landlords are working it into new deals, said Edward Sonshine, CEO of Toronto-based RioCan, Canada’s largest REIT with a portfolio of 344 retail properties containing more than 84 million square feet. “We learned about annual increases from Tanger,” Sonshine said, referring to his firm’s joint venture with U.S.–based outlet developer Tanger Outlets; the firms are building Tanger Outlets Cookstown outside Toronto. “We love that.”

Lease lengths are getting shorter, too, and landlords are also pushing back when tenants request long-term, fixed-rent leases, Sonshine said. Retailers also want shorter terms, Oberfeld said. The tenant pool is less entrepreneurial now and makes real estate decisions that are based less on emotional attachments to certain properties, he added. “Its problematic for us to reach beyond a 10-year term,” Drohomirecki said. “We have more relocation provisions in our leases than in the past. We want to maintain control of the asset.”

CAM costs are also evolving. “We may see an evolution to fixed CAM like in the U.S.,” said John Sullivan, president and CEO of Toronto-based Cadillac Fairview Corp., whose portfolio includes 43 million square feet at 73 properties.

Panelists agreed that few regional malls are likely to open in Canada anytime soon, as the market is sufficiently supplied. Much of the redevelopment going on is in dense urban areas, where retail has failed to keep up with residential growth, Sonshine said. The next 10 years are likely to be a period of redevelopment and retail intensification near transit-oriented development planned by major cities. An upcoming boom in municipal transit development will fuel retail redevelopment and “intensification” in adjacent areas, he added.

One big change coming up for Canada’s retail market is the entrance of Nordstrom and Saks Fifth Avenue in coming years. The country has traditionally been known as a mid-range market. “Canada doesn’t yet have a big fashion department store presence. It will be interesting to see how it shakes out,” Oberfeld said. All eyes will be on these chains as they roll out, to see how they compare to Target’s ambitious opening of 125 stores in one day, a move panelists described as overly ambitious.

Panelists agreed that Target, whose struggles to get a foothold in the Canadian market have been much publicized, will turn its business around in time. “Target’s issue was Target, it’s not a reflection of Canada,” said Drohomirecki, pointing out that a host of U.S.-based chains are doing well in Canada, including Bass Pro Shops, Cabelas, Chico’s, Costco, Crate & Barrel, H&M and Restoration Hardware. These retailers studied the market first before over-expanding, as did Chico’s and Nordstrom. For example, products are often more expensive in Canada than in the U.S. because of various tax issue including import tariffs. To accommodate for this, Chico’s sent an expert to study Canadian pricing trends a year before opening its first store. Nordstrom studied the market intensely for two years before signing its first lease, Sullivan said.

Target’s pricing and supply chain management problems have served as an example for other companies aiming to crack into Canada. Pricing is particularly important for U.S.–based chains to get right in Canada because Canadians are acutely aware of what goes on south of the border. “Ninety percent of the population is within 160 kilometers of the U.S.,” Oberfeld said. “You have to provide the same experience as in the U.S.”

Chains that the landlords said they would like to lure to Canada included Athleta, Cheesecake Factory, Macy’s and Uniqlo.

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