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Retailers gear up for foreign competitors Add to ...

Fred Waks is spending more time these days weighing which retailers to lose - and which ones to lure - in a bid to draw more shoppers to his malls.

The chief operating officer at one of the country's largest shopping-centre companies recently dropped long-time tenant Fairweather from one of his prime Toronto malls. He's in discussions with two foreign fashion chains about taking over the space.

"We want to upgrade our portfolio where we can by having these new tenants in there who are proven entities in other countries and already proven entities in other shopping centres," said Mr. Waks at RioCan Real Estate Investment Trust. "If I have a chance to consolidate three or four weaker tenants to put in a strong [one] I'm going to do that."

Landlords across the country are juggling their tenant rosters to make room for a wave of foreign merchants. This reshaping of the retail landscape got under way in earnest this month, when style-conscious discounter Target Corp. of Minneapolis unveiled its $1.8-billion deal to buy most Zellers stores and convert many to the Target banner by 2013.

The Target deal, while big, marks only the beginning of what might prove to be an unprecedented invasion by foreign stores. Talks are under way to unload the remaining Zellers outlets to other U.S. chains. Companies such as Wal-Mart Stores Inc. are expanding, while still others are poised to build their first stores here, beginning this year. Meanwhile, RioCan is betting it will attract more American and European merchants to Canada with its announcement this week of a $1-billion joint venture with a major U.S. developer to build up to 15 U.S.-style outlet malls in the next five to seven years.

All of this activity is occurring as Canadians are burdened with record levels of debt, and policy makers such as Bank of Canada Governor Mark Carney are warning them to stop adding to it.

So what's the allure? A stronger economic climate, lower unemployment - but just as importantly, a less competitive retailing sector. Canada has 39-per-cent less shopping-centre space, per capita, than the U.S. The business is simply not as cutthroat here.

But the gap between the two countries is about to narrow, thanks to the onslaught of new foreign retailers, and as it does, it will force a retail shakeout. With household debt so high - about 1½ times disposable income - Canadians are unlikely to open their wallets wider in the coming years. More companies will be competing for the same number of shoppers and still-limited retail space.

The fast-changing dynamics raise the stakes for all retailers, increasing pressure on domestic players to boost their game - or else.

"It's survival of the fittest," said Scott MacDonald, executive vice-president at Morguard Investments Ltd., which has ambitious development plans for some of its bigger malls. "Some tenants' [leases]aren't renewed in order to accommodate the sexier new entrants."

The increased competition is coming as numbers suggest shoppers will take a bit of a break as they start to pay off their debts. Spending will probably perk up by less than 4 per cent annually in the next decade, compared with a 4.5-per-cent annual increase over the past 10 years, estimated Douglas Porter, deputy chief economist at Bank of Montreal.

"That leaves precious little room for a wave of new competitors, and we are likely to see some existing players squeezed out and also some of the new entrants fail and ultimately retreat from their expansion into Canada," he said.

And retailers can't count on Canadians being the biggest of retail spenders: In 2009, consumers here shelled out $12,312 each, compared with $13,439 (U.S.) among their U.S. counterparts, according to figures from the International Council of Shopping Centres.

Nevertheless, U.S. retailers, in particular, with limited opportunities in their saturated domestic market, are keen to look to Canada for future growth. "They see Canada as healthy and it's the flavour of the week," said Larry Rosen, chief executive officer of Toronto-based men's clothier Harry Rosen.

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