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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.

Largely thanks to less competition, Canadian mall merchants ring up $568 per square foot of sales, roughly 45-per-cent more than their U.S. counterparts, according to ICSC data for the year up to the end of November.

American retailers are in a more solid position today than in the past few years, with cash to spare after having slashed costs and improving their profit margins during the downturn. They view Canada as an attractive launching pad for international growth, allowing them to test new logistics and regulatory requirements in relatively familiar foreign territory.

Landlords such as RioCan are chasing the potential new tenants with an array of mall expansions on their drawing boards. Yorkdale Shopping Centre in Toronto, one of the country's top malls with more than $1,200 of sales per square foot, will spend $220-million in the next two years to add 40 new stores, many of them expected to be filled by foreign players.

Morguard plans to almost double the size of one of its Ottawa malls - "it's got the potential to be the Yorkdale of Ottawa" - while developing an open-air shopping centre in Victoria, amid other activities, Mr. MacDonald said. "Will there be casualties? Absolutely," he added. "Older chains that lose their clientele, don't stay current, don't re-invest, are marginalized over time."

Already some retailers feel the heat. Montreal-based fashion chain Boutique Jacob Inc. got court protection from creditors in late fall, citing burgeoning foreign competitors. This month, Yorkdale general manager Anthony Casalanguida closed a struggling Jacob outlet. The space is being prepared for U.S.-based clothier J. Crew - a favourite of Michelle Obama - as the chain's first store in Canada, according to sources. Mr. Casalanguida wouldn't comment, only saying he's in talks with a number of foreign retailers. "We needed the space for a tenant."

Other revampings are playing out behind the scenes. The owner of Toronto-based fashion merchant Urban Behaviour is negotiating for concessions in rent with Morguard as the retailer tries to strengthen its operations, Mr. MacDonald said. Officials at the chain could not be reached.

And at Yorkdale last fall, Mr. Casalanguida shifted Fairweather into a vastly smaller site - 25 per cent of the size of its previous Yorkdale store - and moved Victoria's Secret, the popular U.S. lingerie chain, into Fairweather's former spot.

Still, amid the jockeying for space, some Canadian retailers - even Fairweather - are looking to spread their wings here. Isaac Benitah, the fashion retail magnate who owns multiple chains including Fairweather and Labels, is shifting his stores to new locations and in some cases converting them to new banners as he hunts down the best fit for each of his 10 or so concepts. Part of the shuffle is a move to open-air power centres in the suburbs that demand as little as half the rent of enclosed malls.

By far Mr. Benitah's most high-profile store expansion and conversions involve his Target Apparel. Mr. Benitah, who has aggressive plans for the five-store Target chain, gained North American attention recently in his legal tussle with U.S.-based Target over use of the name.

This year, Mr. Benitah plans to add 20 to 25 outlets to today's 300, including a new banner called Les Ailes Xpress, which is a downsized version of his Les Ailes de la Mode, said Harley Oberfeld of Oberfeld Snowcap, which advises Mr. Benitah on real estate. Among other re-jiggings: His weaker Randy River men's stores are being phased out in favour of his newer Stockhomme.

Existing retailers are rushing to prepare for the foreign assault. Loblaw Cos. Ltd. is stepping up its plans for standalone stores for its cheap-chic Joe Fresh Style fashion line, even eyeing a flagship store on New York's Fifth Avenue to create a buzz. Sporting Life, a sporting goods and fashion chain, is considering an expansion outside of its Ontario home base of four mega-stores, said co-owner David Russell.

He envisions as many as 10 to 15 outlets in all, across the country, but he won't rush his decision just because foreign rivals are jostling for space, he said. He's learned from past missteps: Almost a decade ago, Sporting Life moved into a posh downtown Toronto location that was about a quarter of the size of its standard format, which proved to be too small; it was closed a few years later.

Upscale Harry Rosen is looking to expand almost half of its 16 stores, boosting by about 25 per cent its total space in the next five years, Mr. Rosen said.

The arrival in Canada of U.S.-based Brooks Brothers a couple of years ago had a "negligible" effect on his privately held business, which enjoyed a healthy same-store sales gain of about 12 per cent in 2010 from a year earlier, he said. He's carving out his niche partly by stocking more Canadian brands: Canada Goose parkas are such a hot seller he couldn't keep them in stock by early December. He's attracting a younger clientele by carrying more slim-fitting suits and jeans.

Mr. Rosen spends 80 days a year checking out competitors around the world. to ensure he can take on any new foreign rival. "There are no surprises," he said. "I know exactly what each of those operations do. We just have to keep very focused on doing what we do better."

______

FOREIGN RETAIL ENTRIES



Confirmed



Target Corp. (discounter)



J. Crew (upscale fashion)



Zumiez (skateboard apparel)



Express (fashion)



Justice (tween fashions)



Marshalls (discounter)



Considering



Kohl's (discounter)



J.C. Penney (department store)



Nordstrom (upscale department store)



Saks Off 5th (discount fashions)



Dick's Sporting Goods (sporting goods)



Container Store (storage systems)



Expanding



Wal-Mart (discounter)

Apple Inc. (computers)

Crate and Barrel (home furnishings)

Lowe's (home improvement)



Victoria's Secret (lingerie)



Bath & Body Works



Forever 21 (cheap chic fashions)



Aerie (teen apparel and lingerie)



Journeys (shoes and accessories)



H&M (cheap chic fashion)



Bestsellers' Jack & Jones and Vero Moda and Only



Marina Strauss

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