Mid-sized domestic retail chains are under siege, rapidly being squeezed out of their coveted store sites by deep-pocketed foreign rivals.
The chains, ranging from clothier Tabi to children's-wear purveyor Please Mum to Sterling Shoes, are being hit by landlords and banks that are losing patience with weak players, favouring better financed rivals. Reflecting the deepening strains, a surprising number of mid-sized chains faltered in 2011, closing hundreds of stores, with all signs pointing to a repeat performance this year. During the 2009 recession, smaller operators tended to feel the pinch.
The stumbles at the expense of foreign counterparts underscore the changing face of the retail landscape, shifting more revenues to foreign coffers even as low-paying retail jobs remain in Canada. Besides the failure of video-rental specialist Blockbuster Canada, none of the retail flops on its own is particularly noteworthy. But taken together, they spell trouble – and an urgent need for incumbents to sharpen their strategies.
"In 2009, we were losing a lot of small tenants, the small shops, the independents who couldn't get financing," said Edward Sonshine, chief executive officer of RioCan Real Estate Income Trust , one of the country's top mall landlords. "Now they're a lot bigger than we would have expected … We started to see that last year, and I suspect that will continue."
With a waiting list of new tenants such as U.S. chains Victoria's Secret (lingerie), Forever 21 (teen fashions) and Ann Taylor (women's wear), mall owners are more inclined to replace the slackers with new banners.
By 2013, U.S. discount titan Target Corp. will take over Zellers stores here, yet another foreign player looking for expansion opportunities in the relatively stable Canadian economy.
The rush of foreign chains is creating a new challenge for Canada's retail sector. It faces the threat of more managerial jobs being consolidated in foreign hands, even while lower-paying store positions remain here. How the sector deals with this conundrum will provide lessons to other sectors, which also are grappling with a loss of control over operations and investments in this country.
"I think it's going to be rough for 2012," said Phil Lichtsztral, a partner at consultancy RSM Richter, which acted as court-appointed restructuring monitor or in other capacities in an array of insolvencies, including at discounter Hart Stores and clothiers Tabi, Jacob and Urban Behavior, as well as Sterling Shoes. "The retailers really have to review their positioning and revalidate their strategies."
Mall operator Primaris Retail Real Estate Investment Trust is one landlord feeling the short-term pain of the failing retailers. By its third quarter last year, its faltering mall tenants included Blockbuster, Tabi, Jacob and Please Mum, which left vacant store space behind. Sterling Shoes, Urban Behaviour and Costa Blanca were still restructuring.
In the 12 months ended Aug. 31, Primaris's retail tenants' sales slipped 0.3 per cent to $453 per square foot, while the overall national average tenant sales rose 3 per cent to $579 in the same period, the mall operator reported in November.
In its third quarter, Primaris's operating profit picked up just 0.1 per cent from a year earlier for properties held continually for the previous 24 months.
"In these sorts of situations, where retailers are restructuring or filing [for bankruptcy]or disappearing, this is part of the cycle: the strong survive, the weak don't," said John Morrison, chief executive officer of Primaris. "We were surprised that within the time frame that they all occurred. Competition and the economy and their own business decisions caught up with them. … It was an unusual year."
Mr. Morrison said he has found replacements for the failed tenants in many locations, but newcomers take time to move in. As a result, his company's performance won't be back on track until late 2012 or 2013, he predicted. By then, Target will have taken over eight of Primaris's Zellers stores, helping to ease the pain.
The pressures are even being felt by more stable domestic retailers. To lure new tenants, landlords are forcing existing merchants to abandon their prized spots in the best malls in favour of a foreign competitor, Mr. Lichtsztral said. Or top malls are demanding steep rent hikes of up to 50 per cent to renew a lease, forcing incumbents to leave.
At Yorkdale Shopping Centre in Toronto, one of two clothing stores owned by Jacob closed to make way for the first J. Crew shop in Canada.
Anthony Casalanguida, the mall's general manager, said big rent increases are warranted because Yorkdale has become such a productive mall, generating $1,288 sales per square foot, more than twice the country's average today of about $585.
Weak domestic chains are finding that "the banks are becoming more apprehensive and not necessarily waiting for things to happen," Mr. Casalanguida said. "They're saying, 'We can't be as patient as we once were.'… As you get more retailers coming into the market there will be more casualties. It is the survival of the fittest."
RETAIL STUMBLES IN 2011
Blockbuster Canada: Video rental giant closed more than 400 stores in Canada after being pushed into receivership in May.
Tabi: Women's clothier Tabi filed an intention to file a restructuring proposal under bankruptcy laws in February, eventually closing all of its 76 stores.
Jacob: Another women's clothing chain, Jacob, emerged from court protection from creditors in October after almost a year, closing about 50 of its 150 stores.
Hart Stores: Discount department store Hart, which has stores in Quebec and Eastern Canada, filed for protection from its creditors in August, with plans to close 28 of its 88 stores.
Please Mum: The children's wear chain filed for bankruptcy protection in the summer, closing 68 of its almost 90 stores.
Clothing for Modern Times: (Includes Urban Behavior and Costa Blanca) The company, which runs three fashion chains, filed an intention to restructure under bankruptcy laws last summer and eventually filed for court protection from creditors in December, with a plan to sell Urban Behavior to YM Inc., which owns Suzy Shier, Bluenotes and other chains. It is closing 68 of its 116 stores and looking for a buyer for Costa Blanca.
Sterling Shoes: The footwear retailer filed for protection from its creditors in October, closing 53 of its 158 stores.
Esprit: The struggling Hong Kong-based fashion retailer said in September it was closing its 46 stores in Canada.