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Target's entry into Canada has set off a wave of retail transformation.JIM YOUNG/Reuters

Canada's retail sector is changing rapidly.

Despite Target's spectacular failure in trying to expand into Canada, the U.S. discount retailer inspired rivals such as Wal-Mart to expand their presence in the country, while online players such as Amazon ramped up their offerings.

The influx of U.S. chains along with the rise of online shopping have lit a collective fire among companies across Canada, prompting many homegrown retailers to up their game.

Hudson's Bay is now fighting for market share by bringing in U.S. retailer Sak's to go head-to-head against high-end department store Nordstrom. Also consider what Canadian Tire has done with its 80,000-square-foot interactive flagship Sport Chek location at West Edmonton Mall, which features floor-to-ceiling gesture-activated screens, in addition to motion analysis machines to find the perfect running shoe.

At the same time, many retailers are struggling in this new environment, with a growing number of businesses having to rethink their spaces by closing stores or shuttering operations entirely.

Office-supply chain Staples closed some stores and shrank the size of others. Reitmans closed all 107 of its Smart Set womenswear stores and is converting 76 of them to other company banners such as Reitmans, Addition Elle and RW&Co. Best Buy's surprise closure of all Future Shop stores with the intention of converting 65 of them into Best Buy locations is just another kick in the gut of Canadian retail.

The changes have shaken up the commercial real estate industry. While some space is being vacated, renovation and building activity continues to accommodate new players and the overall retail transformation in Canada.

"It's been an incredible year and a half in the retail real estate market," says Arlyn Stoik, principal at real estate consulting and advisory firm Avison Young.

Stoik says many retailers are trying to fend off the competition by increasing their online presence while using physical stores to showcase their brand and offer a better customer experience. In today's ultra-competitive climate, a multi-pronged approach is necessary for retailers to survive.

"Retailers are becoming smarter in terms of market penetration, in terms of the size and footprint of their stores," Stoik says. "They are trying to reduce overhead costs and being selective about products they do carry."

A hole in the middle

The increase in discount retailers in Canada and rise of luxury brands has led to a split in the retail sector, says Doug Stephens, founder of Retail Prophet  and author of The Retail Revival.

It's the middle players that are being squeezed out, such as Smart Set, women's fashion retailer Jacob, which closed its 92 stores across Canada, and MEXX, which filed for bankruptcy protection last year.

"The stuff in the middle which doesn't have the greatest selection, the great price, or the greatest product - consumers are completely looking past it," says Stephens.

While that's leaving some vacancies at malls and on main streets across Canada, Stephens expects some of the void to be filled by manufacturers looking for a greater presence among consumers and even online brands on the hunt for a bricks and mortar location.

Examples of stores going from clicks to bricks include Montreal-based online menswear retailer Frank and Oak, which has opened stores in Montreal and Toronto, and American men's retailer Bonobos, which has expanded into about 20 Nordstrom locations in the U.S.

Stephens says it's all part of the changing retail experience.

"A store used to be purely for distribution. You advertised to try to drive people to your stores. Now, the media is becoming the direct route to purchase," he says. "Consumers are buying direct from online ads and going to the store to get the branding experience. They are switching roles, the stores are becoming media and media is becoming the store."

As a result, Stephens believes most retailers should think twice about downsizing their stores, even as online shopping grows.

"If you downsize your stores, you are downsizing experience in the store. In effect you're watering down your live brand experience," he says. "That can be detrimental to your overall sales.

Long live the big box store

While massive retail locations are being scaled back in the U.S., it's a different story in Canada where rising immigration continues to drive families to the suburbs and big box power centres are being built to accommodate their consumer needs.

While the trend has slowed in recent decades, the building continues, especially in major urban centres such as Toronto and Calgary.

"One of the biggest things we've seen over the last five years and continuing today is expansion of [retail commercial] floor area in major metropolitan areas," says James Smerdon, vice president and director of retail consulting at Colliers.

A Colliers report released last year says Edmonton, Halifax, and Calgary remain the top three retail markets in Canada in terms of shopping centre supply per capita. A separate study released last spring also found that vacancy rates for neighbourhood retail shops, malls and power centres are mostly stable or decreasing in cities across Canada, including Vancouver, Calgary and Toronto.

That's why even though some retailers are downsizing amid an increase in online shopping, Smerdon doesn't see the death of the suburban mall anytime soon.

"So far they're fine," he says.