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Canadian clothing retailers brace for U.S. tide

This fall, clothing retailer Boutique Jacob Inc. took some bold steps in an attempt to save itself. The Montreal-based company, best known for women's career wear, moved edgier outfits into the aisles, ditched a chain that specialized in casual wear, and publicly took on a campaign against the fashion industry's practice of digitally altering models' photos.

But the efforts weren't enough. Last month, Jacob was granted court protection from creditors, citing sizable losses and blaming burgeoning competition from international retailers.

Jacob's failure may be just the tip of the iceberg, as other Canadian-owned clothing retailers feel the pain of a wave of international fashion retailers rapidly expanding in this country.

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A new forecast underlines the urgency of the situation. Within six years, foreign-owned retailers will control the majority of sales by specialty clothiers in Canada, stealing away business from domestically held chains, according to projections by market researcher Trendex North America. Foreign specialty apparel retailers, which made up just 13 per cent of the field in 2005, will carve out 28.5 per cent of the Canadian market by the end of this year and 51.4 per cent by 2016, Trendex predicts.

The strains being felt by domestic specialty chains, which account for an estimated $12.8-billion in sales, are part of a broader trend that swept over the retail sector over the past two decades, transforming department stores and discounters into mainly foreign-owned entities. The foreign players – encouraged by a healthier Canadian consumer and the relative ease of entering this market – are expanding rapidly, including H&M of Sweden, U.S.-based Forever 21 and Zara of Spain. Others, such as U.S.-based J. Crew, are preparing to open their first stores here to cash in on a more buoyant economy. At the same time, foreign e-commerce players will take a bigger bite of the Canadian market.

"They're eating into a sizable amount of market share," warned David Schachter, president of the National Apparel Bureau in Montreal. "It's going to create a problem for Canadian retailers. They're going to be squeezed. This is something we have to watch out for."

Jacob was simply the first domino to fall, said Randy Harris, president of Trendex. "It's a wake-up call."

In response, domestic specialty retailers are racing to get ready for the onslaught of new rivals. Reitmans the country's largest specialty apparel chain, could be considering snapping up Jacob to bolster its position, analysts say; Reitmans and other domestic retailers are beefing up their e-commerce offerings; still others, such as Aritzia, are expanding outside of Canada.

Tal Woolley, a retail analyst at RBC Dominion Securities Inc., said Reitmans could pay between $10-million and $40-million if it bought Jacob. The acquisition could generate plenty of savings in coming years for Reitmans, he said.

Jeremy Reitman, chief executive officer of Reitmans, declined to comment. But with cash on hand and virtually no debt, the merchant is well positioned to expand by acquisition, its executives said last week. It's looking for a boost: Reitmans' sales fell 3.1 per cent in its latest quarter and aren't expected to grow significantly during the key holiday season.

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Jacob, for its part, received a "verbal expression of interest" from an unnamed company that wants to buy a portion of Jacob's assets, according to court documents. Saddled with $88.5-million of debts, of which $66-million is owed to its own parent company, Jacob racked up $45-million of losses since the beginning of fiscal 2009, the documents say. It expects next year's fiscal sales to be 20 per cent lower than this year's.

A Jacob spokeswoman said it is in talks with an array of potential suitors but didn't know whether Reitmans was one of them.

Jacob needs to simplify its message by getting rid of some of its different banners, including a lingerie chain, which confuses some consumers, Trendex's Mr. Harris said.

Jacob and others face foreign rivals that have the economies of scale to rapidly spread their message, he said. "These retailers came to Canada with deep pockets and a willingness, regardless of the economic malaise, to invest in marketing to build brand awareness."

David Schachter is president of the National Apparel Bureau. This online version contains corrected information.

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About the Author
Retailing Reporter

Marina Strauss covers retailing for The Globe and Mail's Report on Business. She follows a wide range of topics in the sector, from the fallout of foreign retailers invading Canada to how a merchant such as the Swedish Ikea gets its mojo. She has probed the rise and fall (and revival efforts) of Loblaw Cos., Hudson's Bay and others. More

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