When John Sullivan learned that Saks would be opening its first Canadian location at the intersection of Yonge and Bloor Streets in Toronto, he sprang into action.
The chief executive officer of Cadillac Fairview Corp. picked up the telephone with a mission to change the mind of Richard Baker, the CEO of Hudson's Bay Co., which bought the Saks chain last year in a $2.4-billion (U.S.) deal.
"I said to him, 'Look, you're missing an amazing opportunity,' " Mr. Sullivan recalls. "'We have a mall [the Eaton Centre] that has 50 million people a year walk through it. We are going to announce that we've got a Nordstrom deal shortly. And you have a great store at the other end, the Bay, which you've done a terrific job re-engineering. Why don't you think about putting a Saks in as part of that?
"'And I'll tell you what – I'm such a believer in it I'll buy the store and lease it back to you.'"
That phone call was the origin of Monday's $650-million (Canadian) deal by Cadillac to purchase HBC's flagship store, which the retailer will lease back for its first Saks outlet in this country. For Mr. Sullivan, it was also a big step toward revitalizing what has been Canada's premier shopping centre – but which has been under threat from rising competition from other high-end malls.
Major malls have long been a highly profitable, and relatively safe, bet for landlords.
"The top five malls are the top five malls," said Tom Balkos, a Canadian director of CBRE's retail services group. But the Eaton Centre, which opened in 1977, has been battling Vancouver's Pacific Centre and Toronto's Yorkdale Shopping Centre in recent years for the title of top mall in the country when measured by sales per square foot. Yorkdale is owned by rival real estate company Oxford Properties Group Inc.
Dramatic changes in the retail landscape are providing a wake-up call for mall landlords, prompting them to replace tired retailers with new ones and leading Cadillac Fairview to launch a makeover of its Eaton Centre. There has been an influx of savvy foreign retailers, and every mall wants to be the first to attract the next big brand that migrates to Canada.
In the meantime, the leading malls are facing stiffer competition from other shopping options such as new outlet malls, online shopping, and downtown developments that companies like RioCan Real Estate Investment Trust are experimenting with. By attracting anchor tenants that have a lot of cachet, a mall hopes to lure bigger-spending customers, making it a more desirable place for tenants and enabling the landlord to raise the rents.
Mr. Sullivan said he wanted to announce the deals with Nordstrom and Saks before looking for other new retailers to complete the Eaton Centre's revitalization. "Now that that's public, we can really go after some of those key retailers we've been thinking about these last few months," he says. "The ultimate goal is to have the right mix of anchors and small shops such that you maximize traffic, you maximize sales, and everyone wins."
Cadillac has spent about $120-million upgrading the mall in the past three years and now plans to spend $400-million more.
"Big is getting bigger," says John Crombie, a senior managing director at brokerage Cushman & Wakefield. "These major shopping centres continue to expand."
Construction of the 213,000-square-foot, three-level Nordstrom that will anchor the north end of the Eaton Centre should start in March, with the store opening in late 2016. The Eaton Centre was the sixth Canadian location that Seattle-based Nordstrom announced.
The 150,000-square-foot Saks is scheduled to open in the fall of 2015, within the current Bay store at the south end of the mall. While that store has long been connected to the mall by a pedestrian walkway, it is just now officially becoming part of the Eaton Centre with this week's deal.
As part of the deal, Mr. Sullivan talked Mr. Baker into agreeing to lease space to open up a Saks store in Cadillac-owned Sherway Gardens, in Toronto's west end.
"What we've really tried to do with this transaction is define those two malls in the future as the place to go for luxury shopping," Mr. Sullivan says. "In both malls I see huge increases in traffic, huge increases in spend, and really in both instances we want to take them up a notch to that next level and really be the premier malls in Toronto."
That's a title that Oxford would also like to claim, and the landlords are battling it out in the trenches.
Yorkdale, which is located in suburban Toronto, has managed to woo foreign retailers such as J. Crew, Kate Spade, Microsoft and Tesla Motors to its property with their first stores in Canada. In the past, those types of retailers often looked for downtown sites as their first outlets here.
"[Cadillac] needs to protect their market share, not only at that one centre, but also at the other centres they manage," said Anthony Casalanguida, former general manager of Yorkdale and now director of property management at Oxford.
With sales of more than $1,300 per square foot, Yorkdale is one of the highest-performing malls in Canada, luring increasingly more upscale tenants. But it too feels the effects of a more competitive retail field.
"I don't think [the Eaton Centre have] beaten us to any particular retailers," Mr. Casalanguida said. "If you look at between now and seven years ago, I would say there's a tangible difference in the environment."
The landlords have also felt the pressure to take back store space of struggling Sears Canada Inc. and find stronger tenants to replace it. Sears pays about $1 or less per square foot for some of its anchor mall sites.