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Holt Renfrew's new ‘beauty hall’ at its Yorkdale store is part of the chain’s $300-million makeover.Kevin Van Paassen/The Globe and Mail

Under renovation for the past year, much of the Holt Renfrew store at Toronto's Yorkdale Shopping Centre is a labyrinth, a cluttered space that doesn't conjure the luxurious experience one expects from a premium retailer.

Yet the Holt Renfrew of the future is gradually becoming evident with the unveiling of a spacious "beauty hall," launched this summer. There are plans for a Christian Louboutin shoe boutique modelled on the chi-chi designer's Paris apartment, its red velvet couches evoking images of his red-soled pumps. It's all part of a wider $300-million makeover, as Holts arms itself for the coming luxury battle.

Holts is not alone in the fight for big spenders. From Harry Rosen Inc. to La Maison Simons, premium fashion retailers are feeling the heat. The Americans are coming, and they know it.

The market in Canada will become decidedly more crowded. This week, Hudson's Bay Co. unveiled a $2.4-billion deal to buy New York-based Saks Inc. and bring as many as seven of its tony Saks Fifth Avenue outlets to Canada. Seattle-based Nordstrom Inc. will open its first Canadian store in the fall of 2014 and has plans for up to 10 locations. Luxury brands that supply the chains, from Hugo Boss to Stuart Weitzman, are opening their own standalone boutiques, raising the ante for incumbents.

Erik Nordstrom, president of stores at the chain that bears his name, isn't daunted. He said in an interview this week that when staking out new territory, "traditionally we look for the best competition, because that's where the most business is to be had.

"Once we get those locations, we have to compete like crazy ... Sometimes there is fallout."

High-end fashion merchants are preparing for an unprecedented level of competition, not only in their bricks-and-mortar stores but also in the fast-growing e-commerce segment. To succeed, they will need to freshen their stores, making it easier and faster for shoppers to find products and check out with mobile devices. They will need to better understand their customers' demands to tailor offerings to them, while focusing increasingly on cybershoppers. And while demand for $800 Coach handbags and $295 J. Brand skinny jeans is growing among Generation Y consumers, there is evidence that, over all, wealthy customers aren't opening their wallets much wider than they did in previous years.

"The suggestion is that there is an undeveloped market in Canada – there is a need," said Alecsandra Hancas, fashion industry analyst at market researcher NPD Group. "But we're not seeing a lot of money spent in the luxury market."

The changes will force incumbents to improve their store ambiance, customer service and product selection. Consumers will potentially benefit from better service and even possibly lower prices.

Calling big spenders

The luxury players who are preparing for battle are expecting to serve a swelling population of heavy spenders in this country.

While data on the Canadian luxury fashion market is in short supply and inconsistent, research does point to a growing number of wealthy consumers. The number of households with income of more than $200,000 accelerated four times as fast as that of households with average incomes since 2007, according to Environics Analytics. And the number of households in the top income bracket – over $250,000 – jumped 34.2 per cent since 2008, with 14.9-per-cent growth in the past year alone, it said.

But growth in the $83.4-billion North American luxury market over all isn't exactly robust. According to consultancy Bain & Co., the segment is expected to grow by just 5 to 7 per cent this year, less than half the 13 per cent it grew last year.

The Canadian market could see an uptick as consumers who would ordinarily travel across the border to visit U.S. retailers can now shop at home. Cross-border shopping has taken away an estimated $1-billion in business from Canadian retailers in the year to May, according to NPD's Ms. Hancas. Its research shows consumers are spending more on apparel purchases outside Canada, suggesting that they're purchasing more expensive items, such as those found at retailers such as Nordstrom and Saks.

While there may be some room for new competitors, there is still significant pressure on domestic retailers, who can ill afford to lose sales to newcomers. "There has to be a bit of a shakeout," said Larry Rosen, chief executive officer of Harry Rosen. "It's got to come from somewhere."

One of the key issues will be how to stand out from the pack.

Both Holts and Harry Rosen have embarked on expensive makeovers – in the latter case, the company is spending $100-million over the next several years to revamp and expand stores by 40 per cent. Privately held Harry Rosen has enjoyed annual post-recession sales gains of about 10 per cent, although they slowed to 3 per cent in the first half of this year amid dipping consumer confidence, Mr. Rosen said.

But differentiation is challenging when the retailers carry lots of the same brands and cater to many of the same well-off customers, said Antony Karabus, president of Hilco Retail Consulting in Chicago, who has advised major luxury retailers. Holts and Saks in particular have significant overlap, with labels ranging from Chanel to Prada to Diane von Furstenberg.

Nordstrom has a broader array of goods, but an estimated one-third of its most expensive lines are also stocked at Saks and perhaps as much as half of its brands overlap with those at Hudson's Bay, catering to customers who are looking for more affordable luxury. Mr. Nordstrom, the great-grandson of the chain's founder, acknowledged that there be will some overlap but said "we don't get too consumed with any competitors. In this specific case, I don't think it really changes the landscape."

"We have a broader offering," he said. "We compete with Hudson's Bay on one end and we compete with Holts and now, presumably, Saks at the upper end, which is no different than what we have here in the U.S."

Nordstrom prides itself on customer service, famously giving staff leeway to go out of their way to help shoppers. Recently, a Vancouver resident wrote online about her friend having her purse stolen at Nordstrom's flagship store in Seattle while she was trying on a pair of boots.

The manager took the woman and her friend to the store restaurant, to wait for police, where he bought them meals, drinks and chocolates, handed them a bottle of champagne and gave the woman $400 to buy a new purse.

"If we can deliver the best Nordstrom experience up there, I think we'll be successful regardless of what goes on outside our control," Mr. Nordstrom said.

The 'Harrods of Canada'

The ground may shift more quickly than either Nordstrom or Holts expect, as HBC closes its deal to buy Saks by the end of this year.

Richard Baker, the U.S. real-estate-magnate-turned-retail-mogul who acquired the struggling HBC in 2008, promises to move quickly. Sources familiar with HBC said he expects to open the first two Saks stores within the Toronto and Vancouver flagship stores by the end of 2014.

Mr. Baker is modelling the future Hudson's Bay on its Toronto Queen Street West store , with a huge new shoe department, and in-store shops including Topshop from Britain, Kleinfeld Bridal Boutique from New York and, according to plans, Saks in 2014.

"It will become the Harrods of Canada," Mr. Baker said in an interview Friday, referring to the prestigious London-based department store. "Bringing Saks to Canada is going to keep Canadians shopping in Canadian dollars in Canada."

He predicted that HBC will have an edge over Nordstrom, as it already has stores, systems, technology and Canadian know-how in place to roll out Saks quickly.

Nordstrom is spending more than it had originally forecast for technology and merchandising systems for its Canadian stores, Mr. Nordstrom said in the interview. The investment is partly for mobile checkouts, which the company has in its U.S. outlets.

"We haven't operated our stores in another country before," he said. "Almost every single business operational process needs to be different in some way. That's been a lot of work for us."

Saks has an edge when it comes to selling pricey brands, whether it's $4,000 Gucci leather jackets or $3,500 Jimmy Choo clutch purses, as it can count on economies of scale to lower costs and boost the bottom line. The increased number of competitors creates an issue for suppliers, however, which must figure out how to divvy up their collections without compromising past allegiances, or cannibalizing their current sales.

The new entrants could force everyone to lower prices, squeezing margins for vendors and retailers, even as it's a boon for consumers, said Joey Adler, chief executive officer of Diesel Canada, whose various lines are now carried in all the chains (although differentiated by style and price) as well as three standalone Diesel stores.

While pleased to have a greater number of potential customers, Ms. Adler said that suppliers "are worried about having another retailer on board and being able to serve it properly and have them be successful."

Shoe company Stuart Weitzman, whose lines are stocked at Saks, Holts and Nordstrom, faces a similar dilemma.

"It's really the evolution of retail," said Nicholas Niro, director of the Stuart Weitzman Canadian operation. "As fresh brands come in, more tired brands will come out. That's what will happen in the next five to 10 years."

Developers are seeing opportunity, as they woo upscale new entrants. Yorkdale has been among the most successful, now generating more than $1,300 of sales per square foot.

West Edmonton Mall, the country's largest shopping centre, is rapidly adding more luxury banners, such as jewellery specialist Tiffany & Co., with the centre's sales now at about $745 a square foot, up from $450 five years ago and aimed at $1,000 in the next few years, mall president David Ghermezian said. La Maison Simons rolled out its first store outside of Quebec last fall at West Edmonton and its performance "has exceeded all our expectations."

Mr. Ghermezian is pitching for Nordstrom, among others, to come to his mall and will soon speak to Mr. Baker about Saks. "Eventually, there will be a saturation point but I don't think we're there yet," he said. "At some point, it will be too much."

'Some fallout'

The retailer with perhaps the most to lose is Holt Renfrew, by virtue of its position as the dominant luxury player. "Holts, I suspect, will lose some business," consultant Mr. Karabus said. "I think there will be some fallout."

Owned by the Weston family, which also owns Selfridges in Britain, other prominent overseas chains, and controls grocery giant Loblaw Cos. Ltd., Holts is not standing still.

The company is using its Yorkdale store, which will relaunch by the fall, as a laboratory. Set to double in size, it will feature a beefed-up men's section and a new men's lounge, a grooming area to get a shave and "tech toys" to keep men in the store and in the buying mood, Alix Box, vice-president of marketing at Holts, said late last year. (The company did not provide an executive for an interview this week.) The store will spotlight designer brands including heavyweights Manolo Blahnik, Jimmy Choo, Donna Karan, all of which are stocked at Saks.

Fitting rooms will be up to three times larger than current ones – "Big enough so that a woman could bring five or six of her best friends and shop together, which is a growing habit we've seen among our high-value clients," she said. With nine stores, Holts has also announced it will launch a new store in Mississauga's Square One Shopping Centre and expand its space by 40 per cent over all.

"Holts is aggressively expanding – don't underestimate it," consultant Mr. Karabus said. "The Westons are extraordinary retailers."

But if there's an Achilles heel, it's in online sales. Its importance can't be underestimated: Total Internet luxury spending is expected to nearly double to $12.5-billion by 2015, says American Express. Holts has yet to launch a cyber-shop.

Harry Rosen, which has annual sales of about $300-million, saw its e-commerce sales soar 90 per cent in the first six months of 2013 (though it makes up about 2 per cent of total sales). And both Saks and Nordstrom have reported that growth in their e-commerce businesses has outpaced those in their conventional stores.

Stephen Sadove, chief executive officer at Saks, said customers who shop both online and in-store purchase about three or four times as much as those who shop in a single channel. "Getting people to shop both channels is extremely important," he told Saks' annual meeting in June.

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