By Will Hackney · On April 2, 2015
The retail landscape in Canada has recently shown signs of weakness, succumbing to the changes brought on by e-commerce and downward pricing pressure. The January 2015 announcement of Target Canada’s plan to close its entire 133-store portfolio is but a ripple on the surface of the Canadian retail scene, a space that is ripe for further change. In February 2015, Statistics Canada released information stating that overall Canadian retail sales had declined 2% between November and December of 2014. This marks the largest decline since April 2010 and outpaced economists’ estimates of a 0.4% fall. Within retail, the major losers were the electronics and appliances division and the shoe industry, which fell 9.2% and 9.4% respectively (Statistics Canada). While a handful of brick-and-mortar stores will no doubt last long into the future, the transition towards online retail hubs swallowing up the margins of independently owned stores ensues. As the industry shift squeezes out many longtime players, one stronghold stands the test of time: Hudson’s Bay Company.
Surviving as the purest example of Canadian, Hudson’s Bay Company (HBC) has successfully been in business since being granted a royal charter in 1670. Initially, finding success by leveraging Canada’s vast fur resources, HBC has ridden atop the transformation of Canada’s retail industry, all the while continuing to offer classic products such as its fabled striped woolen blankets. After becoming officially incorporated on its 300th anniversary in 1970, HBC continued to grow through the acquisition of domestic retailers: Simpsons, Robinson’s, Woodward’s, Kmart Canada, and Zellers, to name a few. More recently, the firm diversified through the cross-border purchase of Lord & Taylor as well as Saks Fifth Avenue and its outlet counterpart, Saks Fifth Avenue OFF 5TH (HBC Heritage). Despite their impressive success, even HBC cannot claim immunity to the evolution of its participating industry, as Canada’s global peers seek opportunities to innovate.
Factors contributing to the secular decline of “business as usual”
A fleet of factors has been reshaping the Canadian retail scene, including foreign entrants, competitive outlet malls, and changing department store dynamics. Eaton’s, Sears, and other icons of the past have been replaced by the likes of Nordstrom and other incoming foreign players. Furthermore, stores are less able to depend on the promising holiday season as sales have dampened in recent years. December, the largest single month for retail sales, continues to show year-over-year declines. Though responsible for 9.3% of yearly sales in 2013, this compares to 11.5% in the 1990s, representing $3 billion in redistribution. Target’s failure has served as caution for other entrants into Canada. Meanwhile, the trend towards “bulk shopping” is driven by a consumer preference for convenience and cost efficiency, which is expected to carry success for firms such as Costco, Superstore, and Amazon.
With these changes in consumer preferences, forecasts in retail development have reacted accordingly. As per a report released by the Canadian Board of Real Estate, the investment in real estate across Canada was $5.826 billion in 2013, and is forecasted to grow to $6.898 billion in 2014 before shrinking to $4.931 billion in 2015 (CBRE). In light of pessimistic predictions, Sony has declared that it will be closing its 14 remaining Canadian locations. Similarly, after declaring bankruptcy in December 2014, clothing retailer Mexx Canada will be shutting down its 95 locations across Canada by the end of February 2015, and Smart Set, Jacob Inc., Bombay, Bowring & Co. Inc., and Benix & Co. are among other retailers ending their Canadian operations.
Opportunities in innovation
According to a report released in June 2014 by the Retail Council of Canada, there is hope in the innovation afoot in the Canadian retail landscape. 43% of surveyed businesses revealed that customer acquisition and retention are chief strategies in the coming year and 48% plan to reduce prices in an effort to gain more customer loyalty (Retail Council of Canada). These indicators generate hope as a more customer-centric retail strategy emerges.
Although there is variance by segment of the retail industry, multi-channel or omni-channel business models should be the goal of any retailer. Omni-channels, which are aimed to fully integrate a company’s channels of mobile applications, online browsing, in-store technology, and information, seamlessly connect all levels of a store to maintain the consistency of the consumer’s experience. Omni-channel economics are favourable for pure play Internet retailers, but companies paying high operating costs for brick-and-mortar storefronts may not be able to afford the supply chains to support a true omni-channel offering. The omni-channel principle has evolved brick-and-mortar to the “bricks-and-clicks” model, emphasizing the need to enrich levels of offering within a retailer (The Economist). As traditional retailers broaden their channels, Amazon is in discussion of acquiring locations from the now-defunct RadioShack Corp. The online retailer intends to use the stores as product showcases and to support the click-and-collect model where customers can pick-up and drop-off merchandise ordered online.
It is no longer a mere consideration for a retailer to launch an online presence but is a requirement . As retail powerhouses China and the United States have been experiencing double-digit growth in online stores, Canada has been lagging behind. In terms of the effects on real estate, there is a noticeable trend of redirecting sales in physical stores to online. The risk of managing retailers’ physical presence is also on the rise (Retail Council of Canada). Consequently, according to Gartner, brick-and-mortar stores in Canada are expected to resume modest growth at about 3% while mobile retail platforms should hurdle 15%annually in the coming years. Regardless, 68% of Canadians who shop online are purchasing goods from the United States and other countries, representing a large loss to the Canadian economy. In order to maintain an edge for consumers, brick-and-mortar stores may require investments to cater to the consumers’ senses while offering interactive product reviews, opinions, and social media, to name a few.
This retail rejuvenation will pressure stores to maintain innovation in product experience, customer interaction, brand, and privacy in an omni-channel environment. In reality, we cannot dispel the brick-and-mortar store’s principal purpose: the tangible product experience that is not replicable online. There should be a renewed emphasis on showcasing fewer products with greater sampling opportunity. For the trailing midmarket retailers, providing a better product experience improves efficiency from a real estate cost perspective. Enhancing services is a priority with the end goal of information resonation and quality of experience. The future of customer service will be marked by greater investment in face-to-face interactions, as well as data analytics and mining capabilities. Big data analytics enable retailers to construct tailored profiles and appropriately recommend products. For physical retailers, massive quantities of customer information can be stored and manipulated using software to identify cross-store trends. Personalized interactions boost overall satisfaction and experience, and are largely absent in Canadian retailers. Furthermore, mobilizing the in-store experience, as in the case of Apple’s use of iPads from product selection to purchase, is an efficient approach to maximizing customer exposure to product features. It is essential that retailers ascertain consistent service across all storefronts and platforms.
It can be observed that as one store closes, another one opens. Despite mass quantities of retail closures in the low and midmarket, entrants in the higher end still see great opportunity. Holt Renfrew and Harry Rosen, dating back to 1837 and 1954 respectively, have long satiated wealthy Canadians’ retail demands. In response, Nordstrom plans to open six stores across Canada before 2017, while Saks Fifth Avenue has plans to open as many as seven stores. One issue for Nordstrom is that they intend to occupy former Sears locations, a potential misalignment in real estate fit considering Sears’ starkly different consumer demographics. Target encountered this problem while acquiring past Zellers locations, many of which were lower-end. There may be potential for history to repeat itself with Nordstrom. Further, Canada’s $1.6 billion luxury apparel market represents 6% of overall retail sales, less than half of the segment’s share in the United States. While foreign retailers roll in, Canada continues to hold proportionally less high-income earners than the United States (National Post).
As proclaimed by Doug Stephens, Canadian futurist and founder of retail consultancy Retail Prophet, “The hordes are breaking down the castle walls — with all the competition that’s coming into the country, it’s putting pressure on Canadian retailers to begin to innovate and to offer customers more options.” Though we operate in a unique Canadian context, where many of Canada’s retail locations are owned by pension funds and REITs with an eager supply of tenants, the pressure to explore the omni-channel space is imminent. Given the position of the Canadian dollar and resulting disincentive to shop cross-border, Canadian retailers have a unique opportunity to engender an enhanced consumer experience that is long overdue within our borders, while also well within their reach.