There was a time when the Canadian shopping mall was more than a mecca for consumer culture. It was a community space that functioned as an exercise circuit for seniors, a fun escape for moms on maternity leave and the default weekend hangout for teenagers.
Today, it's an environment under threat. A hyperspeed revolution in the retail sector promises to transform the Canadian shopping mall into something that is neither “Canadian” nor “mall.”
That trend is clear in the fast-paced turnaround at the Toronto Eaton Centre. As Canada’s busiest shopping mall adapts to survive, it is rapidly becoming less Canadian.
In just the few years since the 2008-2009 recession, the number of Canadian retailers in the mall has fallen by 10 percentage points, to half of all stores, according to an analysis by the Huffington Post Canada.
The number of U.S. retailers has risen by nearly the same percentage, to 35 per cent, from 2008 and 2014. About 77 per cent of the stores closed since 2008 were Canadian, while 62 per cent of stores opened in that time are American.
It is a phenomenon that is playing out at malls across the country and 2014 could prove a particularly hard, and pivotal, year for Canadian retailers.
Retail sales growth is expected to shrink by as much as a third this year from 2013’s growth rate of three per cent, according to Moody’s Investor Services.
One-third of Canadian clothing stores reported that sales have declined in the past year, according to an American Express survey. It also found 62 per cent of Canadian retailers are concerned about new competitors in their industry, while eight in 10 said the environment is more competitive than ever.
Halfway into the year, a number of retailers have reported less-than-stellar sales, including the Canadian divisions of U.S. heavyweights Target and Walmart.
But it is Canadian apparel chains that are faring worst. Jacob Inc., a 35-year retail veteran, is closing the doors to its 92 boutiques, citing the arrival of international competitors as a major reason. Rivals Reitmans Inc. and Le Chateau have been struggling to turn a profit for years and both have closed stores in the course of the past year.
Other retailers are struggling for survival: Sears Canada has shuttered its highest profile locations and its U.S. parent company announced in May the sale of its Canadian stake. That same month, B.C.-based Petcetera said it plans to sell all of its stores and liquidate its assets. Indigo Books and Music shuttered its flagship Chapters store in downtown Toronto amid faltering sales in the e-book era.
Canadian players face a “trifecta” of challenges as debt-laden consumers rein in spending, an onslaught of foreign competition arrives in the market and more sales move to the realm of e-commerce, says Jan Rogers Kniffen, CEO of retail consultancy Worldwide Enterprises.
That, he predicts, will lead to attrition among smaller Canadian players.
THE YANKEES ARE COMING
There has been a “seismic shift” in the Canadian retail scene since the Great Recession, says James Smerdon, director of retail consulting at Colliers International Canada.
In the aftermath, U.S. retailers were hard hit by a massive drop in consumer spending at home, while Canadian sales continued to grow at a healthy rate through 2012, he says. At the same time, the Canadian currency rose to par, making the move north even more attractive.
U.S. retailers saw the country’s relative stability as an opportunity to expand into a market that is similar to the United States, where declining mall traffic was leading to the closing of shopping centres.
Several multinationals have entered Canada since the recession, and many more are considering the space, including the world’s fourth-largest retailer, Japan’s Uniqlo. But the phenomenon is largely U.S.-driven.
A whopping 95 per cent of foreign retailers operating in Canada were U.S.-based in 2011, according to a report by Ryerson University’s Centre for the Study of Commercial Activity (CSCA). And that will only increase with the Canadian expansions of Saks Fifth Avenue, Nordstrom, Designer Shoe Warehouse and American Girl.
“What we’ve seen over the past five to 10 years is the Americanization of Canadian retail,” Smerdon said.
“It’s very hard for Canadian brands to compete on an equal footing with U.S. chains that are coming in and doing the same type of business.”
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The Americanization of Canadian malls is the intensification of a trend that took off in the 1990s when Costco entered the market, followed by Walmart in 1994, the same year the North American Free Trade Agreement made it easier to do business across borders.
This shaking out in the retail industry could end with few Canadian retailers left standing. Those best positioned are conglomerates such as Loblaws (which now owns Shoppers Drug Mart) and Canadian Tire. They have cost advantages over smaller players due to the size and scale of their operations.
It’s not a question of U.S. chains killing Canadian ones, but rather a question of big retailers destroying the small, says McGill University retailing professor Minha Hwang
“It’s about getting bigger around the world,” he said. “Those who didn’t figure out their own positioning get wiped out in the process. Usually those who are stuck in the middle, who can’t provide either good quality or good price, will be in trouble.”
Even Canada’s retail giants are suffering from the Walmart effect on local competition, according to a study by Hwang. It found that when a Walmart Supercentre enters a local market, competitors see a reduction in foot traffic, which can lead to costly price wars to attract customers.
Incumbents often end up losing because global operators are in a better position to eat the costs to keep prices low. That squeeze puts pressure on everyone, he says, but especially on local independents, which lack the finances and resources to compete, and end up closing.
COMPLACENT CANADIAN CHAINS
Many Canadian retailers are unprepared for the level of intense competition they now face.
Until this century, the market had been dominated by a small number of large family-owned chains, including department stores such as Simpson’s, Eaton’s and the Hudson’s Bay Company.
Before 1990, there had been little foreign competition in the market. Some Canadian retailers grew complacent with their place in the small and staid domestic market where aggressive marketing and branding tactics were unnecessary.
A study of two Canadian malls by the head of Ryerson University’s School of Retail Management found that, in 1990, all of the women’s and men’s apparel stores in the mall were Canadian. But between 1989 and 2007, half of the Canadian stores closed, while only 14 per cent of foreign retailers were replaced.
The entry of U.S. retailers such as The Gap and Walmart in the 90s, with their well-established consumer identities, exposed a major Canadian retailer vulnerability — they had not established brand identities to position themselves successfully in a more competitive market, said the study’s author, Elizabeth Evans.
“For some domestic retailers, the transformation was too great. It was unrealistic for a family-run merchant business that depended upon price promotions to become a company that generates enough sales to re-create itself as a brand in the popular foreign concept,” she said.
“For most of these merchant businesses, there was neither the size nor finances to make such a competitive move.”
In apparel, that is what happened to Thrifty’s, Bata and most recently, Jacob.
Canadian apparel retailers that remain are either under constant profitability pressure, such as Le Chateau and Reitman’s; have turned to U.S. investors for help, such as Lululemon or Aritzia; or are niche segments of large Canadian retailers, such as Joe Fresh, a segment of Loblaws, and Mark’s, which is owned by Canadian Tire.
Some of the most recognizable Canadian brands have been bought out by their U.S. peers: La Senza is owned by the parent company of Victoria’s Secret; U.S.-based Best Buy bought out Canada’s Future Shop; Club Monaco was bought by Ralph Lauren in 1999 and even Canada’s oldest retailer, the Hudson’s Bay Company, was sold to a U.S. private equity firm in 2006, though it has since gone public.
THE RACE FOR RETAIL SPACE
As competition for consumer dollars and scarce retail space in malls gets even more fierce, Canadian retailers, who are less desirable and less reliable tenants, face an ever-growing risk of closing.
Only two indoor shopping centres have been built in Canada in the past 15 years. Enclosed malls have fallen out of favour as the trend towards “big box” stores moves north, says Smerdon. Big box stores are cheaper to build and operate.
That has crunched the supply of retail space in existing malls, sending demand for premium spots soaring thanks to the influx of international competitors. That has driven up rent prices, which large multinational chains are in a better position to pay, driving out middling Canadian retailers.
The rise of stand-alone box stores and supercentres such as Costco or Real Canadian Superstore has changed the consumer landscape toward “power centres that, from Brampton to Burnaby, look exactly the same, with the same tenants and the same parking ratios and the same look and feel,” Smerdon said.
That, along with the struggles of department stores such as Sears, leaves malls with fewer “anchor tenants” — multipurpose stores with large square footage that attract shoppers, who are then inclined to browse the rest of the mall’s tenants.
“The anchor effect – the idea that an anchor tenant will bring traffic to the center and benefit all other tenants through increased foot traffic – definitely has a diminished role in power centres, where major retailers like Walmart, Canadian Tire, Costco, Home Depot are physically isolated from the other shops, and the entire premise of the place is to drive from retailer to retailer and park as close as you can to each,” Smerdon said.
THE RISE OF E-COMMERCE
In the era of multi-tasking, consumers are trying to reduce their shopping time, and one of the most efficient ways to do that is through their computers, tablets or phones.
The growth of e-retail as a new business model, a way of sidestepping the costs associated with a brick-and-mortar store, is a threat to traditional malls. The situation may be more dire than most in the industry realize, according to a 2013 CSCA study on e-commerce.
It projected that online shopping will double as a percentage of overall retail sales to capture more than six per cent of sales by 2018, growing faster than store-based sales and taking away an increasingly large share of total retail sales as the century progresses, the study warned.
Several reports suggest that Canadian retailers are behind in the e-commerce game compared with their U.S. and European peers, which could encourage more cross-border e-shopping owing to a lack of Canadian options.
Canadian retailers saw $170 in online sales per capita in 2012, one of the lowest rates in the developed world. That compares to $600 in sales per capita in the U.S., according to the CSCA study.
Canada ranks just about last when it comes to e-commerce sales and sophistication compared with G8 nations and other similarly sized markets, Google Canada’s head of retail has said.
As international competition in physical retail spaces grows increasingly intense, Canadian retailers not shifting to the internet will get shut out and close down, says retail analyst Kniffen.
“I don’t want to use the term ‘tipping point,’ that’s trite, but that’s what we saw in 2013, when mall traffic actually fell for the first time in my memory outside of a recession year and internet traffic made up the difference,” he said.
The squeeze from online shopping and power centres, along with a declining number of enclosed malls being built, could force Canadian shopping malls to rethink their strategies, Smerdon says.
“If someone is willing to do their basic shopping at the power centre or large format mall , then go to [the] High Street on the weekends for their evening experience, then malls are the net loser in that experience.”
MALLS ARE SO YESTERDAY
While older time- and cash-strapped shoppers flock to one-stop shops or online retailers, the demographic with time and disposable income to spare is hanging out online instead of the mall.
“Across North America, we’re seeing a trend toward fewer and fewer kids spending time just hanging out in malls,” Smerdon said. “Their social time is much more electronic, and if it’s face to face, it can be more in cafés, restaurants.”
Teen mall traffic, the barometer of the health of malls across the continent, has fallen by some 30 per cent, according to a U.S.-based study that attributes the trend to a new, technology-driven idea of what’s cool. The increasingly important Generation Y consumers are now doing a large portion of shopping on their phones, laptops and tablets, the same places they are hanging out with friends on social media and replacing TV, music stores and cinemas with online video and music.
In the United States, where more than 400 of the country’s 1,100 malls have closed in the past decade, the phenomenon has spawned its own website, Deadmalls.com, where mallrats can share their stories. The site also features stories from 14 dead Canadian malls.
Demographic shifts are forcing mall planners and retailers to reinvent the space in hope of attracting foot traffic and potential sales.
“The mall has always functioned as a social space as well as a commercial space,” Smerdon says.
“At one time, the commercial aspect of the mall led to its role as a place to socialize, but now it’s kind of flipped around, so the social relations that people want out of spaces — whether they’re indoor or outdoor — is leading the commercial aspect.”
Just as demographic and technological change have disrupted the entertainment industry, they have also permanently altered consumer culture.
The changes driven by technology and consumer behaviour have already started to have a major effect on retailing in Canada, but the full effects are a long way off, Smerdon says.
“I think we’re just starting to see how that’s going to impact the look and feel of the shopping environment in Canada.”
Developers such as Oxford Properties are setting their sights on mixed outdoor spaces. Their redesign for the Square One mall in Mississauga will make it the largest mixed-use development in Canada.
The company’s CEO has said he pictures the future role of the shopping centre functioning as being essentially a small city-state, telling The Globe and Mail that it will have an “emotional contract” with the people who work, live and shop there.
Developers are looking at alternative environments that include an eclectic mix of retailers, restaurants, office and living spaces in the hopes that they can revive the mall as a Canadian public space.
The old grey spaces and stale halls of tiles, pillars and concrete are being reimagined to include green space for a new active generation of elderly mall walkers, comfortable cafes where friends can share a cup of java, quality restaurants where families can dine out and loungers can surf the internet.
New shopping environments can be part of urban revitalization, and many developers are thinking about including transit connectivity, bike access and tailoring their space to the local community, Smerdon says.
But at this point it remains to be seen whether the mall is destined to die, or to be reinvented with new social utility for the 21st century.