Target’s $1.82-billion purchase of 220 Zellers stores draws attention to the increasing appeal of Canada to U.S. retailers as they seek new opportunities outside of their sluggish home market, retail experts said.
Canada’s relatively robust economy and strong dollar, as well as its similar culture and proximity to the U.S., make it tempting for retailers south of the border.
Over the past year, Victoria’s Secret, Juicy Couture and Marshalls have opened their doors here, While J.Crew and Kohl’s have expressed an interest.
“If you look at Canada over the U.S. over the past year, Canada has been the stronger market, with better fundamentals, lower unemployment and stronger retail spending,” said Daniel Baer, an Ernst & Young partner and national retail industry leader.
Payment processor Moneris Solutions released figures Thursday showing Canadian consumer credit card sales rose 3% by volume in the fourth quarter, led by airlines and clothing. Spending on women’s wear jumped 18.3%.
The market also holds another attraction. U.S. retailers have been slower to expand internationally than their European rivals, and with lacklustre growth predicted at home for at least the next five years, Canada may be the logical first step in a broader expansion plan.
“It’s an excellent test market to make sure they are ready for international expansion,” Baer said, adding the ultimate retail prize will be the booming emerging market economies such as India and China.
Maureen Atkinson, senior partner at retail consultant J.C. Williams, agreed, saying Target had very little room left for growth in its home market and strong brand recognition here.
The strong Canadian dollar, which is now at parity with its U.S. counterpart, may also provide advantages for U.S. retailers operating here.
Although a strong loonie will make any initial investment in the country more expensive, it will mean that the cost of importing goods is lower.
Despite the advantages, Canada does pose a unique set of challenges for retailers.
The country only has a handful of major retail markets, with huge distances between them. It also has a small population of just over 33 million.
“If you choose to expand in California, within a relatively small geographic area you have almost the entire population of Canada,” Atkinson said. “Here, you need to spread literally across the country and, from a marketing and distribution standpoint, that becomes a challenge.”
The availability of suitable retail space may also prove a hindrance for new entrants to the market, with opportunities such as Target’s acquisition of the Zellers sites few and far between.
“There are only 120 to 130 malls across Canada and vacancy rates are quite low,” Baer said.