Overview of the Canadian retail landscape

Citation

(2007), "Overview of the Canadian retail landscape", International Journal of Retail & Distribution Management, Vol. 35 No. 12. https://doi.org/10.1108/ijrdm.2007.08935lab.002

Overview of the Canadian retail landscape

Overview of the Canadian retail landscape

In recent years, Canada has had one of the highest GDP growth rates among industrialized countries. Strong consumer spending has been fuelling this growth – retail sales in Canada are currently exceeding $380 billion per year and are growing at 7.2 per cent per year1. A disproportionate share of this growth is occurring in one place – Alberta.

Drivers of retail sales include a buoyant economy, a strong housing market and more consumer spending power due to the strong Canadian $ and low-interest rates. Recently, Canadian retail is unquestionably strong – certainly bankruptcy statistics indicate that the rate of failure of retailers since 1990 has slowed dramatically.

Retail performance across Canada differs dramatically from region to region. Although Ontario and Quebec continue to lead in dollar sales, the past year has seen Alberta's growth far outstrip the rest of Canada. Riding the wave of growth in the energy sector, Alberta's retail sales are currently growing at an annualized rate of 16 per cent, whereas other provinces and regions have growth rates between 2 and 5 per cent. The western boom has also had a positive impact on the Atlantic provinces, as their workers have migrated temporarily but are sending their wages home for consumer spending. If energy prices were to drop significantly, there would be a dramatic impact on retail spending in the west. There is no sign of that happening yet, but if oil prices continue to drop there could be an impact.

As a sector, retail covers a broad range of consumer spending. Figure 1 shows the size of the key retail sub-sectors and their annual growth rates.

Figure 1 Year over year Canadian retail sales by category

A number of trends are influencing sub-sector performance, including shifting customer traffic patterns, blurring of lines between sub-sectors (for example, grocery and apparel under one roof), increasing competition, continuing strength in the housing market and changing demographics. To understand the impact of these trends, it is important to analyze them at a deeper level by looking at individual retailers in each sub-sector.

In the past 15 years, customer traffic patterns have shifted away from shopping malls to suburban and regional “power centres” – large retail developments featuring a Wal-Mart, Costco and/or Canadian Tire surrounded by smaller retailers in stand-alone units. The effect on Canadian department stores, the traditional anchors of shopping malls, has been dramatic: Eaton's has disappeared and Hudson's Bay Company is now privately held but prior to going private it was struggling. It is likely that changes will continue in the department store sub-sector, including rebranding, (e.g. changing a Bay into a Zellers) or closure of unprofitable locations. Of all retail sectors, traditional department stores continue to be under the greatest pressure.

In the fierce competition for the consumer dollar, the lines between traditional retailers have blurred. Grocery stores, pharmacies and general merchandisers have been branching out into each other's categories for the past decade. The next phase of this trend has started in Ontario with the pending showdown between Wal-Mart's “supercentres” and Loblaws' “superstores”. The winners will be consumers, who will benefit from more competitive prices on groceries and general merchandise. The losers will be department stores and grocery stores that fail to differentiate themselves from the supercentres/superstores.

Lately, much of the new competition in Canadian retail is coming from abroad. Apart from Wal-Mart, other US retailers such as American Eagle and Abercrombie & Fitch are expanding across Canada. Established European apparel retailers such as H&M, Zara and Mango have also expanded into Canada over the past couple of years. Foreign retailers have the expertise and capital to rapidly build brand awareness among consumers and a footprint across the country. They also have management depth and supply chain efficiencies that are often beyond that of many Canadian retailers. As competition increases, Canadian retailers who fail to adapt to the global retail environment will find it harder to survive.

The Canadian housing market has shown continued strength, leading to above average sales growth of building supplies and home furnishings; however, the USA is experiencing a housing slowdown. Stock prices for Home Depot and Lowe's have shown double-digit declines year-to-date based in part on flat sales. A housing slowdown in Canada would not only affect large players like Home Depot and Rona, but also the hundreds of independent hardware, furniture, appliance and home electronics retailers that rely upon the housing market.

Hidden beneath the macro-level retail data are two important demographic trends: the aging population and the increase in non-European communities across the country. While teen and pre-teen clothing stores generate hype and media coverage, retailers are adapting and profiting serving aging baby boomers – the population cohort with the most disposable income. Ethnic communities contribute to retail spending, but their tastes in food and clothing and their expectations for the shopping experience vary from the traditional Canadian consumer. Canadian retailers who ignore demographic trends and apply a “one size fits all” approach to their customers will suffer in the long term.

While the Canadian retail sector remains strong, a slowdown in the economy, coupled with the impact of one or more retail trends, would reveal weaknesses in certain regions, subsectors or specific retailers. The challenge for restructuring professionals will be to anticipate these weak points as new trends emerge. The current watch zones continue to be department stores and smaller or mid-sized chains that lack the management depth and vision to survive the fast paced changes facing today's retailers.

Because the retail industry is subject to so many risk factors, failures are inevitable. When restructuring is required, most are done using the Companies' Creditors Arrangement Act (CCAA). Restructuring a retail chain can be tricky, as much of the potential value is intangible or goodwill – often represented by a brand name or location. The challenge is to access this value for the creditors.

As an example, prime locations in “A” class malls will command a premium price from buyers, especially if coupled with a well known brand name. The landlords of “A” class malls in Canada (approximately five landlords own 80 per cent of them) are not keen to have their locations used as bankruptcy or sale outlets and want control over who are their tenants. They will certainly want to obtain any “key” money paid for a location instead of having that money go to other creditors.

Usually, there are heavy-duty negotiations around these issues, with the court officer pointing out its powers and rights under a court order, while the landlords point out all of the gaps in the legislation, particularly the inability to assign leases under the CCAA. In practice, because the usual suspects have worked together so many times, compromises are worked out. Generally, the debtor agrees not to advertise “bankruptcy sale” and to seek the landlord's approval on prospective purchasers. Depending on who the buyer is, landlords may agree to some flexibility on signage, amendment of certain lease terms and the mix of malls available for the new stores. In the end, the landlord usually consents to the lease assignments, however the outcome is far from assured: this negotiation is an art, not a science.

A second major issue in a retail restructuring is maximizing value from the inventory. The opportunity to sell a chain as a going concern for maximum investor value depends on having operational stores that are properly merchandised. To achieve this, it is critical to work with management to develop a tight, well-thought-out buying plan. This means having them prioritize their buying, given that there is usually a cash constraint to consider in allocating resources. Knowledge of retail supply chain logistics is a must. The season, inventory mix, sale process timeline and working capital constraints all are factors in developing a buying program. Planning is especially critical at pre-christmas time, when fresh stock is not available unless it has already been ordered and committed months before.

In situations where a chain cannot be sold as a going concern, a strategy is necessary to maximize the value for creditors through liquidation. The time of the year of the filing (high or low season), the ability to augment existing stock, and the liquidator's expertise all are key factors.

There are a handful of liquidators operating in North America who are experts in realizing the most from inventories. They are highly skilled and have developed detailed formulas on sharing of costs and profits with distressed estates. These arrangements are usually distilled into a tight, 40-page, single-spaced contract that the liquidator will want to see executed quickly. All the “what ifs” in this contract have to be understood and heavily negotiated in order to ensure all parties enter the agreement with full knowledge of the range of results. The ability to fully understand the terminology and issues in this contract comes with experience; having relationships with these liquidators is also helpful to ensure a speedy and fair deal for all parties.

In summary, Canadian retailers are enjoying the benefits of a strong economy; however, there are pockets of weakness due to customers' shifting buying behaviour. When failures occur, the resulting restructuring of a retail chain has to be carefully orchestrated in order to maximize the benefit for creditors.

Note

1.This paper was previously published in Rebuilding Success, Spring, 2007.