U.S. retailers report mixed results north of the border

TORONTO — Some U.S. retailers succeed spectacularly well in Canada — The Gap, Banana Republic and Wal-Mart in particular; Home Depot and Business Depot (Staples in the United States) among others. Some do respectably well and expand more slowly. A few fail.

All of these scenarios were represented during a U.S. retailer panel at an International Council of Shopping Centers (ICSC) forum held here in late April.

Russell Greg, director of international store development for Topeka, Kan.-based Payless ShoeSource Inc., reported that the footwear retailer has opened 240 stores across Canada over the past four years. Sixty more are planned.

“Canada demonstrated that we can get into other markets outside the United States. It also taught us to think globally and adapt our systems,” Greg said.

Quebec, for example, is linguistically and culturally different from an otherwise homogenous Canadian market. “We studied the Quebec market for nearly a year before opening a store and made sure everything was appropriate. It paid off,” Greg added.

Dallas-based Michaels Stores Inc., a top U.S. arts and crafts retailer, opened two stores in the Toronto area in 1993 and is now on schedule for 35 stores across Canada by year-end. Beyond that, Michaels plans to open 10 to 12 stores a year in Canada for the forseeable future, according to Doug Sullivan, Michaels' executive vice president of development.

More stores, greater profitability

Michaels' profitability was hampered the first few years because consumer awareness was slow to build. In addition, operating a small number of stores in Canada proved to be expensive. Profitability has “greatly increased since the store count has come up and we have eliminated some overhead,” Sullivan noted.

“Fortunately we had staying power and we're getting higher sales volumes, particularly out West,” he said. Michaels is opening stores in Winnipeg, Manitoba, and in smaller western markets such as Red Deer, Medicine Hat and Lethbridge in Alberta this spring, and five more in Vancouver this fall.

He rated Michaels' employees in Canada as “superior to those in the United States. A higher percentage of our associates (sales staff) are crafters who know our products and are interested in the stores. There is also a significantly lower turnover rate.” One wonders where employees would go, since Michaels has no real competition in Canada.

Sullivan said the company likes the numbers it is posting in Canada, noting an average of $2.28 million in annual sales per store.

Best Buy raises the stakes

Minneapolis-based Best Buy Co. Inc., a leading American retailer of consumer electronics, personal computers, entertainment software and appliances, plans to debut in Canada with more stores than it had originally planned — 13 in Toronto, as many as 27 stores in Ontario by late next year and 70 outlets across Canada by 2004.

Melissa Mosley, Best Buy's director of real estate for Canada, said consumers will find that the store products are “ready to go on the floor, and the sales people are not there to make a sale (they're presumably salaried and not on commssion). They don't care if you buy product A or product B. They're there to explain the products and their features.”

Underestimating Canadian competitors

Mitchell P. Kahn was also upbeat about the Canadian retail market, but as he explained in blunt detail, it can turn downbeat. Kahn, president of Hilco Real Estate LLC, Northbrook, Ill., previously was senior vice president of Sportmart Inc., a Chicago-based, big-box sporting goods chain that opened 11 stores in Toronto, Vancouver, Edmonton and Calgary in the mid-1990s.

Within two years, Sportmart shut down its Canadian operations and returned to proven markets in the United States. “Most U.S. markets had two and even three large-format sporting goods chains,” he recalled. “We believed there was a huge void in our format in Toronto and that our competitors wouldn't necessarily follow.”

But they did.

“Our Canadian competitors didn't look as sophisticated, and their stores weren't the size of ours in the United States, but they understood their marketplace and customers better than we did,” Kahn added.

Canadian sporting goods retailers responded by expanding, which Khan estimates doubled or tripled the store space in Toronto within two years of Sportmart's arrival.

“The demand wasn't there to support all that expansion, and it created a tremendous oversupply. We also overestimated disposable income in Canada, which is dramatically less than most major U.S. markets (an estimated 70% of U.S. disposable income).”

Sportmart also didn't study the market sufficiently, Kahn added. Moreover, store sizes should have been 25% smaller, and hunting and fishing gear, for example, did not appeal to Canadian shoppers.

“The Canadian marketplace is also extremely parochial. If it wasn't on sale, it didn't sell,” recalls Kahn. Ironically, sales over the first six months were “phenomenal” but the novelty wore off, and, as Kahn recalls, “sales took a dive like nothing any of us had ever seen before.”

In retrospect, coming to Canada was “fundamentally a good decision,” he concluded, “and if we had done what we should have, today we might have 25 stores across Canada.”

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