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August 2014
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Retail Invasion: Canadian
Industries Ripe for US Takeover
By Will McKitterick
After consumer confidence and discretionary spending plummeted at
home, US retailers set their sights on Canada to expand operations.
100
80
60
40
20
Shoe Stores
Lingerie, Swimwear
& Bridal Stores
Department Stores
Auto Parts Stores
0
Men's Clothing Stores
Turning North
Prior to the recession, US retailers
considered the Canadian market too
small to be a target for expansion.
Consumer confidence and discretionary
spending were healthy at home,
providing retailers ample room for
growth; however, the housing market
collapse halted these once-indomitable
growth opportunities within the United
States, and the recession staggered
into a weak recovery. Subsequently,
retailers found themselves vying for
limited consumer spending power in
constricted markets. To escape the
constraints of their domestic dilemma,
many US retailers have begun to
seek out opportunities abroad.
Meanwhile, the Canadian retail
sector has exhibited rapid growth over
the past five years. Consumers have
remained financially confident, with
Top Five Industries Market Share
Concentration Comparison
%
The Canadian
retail sector is
a less-crowded
field with fewer
dominant
players
Bogged down by sluggish demand,
lackluster growth opportunities and
saturated markets at home, US retailers
have set their sights on Canada to
capitalize on a consumer base yearning
for a greater selection of US brands.
Canadian consumers appear ready to
welcome US retailers, but a seemingly
easy-win market for expansion is fraught
with several hidden pitfalls.
Canada
US
SOURCE: WWW.IBISWORLD.COM
plenty of cash on hand for discretionary
purchases. Most are familiar with US
stores and frequently cross the border
to shop for a broader selection of
brands. Furthermore, the Canadian
retail sector is a less-crowded field with
fewer dominant players. Many former
homegrown giants, including Zellers,
Eaton’s, Woolworth’s, Simpsons and
A&A Records, have already closed their
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August 2014 2
Retail Invasion: Canadian Industries
Ripe for US Takeover
doors in Canada, opening up plenty of
room for foreign companies to fill in
the gaps that these exits have created.
Consequently, the Canadian market
offers an opportunity for US retailers
to expand and cut their teeth on an
international market. A variety of wellknown retailers have already moved
into the Canadian landscape: Walmart,
Target, Nordstrom and Marshalls
have or are in the process of rolling
out stores across the country. Yet each
retail industry is different, making some
companies more likely to succeed in
Canada than others.
Primed for invasion
US industries best suited to expand
into Canada are characterized by slow
growth and a high level of market share
concentration, with few dominant
major players generating the majority of
industry revenue. In contrast, Canadian
industries primed for entry tend to
be fragmented and exhibit low levels
of market share concentration; these
industries are especially appealing if
they consistently post revenue growth.
IBISWorld queried its database of more
than 1,200 US industries and identified
those particularly well poised to enter the
Canadian market.
Clothing Stores industries
Feeble consumer confidence and
low discretionary spending kept US
apparel retailers on shaky ground
after the economic downturn. Even
the Women’s Clothing Stores industry
(IBISWorld report 44812), once believed
to be recession-proof, has had difficulty
generating demand. Operators have
clamored for the attention of priceconscious consumers, many of whom
have turned to discount stores for their
wardrobe needs. Average industry profit
margins, however, have improved over
the five years to 2014, but intense pricebased competition has kept them below
prerecessionary levels. Meanwhile,
operators in the Men’s Clothing Stores
industry (IBISWorld report 44811) have
continued to consolidate through intense
merger and acquisition (M&A) activity.
Major company PVH Corp. purchased
Tommy Hilfiger in 2010, while The
Men’s Wearhouse Inc. acquired Jos. A.
Bank in 2014, significantly bolstering
each company’s respective market share.
The top four participants currently
control a majority (55.8%) of industry
market share. Heightened M&A activity
signals that retailers, with little room for
organic growth, are looking to acquire
competitors to expand their businesses.
In contrast, the Canadian apparel
sector bounced back from the recession
relatively quickly. Consumer demand in
Canada has remained strong throughout
the past five years, including ample
demand for clothing. Moreover, both
the Men’s Clothing Stores industry and
the Women’s Clothing Stores industry
in Canada are fragmented. The largest
men’s clothing stores in Canada, Harry
Rosen and Moores Clothing for Men,
both of which are more narrowly focused
on the luxury and dress wear segments
of the men’s apparel market, represent
only 15.8% of the Men’s Clothing Stores
industry. The Women’s Clothing Stores
industry is similarly fragmented, with
major players Reitmans (Canada)
Limited, H&M and YM Inc. controlling
a combined 37.0% of the industry’s
market share. This low market share
concentration indicates opportunity for
US expansion and industry leaders Ann
Taylor, Kate Spade and J. Crew have
already made the leap to Canada.
Auto Parts Store industry
Auto parts stores are grappling with longterm stagnation in the United States,
with little or no room for substantial
industry-wide revenue growth. As a
result, the industry has consolidated
during the recovery period. Large
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August 2014 3
Retail Invasion: Canadian Industries
Ripe for US Takeover
players, such as AutoZone and O’Reilly,
have increased their market share by
expanding existing operations and
engaging in acquisition activity, the
most significant of which occurred in
January 2014, when Advance Auto Parts
purchased General Parts International.
As such, IBISWorld expects the number
of operators in the US Auto Parts Stores
industry to decline at an annualized
rate of 0.8% to 18,177 over the next
five years. Consolidation will enable
the industry’s top four companies
to account for 66.6% of revenue in
this fairly concentrated industry.
Heightened competition within the
United States is expected to set off US
acquisitions of players in the Canadian
Auto Parts Stores industry, which has
remained largely resilient despite the
economic downturn. A decline in income
and employment levels during the
recession prompted Canadian consumers
to perform their own maintenance and
repair work to cut costs. The industry
is also highly fragmented, with a large
amount of small independently owned
stores; the top four companies are
expected account for less than 5.0% of
industry revenue. Sensing opportunity,
US industry leader Advance Auto Parts
Inc. has already moved to expand its
operations through the acquisition of
Carquest, an auto parts dealer with a
substantial number of stores in Canada.
warehouse clubs and e-commerce
websites for better deals. In the United
States, the department store market is
completely saturated, with the top four
operators accounting for an estimated
80.0% of industry revenue in 2014.
With virtually no room for organic
growth, retailers will likely continue to
consolidate as competition mounts. For
many industry players, including Saks
Fifth Avenue and Nordstrom, moving
some operations to the Canadian market
has provided relief from the cramped
conditions in the United States.
In Canada, consumers have welcomed
the surge of new US department stores
with open arms. Canada’s top income
earners have demanded a greater variety
of luxury and high-end fashion brands;
while big-box discount retailers such as
Walmart and Sears have long existed
in the Canadian market, luxury goods
department stores are a relatively new
phenomenon in Canada. The industry
is moderately saturated, with the top
four companies controlling 45.1% of
market share. Canadian department
store Hudson’s Bay Company, which
recently acquired Saks Fifth Avenue, is
the only Canadian luxury department
store with a controlling stake (9.8%) of
the market. This leaves plenty of room for
new industry entrants, like Nordstrom,
to satisfy pent-up demand for high-end
clothing and accessories.
Department Stores industry
The recession hammered both upscale
department stores and their discountvariety counterparts in the United
States. Retailers suffered as a result of
falling demand and rising price-based
competition as changes in consumer
confidence and per capita disposable
income limited sales opportunities.
Over the five years to 2014, industry
operators have struggled to attract
price-conscious consumers, who have
instead opted to shop at big-box stores,
Other examples
Jewelry Stores industry:
In 2014, Signet Jewelers Ltd. acquired
Zale Corp., the largest specialty jewelry
retailer in the United States and the
United Kingdom. Zales owns a variety of
stores in Canada, including Zales Corp.,
Zales Outlet, Gordon’s Jewellers, Peoples
Jewellers and Mappins Jewellers.
Shoe Stores industry:
Discount Shoe Warehouse (DSW)
purchased 44.0% of Town Shoes Ltd.,
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August 2014 4
Retail Invasion: Canadian Industries
Ripe for US Takeover
a chain of Canadian shoe stores, in
2014. The move will give DSW access to
the Canadian market as well as a local
partner familiar with the Canadian retail
landscape. Jimmy Choo, an American
women’s shoe designer, is also expected
to open its first stand-alone store in
Toronto’s Yorkdale mall in 2014.
Lingerie, Swimwear and
Bridal Stores industry:
Victoria’s Secret lingerie brand moved
into Canada by taking over the La Senza
chain. The takeover strategy helped
the company gain access to coveted
real estate in Canadian shopping
centers. Victoria’s Secret currently has
24 stores in Canada with locations in
Alberta, British Columbia, Manitoba,
Newfoundland and Labrador, Nova
Scotia and Ontario.
Potential pitfalls
Setting up shop across the border can
benefit US retailers mired in lagging
domestic markets, but expanding north,
despite ample similarities between
Canadian and American consumers, can
be a challenging process. Firstly, vacancy
rates are much lower in Canada than in
the United States, which means property
values are much higher. Finding store
space can be difficult and expensive for
companies looking to quickly roll out a
large number of storefronts. As a result,
many operators entering Canada have
opted to expand through acquiring
Canadian companies. This was true
of Target, which purchased the ailing
Canadian department store Zellers, along
with 220 of its store locations in 2011.
Furthermore, expanding too rapidly
can lead to growing pains for companies.
For example, Target opened 124 stores in
2013 alone, though the retailer struggled
to meet its sales targets. Transplanting
a supply chain to Canada requires an
entirely new logistical network to manage
transportation and storage of inventories.
Adjusting to new government rules
and regulations can also be extremely
complicated when moving goods across
a border. In addition, operational costs
in Canada, like taxes and provincial
minimum wages, are higher than in
the United States; labor costs in the
Hardware Stores industry (IBISWorld
report 44413) are estimated to account
for 13.2% of revenue in the United States,
compared with 16.5% in Canada in 2014.
Finally, despite many similarities,
Canadians and Americans are different
consumers. Preferences and styles in
Canada may diverge from US fashions.
Like the United States, Canada is not one
giant monolithic consumer base. The
country boasts vastly differing regional
metropolitan centers, some of which
have fairly homogenous populations,
while others have extremely diverse
multicultural vibes. Thus, simply
implanting US store models can be
disastrous if a company overlooks
these intricacies. For example, the
seasonal differences between British
Columbia and Quebec are enormous
and affect many of the product arrays
that retailers display in their stores
at a given point during the year.
US retailers also have a tendency
to price products higher in Canada,
but Canadian consumers tend to be
price savvy and aware of how much
products cost in corresponding US
stores. Inflating prices can be not only
embarrassing, but also potentially
harmful to companies attempting to
land in a new retail environment, as
J. Crew discovered when it was forced
to issue a public apology after offering
higher prices in Canada for the same
products sold in the United States.
A shifting landscape
Canada, with a population of about the
size of California, offers opportunities to
big retailers looking for growth potential
amid a struggling US economy; however,
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Retail Invasion: Canadian Industries
Ripe for US Takeover
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the oncoming flood of competition is
likely to set off a series of price wars
in domestic markets, as established
Canadian brands and new US players vie
for market share. Though price-cutting
will benefit consumers, it will likely
drive down retailers’ bottom lines.
Increased M&A activity within
Canada is also likely, as homegrown
retailers band together to fend off
encroaching foreign competitors. For
example, Canadian furniture giant
Leon’s Furniture Inc. purchased its
primary industry competitor Bricks
Ltd. in 2012 in a preemptive measure
to fend off competition from Target
and other US-based merchants
planning to move into Canada.
Though the success of this strategy
has yet to be actualized, maintaining
market share will likely be easier for
well-established local competitors,
such as Canadian Tire, men’s retailer
Harry Rosen and Aldo shoes.
Finally, it is unclear whether the
US retail invasion will be long lasting.
Canadian shoppers were better able
to loosen their purse strings during
the recovery than most American
consumers; however, high consumer
debt levels have begun to wear on
Canadians’ willingness to spend.
Moreover, the recent foibles of US
retail giant Target have potentially
turned off some companies from
moving to Canada. Retailers may
begin looking for other opportunities
domestically if the Canadian market
proves too risky. These concerns,
if significantly acute, could signal
an abrupt end for the northward
migration of US retailers to Canada.
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