Is it the end of big box?

Is it the end of big box?
Image: Matthew Billington
The brief and unsuccessful entry into the Canadian market by Target has dominated media coverage this year when the topic turns to the state of retail.

Given the pace of its entry and then exit from Canada along with the court filing for creditor protection, Target casting a shadow over retail in the first half of 2015 was no surprise. Its exit also opened up nearly 10 per cent of large retail space in the country.

But the retail and commercial real-estate sectors in Canada have already moved on to confront the long-term challenges facing their industries and these issues have little to do with what happened to Target.

Instead, the conversation and analysis is about concepts such as urban-retail, smaller footprints, omni-channel retailing, pick-up point stores, and perhaps the most significant one from a real estate perspective — online shopping.

Even in the short term, the inventory that opened up as a result of Target’s exit has been mostly filled by other large retailers or bought back by the commercial landlords.

As well, while they may be proceeding more slowly, well-known foreign retailers are continuing with plans to enter Canada. Saks Off 5th intends to open three stores in Ontario next year, with as many as 25 by 2019. Nordstrom opened stores in Ottawa and Calgary this spring, building up to six locations over the next two years, as well as outlets for its discount chain.

Lisa Borsook, executive partner at Weir Foulds LLP in Toronto, says it is a mistake to generalize about the state of this sector in Canada. “We have had a buoyant market for some time,” says Borsook. “But pro-active shopping centre owners have been thinking generally about the challenges for the past three or four years about how to keep customers in their malls,” she says. “The retail market is much more nuanced than people give it credit for,” says Borsook, who adds that the challenges may impact the need for legal services, similar to other commercial sectors where there are increasing cost pressures.

One part of the market that may be permanently changing is the actual size, or footprint of a retail outlet, suggests Paul Greven, chief counsel for the Canadian operations of Jones Lang LaSalle, a commercial real estate services firm. “There is starting to be a move away from big box,” says Greven. Companies in areas such as electronics “are consolidating in fewer large spaces,” he says.
An example of this is Best Buy, which closed its Future Shop outlets in March of this year and re-opened nearly half of them under the Best Buy name.

One exception to the downsizing rule is for certain types of sporting goods stores, which sell hockey, golf, or skiing-related products. “People still want to try out the equipment,” says Greven.

As well, there is still commercial real estate demand in the larger urban areas. “The institutional investors are coming into the big cities,” he says.

Jim Fraser, a partner at McLean & Kerr LLP in Toronto, believes the market is still healthy, but agrees that a saturation point may have been reached for big box stores. “Retailers are getting very sophisticated. Space is getting smaller, but that was a trend before Target. Landlords are getting more tenants. The successful malls hardly have any vacancies and there are not vacancies for long,” says Fraser, who specializes in a commercial real estate practice.

Fraser remains optimistic and says, “I have not seen a deal go sideways or perceptions change,” since Target announced plans to shut down its Canadian operations.

The optics from Target’s failure were not good, but specific to that company, suggests Michael Turner, senior vice president of real estate management for Oxford Properties Group. “Target was a failure of execution. Not a failure of consumers or the Canadian market,” he says.

For commercial landlords, the retail market “is a challenging environment,” says Turner, who predicts factors such as online shopping will lead to significant changes in the next few years.

“For landlords, the best centres will steal market share from the weaker centres,” says Turner. “The best are going to get better. It is not linear for everyone,” predicts the real estate executive at Oxford, which has holdings including the successful Yorkdale mall in Toronto.

In that competition for the consumer dollar there are a number of different formats that retailers are using to try to get people into their stores.

Even in the big box field, different types of businesses are becoming anchor tenants, says John Andrew, director of the Real Estate Roundtable at Queen’s University in Kingston. Large-scale fitness chains are now taking over where there may have been a department store and driving traffic, notes Andrew. “They can move into the space and set up pretty quickly,” says Andrew, who is also a real estate management professor at Queen’s.

There has also been some recent expansion in the outlet mall sector, with its lure of premium brands at lower prices.

The Saks Off 5th entry into Canada is “intriguing” says Andrew, because Saks is a luxury brand. However, outlet malls can be a “rather volatile sector, especially when the economy suffers,” the professor says. “You have to make it affordable, but still keep the prestige,” adds Andrew.

While outlet malls have been successful in the United States, “you have to be careful not to undermine your own brand,” says Turner. Some luxury good companies do this by making a product in a “peculiar colour” that can be sold at outlet malls and which don’t impact sales to its more affluent customers, he explains.

Mixed-use or “urban retail” properties are on the rise in the largest cities in the country, although mostly in downtown areas. One very high-end example is a proposal by a Toronto developer to build an 80-story tower with eight floors of luxury stores, topped by 72 levels of residential units at the corner of Bloor and Yonge, where the men’s clothing store Stollerys was located for over a century.

The proposed tower is a project that “falls into the wow category,” says Borsook. At the same time, it is still an example of a mixed-use property, if on a grander scale. Retail outlets at the base of downtown residential properties for example, do not have to be just a food store, says Borsook.

If there is a consistent theme it is that retailers are trying to get more value out of each square foot. “Fewer, but more productive stores,” says Turner.

Ikea Canada announced this spring that it is opening “pick-up point” stores in London, Ontario, and Quebec City, which will be about one-tenth the size of its regular outlets. The format allows customers to order online and drive to the stores to pick up the goods, to avoid delivery charges. There will also be some of its most popular items on sale inside the outlets.

Whether customers will be willing to make the drive to save on shipping costs, remains to be seen, but it is an example of “omni-channel” retailing, one of the current buzzwords to describe multiple distribution channels to customers.

It is also an attempt to address the growth in online shopping, a topic that is still an ongoing challenge for retailers and commercial real estate landlords in Canada, says Andrew. “When I attend retail conferences, you can see people turn a different colour. Online selling is truly the elephant in the room,” he adds.

Total online sales for retailers have doubled since 2010, according to industry surveys. It is still less than 10 per cent of overall sales, although the current figure is expected to double within the next five years.

That could mean an increase in commercial real estate inventory that is about four times the size of what was made available when Target ended its Canadian operations, estimates Turner. Some of the inventory will be “repurposed” says Turner. “But it means less need for space,” he adds.

For goods that customers want immediately, retailers may be “immune” to online sales, says Andrew. Other areas, such as electronics, “are an enormous threat,” he predicts. “You don’t need to see it, you buy based on the lowest price,” he adds.

A comprehensive online presence is key, regardless of the type of retail operation, suggests Borsook. “People will research online and then go into the store to buy it,” she says.

The challenge for all retailers is to combine online and in-store sales into “a seamless experience” for consumers, says Turner. If there is less demand for overall space, then a retailer’s decision on where to put each store is much more significant. “Where are they going to be located? Selection becomes very critical,” says Turner.

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