The Sorry State of Canadian Retail

When HBC closed Zellers, Canadians never really had to fully experience the consequences of the change. Sure, we had to take our appetite for frugal and odd purchases elsewhere, but that appetite was quickly filled by Target… or so we thought.

Now, we all have our own opinions about why Target failed in Canada so allow me to voice mine. Beyond the obvious 1) not treating their business like a startup and anticipating a loss while they gained traction and 2) utterly failing from the perspective of inventory and online syndication, I believe there was a fundamental systemic problem that undermined their ability to succeed:

In America, Target’s business model is “pay marginally more to not have to go to Walmart”.  If you’ve ever crossed the border to shop at a US Walmart, I’m sure you understand why. The fact that www.peopleofwalmart.com has a constant stream of content is testament to this fact. The reality is that this model isn’t applicable to the Canadian market because Canadians are wonderful people and in the great white north, shopping at Walmart is not equivalent to an episode of the most recent season of American Horror Story.

So, with Target’s graceful (sarcasm) exit of the Canadian market, we’re finally going to feel the aforementioned consequences. But what about Mexx? What about Jacob? What about Canada’s own golden boy Holt Renfrew? What about Sears?

Allow me to speculate a bit on the looming issue of Sears. While many investors are privy to the $2.5 billion REIT leaseback deal Sears has arranged for itself, the general population hasn’t really been given enough information to fully evaluate what this means for Canadians. Could Sears be positioning themselves in asset ownership to gradually run their retail business into the ground, hedging bankruptcy by dividing the business, leasing the space back and owning the assets outright in an attempt to walk away unscathed? Only time will tell.

The big question here is in regards to the fate of all this vacant space. Sure, Walmart, and Canadian fitness giant Goodlife have expressed interested in the Target space, among others, but is their demand enough to absorb such a substantial amount of retail coming online? What happens when we have power centers with 80,000+ square foot vacancies, how big is the ripple effect of this problem? Is it finally becoming clear that we’ve overdeveloped our retail? What happens when Canadians are forced to stop spending 170% of their income? I can’t see this problem getting any better, anytime soon.

I’d love to hear your thoughts. I propose we rip the roofs off and start an urban farming initiative.