TORONTO U.S. retailers looking north in their quest for growth should consider the frosty reception Canada has so far given trendy discounter Target Corp a cautionary tale: what looks like a simple border crossing can easily go wrong.
On the surface, Canada seems a good bet for retailers tiptoeing outside the United States, with Nordstrom and Saks among those now lined up to test the market. But winning over Canadians is no cake walk, and name recognition alone won't do the trick.
"The bottom line has to be the price," said Peter Tong, a 38-year-old transit system designer who spends many lunch hours browsing at the Eaton Center mall in downtown Toronto, where a good number of U.S.-based retailers are located.
The Black Friday sales there were "hyped up," he said. At the JCrew store, a C$260 ($240) cashmere sweater is 30 percent off, but a quick check on Tong's iPhone shows it sells for $200 at JCrew in the United States, with the same discount. "Why are we paying C$60 - and 13 percent taxes - on top?"
Retailers underestimate the importance of pricing in Canada at their peril, and Target's experiences are a case in point.
Target had big plans for Canada earlier this year when it started opening the first of an unprecedented 124 stores in one year, along with three distribution centers.
But it disappointed shoppers with prices above those it charges in the United States, and then with empty shelves as it miscalculated demand and struggled with managing inventory.
Admitting it has had problems in its first international expansion, Target last month cut its full-year profit forecast, due largely to lower-than-expected sales in Canada.
"Target had one thing that they had to accomplish...make the first shopping experience for every Canadian a positive one, and unfortunately, they failed at that," said James Smerdon, vice president and director of retail consulting at Colliers International Consulting.
LEADING THE GAME
The allure of Canada for U.S. retailers is that it is a market with fewer shopping centers than in the United States, less intense competition and relatively high sales volume.
The Eaton Center and the Yorkdale Shopping Center, both in Toronto, for instance, boast North American-leading sales of around C$1,300 per square foot.
"Part of the strength of U.S. retailers that are coming to Canada is that there is brand recognition," said Yorkdale general manager Anthony Casalanguida. "There exists that pent-up demand because of the fact that Canadian shoppers know what these retailers are all about."
Yorkdale is already home to such high-end retailers as Louis Vuitton and Tiffany & Co, and Casalanguida advises new arrivals to consider their pricing carefully because Canadians are keen comparison shoppers.
He said many U.S. retailers at the mall, including Ann Taylor and White House/Black Market, are matching U.S. prices. That may cut into margins, but it stokes sales.
An estimated three-quarters of Canadians live just 160 kilometers (100 miles) from the U.S. border. Cross-border shopping and new relaxed duty-free rules create brand familiarity and high expectations.
The next wave of U.S. newcomers will be led by luxury retailer Nordstrom Inc, whose Canadian president, Karen McKibbin, acknowledges some prices will have to be higher in Canada due to taxes and duties. She says Nordstrom will try to minimize such cases and won't be a "Nordstrom-lite" that will disappoint shoppers.
Nordstrom will open the first of five Canadian stores next year, and may open 15 to 20 lower-cost Rack outlets.
It will have company in upscale chain Saks Fifth Avenue, which was bought by Canada's oldest retailer, Hudson's Bay Co, this summer for $2.9 billion. Up to seven full-line Canadian Saks stores and two dozen Off 5th outlets are planned.
Target still expects its Canadian operations to bring in 10 percent of its profits by 2017. What it didn't expect was the rocky start. Experts say it wanted too much, too quickly, from Canada, while underestimating domestic competition.
"If they (Target) had set the bar lower, then we would not be having this conversation," said Wells Fargo analyst Matt Nemer.
(Editing by Peter Galloway)