Canada: A Safe Haven for Big Box Stores

by Angie Mohr, Investopedia staff writer

For decades, the Canadian retail market was dominated by homegrown companies, such as the Hudson's Bay Company and Zellers. The explosion of the big box stores that occurred in the United States in the 1990s didn't take hold north of the border until recently. American companies found the Canadian market difficult to enter and operate in, and often not worth the investment. Today, however, American big box stores are popping up all over Canada, and these retailers are basking in the benefits of pent-up Canadian consumer demand.

The Challenges
Setting up and operating a retail store in Canada poses some unique challenges. All packaging and labeling must follow Canadian rules, including using both English and using metric weights and measurements. Stores operating in Quebec must also be able to serve customers in French, have French on all signage and advertising material, and produce French versions of web pages. With the Canadian population approximately one-tenth of that of the U.S., the added administrative and legal expenses have often been deemed by large retailers to not be worth the effort.

To make penetration into the Canadian market even more difficult, the Canadian dollar has traditionally been weak against the U.S. dollar, making selling in the former and purchasing in the latter risky. Coupled with the higher transportation and payroll costs, most American companies have kept their operations south of the border.

New Opportunities
The strengthening of the Canadian dollar has led many U.S. companies to take a second look at the Canadian market. As saturation points are being reached in the American market, Canada provides new opportunities for American big box retailers. According to a Colliers International Consulting study, Canadian malls experienced 50% higher sales per square foot than their American counterparts in 2011. Canadians are hungry for consumerism.

The downturn in the economy also gave a boost to large, well-capitalized American big box retailers. As Canadian companies - almost all of which are smaller in size than American consumer product retailers - struggled with declining sales and tighter capital markets, American companies positioned themselves to scoop up the distressed stores.

Hardware giant Lowe's LOW opened its first store in Canada in 2007 and currently has around 30 stores across the country. Recently, the company's expansion plans have included making friendly overtures toward Rona (TSE:C.RON), a Canadian-based chain. Rona currently has approximately 79 big box locations and over 700 smaller stores. A takeover by Lowe's would give the American retailer a substantial footprint in Canada.

In September 2012, Lowe's withdrew its friendly offer for Rona and some analysts believe that the move is a precursor to a hostile takeover. Lowes' activity in Canada is a stark contrast to announced store closings in its U.S. operations. The company announced that it will close 20 underperforming American stores in 2012 and will reduce its pace of growth.

In January 2011, Target TGT announced that it was buying out lease agreements on 220 Zellers stores for a total of CDN$1.825 billion. Target sold off some of the leases to Walmart WMT and announced plans to convert up to 189 Zellers stores to Target outlets. The company plans to complete the conversion by 2014.

The Bottom Line
With an increasing number of large American retailers entering the Canadian market, the tide of Canadians flowing over the border to shop is likely to decline, keeping consumer money and jobs north of the border. Canada continues to be a target for American big box retailers with new stores opening every month. The strengthening Canadian currency and high retail demand make it worth the trip north.

Market News and Data brought to you by Benzinga APIs