It's Tough Being in the "Middle", as Canadian Consumers Continue to Move Up and Down

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Photo: Oxford Properties

Photo: Oxford Properties

Polarization continues in the Canadian retail market, as an increasing number of consumers continue to gravitate towards either the very high-end or low-end. As a result, retailers like Harry Rosen, Holt Renfrew, Dollarama and Forever 21 continue to experience growth, while many middle-market retailers struggle. Antony Karabus, CEO of retail consultancy firm HRC Advisory, recently wrote about this topic in the Journal of Corporate Renewal.  
 
In the article, Mr. Karabus noted that a variety of factors are challenging mid-priced retailers, including increasing costs of doing business, as well as the declining brand loyalty among younger consumers and millenials. Furthermore, online retail from both pure-players and brick-and-mortar e-commerce channels are increasingly gaining market share. Mr. Karabus noted that middle-market retailers in premium malls may see some protection from these trends due to increased traffic and spending in those malls, but those in less-than-prime malls are facing consumer traffic declines. Malls such as Yorkdale Shopping Centre, Chinook Centre, Toronto Eaton Centre, Oakridge Centre, Pacific Centre, Southgate Centre, West Edmonton Mall and a number of others continue to increase sales performance for their tenants.
 
This polarization has been a contributor to the closure of literally hundreds of mid-priced stores, including Mexx, Smart Set, Jacob, Petcetera, Esprit and Target Canada. Some of those mid-market retailers still in operation continue to close locations, as they fine-tune their real estate strategy to align more closely to their target customer. Mr. Karabus said that Canada may have too much retail space per capita housing mid-market brands, which puts additional pressure on mid-priced retailers. Teen/youth brands are increasingly seeing pressure, though a few of the brands are starting to post improved results.

Photo: Oxford Properties

Photo: Oxford Properties

Mr. Karabus said that in order to survive, middle-market retailers need to enhance their value proposition in order to differentiate them from value-priced retailers, creating an experience which keeps customers coming back. Keeping overhead costs low will be key, while investing strategically towards product, stores, digital, and other growth initiatives. Customer service also allows mid-market players to potentially compete with the exceptional service often offered at higher-end retailers. 
 
Another recent characteristic in the mid-market retail sector, according to Mr. Karabus, has been CEO turnover. Leadership change often spearheads new retail strategy or in the case of Target Canada, led to store closures. 
 
In order for mid-priced retailers to survive and thrive in this environment, Mr. Karabus identified the following five key mechanisms for success:
 
1.    Develop a compelling, differentiated customer value proposition and business model that is distinct from price and engages the customer most effectively.
2.    Create a merchandising, assortment, and inventory deployment strategy that aligns with the differentiated customer value proposition.
3.    Deploy their capital to the most important initiatives that will position them for the necessary transformation in the new retail environment.
4.    Manage their cost infrastructure and deploy capital cost-effectively while enabling the strategic agenda and meeting customer needs.
5.    Design an analytics capability that produces key insights into the key drivers of profitability and customer engagement.
 
Mr. Karabus noted that some retailers may need to re-evaluate their real estate strategy to increase customer loyalty. This includes evaluating how customers shop both bricks and mortar and e-commerce channels.
 
Finally, Mr. Karabus noted that retail is increasingly looking like ‘survival of the fittest’. Publicized store closures have resulted in great opportunities for stronger retailers to capitalize on the closures to optimize their store fleets at lower occupancy costs. Mr. Karabus expects this shift from weaker to stronger retailers to continue and  even escalate. 

Antony Karabus is CEO of HRC Advisory, a leading retail advisory firm. He has advised retailers on strategic and financial performance issues for over 25 years and has assisted numerous North American retailers to create significant shareholder value during this time. Karabus has advised numerous national retail chains in key sectors, including department store, specialty apparel and hard lines, big box, and grocery. He can be reached at akarabus@hilcoglobal.com.

Retail News From Around The Web: May 21, 2015