Saks, Nordstrom seek to compete in 'crowded' Canadian luxury market

With the dollar tanking and Canada's economic growth looking bleak, the timing might not be worse forU.S.luxury retailers opening up their high-end stores north of the border.

And while thecurrenteconomic climate willcertainly have aneffect on sales,the retailers'success or failure will alsorely ontheirability to compete in an already-crowded upscale market.

• Saksopens 1st store in Canada in downtown Toronto
• Luxury brands poised to do well despitetough retail climate in Canada
• Saksto open stores in Ontario spring 2016

"Can we support this much luxury retail?My gut tells me withthe currentheadwindsin the economy, we probablycan't," saidDoug Stephens, retail analyst and founder of RetailProphet.com."And I think one of thesechains is goingto be on the losing end of this equation."

SaksFifth Avenue opened up in downtownToronto on Thursdaythefirst location in Canada for the high-end retailerand one of six it plans to eventually open across the country. Meanwhile,Nordstromhas already established roots here, opening upin Calgary, Ottawa and Vancouver over the past couple ofyears, with plans to open two locations in Torontothis year and another in 2017.

Add to thatmix the already-dominantHoltRenfrewand expansion plans for Quebec-based Simons, andthe now "crowdedmarket" will, in just a couple of years,havegonefrom a dozen luxury department store locationsto 30 or 40, Stephens said.

"Ultimatelyitwill come downto who can provide the customer experience which is most in keepingwiththeirbrand.
HoltRenfrewhas built a verystoried reputation fordeliveringon thatpromise. We'll see if SaksFifth Avenuecan."

Some of theU.S.-basedluxury retail chains are likelyfeeling adegree of remorse that they're setting up and/or expanding in these precarioustimes, Stephens said.Only five years ago, Canada's economic outlooklooked pretty rosy, particularly when contrastedagainst the U.S.

They may also be stinging at the fact that other U.S. retailers have failed here, most notably Target, which closed 133 stores in 2014 after less than two years.

Yet despite the downturn in provinces like Alberta, looming deficits and smalleconomic growth,many of the fundamentals in Canada are solid, he said.Canada has healthy population growthand, in placeslike Vancouver, attracts substantial amounts of tourism from Asianconsumers, many of whom have developed a reputation as luxury buyers.

"You can imagine that aSaksandNordstromin Vancouver and Torontoare goingto be buoyed somewhat by that."

As well, incomes at the upper end of the income spectrumthe very clientele these retailers are hoping to attracthave been growing disproportionately.

"So there aresome things thatbodewell for them butcertainlythis is not the fertile market that theyhadhopedfor," Stephens said.

Obviously the timing isn't ideal, said MaureenAtkinson, a senior partner at global retail-consultingfirm J.C. Williams Group. But a company like Saks has an "underestimated advantage"of being owned by theHudson's Bay Company.Theestablished operation can provide valuableresources, including customer research and logistics, to its subsidiary and help offset some of the costs.

As for the effect of the economic downturn, many ofthese high-end retailers are partiallyinsulated, Atkinson said.

"There's the market segment that's the sort of permanentlyrich,and for them it doesn't really matter. Life goes on. They buy or don't buy," she said.

Butthere othersthosewhoaren't regular customers but might be lookingtobuy something niceonrare occasionswho could be deterred.

"I thinkthis will affect some of their marketplace but there certainlyare peoplewho just have money and it really doesn't matter what the market is like."

Mark Cohen, the formerCEO of Sears Canada Inc., said timing isalways a challenge as ittakes a couple of years to launch a store.

"And you never know whether the economy, which you hope would be boomingwhen youmadethe decision, will continueto be good," said Cohen, now director of retail studies at New York-basedColumbia Business School.

"So the decision is a mid- to longer-term decision. And if the cycle is going the wrong way, you just have to hang in there and wait it out."

But a more critical issue in Canada, he suggested,is the size of the country's marketplace and how much share is available for luxury players.

"And I wouldsubmit that there are not alot ofhigh-end Canadian consumers relative to the marketplace in total,just likethere's not a lot of high-end consumersin the U.S.," he said. "So how many more entries at this level of fashionand price will the marketplace be able to absorb?"

Cohenwas alsoskeptical aboutthe downtown Toronto location forSaks's flagship store, at the Toronto Eaton Centre, questioning whether it will attractthe upscale traffic it needs.

Sakswill also have a difficult time competing against Holt Renfrew,which he saidhasa long-standinglock onquite afew of the mostrelevantluxurybrands. This will mean Saks will have to find a way to get distribution in Canada in face of Holt Renfrew'sexclusive relationships with these brands.

"I think Saksis a shotin thedarkand is not likely to be successful," he said.

However, Cohen was more optimistic on the prospects ofNordstrom, which offers very fashionable but lower-pricedmerchandise compared toSaks and Holt's, and is not at the "top of the sphere interms of luxury."

"Because of how excellent they are, they will not screw up the way Target did and they will acquire a loyal and faithful customer base," he suggested.

"I believe the attributesthat havemadethem famous, they will establishin Canadain an excellentway."