PRINT THIS STORY:

CHANGE TEXT SIZE:

RETAIL CONVERGENCE BRINGS CONFLICT TO CENTERS

BY SUSAN THORNE

Everybody is selling everything these days. Canadian Tire has added seasonal garden centers and gas stations. At its 20/20 stores (below) — so named because they’re 20 percent larger — it offers home decor and houseware items, putting it into competition with Home Depot and Ikea.

Attempting to become one-stop shops, several of Canada’s large retailers are aggressively broadening their brands well beyond their core categories. But this strategy is bringing them into conflict with one another and giving some landlords headaches.

These kinds of merchandise expansions may boost sales, but they also heighten competition when there is overlap. That makes for less compatibility among shopping center co-tenants, and the resultant friction over use clauses in leases has led to at least three publicized lawsuits. The trend raises other issues, too, for managers of enclosed and open-air centers alike.

“Somewhere down the road, everyone’s going to become a department store,” said Ken Jones, director of the Center for Study of Commercial Activity at Ryerson University, Toronto.

Inventory overlap is particularly affecting the food, pharmaceuticals and mass-merchandise categories. Shoppers Drug Mart, Canada’s largest national pharmacy chain, is stocking more groceries and gifts, while Home Depot has branched out into appliances. Discount chain Zellers has added food sections, including, in selected stores, refrigerated goods. The Giant Tiger discount store chain, besides selling nonperishable groceries, is test-marketing produce and meats. Wal-Mart increased its stake in the Canadian food sector with the introduction of the Sam’s Club warehouse concept in Ontario last fall. Meanwhile, Loblaw is expanding complement of superstores carries children’s clothing, casual furniture and housewares, enhanced cosmetics offerings and dollar-store general merchandise.

This blurring of the lines between traditional retail groupings shows up in sales patterns. According to data from the national government’s Statistics Canada, in 2002 (the most recent numbers available) general merchandise stores accounted for 9.7 percent of Canada’s C$66.6 billion ($49.9 billion) in food and beverage sales, while drugstores and gas stations sold 1.4 percent and 1 percent, respectively.

The race to diversify involves a range of other types of merchandise and services as well. Seasonal garden centers have become a regular feature at Loblaws, other leading supermarket retailers and at Canadian Tire.

The Shoppers and Jean Coutu drugstore chains are expanding their health and beauty offerings from lower-price and generic lines to such top brands as Lancôme and Lise Watier, which have traditionally been sold in department stores. Shoppers has also introduced “beauty boutiques” in some of its stores.

But the matter doesn’t stop there. The largest Loblaws stores have photofinishing and dry-cleaning counters, pharmacy and optometry services, and President’s Choice in-store banks. Even medical clinics have been installed in some stores of late. Canadian Tire and Wal-Mart have added gas stations in places, and Canadian Tire has joined up with Budget Auto Canada to establish car rental kiosks at some stores. The West Canadian London Drugs chain has an ever-expanding range of services, including same-day photo and Internet cafés.

All of this presupposes the needs of a time-pressed customer who favors one-stop shopping, says the Commercial Activity Study Center’s Jones.

“Retailers are obviously trying to get a larger share of your wallet, conveying the message that they are becoming major destinations where you can shop across product lines,” he said. “You used to shop stores; now you shop within a store.” Jones attributes the trend to the decline of Canada’s department stores and the growing presence of Wal-Mart and its Canadian Sam’s Clubs.

The Jean Coutu drugstore chain is expanding its health and beauty offerings to include top brands that traditionally have been sold in department stores.

New store concepts are also contributing to this convergence, which is sometimes referred to as “category incursion.” Loblaw introduced its Real Canadian Superstore, a 70,000-square-foot, warehouse-type facility that sells general merchandise as well as food, in Ontario last year. Canadian unveiled its Concept 20/20 format in November, rolling out three stores in Ontario and one in British Columbia.

The 20/20 stores (so named because they are 20 percent larger) include home decor and houseware items, so this new entrant will most likely compete for at least part of that market demographic with Home Depot and Ikea.

Winners says it plans to roll out its Winners & More concept (selling apparel and home goods) this year. Home Depot, meanwhile, will unveil its Expo Design Centre concept in Vancouver, British Columbia, this summer, and anticipates having as many as eight such stores in major Canadian cities over the next two years.

This convergence is a demonstration of brand power, says John Torella, senior partner at the J.C. Williams Group, a Toronto retail consulting firm.

“Essentially, it’s a matter of brand equity — the strength of a brand relationship with their customers,” he said. “If the relationship is strong in terms of benefits to the customer, the retailer will be able to broaden their share of appropriate and even inappropriate discretionary categories.”

Torella notes that some retailers may be reaching in new directions because they have matured in their core categories. “That’s why you see Canadian Tire getting into apparel by adding Mark’s Work Wearhouse,” he said. Even Wal-Mart’s growth is slowing, Torella says, so its future in Canada may hinge on grocery sales. “Wal-Mart is already adding more food items — snacks in particular,” he said.

On the leasing side, when merchandise convergence puts use clauses to the test, formerly compatible retailers start locking horns. A major food retailer and a drugstore with significant food offerings, for example, might refuse to share a power center, says Doug Fogg, a partner at J.J. Barnicke Edmonton, leasing agents specializing in big-box and power centers, including supermarket-anchored centers. The expansion of a retailer’s exclusivity interests makes leasing more complex, he says. “It involves more time to draft leases with use clauses that will satisfy tenants, and you’ve got to get it right,” he said.

In the courts
Overlapping inventories can create no small amount of legal conflict, as some recent court cases demonstrate. In one Ontario lawsuit, A&P Canada objected to the expanded grocery inventory of the Shoppers store at Meadowvale Shopping Center, in the Toronto suburb of Mississauga (the landlord at the time was Toronto-based Bentall Retail Services). In a similar dispute at a community center in Stouffville, Ontario, Loblaw sought to halt Shoppers’ sale of food. Both cases were settled out of court.

But Shoppers found itself on the complainant side in a skirmish at North Sydney Mall, Sydney, Nova Scotia, regarding the addition of an in-store pharmacy department at the Sobeys grocery store there. A court injunction on behalf of the landlord, Montréal-based Econo-Malls Management, forced Sobeys, whose lease limited the supermarket to carrying food and general merchandise, to dismantle the pharmacy.

Larger shopping centers are also feeling the effects of broadening retail concepts, though the landlords of regionals and super-regionals consider their properties less vulnerable than power centers.

“Most of the retailers that are doing it, such as Canadian Tire or Wal-Mart, are not traditional regional shopping center retailers,” said Kim D. McInnes, executive vice president and COO of Ivanhoe Cambridge, Toronto. “Seventy percent of our tenants are fashion tenants, so there are no restrictions on other retailers’ activities where they are concerned,” he said. Ivanhoe has recently signed deals with Shoppers for stores with increased food inventories — the 16,000-square-foot Shoppers at Oakville (Ontario) Place, for one — but this couldn’t be done in a mall with a supermarket, he points out.

McInnes opines that well-drafted lease-use clauses can help avert most conflicts, but he acknowledges that enclosed centers are not immune to the effects of convergence. “What is happening is that these retailers [that are extending their lines] are eating away at other retailers’ market shares,” he said. “If Wal-Mart opens a Supercenter or Loblaw a superstore with clothing and banking, they’re taking dollars out of the market and out of the mall. But the results are difficult to measure.”

Broadened merchandise offerings generally require more store space, says Jones, and this is leading many retailers to locate more of their new stores in power centers or shopping center pads than before. Opening stores outside shopping centers also permits retailers to avoid restrictive-use covenants altogether. Geoff Wilson, vice president of industry and investor relations at Loblaw says this is one of the main reasons his company tries to own its store sites. “Owning our own real estate means we are masters of our own destiny so far as what we choose to put in our stores.”

Far from winding down, convergence, which started as an expansion of lower-price-point items, now shows signs of heading upmarket. Loblaws has begun offering bigger-ticket items such as computers and TVs, and Home Depot has captured 2 percent of the Canadian appliance market.

“We’re putting in many more types of products in order to try to increasingly offer a wider assortment of household needs,” said Wilson. “Food, certainly, will always be our primary focus, but we will continue to expand our offerings.”

Retailers may be adjusting to these new realities, though. Barnicke’s Fogg says that some power center retailers, including grocery chains, are becoming more tolerant of co-tenants whose merchandise duplicates their own offerings.

“In some cases, these large tenancies are allowing each other to go on-site where they didn’t before,” he said. “They’re starting to see that they’re better off to cohabit on the same site and have the power of two major corporations drawing traffic to the site — the whole site will benefit.”

© 2008 ICSC. All rights reserved. | Terms and Conditions | Privacy Policy | Contact ICSC | ICSC Home |