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CANADA’S HOT HOME IMPROVEMENT SECTOR DRAWS LOWE’S

By Susan Thorne

Canada’s booming home improvements market has attracted the attention of U.S. home improvement chain Lowe’s Cos., which plans to expand its operations northward into Ontario in the near future. Lowe’s announced in June that it will open its first Canadian stores in the Toronto area in 2007, to be followed by 100 more stores across Canada.

“Canada offers Lowe’s a convenient opportunity for international growth,” said Chris B. Ahearn, Lowe’s director of public relations. “The market potential is very attractive.” She has a point about the market’s strength. Since 2001 the home improvement sector has experienced faster sales growth than any other product category except gasoline, according to data from Statistics Canada, the federal government’s census and research agency. House-proud Canadian home owners spent C$37 billion ($30 billion) on renovations last year, up 12.5 percent over the year before.

And that could rise to C$39.2 billion this year, according to projections by the Ottawa-based Canadian Mortgage and Housing Corp. (CMHC). Most households are investing substantial amounts in their homes, with purchases ranging from hammers and nails to entire room refits. A CMHC survey last fall showed that 39 percent of home owners intend to spend an average of C$14,140 on their homes this year.

Some 400,000 Canadians shopped at Lowe’s U.S. stores last year, so Ahearn is confident that the company’s big-box home centers will be well received north of the border. “There is a high median income and over 12 million total households, mostly single-family,” she said. “And Toronto is the fifth-largest metropolitan area in North America.”

Lowe’s is publicizing its intentions well in advance to generate awareness on the part of Canadian consumers and the real estate community, because the retailer is actively scouting for six to 10 store sites in the Toronto area, Ahearn says. Operations in Canada will be headed by Doug Robinson, vice president special projects, who is familiar with that market from his experience as chief executive of the Beaver Lumber Co. in the 1990s.

Lowe’s will be entering a very competitive field, however. The two leading players are Home Depot Canada and Boucherville, Québec-based Rona, which rang up 13.8 percent and 12.6 percent, respectively, of total home improvement sales in Canada last year, according to Hardlines, an Internet periodical for the home improvement sector. Home Hardware, a St. Jacobs, Ontario, cooperative of about 1,000 independent dealers, and the Canadian Tire Corp. are close behind with 11.8 percent and 11 percent, respectively. Smaller players account for the remaining 50.8 percent of the market.

The leaders are in an expansion mode at present. Home Depot Canada says it will open 18 big-box stores this year, bringing its total to 138, and that it will continue at a similar pace in future years. To gain access to untapped markets, the company is diversifying into smaller store formats, such as its 72,000-square-foot urban store at Park Royal Shopping Centre, North Vancouver, and a 60,000-square-foot model it is piloting in two smaller cities this year. While products for do-it-yourselfers remain Home Depot’s core offering, the company’s in-house contracting revenues are growing at double-digit rates as patrons increasingly opt to pay for renovation services, says Nick Cowling, the company’s head of public relations.

Rona is a conglomerate of 565 franchised, affiliated and corporate stores of various sizes, from the 183,000-square-foot St. Bruno, Québec, flagship store to urban neighborhood stores of 40,000 square feet and small corner hardware units. In addition to an ongoing program of acquisitions of regional chains, Rona will develop about 20 new big-box and regional stores annually, says Sylvain Morissette, Rona’s director of communications.

Is there room for Lowe’s? Morissette says the Canadian market is already crowded, with 200 large-format stores for a population of 33 million. “There is a danger of saturation and potential cannibalization for those with only one concept,” he said. “We don’t think the country can absorb more than 45 to 50 additional big-box stores.”

Yet Canada’s small and midsize population centers still offer opportunities for large-format retailers to expand at the expense of smaller retailers, says Ed Strapagiel, executive vice president of Kubas Consultants, a Toronto-based business and economics consulting firm. “When big-box stores move in, it’s the smaller stores that are pushed out — the lumberyards and corner hardwares,” he said. “There is still potential there.”

In the Toronto area on the other hand, Lowe’s will face competition from other big-box players for prime retail sites, Strapagiel says. “Finding sites is not impossible, but it might be very expensive,” he said.

Another potential challenge will be for Lowe’s to differentiate itself in the eyes of Canadian shoppers. Michael McLarney, editor of Hardlines, says the U.S. retailer will lack some of the marketing advantages it enjoys in the U.S., such as its appeal for women shoppers.

“Up here, Canadian retailers are already doing a really great job of that,” McLarney said. “Home Depot paved the way for being more female-friendly in its Canadian stores, while Rona has a more European flavor with a decor-minded approach.”

Lowe’s Canadian launch lies some distance in the future, but the economic factors driving home renovations appear likely to stay strong for some time. Sales of existing homes reached a record last year, and the CMHC forecasts that 2005 will be the second-strongest year, with 441,100 houses changing hands.

This year’s growth in housing starts will be down 7.3 percent from last year’s 17-year high, the CMHC predicts. Low interest rates, a strong driver of renovation activity since 2001, are also holding steady, according to Bob Dugan, CMHC’s chief economist. Another favorable indicator is employment. In June the jobless rate stood at 6.7 percent, its lowest point in three decades.

Even a sharp dip in home sales would take time to be felt in the home improvement market, because new home owners tend to renovate during the three years following their purchase, says Dugan.

Home Depot’s Cowling says the home improvements market can also survive interest rate fluctuations. “If interest rates are low, people buy new homes and they renovate,” said Cowling. “If interest rates go up, they stay put and renovate the home they’re in. It’s a great business.”