TORONTO — A full 10 hours before the Outlet Collection Winnipeg opened its doors for the first time on May 4, a burgeoning crowd of bargain hunters had started to form outside in the overnight chill.
By the time the doors opened at 10 a.m., about 4,000 people flanked the perimeter of the 400,000 square-foot building, clamouring to get their hands on cut-rate designer apparel and footwear at merchants including Saks Off Fifth and Designer Shoe Warehouse.
The traffic snarl radiated for a kilometre along the roads leading in and out of the mall and the crush of cars had still not abated as the mall prepared to close at 8:55 that night.
It was a similar scene of pandemonium last fall when the 1.2-million-square-foot Tsawwassen Mills outlet mall opened in the Vancouver suburb, prompting B.C. Ferries officials to send out warnings about crowded streets en route to local ferry terminal, six kilometres away.
While sales of apparel have been tepid at conventional retail chains and department stores, the off-price category has been booming, with sales soaring nearly twenty per cent in Canada in 2016 and dozens of new stores slated to open in the next few years.
For those fretting about the future of bricks-and-mortar apparel retailing, it’s still unclear if the off-price phenomenon is a saviour or just a symptom of the industry’s broader long-term decline.
Either way, it’s hard to argue with the success the category has enjoyed, particularly in the last two to three years.
“There was always, historically, a group of Canadians who would cross the border to shop at off-price stores and outlet malls,” said Randy Harris, president of apparel market research firm Trendex International.
He says off-price real estate developments in Canada historically lagged the penetration of the U.S. market, but in the last few years, developers and many more consumers have cottoned on to the trend.
“Now that the Canadian dollar has dropped, the people who would have crossed the border are buying in Canada, and as off-price stores spread out to areas of northern Canada and into cities and towns that are not close to the U.S. border, many more people are becoming aware of the alternatives. Canadian consumers love the concept. I don’t see any reason why this won’t continue to grow, with the amount of expansion happening in the market.”
The development is no surprise, given that off-price retail has been the fastest growing segment of apparel retailing. In 2016, the number of off-price stores, which sell typically sell a range of designer goods at 20 per cent to 60 per cent below the original retail price and are three to five times bigger than an average mall-based specialty store, rose to 322 in Canada from 288 in 2015.
And the market is set to get a whole lot bigger, with an estimated 380 stores operating in this market by 2018, according to Trendex.
Apparel sales at off-price retailers in Canada increased by 18 per cent in 2016 to $2.8 billion from $2.4 billion in 2015, the research firm estimates. That compares with 2.7 per cent growth in the total apparel retail market in Canada to $31.1 billion Canadian in 2016.
Harris estimates that figure will grow to $3.8 billion by the end of 2018 and account for close to nine per cent of Canadian apparel sales, vastly outstripping the growth rate of overall apparel retail, which Trendex anticipates will grow at a rate of about 2.9 per cent per year in 2017 and 2018.
Even before Hudson’s Bay Co. bought Saks and announced bullish plans to open 25 of its off-price Saks Off Fifth chain throughout Canada and Nordstrom announced it would open 15 or more of its off-price Rack stores, the sector was already strong. TJX Canada, which took over the Winners chain in 1990, has performed well for the better part of a decade as it continues to expand its retail footprint across the country, opening the Marshalls apparel and footwear business and the décor and housewares chain HomeSense.
Industry experts say one reason for the category’s success is that off-price stores are less susceptible to the eroding effects of e-commerce: the merchandise changes quickly and comes in variable quantities, so customers feel compelled to visit the stores frequently. In addition, most off-price retailers do not sell their merchandise online, so in order to see the deals, customers have to set foot inside the retailers’ stores.
And Canada is ripe for the format. Off-price is an undeveloped retail category in Canada relative to the U.S., if you look at the one-to-ten retailing maxim. (With U.S. having ten times the population of Canada, optimal retail enterprises in Canada are frequently one-tenth the size of their developments in the U.S.)
Canada currently has 12 outlet malls, up from 10 in 2015, giant complexes that contain off-price retailers like Winners or Saks Off Fifth, as well as brand-based outlet stores such as Calvin Klein or J Crew. According to the International Council of Shopping Centres, two additional outlet malls are expected to open in Canada by the end of 2018. The U.S., meanwhile, has about 225 outlet malls, and about two dozen more are set to open by the end of 2018.
The torrid pace of growth has not gone unnoticed by traditional department stores desperate for new avenues of growth.
In April, Sears Canada announced it would begin devoting a full one-third of its department store space to The Cut, an off-price section offering flash deals of 30 to 60 per cent off of designer goods.
“Internally, we have banned the word ‘department store’ — we have tried to abolish it, because we are not a department store anymore,” said executive chairman Brandon Stranzl said when The Cut made its debut in April. He said internet-savvy customers, who can also view and buy The Cut’s store-based offerings online, respond well to flash deals and big-name brands.
In the meantime, as Nordstrom and Saks slowly wind their upscale retail formats throughout Canada’s biggest cities it’s their off-price banners that are expected to see the most market penetration in this country.
In the U.S., Nordstrom has 121 full-line stores and 200 Nordstrom Rack stores. In Canada, it plans to open a total of six full line stores and 15 or more Rack stores.
Saks, which has 41 stores in the U.S. and 117 Saks off Fifth, plans to open 25 Off Fifth stores by the end of 2018 in Canada, where it currently has two full-line Saks stores with up to five more planned.
Still, it’s not a given that the “build it and the people will come” adage applies to all off-price stores, or that the category will be a panacea for some of retail’s deeper problems.
Canadian luxury retailer Holt Renfrew announced in February that it would shut down its two off-price HR2 stores, citing a desire to focus on its core luxury business.
And at Hudson’s Bay, off-price retail was its poorest performing division in 2016, with same-store sales spiralling 7.4 per cent at Saks Off Fifth and its online off-price flash deals site, Gilt.com. (Sales in the more pressured industry category, department stores Hudson’s Bay and Lord & Taylor, meanwhile, posted a meagre rise of 0.4 per cent during the year).
Weakness in the segment prompted HBC to record a non-cash goodwill impairment charge of $116 million for its off-price business in the fourth quarter of 2016 and management has lowered its future earnings expectations for both brands from its original internal estimates.
“We continue to believe that both Saks Off Fifth and Gilt have strong strategies in place, with the potential to generate long-term profitable growth,” Gerald Storch, HBC’s chief executive, said in an April conference call discussing the results.
Bruce Winder, a partner at Toronto-based Retail Advisors Network, said HBC’s off-price business is primarily in the U.S., where the category is closer to market saturation. “It’s a big channel and it is still growing and I don’t know why they would be soft in that area,” he said, though it might have been a since-reversed decision at Saks Off Fifth to include more moderately priced apparel in 2016.
Now that the Canadian dollar has dropped, the people who would have crossed the border are buying in Canada
Winder says it makes sense that off-price subsidiary spinoffs are growing at a much faster rate than their luxury counterparts: a bigger chunk of the population can spend $500 on a handbag than those who can afford $5,000.
“The top spending and income echelon will go to the full-line stores but the off-price customer is not super-rich,” Winder said. “They want to look like they have access to the brands, and brands are important to them. In Canada, I think there is a big runway for the off-price channel. As a population, we love a deal.” While many retailers in the U.S. price goods consistently on a so-called “EDLP” model, (every day low price), Canadians respond more to “high-low” promotional activity, he said, looking for goods that are marked down dramatically from their top price.
Another skeptic about the market’s potential is Larry Rosen, chief executive of luxury menswear retailer Harry Rosen, who operates a handful of outlet stores across the country.
Rosen believes the off-price category has strayed from its origins as a sales channel for unsold merchandise from full-line specialty stores and department stores. Now, along with pieces of unsold designer merchandise, off-price giants such as Winners and outlet stores belonging to luxury brands such as Ralph Lauren carry a glut of lower-quality merchandise that was manufactured specifically for outlet stores, often made with cheaper fabric and with fewer finishes to the garments.
“I like to call them ‘fake outlets’ and I think we have something unique to offer, because our outlet stores are really outlets,” Rosen said. He said the company is thinking about mentioning it as a point of difference in its marketing strategy.
“We are not fake. It’s a true treasure hunt.”
Over the long term, there are doubts about whether off-price retail will help the retail apparel market at bricks-and-mortar stores.
“I don’t think it’s going to save apparel,” Winder said. “Amazon is expected to become the biggest seller of apparel in the U.S. this year, and eventually it will disrupt the apparel market in Canada in a bigger way. People are always going to buy clothes, but the method of selling them is changing. And that is a theme throughout the rest of the retail market.”