For American Retailers, Canada Is a Conflict

by Will Ashworth | October 15, 2012 7:30 am

Canadians aren’t a particularly loyal bunch when it comes to shopping. They generally don’t care where products are made or sold — as long as they’re cheap. For years, even when the Canadian dollar was well below the U.S. greenback, planeloads of us parka-wearing, sun-loving, hockey-playing Canucks would bring back the latest Ralph Lauren (NYSE:RL[1]) apparel in our bulging suitcases after a week in Boca Raton.

So a big day came for North American retail when the Canadian government introduced higher duty-free exemptions in June for citizens returning from trips abroad. Already known for cross-border shopping, Canadians have gone hog wild in pursuit of the next great deal south of the border.

The move increased the 24-hour duty free limit from $50 to $200 and the two-to-seven-day exemption from $400 to $800. No wonder that in June, according to Statistics Canada, Canadians made 1.9 million overnight trips to the U.S. — the highest level in 40 years. Thanks to moves like this, conservative estimates peg the annual losses in Canada from cross-border shopping in the U.S. at $20 billion.

So … why should American retailers care? Well, any company looking to move to Canada must be sure shoppers won’t go to its stores south of the border and ignore those in its own backyard. And because of this, the mentality has to be “go big or go home.”

Lucky Brand Jeans is a prime example of why. It opened 11 stores in Canada between the fourth quarter of 2006 and the end of 2008. Today, it has exactly the same number of stores. That lack of commitment ensures failure. Parent company Fifth & Pacific (NYSE:FNP[2]) would have been better off figuring out how to drive Canadians to its e-commerce site and across the border to its U.S. stores rather than wasting time and money on an expansion it wasn’t fully committed to.

J. Crew also learned how tough the retail space is last year when it opened its first Canadian store in Toronto. The company was quickly forced to reverse its decision to charge Canadian e-commerce customers duties, which raised prices in Canada by 50% from those in the U.S. Despite the furor, it still charges 15% more for the exact same product. CEO Mickey Drexler says that’s the extra cost of doing business in Canada.

Nordstrom (NYSE:JWN[3]) is the next big name looking to move north. The company just announced it will be opening four department stores[4] in Canadian cities starting in the fall of 2014. That’s at least a $250 million commitment by the Seattle-based company.

In its press conference to announce Nordstrom’s invasion of Canada back in September, though, Nordstrom at least admitted that it was sensitive to the issue of price discrepancies between Canada and the U.S. That’s smart — and must be acted upon.

Despite these issues, I’ve been a proponent of American retailers invading Canada for several years. Our homegrown retailers with a couple of exceptions — Lululemon (NASDAQ:LULU[5]) and Aritzia — are mediocre at best. While prices play a role in cross-border shopping, we also simply don’t have enough exciting retailers like J. Crew and Nordstrom.

Nordstrom, for one, also has the added advantage of 15,000 credit card customers in Canada — a built-in audience. By opening in Canada, it will give those customers (and the rest of us who haven’t seen it up close) an opportunity to embrace the Nordstrom experience. Its success is bascially assured. The same goes for Target (NYSE:TGT[6]), which has also made a tremendous financial commitment in Canada[7].

In the end, there’s plenty of opportunity in Canada for American retailers like these, along with names like Trader Joe’s and Buckle (NYSE:BKE[8]), because they have something to offer.

Still, they have to understand the benefits of the Canadian market first and make sure they will be unaffected by cross-border shopping, as opposed to just migrating because everyone else is doing it.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

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