With the dollar tanking and Canada's economic growth looking bleak, the timing might not be worse for U.S. luxury retailers opening up their high-end stores north of the border.
And while the current economic climate will certainly have an effect on sales, the retailers' success or failure will also rely on their ability to compete in an already-crowded upscale market.
"Can we support this much luxury retail? My gut tells me with the current headwinds in the economy, we probably can't," said Doug Stephens, retail analyst and founder of RetailProphet.com. "And I think one of these chains is going to be on the losing end of this equation."
Saks Fifth Avenue opened up in downtown Toronto on Thursday — the first location in Canada for the high-end retailer and one of six it plans to eventually open across the country. Meanwhile, Nordstrom has already established roots here, opening up in Calgary, Ottawa and Vancouver over the past couple years, with plans to open two locations in Toronto this year and another in 2017.
Women's shoes are shown inside Saks Fifth Avenue's downtown Toronto store, which is entering an already-crowded luxury retail marketplace. (Nathan Denette/Canadian Press)
Add to that mix the already-dominant Holt Renfrew and expansion plans for Quebec-based Simons, and the now "crowded market" will, in just a couple of years, have gone from a dozen luxury department store locations to 30 or 40, Stephens said.
"Ultimately it will come down to who can provide the customer experience which is most in keeping with their brand.
Holt Renfrew has built a very storied reputation for delivering on that promise. We'll see if Saks Fifth Avenue can."
Some of the U.S.-based luxury retail chains are likely feeling a degree of remorse that they're setting up and/or expanding in these precarious times, Stephens said. Only five years ago, Canada's economic outlook looked pretty rosy, particularly when contrasted against 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 small economic growth, many of the fundamentals in Canada are solid, he said. Canada has healthy population growth and, in places like Vancouver, attracts substantial amounts of tourism from Asian consumers, many of whom have developed a reputation as luxury buyers.
"You can imagine that a Saks and Nordstrom in Vancouver and Toronto are going to be buoyed somewhat by that."
As well, incomes at the upper end of the income spectrum — the very clientele these retailers are hoping to attract — have been growing disproportionately.
"So there are some things that bode well for them but certainly this is not the fertile market that they had hoped for," Stephens said.
Among Saks' major competitors is Holt Renfrew, which already has exclusive relationships with many top luxury brands. (CBC)
Obviously the timing isn't ideal, said Maureen Atkinson, a senior partner at global retail-consulting firm J.C. Williams Group. But a company like Saks has an "underestimated advantage" of being owned by the Hudson's Bay Company. The established operation can provide valuable resources, including customer research and logistics, to its subsidiary and help offset some of the costs.
As for the effect of the economic downturn, many of these high-end retailers are partially insulated, Atkinson said.
"There's the market segment that's the sort of permanently rich, and for them it doesn't really matter. Life goes on. They buy or don't buy," she said.
But there others — those who aren't regular customers but might be looking to buy something nice on rare occasions — who could be deterred.
"I think this will affect some of their marketplace but there certainly are people who just have money and it really doesn't matter what the market is like."
Mark Cohen, the former CEO of Sears Canada Inc., said timing is always a challenge as it takes a couple years to launch a store.
"And you never know whether the economy, which you hope would be booming when you made the decision, will continue to be good," said Cohen, now director of retail studies at New York-based Columbia 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 would submit that there are not a lot of high-end Canadian consumers relative to the marketplace in total, just like there's not a lot of high-end consumers in the U.S.," he said. "So how many more entries at this level of fashion and price will the marketplace be able to absorb?"
Cohen was also skeptical about the downtown Toronto location for Saks's flagship store, at the Toronto Eaton Centre, questioning whether it will attract the upscale traffic it needs.
Saks will also have a difficult time competing against Holt Renfrew, which he said has a long-standing lock on quite a few of the most relevant luxury brands. This will mean Saks will have to find a way to get distribution in Canada in face of Holt Renfrew's exclusive relationships with these brands.
"I think Saks is a shot in the dark and is not likely to be successful," he said.
However, Cohen was more optimistic on the prospects of Nordstrom, which offers very fashionable but lower-priced merchandise compared to Saks and Holt's, and is not at the "top of the sphere in terms 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 attributes that have made them famous, they will establish in Canada in an excellent way."
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