The British Columbia retail sector is struggling to stay afloat as a tidal wave of changes squeezes margins, alters real estate decisions and fuels pushback against municipal policies and tax hikes.
Challenges include a Canadian dollar that has lost about 14% of its value against the U.S. greenback in the past 10 months, rising minimum wages, a growing consumer preference for online shopping and a hollowed-out brick-and-mortar landscape.
“We’re in a time when the retailers are having the most profound changes that I’ve seen in 25 years,” said Sitings Realty CEO Stephen Knight, whose company represents retail tenants. “We’ve got a ton of space coming into the market.”
Deloitte counts more than 22 million square feet of newly available retail space countrywide thanks to a slew of closures.
Not only has Target Corp. (NYSE:TGT) closed all Canadian locations but Best Buy Canada, in March, closed 66 of its 131 Future Shop locationsclosed 66 of its 131 Future Shop locations.
That followed the closure of Canadian locations by several small-footprint chains, including Sony Canada, Boutique Jacob and Mexx.
“It’s going to change our lives as developers and brokers because we’ve got to help the developers figure out how to get all that space leased and broken up,” Knight said. “It’s going to take a couple years.”
Think the glut of retail space will push lease rates down? Think again, said Northwest Atlantic principal and director Scott Lee.
Outright rent reductions are unlikely because landlords want to keep the face value of rents stable. Rents, Lee told Business in Vancouver, are calculated based on mortgage costs and requirements of the institutions that own the sites.
Instead, landlords try to entice tenants with non-rent perks such as extended periods of free rent at the beginning of the tenancy or escape clauses that enable a tenant to get out of a lease with minimal penalty if sales do not meet an expected threshold.
Lee and Knight have also watched their retail clients endure squeezed profit margins thanks to higher taxation and a lower Canadian dollar.
London Drugs COO Clint Mahlman explained that most retailers hedge currencies when they buy supplies.
Much of that ability to hedge and compensate for a lower dollar, however, is near its end.
“What happens is that all of a sudden you knock 10% out of a retailer’s margin in no time,” Mahlman said.
He pointed to public companies, such as Dollarama Inc. (TSX:DOL), which have said in filings that they have had trouble trying to purchase supplies in Canadian dollars in China and that, as a result, their money isn’t going as far.
One of his concerns at London Drugs, which is one of the province’s largest privately owned retailers, is that municipal governments are adding to retailers’ troubles.
Signage bylaws vary among municipalities so that a sign that works in one municipality may not be acceptable in another. Where signs can be placed can also affect how visible they are to passersby.
Municipalities also have burdensome development restrictions, fees and taxes.
“Our municipal tax increase last year was approximately 6%,” Mahlman said. “There’re not too many businesses whose margins are growing at 6% annually.”
City of glass
Another grievance London Drugs has, specifically with the City of Vancouver, is that the city has “fallen in love with glass,” Mahlman said.
The city demands that retailers use as much durable transparent plastic as possible on walls that face streets – a requirement that has deterred London Drugs from renovating stores such as one near the corner of Robson and Bute streets.
Replacing concrete walls with expensive polycarbonate at that location not only would make it less safe if there is another post-hockey-season riot on the scale of the ones in 1994 and 2011, Malhman said, but will also diminish the value of the interior space next to the transparent walls.
London Drugs would not be able to use its walls to present merchandise and instead would have to keep the valuable floor space next to the window free of products so customers could see inside the store.
“The golden rule in retail is that every square foot must be productive,” Mahlman said. “When anything impacts your productivity per square foot, that’s a cost. You’re paying rent on something that you can’t sell from.”
When asked if the city would compensate retailers for the diminished value of their renovated real estate, Anita Molaro, the city’s assistant director of planning in urban design and planning and development services, said, “No.”
She explained to BIV that the city’s policy has long been in place and its purpose is to increase interactivity between the streets and the inside of stores.
“That is an important principle of high-quality, pedestrian retail environments,” she said.
Molaro stressed that the city has worked with retailers such as L Brands Inc. (NYSE:LB) and allowed it to put floor-to-ceiling curtains on some of the transparent street frontage at its high-profile Victoria’s Secret location at the corner of Robson and Burrard streets. Those curtains help create the decor that L Brands wants while enabling it to put merchandise closer to its walls.•
