Making Cross-Border Connections

March 2017

When breaking down the U.S. and Canadian business environment side-by-side, it is clear that the retail sector in both countries are cut from the same cloth. The unique closeness of the U.S. and Canada is reflected in a long-standing commitment to act as a team, even in business. So what trends are at the forefront for North American retailers?

In both countries, an uptick in bankruptcy announcements from mid-tier brands, such as Golf Town in the fall of 2016, are showing that one-dimensional businesses just won’t cut it. Unique offerings are the name of the game, whether that means an interesting in-store experience or a one-of-a-kind product, and without it, brands can no longer sustain business.

Where single-concept brands struggle, however, luxury thrives. Luxury brands are entering Canada now more than ever, breathing new life into the segment. Despite some trepidation around Saks Fifth Avenue’s vie for market share in the crowded Canadian luxury space last February, the brand has succeeded in demonstrating a larger success for the segment, measured by its robust sales. In a 2016 interview with Bloomberg, Saks’ President Marc Metrick noted the company was making a concerted effort to differentiate itself, ensuring minimal overlap between its offerings and other stores like its Canadian parent, Hudson’s Bay Co.

As segments like luxury continue to grow stronger, cross-border transactions are likely to increase, as well. Rumored mergers and acquisitions (M&A), like the hushed Hudson’s Bay Co. and Macy’s talks, could help struggling American brands and refresh the Canadian market. While American department stores work to retrench, the industry for these types of players is expanding in Canada. American brands look to Canada and see opportunity for growth. Meanwhile, Canadian brands see strong brand heritage through these legacy companies that are potentially up for grabs. U.S. private equity dollars are also likely to bolster cross-border deal flow, with PE firms heading north to look for opportunities in the burgeoning Canadian market.

Currently, 75 percent of the Canadian population lives within 100 miles of the U.S. border, and many Canadians travel south to make retail purchases. So, it’s unsurprising that both Canadian and U.S. shoppers are very similar demographically. Both markets are watching Millennials closely, waiting for a shift in buying power as they grow older and accumulate wealth. Strategizing how to effectively market to this increasingly influential consumer base is in the best interest for both U.S. and Canadian brands looking to stay relevant as Baby Boomers near retirement and fixed incomes.

The wealth shift from Boomers to Millennials is affecting consumer confidence, as well. Many Millennials are still recovering from the 2008 financial crisis, which continues to dampen consumer sentiments. In Canada, a weak dollar and concerns about the future of NAFTA drove consumer confidence to 56.1 percent in late January, an eight-month low, reports Bloomberg. Meanwhile, Canadian consumer debt is currently at an all-time high, and many are comparing the country’s current real estate “bubble” to the United States’ in the mid-2000s. On the flip side, Americans are coming off of a decade-long consumer confidence high, as confidence finally pulled back slightly in February, falling to 95.7 from January’s 98.5 percent.

Financials aside, what’s trending in both markets? It’s clear that omnichannel will remain critical in 2017 for both the U.S. and Canada. As retailers try to understand what Millennials really want, creating a unique brick-and-mortar experience while staying up-to-date online—and doing it all seamlessly—will be paramount. Traditional retailers will become more strategic about expansion and M&A, especially as they consider real estate contracts and how they can optimize physical stores for an increasingly plugged-in generation.

While the U.S. and Canada share a lot in common, fundamental differences in government and policy, and their resulting impact on the retail sector, will be interesting to watch in the coming months. As the United States’ new president settles into office and advocates policy and tax changes with major implications for the industry, Canadian Prime Minister Justin Trudeau emphasized an enduring U.S.-Canada partnership in early February—signaling that despite lingering uncertainty, both countries are prepared to work cooperatively to keep their economies and North American businesses afloat.