Brian Hill could not have picked a worse time to launch an ambitious U.S. retail expansion: Soon after he opened his first stores, Americans began closing their wallets.
It was late 2007, and the founder of Aritzia LP, a chain of hip, high-end women's fashion shops, had already made the same decision many other Canadian retailers have made, and most lived to regret. Almost out of room to grow in his home country, he took Aritzia into the crowded U.S. market.
But no sooner had he thrown open the doors on new stores in San Jose, Calif., and Bellevue, Wash., than the U.S. economy was tottering. Economists believe the recession officially began in December of that year. With unemployment on the rise and the outlook getting bleaker by the day, few consumers were in a mood to snap up posh items like crystal-studded 7 For All Mankind jeans - at $340 a pair.
It could have been another Canadian retail disaster. Yet against the odds, Mr. Hill is making headway.
He's doing it with edgy offerings for a select 15- to 35-year-old customer who likes the retailer's slim-fitting styles. But he has taken the advice of his pal and fellow Vancouverite Chip Wilson, founder of the hot premium yoga-wear chain Lululemon Athletica: It's all about location. And the silver lining of tough times is that it's easier to find prime U.S. retail space in the upscale shopping centres and street fronts Aritzia favours.
Store location is crucial. Both retailers depend heavily on their stores to do their marketing, shying away from traditional advertising. Now, with eight U.S. Aritzia outlets - along with 39 in Canada - Mr. Hill is betting he can double his $200-million-plus of total annual sales in the next five years by adding about 50 more U.S. outlets. He believes U.S. landlords will bring him on board in coveted spots as word spreads about Aritzia's performance.
"It was very difficult initially for us to find retail locations in the U.S. that were the same quality as our real estate in Canada," Mr. Hill, Aritzia's chief executive officer, said. "Now we're finding the availability. Because of the recession, there's not a lot of competition - there are not a lot of new retailers starting out. And landlords are excited about our performance in some of our centres."
Already, privately held Aritzia is outperforming its fashion peers in U.S. malls, Mr. Hill said. Its productivity runs at more than twice the March average of $285 (U.S.) in sales per square foot at U.S. women's wear mall chains, Mr. Hill said.
Still, it hasn't caught up to the stellar productivity of its Canadian outlets, where sales per square foot are almost twice its U.S. level - and more than three times the Canadian mall average in March of $385 (Canadian) per square foot for its segment.
"He's achieving a level of performance that others in the U.S. would envy," said Tony Grossi of retail real estate adviser Grossi North-Bound in New York. "Aritzia's performance is in line with some of the top retailers in the U.S."
Even so, Mr. Hill will be stretched to duplicate his Canadian performance in the U.S. because of brutal competition, Mr. Grossi said. The average productivity at U.S. women's fashion chains is roughly 25 per cent lower than at their counterparts in Canada, according to data from the International Council of Shopping Centres.
Lululemon, with an impressive $1,400-plus of sales per square foot over all, also lags in its U.S. stores, analysts say. Nevertheless, it has become a sought-after U.S. retail tenant, one that Mr. Hill can emulate.
"Real estate people talk between each other," Lululemon's Mr. Wilson said. "They tell each other who's doing the best sales per square foot. When Brian goes to approach another landlord about another location, the due diligence has been done on him."
Mr. Hill also is learning from Lululemon's real estate mistakes. Mr. Wilson's company rushed to open 35 U.S. stores after going public in 2007, only to be forced to retreat. By 2009, it had taken a $4.4-million writedown to cover the cost of breaking and renegotiating leases. Now, with 74 U.S. outlets out of a total of 128, Lululemon is more picky.
Eventually, Mr. Hill may borrow another page from the Lululemon playbook and take Aritzia public. "It's something we might be considering in the mid-term."
For now, he has his own challenges. His two Chicago stores are underperforming the others, a fact he blames on the recession, which has pinched the U.S. Midwest hard. Mr. Grossi said residents in that region tend to prefer more conservative fashions and don't spend as much as consumers on the East and West coasts.
To build his U.S. business, Mr. Hill is bolstering his private label offerings, which he said are resonating with U.S. customers. In-house labels such as Wilfred make up about 70 per cent of the retailer's overall sales; now he's raising them to as much as 80 per cent of U.S. offerings.
Private labels can generate gross margins that are 10 per cent higher than branded lines such as 7 and J Brand. The national brands, meanwhile, are a tougher sell because they're carried in a wide range of U.S. rivals.
More important for Mr. Hill, store labels give him more control over styles and deliveries. He entices customers back with shipments of new items two to three times weekly.
Adapting to local operating rules, however, has been a hurdle. In California, for example, Mr. Hill must grapple with an array of regulations that add to costs, including having to provide both a men's and women's washroom for the handicapped. "Over all, there's a lot more to know in the U.S. It's a big market to get your arms around."
CROSS-BORDER SHOPPING
Plenty of chains have ventured south but few have succeeded
HITS
Lululemon Athletica
The Vancouver-based yoga-wear chain expanded rapidly in the United States after it went public in 2007, now operating 74 of its 128 stores south of the border. The retailer generates $1,428 of sales per square foot, although analysts say they're not quite as high in the more crowded U.S. market.
Aldo Shoes
The Montreal-based shoe retailer is another of the few U.S.-expansion success stories in Canadian retail. Since opening its first U.S. store in 1993, Aldo has increased its American base to 383 stores and parlayed that achievement into international growth, with more than 1,400 stores in more than 50 countries today.
MISSES
Le Château
Montreal-based Le Château has struggled since entering the U.S. market in 1985. After opening about 20 U.S. outlets, it retreated. This spring, it closed one of the four remaining U.S. stores it had left. Now it has decided to shut the last three when their leases expire over the next few years.
Danier Leather
In 2005, the Toronto-based leather chain closed three struggling U.S. stores after four years in the market.
La Senza
In 2005, the lingerie retailer shut its five U.S. stores after about two years in the market, the victim of tight competition and disappointing results. Almost two years later, it was taken over by the U.S. parent of rival Victoria's Secret.
Mark's Work Wearhouse
The Calgary-based work and casual wear chain entered the U.S. market in 1981 and peaked at nine stores. But the U.S. operation ran into difficulties and filed for bankruptcy six years later.
Shoppers Drug Mart
Canada's largest pharmacy chain already had nearly 40 franchise stores in Florida when, in 1984, then-parent company Imasco Ltd. purchased the Virginia-based chain Peoples Drug Stores Inc., with nearly 800 company-owned stores spanning 14 states. But over the next two years, Shoppers got caught in a heated discount-drug war against its larger American competitors. The chain downsized and slashed costs but, by 1989, Imasco gave up on its U.S. venture and sold off the remaining outlets.
Canadian Tire
In 1982, the company scooped up the ailing home and auto supply chain White Stores Inc., based in Wichita Falls, Tex., but failed to turn the brand around. By the time Canadian Tire sold off the assets in 1986, the company's U.S. experiment had racked up about $250-million in losses.
In 1991, Canadian Tire ventured south again, this time launching an auto parts and service chain called Auto Source Inc. in Ohio, Indiana and Kentucky. But the company was again unable to compete in the cutthroat U.S. market, and Canadian Tire eventually mothballed the chain in 1994 after losing more than $60-million.
Marina Strauss