Emerging trends in Canada’s retail sector

In a distressed market, the retail landscape is changing

The post-pandemic commercial real estate (CRE) market has been earmarked by inactivity; amidst high borrowing costs and continued uncertainty pertaining to the possibility of a recession, investors and developers appear to be taking a ‘wait and see’ approach to their portfolio. Certain sectors, like office, have been especially volatile in response to a max exodus of tenant demand, while other sectors, like retail, have demonstrated considerable resilience within an otherwise turbulent landscape.

Although Canada’s retail sector showed a 0.8% sales decrease in May, certain retail segments seem to be gaining momentum. From the revitalization of malls and shopping centres to the surge in boutique food hall popularity and the rise of small-format stores, the retail sector appears to be increasingly malleable to change as brands work to align with the evolving needs and preferences of cost-sensitive consumers.

The bifurcation of retail

Prior to the internet, stores were only competing with neighbouring stores. Today, however, the market is ‘nosier’ than it’s ever been, with an abundance of competition online and offline while consumers contend with information overload. As a result, a bifurcation has occurred whereby luxury and discount retailers appear to be at a significant advantage, while mid-tier retailers (such as traditional, large-format department stores), must work harder to capture the interest and loyalty of consumers. Not only do these stores face competition from online retailers; they also play in a market that doesn’t give an edge to brands that occupy the middle of the retail world.

At the same time, luxury retailers appeal to the upper-class consumer who may be more sheltered from economic headwinds, while discount retailers appeal to increasingly cost-sensitive consumers. In times of economic distress, inflation-wary consumers cut back on discretionary spending. Consequently, the middle part of the retail market – which lacks the allure of a luxury brand and the ‘bargain’ offered by discount brands – typically bears the brunt of this impact.

Retailers today must meaningfully recalibrate their value proposition to appeal to consumers who have the power of choice across e-commerce brands, luxury retailers, discount goods providers, direct-to-consumer startups, and boutique retail experiences.

Is it time for a mall make-over?

As the retail sector begins to show some signs of constriction in response to a softening economy, we are seeing a growing divide between class “A” and class “B” and “C” properties – a trend that first materialized in the office sector. While some office buildings struggle to maintain occupancy as companies adjust to remote and hybrid work models, properties that are well-located, highly amenitized, and modern appear far more likely to weather the storm of dwindling demand. Simply put, in a market with more demand than supply, class B and C office stock can continue to perform without needing to upgrade their offering to tenants. Conversely, when that demand dissipates, only the best properties will capture the reduced share of prospective tenants. As a result, many underperforming office properties have begun to place an increased focus on building upgrades and amenities as a way to build back tenancy. Similarly, shopping centres in need of an update are seeing a significant drop-off in foot traffic and, in some cases, are being slated for redevelopment to tap the emerging demand for boutique retail experiences and luxury goods.

In the past, traditional malls relied heavily on the appeal of large-format, anchor stores like Sears, Best Buy, and Nordstorm – brands that had multidecade contracts that made the prospect of revitalizing or redeveloping a mall next to impossible. However, as consumers have begun to demonstrate a preference for online convenience and hyper-personalization over the last decade, the retail sector has shifted favour to two mediums: e-commerce and smaller format, ‘boutique’ brick-and-mortar. As a result, many legacy retailers have decided to downsize or restructure. At the same time, many of the weaker tenancies within shopping centres have departed, providing malls with an opportunity to pivot their tenant rolodex toward higher-value, smaller-footprint brands.

The Jane and Finch Mall in Toronto is just one example of a shopping centre now primed for redevelopment, with the addition of residential space. According to plans, the revitalized mall will offer a blend of residential, commercial, and institutional elements across seven blocks, including ten residential towers and two additional mid-rise buildings. The redevelopment of Etobicoke’s Cloverdale Mall is another highly anticipated project that will introduce a completely redesigned mixed-use community devoted to residential, retail, and community amenities, including extensive green space. The Well, a European-influenced, pedestrian-first community located in Toronto's fashion district that was completed late last year, takes a similar approach. The sprawling centre transformed 7.7 acres of Toronto’s downtown core into apartments, offices, shopping, dining, entertainment, and a public square resembling an open-air atrium with impressive architectural design featured throughout the development. Similarly, a redevelopment of British Columbia’s Langley Mall is now in the works. The existing property spans 9 acres, and the proposed redevelopment will carve up the property into four quadrants offering residential units, office space, a designated pedestrian-focused retail and restaurant row, a new grocery store to replace the existing No Frills, upgraded bike lanes, large green spaces, and more.

The excess supply of retail space from the recent closure of department stores like Nordstrom allows shopping centres to allocate more space for popular existing retail categories. For example, Simons, Eataly, and Nike have now taken over the Nordstrom space in the Eaton Centre.

Jennifer Nhieu

Senior Research Analyst

A growing appetite for boutique food halls

The era of food courts is seemingly coming to an end, as boutique food halls – frequently described as “culinary destinations” – see a surge in popularity. While traditional food courts typically offer an array of cookie-cutter franchise chains, these spaces feature unique, chic designs and more upscale, on-the-go dining options sure to delight most foodies. Typically, these halls feature local brands and chef-centric, Instagram-worthy fare ranging from craft beer to craft cocktails, mouth-watering burgers, viral slices of pizza, ramen, tacos, and so much more.

Earlier in July, Toronto residents watched the brand-new, 55,000 square foot Waterworks Food Hall receive its finishing touches and officially open to the public. Waterworks, located at 499 Richmond St. W., offers a curated selection of cafes, bars, bakeries, and offshoots of existing restaurants, and was built within a historic, city-owned building that was reportedly one of the city’s earliest public markets. The Well also features a market-style food hall called ‘The Wellington Market’, which offers restaurants, fresh market fare, and gourmet grab-and-go options. Perhaps even more enticing to local shoppers is the fact that the market, which sits on the ground floor of the open-air centre, is pet-friendly. Meanwhile, Le Fou Fou, a European-Style Food Hall, is set to open in Montreal later this month, offering patrons an immersive dining experience derived from “a captivating tapestry of distinctive gastronomical concepts, convivial social spaces, and cutting-edge technology.” The new food hall will span more than 30,000 square feet, and boasts a diverse array of 12 culinary offerings, 4 bars, and an expansive indoor/outdoor area.

Within the retail sector, boutique food halls boast a unique appeal. Not only are they a more affordable, smaller-format venture than a standard restaurant, but they also attract a unique range of vendors that otherwise might be hard to find around the city. The result? A significant boost in foot traffic, and no shortage of “Instagram-worthy” hype. Moreover, food halls align with the continued proliferation of grocery-anchored shopping centers, which have proved uniquely resilient to economic headwinds. Where there is food, there is a reason to shop, and consumers may also feel drawn to the community feel of these thoughtfully designed spaces.

Small format, big impact

The recent decision of large retailers to downsize doesn’t come as a surprise when you consider the disparity that often exists between square footage and percentage of sales. In the current landscape, it’s reasonable to assume that a small-format, thoughtfully curated, and hyper-localized space may be more appealing to customers, and more beneficial to a brand’s bottom line.

Earlier this year, Best Buy Canada joined forces with Bell Canada to open a small-format store in British Columbia – with another 167 locations expected to open by the end of this year. These “express” stores cater to consumers’ demand for convenience, with the option to buy online and pick up in-store in addition to “a curated consumer tech assortment, Geek Squad services and telecom services” from select carriers. The location of these stores is also strategic, as they will be placed in communities that did not previously have a Best Buy. Ikea has adopted a similar strategy over the last four years with the launch of its ‘Planning Studios’ locations, which are 8,000-9,000 square-foot small format stores in cities like Los Angeles, Toronto, and New York. Ikea’s first Canadian Planning Studio was launched in 2022 with a prime location within the Faubourg Boisbriand shopping center on Montreal’s North Shore. These stores intend to focus on “key aspects of city living” while reaching shoppers living in areas that don’t provide easy access to its big-box locations.

Grocery brands also appear primed for a small-format makeover, as consumer preference has seemingly shifted away from large grocery retailers in favour of brands that offer better promotions, local goods, and a more convenient shopping experience. To this effect, No Frills, one of Canada’s popular discount retailers, has announced its second small-format store, located in Liberty Village, Toronto, following the positive response to its first location. These stores are 10,000 square feet or less but still offer customers an extensive selection of grocery items, including fresh, locally sourced produce, meat, hot food items, and baked goods at competitive prices. "We know Torontonians are looking for convenience and low prices - but that sometimes those are trade-offs in the downtown core,” said Melanie Singh, President of Hard Discount at Loblaw Companies in a regarding their small-format expansion. “It was important for us that customers can do a full grocery shop at this location, and still take advantage of the unbeatable prices they expect from No Frills." Similarly, Aisle 24, a "hyper-urban" cashier-less market concept that allows patrons to check themselves out with contactless payment, is on track for a significant expansion. Currently, Aisle 24 has 28 locations in Ontario and Quebec, with plans to launch at least 40 more stores in Vancouver, Edmonton, Calgary, and Halifax by the end of the year.

Loblaws has also positioned their T&T brand, marketed as the largest Asian grocery store in Canada, in small-urban formats and shopping centres, such as Fairview Mall. The ethnic food segment has been overlooked for quite some time, especially when you consider Canada's diversity and increased immigration. T&T situating themselves in downtown cores and within shopping centres highlights a massive opportunity for food retailers and grocery brands to cater to the needs of Canadians and local markets.

Jennifer Nhieu

Senior Research Analyst

Conclusion

The rise of mixed-use developments and thoughtfully curated, personalized experiences, the popularity of boutique food halls, and the strategic downsizing of major retailers highlight a sector that is not only surviving – but thriving by reinventing itself. Brands that prioritize agility and innovation while maintaining a keen sense of consumer behaviour, an appetite for technological advancements, and a vision for spaces that foster community and convenience, are positioned to succeed even in a challenging environment.

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