The Demise of Sears – Observations and Opportunities in Canadian Commercial Real Estate

The birth of the department store

Another large retailer has been put on life support. This time, it is Sears Canada. The chain was founded in 1886 in the United States and became an innovative leader in retail sales, most notably when it introduced the sales catalogue (a precursor to online sales) in 1894. However, Sears did not debut in Canada until 1952, when it partnered with Simpsons, a Canadian department store chain. The new partnership, in addition to Eaton’s and the Hudson Bay Company, two Canadian chains involved in relatively similar markets, played a leading role in the emergence and growth of regional and superregional shopping centres in every major Canadian city in the 1960s up until the mid-eighties. The shopping centre formula was replicated by nearly every major real estate developer during that time. The formula consisted of the following three principles:

  • Build malls larger in scale than the previous generation of shopping centres (community centres) by offering a growing number of consumers in suburban areas more stores, in addition to the traditional department stores that were previously only present and accessible in the downtown core of Canada’s major urban centres.
  • Court traditional department stores, which generate a great deal of traffic (or did at the time), by offering them large, low-rent spaces at the far ends of shopping centres for long periods of time.
  • Rent spaces to independent stores or emerging chains at much higher rent, but with the promise of a higher flow of foot traffic generated by the large, traditional department stores.

This formula was replicated nearly ad nauseam in Canadian suburbs, but sowed some of the first seeds that would destroy the department store concept by offering some of the better performing stores the opportunity to expand quickly in Canada’s retail landscape. These stores were able to offer more targeted products to client sectors with different tastes and preferences that began to emerge when baby boomers entered the job market.

The department store, dubbed the “Cathedral of Modern Commerce,” was invented in 1852 by Aristide Boucicaut in Paris with the grand opening of The Bon Marché department store. It was replicated in the core of every major city in the West until World War II, before branching out into suburban shopping centres. This was the dominant formula for more than a century.

 

Department stores fall from favour

However, by the late 1980s, the traditional department store had lost some of its appeal among North American consumers. What were some of the contributing factors to the department store’s flagging popularity with consumers?

  • Firstly, as mentioned earlier, with the rise of fashion chains, which offered different consumer segments products and environments that were more in tune with their tastes and preferences, large department stores became confined to the market they had helped create.
  • Secondly, starting in the 1980s, the advantage these stores held began to erode with the emergence of big box stores, especially in the categories of durable and semi-durable goods (hardware, electronics, appliances, furniture and home decor), and even more so in discount product lines.
  • Lastly, fast-fashion retailers entered the scene, offering unbeatable prices and faster turnover of collections, and dealing a lethal blow to both larger stores and traditional clothing shops. These new concepts, combined with the rise of online sales, gradually eroded department stores’ market share of the most profitable customers, essentially leaving them with an aging customer base and often a more limited product offering.

After Eaton’s went under in 1999 and Target purchased Zellers but then failed miserably in Canada, there were but three major players left standing: The Bay and Sears, in the category of major department stores, and Walmart, in the category of large discount stores.

 

Sears’ presence in Canadian shopping centres

The potential closure of Sears, which still has 104 department stores in operation (excluding Sears Home (26), Corbeil (32) and HomeTown stores (69)), would create approximately 13.2 million square feet of vacant space in shopping centres. This spells bad news for shopping centre owners, who are still having a hard time finding tenants for empty Target stores.

Which owners will be most affected if Sears goes out of business?

Table showing premises occupied by Sears per shopping centre owner (2017)

The percentage of the leasable area currently occupied by Sears among Sears’ 10 largest lease holders is significant. However, these figures at first glance overemphasize the likely impact on each shopping centre owner:

  • First, these high percentages do not reflect the percentage of total income these rents represent (e.g. Sears pays much lower rent per sq. ft. than regular-size stores).
  • Second, long gone are the days when Sears was the major generator of shopping centre traffic. As a result, Sears closing its doors will likely have a minimal impact on the centre’s productivity.

 

Opportunities for shopping centre owners

While closures would pose the short-term problem of vacancy for shopping centre owners, it is not unsurmountable in the medium term. In fact, a few years ago, in an effort to replenish its coffers, Sears sold its leases at a high price to the owners of some of Canada’s leading shopping centres, which quickly replaced the store with Nordstrom. There is no easy solution that works for every shopping centre, but owners have the opportunity to take a close look at their options so they can use Sears’ departure to breathe new life into their centres. A few things to consider:

  • The best centres may be able to attract new retailers to fill the spaces or arrange for current tenants in need of a larger sales floor to move into them.
  • Online sales have contributed to a drop in foot traffic in shopping centres, and in-store sales have suffered. New consumer trends, particularly among millennials looking for new experiences, such as those involving food, could lead some developers to propose food halls and other food-related concepts that boost shopping centre traffic and has no possible online equivalent.
  • The entertainment industry is another avenue worth exploring.
  • Some shopping centres with an aging customer base might decide to offer opportunities for medical clinics and other local services.
  • Lastly, some of the centres will struggle more than others. One possible solution is to demolish the vacant spaces and replace them with other types of structures, such as homes and offices. Many shopping centre owners are currently investigating income-generating intensification opportunities such as purpose-built rental apartments. Keep in mind that these centres often take up prime urban real estate that is highly sought after by other types of users.

The retail industry is constantly changing, and it comes as no surprise that there are new, winning formulas as well as setbacks. For over a century, the department store model was a titan on the retail scene. Department stores popped up in every major Canadian city and were a major contributor to the creation of the commercial centres we know today. This had a significant influence on our shopping habits. Retailers, managers and owners of shopping centres must adapt and explore new solutions if they are to survive the challenges they face today.

 

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