C anada may not seem the most exotic or exciting location to expand internationally — but it may be the most logical. The country weathered the global economic downturn stronger than most and, according to a report by Collier International, per capita retail spending surpassed that of the United States last year. It’s no wonder, then, that many U.S. retailers are looking to our neighbors to the north. “During the economic downturn here in the United States, companies had to look at additional avenues for growth,” says Jon Watschke, retail strategist at global management consulting firm Kurt Salmon. “Canada was affected by the global downturn, but not to the same extent that the U.S. was. They had natural resources driving their economy to a greater degree than we did. That caught the eye of retailers looking to expand.” Those retailers include Target, which announced plans to open 100-150 stores in Canada in 2013 and 2014 after purchasing Zellers’ leases; Big Lots, which picked up 89 Liquidation World stores there last year; and Dollar Tree, which acquired 86 Dollar Giant stores in 2011. TJX, which has operated in Canada since 1990 with Winners, has taken its Marshalls stores there, opening six locations in the past year. The list goes on — and doesn’t include companies that have dipped a toe in by offering e-commerce shipping. Retailers from The Container Store to the celebrity-driven Mint empire serve Canada through their websites. Even companies like Walmart, which has operated in Canada since 1994, are expanding. Walmart announced plans to complete 73 projects there in fiscal year 2012, adding 4.6 million sq. ft. of retail space. “The Canadian dollar is at an all-time high and the Canadian marketplace has more spendable income than they have in the past,” says David Marinkovich, vice president of marketing and field sales for Newgistics, a delivery and return shipping company that is currently testing service to Canada. “The Canadian business-to-consumer e-commerce market is $15 billion and looks to double by 2015 according to projections. It’s a combination of significant growth, availability of spendable capital and a desire for American goods and technology.”
Taxes and duties For many companies, the first logical step is e-commerce. “The Canadian consumer knows the brand already,” Watschke says. “What a lot of these retailers are doing is offering service to the Canadian market via the website. That may take several forms. It may be that they have a U.S. website but can ... work with a shipping provider to calculate the duty.” “Others are partnering with a company like Borderfree or FiftyOne,” he says. “These companies take care of duty collection, transfer and transportation within Canada. The U.S. retailer just ships to a point at the border. There’s a very low barrier to entry and a very low level of effort on the part of the retailer.” E-commerce is not without its challenges, however, especially when navigating taxes and duties, which differ from province to province. But many companies are willing to work through the headaches to reach the market. Newgistics is partnering with Landmark Global to enter Canada. As in the United States, Newgistics will handle shipping while Landmark oversees duties and custom clearance. Newgistics’ technology will provide “visibility from dock to door and a convenient return service,” Marinkovich says. Consumers receive their orders through Canada Post, a service comparable to the U.S. Postal Service. The risk of returns is a complicating factor for U.S. companies shipping to Canada. Before the return is made, the company already has paid taxes and duties — which can be returned, if the company takes the time to pursue it. “The shipments that we look at handling are between $150-200,” Marinkovich says. “The duties and taxes can run $20-30, and with returns, some companies just leave that on the table.”
Geography and population density Without an in-country distribution center, companies pay customs twice – once to bring shipments into the U.S. from manufacturers, and again to send them to Canada. But in-country DCs are not always practical. “We have to make sure that our forecast is good because we’ll have to liquidate if we overbuy, or supplement with product from the U.S. if we underbuy,” Watschke says. “It’s hard to put together a forecast when you don’t have a history. That’s why you’ll see a lot of companies take that first step to support one or two stores.” And then there’s the geography. Canada’s population (34 million) is slightly smaller than California, yet the nation ranks second only to Russia in terms of land mass. While about 80 percent of the population is centered in major cities near the U.S. border, “in between those population centers you have vast swaths with a very low population density,” Watschke says. American companies often place their first stores in Toronto, Canada’s most populous city, as J.Crew did last summer. The two next-largest cities — Montreal and Vancouver — present unique challenges: French is the official language in Montreal, while Vancouver is far-removed from other major population centers. “In the winter, the Trans-Canada Highway does shut down at times,” Watschke says. “In channels where service times are more critical, companies may have to form an eastern/western distribution plan, or maybe one in-country. “But in terms of retail, directly importing from the country of manufacture overrides the transportation savings of shipping from a U.S. distribution center.”
Growth over time Retailers may also choose to work with a third-party logistics [3PL] provider, but Canadian 3PLs “maintain highly variable capabilities depending on their location and industry vertical specialization,” Watschke says. “Canadian 3PLs also operate under different regulations than their American counterparts, which can further complicate the proposal process.” Some major retail players — like Target — are entering the country with such force that a DC makes sense. Others have acquired an extensive distribution chain when purchasing a Canadian competitor. “While there are examples of U.S. companies that have spooled up to this level quickly, stores usually grow to this over time,” Watschke says.