Rise of luxury retail leaves little choice for middle class

There’s a shift happening in the Canadian marketplace, with many retailers moving away from the middle of the road to cater to either the high or low-end consumer segment. Where’s are Canadians with Holt Renfrew tastes on a Walmart budget to go?

“What seems to have happened is that the middle is starting to disappear,” says Maureen Atkinson, senior partner at J.C. Williams Group, a retail-consulting firm. “It’s not so much the middle class that’s starting to disappear but the middle of retail: for retailers, it’s either up or down.”

True enough, high-end retailers like Nordstrom, Saks, Simons, and Holt’s are jostling for coveted urban retail space. In Vancouver, for example, a flagship Nordstrom is replacing Sears in Pacific Centre. HBC recently purchased luxury retailer Saks Inc. for US$2.9-billion as part of its efforts to reposition itself in the changing marketplace. The acquisition means that HBC will include three North American retail brands: Hudson’s Bay, Lord & Taylor, and Saks Fifth Avenue. Saks is moving into the former Sears store on Vancouver’s Robson Street and will be introduced in other major Canadian cities.

Sears Canada owned the sweet spot for the middle class yet is now in serious trouble, with the former retail giant recently announcing it’s leaving a number of locations and laying off hundreds of staff. Macy’s is another example of a chain that catered to the middle class that’s now struggling. Earlier this year, Macy’s reported an unexpected decline in sales and blamed it on consumers’ reluctance to spend on non-essentials, resulting in prices being slashed and disappointing profits.

“Sears had a number of issues,” Atkinson says. “It’s the kind of business that’s much more heavy on the overhead, so it’s difficult to make it make sense financially. Department stores are generally in that situation around the world; it isn’t just Sears and it’s not just Sears Canada. Yet from what we have seen, the Bay has been able to skirt around that problem,” by adapting to changes in consumer demand.

Most of HBC’s former Zellers locations, meanwhile, have been taken over by Target. And although the Minneapolis-based middle-tier retailer is a favourite among cross-border Canadian shoppers, its debut on this side of the line has been underwhelming.

Suburban areas continue to see low-end retailers dominate. And dollar stores everywhere are thriving, even beating out Wal-mart in the battle to win over budget-conscious consumers. Dollar Tree (formerly Dollar Giant), for instance, is expanding in Canada and is seeing sales rise rapidly.

While Canadian consumers’ mid-range options may be shrinking, the changes in the marketplace reflect changing demands and not necessarily the wealth gap itself, analysts say.

“There is some evidence of a bifurcation in consumer spending patterns between high and low, but this more likely reflects a change in consumer tastes than an effect from a squeezed middle class,” says Michael Burt, director of industrial economic trends at the Conference Board of Canada.

Wealth gap to blame?

“The story of a widening wealth gap in Canada is largely overstated. The change in consumer spending patterns is influenced by many things, including the appearance of new stores such as U.S .chains, the growing prevalence of e-commerce, and shifts in where consumers buy certain things. For example, consumers are increasingly buying clothes at clothing-specific shops while shifting more of their food expenditures to general merchandise stores. This reflects the ever-changing landscape of which retailers are operating and what their product offerings are.”

Although income inequality in Canada has increased over the past 20 years, Burt notes that Canada’s Gini coefficient, a common measure of income inequality, is essentially the same today as it was 10 years ago.

“Increases in income inequality are largely overstated, and thus so too are any suggestions that problems at a particular retailer can be attributed to growing income inequality,” Burt says. “Sears is struggling while other retailers capture its market share. This is an ongoing phenomenon in the industry," he says, adding Kmart, Woolworth and Zellers as examples of failed merchants that have experienced similar downfalls.

The share of clothing sold in department stores in Canada has been steadily declining for a decade, Burt notes, from 26 per cent in 2004 to 21 per cent last year. “Given Sears’ focus on clothing, this may have contributed to its difficulties,” he says.

Atkinson says more Canadians are choosing to shop at factory outlets, off-price stores, and “fast-fashion” retailers.

“That’s definitely the next wave: stores that provide styles of fashion straight from the runway but at an affordable price,” she says. “Somebody who’d love to have the dress that’s being sold in Holt Renfrew but can’t afford it may buy a belt by that same designer and then buy the fast-fashion version of the dress. The issue is what customers value and what they’re prepared to spend their money on.”