Jacob’s shuttering points to further split in Canada’s retail industry

Consumers who never shopped at fashion retailer Boutique Jacob Inc. may still be mourning its bankruptcy for what it signals for the future of Canada’s retail sector.

Jacob wasn’t a discount retailer, nor was it a luxury brand, but instead a middle player appealing to both budget and fashion-conscious women interested in its casual work attire and lingerie.

But the continuous bifurcation of the Canadian retail landscape – with high-end stores on one side and discounters on the other - is starting to tear apart the industry. That has negative consequence for companies such as Montreal-based Jacob.

“I think there will be more victims of this going forward, “ says Doug Stephens, founder of Retail Prophet.

“We are moving towards a market that will be more barbell shaped, where we have strong activity at the discount end … and luxury performing well on the other. It’s the vacuous middle of the market that’s struggling, and I suspect will continue to do so.”

For example, he’s betting Sears Canada may only have a few years left, and chains such as The Gap, Banana Republic and Club Monaco (all owned by the same company), may also be in trouble.

The middle class in Canada is shrinking, he says, and that’s creating more of a two-tier retail market. Consumers either want a screaming deal at a discount store, or to overpay at a luxury store for a big brand and high-end shopping experience.

“That middle-income earner that used to be such a vital and important part of the economy is disappearing slowly,” he says. “Basically, the U.S. market is playing out in Canada.”

Canadian retailers are already starting to position themselves for the change. He points to Hudson’s Bay, which recently bought U.S. luxury retailer Saks.

“I think we’ll see more of that,” Stephens says.

Target’s troubles in Canada are also a bad sign, but Stephens says that’s more an execution problem on the part of the U.S. discount chain. There was a lot of hype before they entered the Canadian market last year, but once they opened their stores, consumers found bare shelves and prices that weren’t as cheap as anticipated.

“It’s a classic case of over-promising and under-delivering,” he says. “They really underwhelmed Canadians.”

Part of the issue is that, when Target was eyeing Canada years earlier, the economy looked a lot better as compared to the U.S., which was walloped in the 2008-09 recession.

Canada’s economy bounced back a lot quicker from the global economic downturn, but growth here has stagnated since.

At the same time, competition is the retail sector is intensifying. Walmart Canada is investing in a multibillion expansion across the country and Amazon.ca has aggressively expanded its offerings to Canadian online shoppers. The increased competition is also causing a wave of consolidation across the sector, including Loblaw’s takeover of Shoppers Drug Mart and Sobey’s purchase of Safeway’s Canadian assets.