Future Shop closures reflect changing face of Canadian retail

Future Shop and other stores abandoning malls in Canada are signs of a retail sector being reinvented on the fly, analysts say.

Future Shop shut down 66 of its stores over the weekend and is converting the other 65 to Best Buy outlets. It’s only the latest in a series of closures in Canada that have included U.S. retail giant Target and smaller players like Sony Canada, Boutique Jacob Inc. and Mexx.

Don Campbell, a senior analyst with the Real Estate Investment Network, said the closure of Future Shop was no surprise, given that parent company Best Buy often had stores nearby.

• Future Shop stores lost out to fulfilled online shoppers
• Future Shop closure not the end for big-box electronics, experts say

But he believes the closures taken as a whole show a sea change in retail similar to what already happened to the video industry.

"The Blockbuster videos and the Rogers video stores were a giant thing a decade ago, and everybody goes, 'There were video stores?'" Campbell said. "Because you can go onto Netflix and watch all this stuff, and it's the same thing we're starting to see in retail. Amazon just rented space in Toronto for 800 people, so the shift is occurring."

Drop-off centres for online orders

Campbell said nobody knows exactly what will happen to Canadian retail space, but he sees a few possibilities:

• Large locations that held anchor stores like Target and Future Shop may be replaced by two or three smaller tenants.
• Shopping centres will see quicker turnover. "You’re going to see stores that open up, and their concept is either going to catch fire with the right buyers, or they’re going to disappear more quickly. No one’s going to hang around for two or three years.”
• Pickup locations could be established for people who order items online but aren't home during the day when Canada Post or UPS come calling. "What we're seeing in Seattle [and] other centres in the U.S. are these drop-off centres. They're renting the space. Not the size of Target, not the size of Future Shop, but that is a growing trend that's also going to start taking up some space."

Bruce Winder, a senior adviser with retail advisory firm J.C. Williams Group, said that retailers need to take advantage of mobile technology.

"Eventually consumers will walk into a store, and if they've opted in, there will be beacon technology that recognizes that consumer is in the store via their smartphone or tablet, and retailers may send a coupon to them while they're in the store to get a discount, or may invite them to purchase something that is complementary to something they purchased last week," Winder said.

"Where it's leading is more of a one-to-one relationship between companies and consumers where companies serve up specific offers, products, assortments and pricing to individual consumers based on their preferences."

Negotiations underway at former Future Shops

Calloway, the real estate investment trust (REIT) with the most Future Shop leases, downplayed the effect of the closures. It said that 11 of its 19 locations will be converted to Best Buys, and negotiations with new tenants are already underway at three of the remaining spots.

The five stores that are closing represent only 0.4 per cent of Calloway's rent, it said in a statement.

"The evolution of retail concepts is an inevitable part of the broad retail landscape" Calloway CEO Huw Thomas said, while noting Calloway's strong connection with Walmart, which continues to expand in Canada. 

Mark Rothschild, a real estate analyst at Canaccord Genuity, said Calloway alone has significant exposure to the Future Shop closures.

But he too sees big changes ahead for Canadian retail.
 
"While Future Shop alone is not the biggest deal, there's no way this is the last retailer that's coming down.… There obviously will be more, because online retailers are taking a big chunk out of the shopping dollar."

Rothschild sees high-end malls and grocery-anchored shopping centres remaining viable, but that locations centred around big box stores could face problems that lead to pressure on the landlords to maintain occupancy and cash flow.

"It’s going to lead to slower growth from the cash flow, for the REITs that have a lot of exposure,” he said.