Executive Summary Of Reitmans: Global Simulation In Canada
Management 711: Professor Louis Thomas
NAVI HEHAR
Student #17910197
REITMANS (CANADA) LTD.:
SPATIAL PREEMPTION IN CANADIAN RETAIL
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Executive Summary
Reitmans is the largest specialty retailer of women’s apparel in Canada. Founded in 1920 as a single store selling women’s apparel, Reitmans has grown into a publicly traded women’s apparel retailer with almost 1,000 stores coast-to-coast across Canada and annual revenue exceeding C$1 billion. Trendex estimates that Reitmans has a market share of approximately 11% in the Canadian women’s apparel market, and a market share of approximately 25% in plus-sized women’s apparel. I believe this level of concentration is unprecedented for a mature western market, and is far higher …show more content…
than US specialty apparel retailers such as Gap Inc. or Spanish giant Inditex. Furthermore, Reitmans has managed to capture this market share while maintaining very high profit margins and a return on equity that greatly exceeds 20% while having never reported an operating loss.
I plan to understand why.
This paper will examine my theory on how Reitmans, and many other low-cost specialty retailers such as Gap Inc. and Inditex, utilized Judo entry techniques to capture a large share of the mature women’s apparel retail market from incumbent department stores. I will propose a thesis on how Reitmans has utilized a Stackelberg leader position to create low customer acquisition costs in order to gain a large share of the women’s apparel market (particularly in plus-sized clothing), and has used spatial preemption techniques in order to maintain (and grow) an unprecedented market share of the Canadian women’s apparel market, and particularly in the mature / plus-sized apparel segment.
Finally, I would like to propose my theory on the question, “if Reitman’s strategies are so successful, why haven’t US-based retailers also done the same thing?”.
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Reitmans (Canada) Limited
Founded in the 1920s by the Reitman family in Montreal, Reitmans (Canada) Limited (TSX: RET.A) (“Reitmans, or the “Company”) is a publicly traded retailer of women’s apparel in Canada with over 900 stores across the country. The Company’s focus is on providing apparel for mature and plus-sized women at an affordable (low to moderate) price point, primarily through stores in malls and power centers. Reitmans has annual sales exceeding C$1 billion and operates 929 stores across the country.
The Company operates seven banners focused on women’s apparel spanning a target market of 18- to 60-year-olds, including pregnant women and the plus-sized market. Reitmans focuses on providing low-to-moderate priced fashions for the working mother or young woman. One unique aspect of the firm’s strategy is the location of its stores; Reitmans will often “cluster” its various brand formats within the same shopping mall or power center, giving it considerable negotiating leverage over mall owners and a retail presence across a broad spectrum of female age groups, body types and price levels. Reitmans also invests heavily in advertising, particularly on its flagship “Reitmans” banner, and sells only its own private label designs in all of its retail segments.
Summary Matrix of Reitmans Brands: 2007 Scotia Capital Research Report
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Description of Brands (ordered by date launched or acquired)
As at April 4, 2009, the Corporation operated a total of seven retail store banners which are profiled below. The majority of the Corporation’s stores are located in enclosed shopping malls which are situated both in central and suburban metropolitan areas and in smaller towns in Canada. Over the years, Reitmans has gradually expanded its product portfolio to include segments closely competing with its core Reitmans banner. The Smart Set banner was introduced to pursue a slightly younger demographic than Reitmans, while Penningtons pursued casual clothing for plus-sized women across the broad age spectrum covered by Reitmans and Smart Set. RW & Co. is a marginal adjustment towards a younger consumer than Smart Set with a more trendy apparel lineup (Smart Set is catered for office casual wear), and the acquisition of Additional Elle and Thyme Maternity offered an entry into plus-sized office wear and maternity wear. The latest brand, Cassis, provides exposure to the same age segment as the core Reitmans banner, but with a trendier clothing lineup.
Table of Reitmans Banners, Entry Date, and Spacial Coverage
|Reitmans (1947) |Reitmans is Canada’s largest ladies apparel specialty chain. Reitmans offers Canadian women |
|- 371 stores |affordable fashions “designed for real life” in regular, plus and petite sizes. The Reitmans |
|- 25-45yrs |brand has utilized advertising strategies to develop strong consumer relationships and loyalty. |
|- 4,400 sq.ft. |All clothing is private label under the Reitmans brand. |
|Smart Set (1972) |A fashion destination for young women in their mid-twenties and is newly positioned as a |
|- 165 stores |"do-it-yourself fashion toolbox".
Smart Set offers current styles designed to mix and match for |
|- mid 20’s |work, after hours and week-end wear. All of which are designed and manufactured specifically and |
|- 3,400 sq. ft. |exclusively for the chain and carry the Smart Set label. |
|Penningtons (1996) |Penningtons is a destination store located in strip plazas and power centre locations providing a|
|- 163 stores |broad assortment of career, casual, intimate apparel and accessories for the plus-size woman of |
|- Plus Size (all age) |all ages at competitive prices. Penningtons also offers the junior plus-size product assortment |
|- 5,900 sq. ft. |known as MXM that caters to the trendy, young value-conscious plus-size customer. |
|RW & Co. (1999) |RW & CO. caters to junior ladies and men, featuring fashionable, original and quality urban and |
|- 59 stores |casual wear at moderate prices. All clothing carries the RW & Co. brand. …show more content…
|
|- 18-30 | |
|- 4,300 sq. ft. | |
|Addition Elle (2002) |Addition Elle was acquired by Reitmans in 2002. Addition Elle is Canada’s fashion leader for |
|- 123 stores |career ladies in plus-size clothing. The store offers a contemporary collection of career, |
|- Plus size (all age) |casual, intimate apparel and accessories at affordable prices. Stores are located in malls and |
|- 5,800 sq. ft. |power centre locations across Canada. The junior MXM assortment is available in 116 Addition Elle|
| |stores. |
|Thyme Maternity (2002) |Thyme Maternity was acquired by Reitmans in 2002 and is Canada’s largest specialty retailer of |
|- 76 stores |maternity clothing. Thyme Maternity sells clothing and accessories that are designed to meet an |
|- 25-40 |expectant mother’s entire fashion needs including her career, casual, lingerie, special occasion |
|- 2.200 sq. ft. |and nursing apparel needs. |
|Cassis (2006) |Cassis constitutes the Company’s newest banner and consists of mall-based stores that offer |
|- 19 stores |contemporary styles for the mature woman with a youthful mindset. |
|- 45-60 | |
|- 3,700 sq. ft. | |
A Model of Reitmans’ Spacial Coverage
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It can be seen fro the above chart that Reitmans has a relatively strong exposure on plus-sized apparel in both trendy and conservative clothing, and across age groups.
Reitmans’ latest brand is Cassis, which plugged a hole that its current Reitmans banner does not capture (trendy clothing for mature women). Areas where Reitmans currently lacks a strong brand presence (and where it likely will utilize preemption strategies in the future) are plus-sized trendy clothing for young consumers (not adequately covered by its Additional Elle or RW&Co. banners) or trendy clothing. Though Reitmans has a presence in younger clothing through RW & Co. and Smartset, these brands are not strong
competitors.
The Rise and Fall of Canadian Department Stores
The Canadian Apparel Market
During the post-war years, Canada’s apparel industry was largely dominated by two department store operators, the Hudson’s Bay Company (HBC) and Eaton’s. Both firms had over 100 years of operating history (HBC actually had a 300 year operating history and was the oldest firm in Canada), were located in every town in the country, had extensive catalogue operations and were national icons. Furthermore, HBC and Eatons were major landowners in the largest metropolitan cities in Canada and also received generous anchor tenant inducements in every new mall developed in the country. In fact, Eaton’s department store format was such a cultural icon that in 1905, the Canadian newspaper the Globe wrote: “There is hardly a name in Canada, with the possible exception of the Prime Minister, so well known to the people at large as that of Mr. Timothy Eaton.”. Around the time that Reitmans began its gradual expansion in the late 1970’s, Sears Canada launched its operations and catalogue business in Ontario, and Eaton’s opened its flagship shopping mall, the Eaton’s Centre, in the heart of downtown Toronto; to this day, the Eaton’s Center is the highest traffic mall in all of Canada.
The department store oligopoly was eventually broken following Wal-Mart’s entry into the Canadian retail market in the 1990’s and the subsequent rise of numerous big-box specialty retailers that cannibalized market share from the department stores in everything from consumer electronics (Best Buy / Futureshop), to furniture (Leons / Brick), to bedroom (Bed Bath & Beyond / Sleep Country) and apparel (Reitmans / Gap). In fact, HBC was acquired by Lord & Taylor in 2008, and Eaton’s was acquired by Sears in 1999. Both produced years of dismal results following the entry of the far more efficient US retailers into the Canadian market and the rise of specialty retailers in most of their segments.
Was Reitmans a Judo Entrant?
I believe specialty retailers such as Reitmans essentially entered the market as Judo entrants. Though Wal-Mart may also be considered a judo entrant, I would argue they fill a slightly different segment of the market than the “impulse” mall shopper, and at a far lower price level. By taking the incumbent department stores’ position as given, I believe specialty retailers such as Reitmans were able to flanking the department stores with slightly lower priced staple apparel, thereby forcing the department stores into a pricing dilemma; either to accommodate, or risk having to lower the price across their entire apparel line to match, which is difficult to do given it is widely known and acknowledged that apparel is the largest contributor to profits for the department stores. Since the department stores were loathe to reduce profits on apparel, they likely accommodated the specialty retailers in the youth segment and lower-priced mature women’s apparel (where Reitmans now dominates).
Illustration of Spatial Entry
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Though the incumbent department stores likely enjoyed a sizable real estate / rental cost advantage through decades of real estate ownership and tenant inducements in new malls (in the case of Eaton’s, owning a mall), I believe their threat of a price war would not be credible, and that Reitmans could see this.
The reason is that the incumbent firms’ “sunk cost” in real estate expenses is not a sunk cost specifically for apparel. If the apparel segment entered into a price war, the incumbent department stores could simply allocate their floor space to less competitive segments, whereas Reitmans, as a pure-play specialty women’s apparel retailer, could not.
Thus, I believe Reitmans forced a pricing dilemma by entering malls and competing directly with incumbent department stores in a niche segment in the low to moderate priced women’s apparel market. Reitmans knew that the incumbent’s threat of a price war was not credible due to (i) the price dilemma of lowering prices across their entire higher value apparel offering (particularly the highly profitable cocktail dresses and fashion apparel) which represented a very large portion of their total profits, and (ii) no true sunk costs to make their threat credible.
Judo entry requires lower costs in order to be successful. I believe Reitmans likely entered with a lower cost basis than the incumbents. Reitmans, like Inditex Inc., Gap Inc. and H&M (the three largest apparel retailers in the world, in order) is a vertically integrated retailer that designs, produces and sells all of its own clothing. These vertically integrated retailers have a far lower cost structure than the department stores that acquire branded label clothing (from companies like VFC, Calvin Klein, etc.,) and charge a markup.
|Reitmans Has Higher Inventory Turnover… |…And Higher Profit Margins, than Incumbents |
|[pic] |[pic] |
The data above shows that a price war may have erupted between Reitmans and Sears for several years prior to 1997, but shows that eventually, Sears accommodated the judo entrant.
Unable to match the lower cost structure of vertically integrated retailers, the department stores had to accommodate the judo entrants and saw their market positions eroded.
Eaton’s specifically was flanked by both Sears and HBC – when it attempted to move upscale, customers were simply not willing to pay for a high-priced department store they had known as being an affordable family destination for over 100 years.
Further Evidence of Specialty Retailers Capturing Share from Incumbents
Data on department store sales are difficult to acquire, particularly before 2000, however an older Trendex report (the leading retail consultancy service) confirms the continued and steady decline of the department stores in the apparel market. Specialty stores such as Reitmans have been capturing market share for a very long time. It should be noted that the market share loss was not to discount stores such as Wal-Mart; rather, the market share is being cannibalized by specialty stores, likely high-end fashion boutiques such as Holt Renfrew and low-end apparel firms such as Reitmans.
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Therefore, I believe Reitmans and other specialty apparel retailers utilized judo entry to force incumbent department stores into a price dilemma. Since the incumbent retailers did not pose a credible price threat, and the judo entrants had a lower cost structure, the incumbents eventually decided to accommodate, evidenced by the eventual recovery of profit margins at both Sears and Reitmans following what appears to be a large price war in the early-to-mid 1990’s.
A quick channel check at most department store chains confirms this thesis. HBC and Sears largely focus their efforts on low service (you’d be hard pressed to find an employee to provide assistance), high volume sales of mid-level branded apparel (such as Calvin Klein, Nautica, etc.), accommodating vertically integrated specialty retailers in the lower priced segments.
Unprecedented Market Share
According to Trendex North America (as of 2007), Reitmans has an 11% share of the women’s apparel market and a 25% share of the plus-sized market. This would make Reitmans one of the largest women’s apparel retailers in the country, likely behind Wal-Mart and Sears, and would almost certainly make Reitmans the largest plus-size retailer in the country. This level of market concentration, particularly in plus-sized clothing, is highly unusual for mature markets.
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Comparison to the US Market
According to NPD group, the US apparel market in 2007 can be segmented as follows:
|Total Apparel |$190 billion |
|Women's Apparel |$102 billion (53% of total) |
|Plus-Sized Women’s Apparel |$26 billion* (14% of total, 25% of women’s) |
| |(assuming same proportion of total apparel retail as in |
| |Canada, as estimated by Trendex) |
The largest specialty retailer in the United States is Gap Inc. reported 2007 revenue of $16 billion globally, implying a far lower share of women’s apparel than Reitmans maintains in Canada. There is certainly no US retailer with anywhere near a 25% share of the US$26 billion women’s plus-sized apparel market. I would argue that the figures clearly indicate that Reitmans has maintained greater market share in its niche of women’s apparel, and particularly in mature women’s apparel (generally plus sized), than any other retailer in North America.
Update Since Recession Post 2007
I believe since the above report was issued, Reitmans has once again increased its already sizable market share. The above noted market share figures are prior to the recession that began in early 2008. It should be noted that Reitmans’ same-store-sales declines were approximately -5% in 2008, which far outperformed comparable sales at US women’s apparel retailers such as J. Crew, Talbots and Dress Barn, as well as the last incumbent department store, Sears Canada; many of these competitors experienced negative same-store-sales-growth of -10% or worse.
How Did Reitmans Manage to Gain Such a Large Market Share? Why Don’t US Competitors Follow a Similar Strategy?
My thesis on why Reitmans managed to capture such a large share in women’s apparel is that in addition to being a judo entrant (along with thousands of small specialty retailers), Reitmans’ large sunk cost investments in distribution and mall real estate, combined with its advertising expenditure, allows the firm to maintain a low acquisition cost for plus-sized female shoppers and essentially preempts the entry of a new rivals. Such a strategy implicitly requires a first-mover advantage as a Stackelberg leader; the reason why I believe US firms did not follow such a strategy is simply a function of the US having a far more competitive retail environment relative to the flat-footed domestic Canadian retailers.
Clustering in Malls
As we discussed in our class, companies selling products with product differentiation will locate near one another, often flanking the incumbent in order to create demand effects and limit price competition. An equilibrium will be reached as competitors divide the market according to customer segmentation while avoiding adverse price competition. This can be seen in many industries, whether looking at casinos in Las Vegas (all located on the strip, providing marginally differentiated products), or restaurants clustered in a cafeteria (all provide quick-service food serving “impulse” customers, segmented by customer taste on that particular day).
Many department stores are located in malls where its competitors flank the incumbent with marginally differentiated products in order to create demand effects through providing a very wide selection. For the women’s apparel shopper that is overly concerned with price, that individual may choose to shop at a discount retailer such as TJ Maxx (Winners in Canada) or Wal-Mart, which tend to locate in power centers and off-mall locations. However, for those looking to enjoy a wide selection, Reitmans takes full advantage of the mall ecosystem.
Sunk Costs and the Expansion of Brand Portfolio
In the 1990’s, Reitmans invested heavily in expanding its distribution capabilities. The firm effectively played the role of Stackelberg leader by invested tens of millions of dollars in its distribution center in Montreal, which at one time was operating at far less than 50% capacity. Though Reitmans successfully outmaneuvered incumbent department stores through its cost advantages as a vertically integrated retailer, it did not have an advantage over department stores, or other specialty retailers, in real estate costs.
In order to take advantage of its Stackelberg leader position, Reitmans began to enter adjacent product segments through the launch and expansion of its Smart Set brand, and then its plus-sized brand, Penningtons. Though Reitmans was starting to gain market share and utilize economies of scale, other vertically integrated retailers such as the Gap (which opened a large distribution center in Toronto) or a variety of other US chains that could have entered Canada (such as Dress Barn, Talbots, etc.). and possibly competed directly with Reitmans.
So what changed? What allowed Reitmans to suddenly catapult into a dominant apparel retailer, particularly in the plus-sized categories, and why has Reitmans continued to maintain its market dominance?
I believe the answer lies in the 2003 acquisition of Shirmax.
The Shirmax Acquisition
Reitmans attempted to enter the plus-sized fashion-forward market several years before 2003. In fact, the Penningtons brand was an attempt by Reitmans to enter Shirmax’s strong-hold in the plus-sized retail market; at the time, Penningtons was underperforming Shirmax’s Additional Elle format.
Upon acquiring Shirmax in 2003, Reitmans was able to consolidate the Additional Elle and Thyme Maternity supply chain into its large distribution center, greatly reducing costs. Furthermore, the Company was now able to acquire mall real estate across 5 separate banners, making Reitmans one of Canada’s largest shopping mall tenants.
Looking back to the chart displayed earlier, the 2003 acquisition of Shirmax was clearly a trigger that allowed Reitmans to solidify itself as a low-cost competitor on women’s apparel, and gave the firm an almost complete spatial product offering in a mall.
|Reitmans Has Higher Inventory Turnover… |…And Higher Profit Margins, than Incumbents |
|[pic] |[pic] |
Completing the Spatial Product Offering and Creating Credible Spatial Preemption
The Shirmax acquisition appears to have allowed Reitmans to gain sufficient scale that it can now use spatial preemption, utilizing its position as Stackelberg leader through its large distribution sunk costs and lower mall rents to provide products that meet the entire gambit of ladies apparel needs, ensuring that competitors do not enter in direct competition. This is similar to the strategy employed by cereal makers such as Kellogg and General Mills where they utilized their existing infrastructure and advertising to achieve spatial preemption from almost any angle in their specific market niches.
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By clustering all of its stores in a single mall or power-center and investing heavily in advertising (particularly on its flagship Reitmans banner), Reitmans has very low customer acquisition costs across a wide spectrum of female age groups, body sizes and even income levels. The firm can scale its distribution platform across the entire customer segmentation. By acquiring so much mall real estate, Reitmans also manages to attain tenant inducements which greatly reduce their real estate acquisition costs. Furthermore, Reitmans is now able to preempt entry into mall-based stores by requiring tenant non-compete clauses (for example, Thyme Maternity requires exclusivity over maternity clothing retail banners in shopping malls).
Reitmans has Lowest Real Estate Efficiency: 2007 RBC Capital Markets Research Report
It can be seen above that Reitmans remains highly profitable despite having one of the lowest real estate efficiency levels in a shopping malls amongst specialty retailers. This would only be possible if Reitmans was receiving equivalent to anchor tenant rents, which I believe to be the case.
When combining all the aforementioned factors with the decades of merchandising experience and brand name that Reitmans has developed, I believe Reitmans has captured a sufficient cost advantage and branding advantage that is necessary for sustainable special preemption.
So, Why Don’t US Retailers Do the Same Thing?
So the success of Reitmans’ special preemption strategy begs the question, why aren’t most retailers following a similar strategy?
Looking at the retail industry, I would argue many in fact do. Companies such as Wal-Mart, Target and TJX have large apparel segments, and provide a wide assortment of products within a given price range. In this case, the spatial preemption is in the form of types of products (dresses / jeans, petite size / plus size) at a given price point (low to moderate). These firms cater to a specific type of shopper.
On the other hand, competitors such as the Gap have utilized spatial competition in malls where they often sell products through their Old Navy brand, the Gap and Banana Republic; utilizing their distribution network and scale economies to make a credible spatial preemption. Unfortunately, the Gap’s cost advantage was circumvented by the new design techniques of Inditex, which recently overtook the Gap as the world’s largest retail conglomerate. When I reviewed a research analyst’s analysis of Inditex’s strategy, it appeared to be very similar to the Judo techniques utilized by Reitmans when it competed against the incumbent department stores – Inditex utilizes judo economics to put its flagship Zara brand in a market, and then acquires local real estate to create economies of scale and a cost advantage to preempt rivals:
“In simple terms, it follows the same 'oil stain' pattern when moving into a new market. This involves opening one 'insignia' store aimed at building up its name in a new location, before setting up smaller shops of different brands to reach a certain density of outlets that allows it to create economies of scale and boost profit margins.
For a company which spends very little on advertising, its shops have always been its principal marketing tool, so many are purpose-built to look like fashion boutiques.
The key to Inditex's brand diversification lies in the group's vertical integration. Almost all the phases of developing and selling a new product are carried out in house — from design and production to logistics and sales.”
My argument for why US retailers may not have achieved a similar level of concentration as Canada is based on my assumption that the US, being an older country that is more densely populated, has simply had far too many competitors for one incumbent to adequately preempt. As a result, the retail selection has generally been fragmented. It is a point of note that the largest retailers in Canada are actually US firms (Wal-Mart, Sears, the Gap, Abercrombie & Fitch, Guess, etc.). Incumbent Canadian firms have simply historically been quite conservative and slow moving. It should be noted that the world’s largest retailers, Inditex, H&M and Gap Inc, are all vertically integrated apparel retailers that utilize a spatial preemption technique similar to the one employed by Reitmans. The fact that these firms went on to become global powerhouses, despite the fact that Reitmans was in business and pursuing this strategy long before they did, speaks to the conservative and low-risk-taking culture in Canada, a country that rarely produces global powerhouses.
In Conclusion
I have researched the retail market for years, and could think of no global precedent for Reitmans (Canada) Limited’s success in managing to not only capture, but maintain, such a large market dominance in what has always been an industry plagued with very low entry costs and diverse customer tastes, which would imply very high fragmentation.
I believe the lessons taught in Management 711 may explain, to an extent, the factors that have allowed the Reitmans phenomenon to exist. My thesis is that Reitmans utilized Judo Economics to enter the mall-based women’s apparel market against the incumbent department stores, and then used Stackelberg leadership in order to gain additional market share via low customer acquisition costs, and finally, has used spatial preemption techniques in order to preempt the entry of new rivals. I believe Reitmans can maintain a credible spatial preemption so long as it can maintain its cost advantage over its rivals.
Appendix: Reitmans Competitors (Chain Stores)
Source: RBC Capital Markets 2007 Research Report
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Appendix: Reitmans Competitors (Department Stores)
Source: RBC Capital Markets 2007 Research Report
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Appendix: Reitmans Competitors (Specialty Apparel Retailers)
Source: RBC Capital Markets 2007 Research Report
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Note that many of Reitmans’ competitors are now attempting to mimic .the Company’s strategy
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Appendix: Non-Credible Price Threats
Reitmans preemption works if the firm has a cost advantage – if Reitmans loses this cost advantage, it may have to resort to credible price threats, possibly from large sunk costs, or excess capacity. Reitmans has neither.
One thing that would make Reitmans preemption a credible threat would be large sunk costs. However, the reality is that Reitmans likely does not have a credible sunk cost given that its inventory investment in a store can be distributed to other locations in its large store network and the firm appears to have negotiated reasonable lease break-costs. Thus, if an entrant did decide to enter the market, Reitmans may decide to accommodate.
With regards to capacity – Reitmans’ flagship Montreal distribution centre currently has capacity to supply approximately 1,100 stores. As it stands now, Reitmans is very close to reaching its maximum store penetration in the Canadian market. The firm has little excess capacity and cannot enter into a volume-based price war.
NAVI HEHAR
Student #17910197
REITMANS (CANADA) LTD.:
SPATIAL PREEMPTION IN CANADIAN RETAIL
[pic]
Executive Summary
Reitmans is the largest specialty retailer of women’s apparel in Canada. Founded in 1920 as a single store selling women’s apparel, Reitmans has grown into a publicly traded women’s apparel retailer with almost 1,000 stores coast-to-coast across Canada and annual revenue exceeding C$1 billion. Trendex estimates that Reitmans has a market share of approximately 11% in the Canadian women’s apparel market, and a market share of approximately 25% in plus-sized women’s apparel. I believe this level of concentration is unprecedented for a mature western market, and is far higher …show more content…
than US specialty apparel retailers such as Gap Inc. or Spanish giant Inditex. Furthermore, Reitmans has managed to capture this market share while maintaining very high profit margins and a return on equity that greatly exceeds 20% while having never reported an operating loss.
I plan to understand why.
This paper will examine my theory on how Reitmans, and many other low-cost specialty retailers such as Gap Inc. and Inditex, utilized Judo entry techniques to capture a large share of the mature women’s apparel retail market from incumbent department stores. I will propose a thesis on how Reitmans has utilized a Stackelberg leader position to create low customer acquisition costs in order to gain a large share of the women’s apparel market (particularly in plus-sized clothing), and has used spatial preemption techniques in order to maintain (and grow) an unprecedented market share of the Canadian women’s apparel market, and particularly in the mature / plus-sized apparel segment.
Finally, I would like to propose my theory on the question, “if Reitman’s strategies are so successful, why haven’t US-based retailers also done the same thing?”.
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Reitmans (Canada) Limited
Founded in the 1920s by the Reitman family in Montreal, Reitmans (Canada) Limited (TSX: RET.A) (“Reitmans, or the “Company”) is a publicly traded retailer of women’s apparel in Canada with over 900 stores across the country. The Company’s focus is on providing apparel for mature and plus-sized women at an affordable (low to moderate) price point, primarily through stores in malls and power centers. Reitmans has annual sales exceeding C$1 billion and operates 929 stores across the country.
The Company operates seven banners focused on women’s apparel spanning a target market of 18- to 60-year-olds, including pregnant women and the plus-sized market. Reitmans focuses on providing low-to-moderate priced fashions for the working mother or young woman. One unique aspect of the firm’s strategy is the location of its stores; Reitmans will often “cluster” its various brand formats within the same shopping mall or power center, giving it considerable negotiating leverage over mall owners and a retail presence across a broad spectrum of female age groups, body types and price levels. Reitmans also invests heavily in advertising, particularly on its flagship “Reitmans” banner, and sells only its own private label designs in all of its retail segments.
Summary Matrix of Reitmans Brands: 2007 Scotia Capital Research Report
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Description of Brands (ordered by date launched or acquired)
As at April 4, 2009, the Corporation operated a total of seven retail store banners which are profiled below. The majority of the Corporation’s stores are located in enclosed shopping malls which are situated both in central and suburban metropolitan areas and in smaller towns in Canada. Over the years, Reitmans has gradually expanded its product portfolio to include segments closely competing with its core Reitmans banner. The Smart Set banner was introduced to pursue a slightly younger demographic than Reitmans, while Penningtons pursued casual clothing for plus-sized women across the broad age spectrum covered by Reitmans and Smart Set. RW & Co. is a marginal adjustment towards a younger consumer than Smart Set with a more trendy apparel lineup (Smart Set is catered for office casual wear), and the acquisition of Additional Elle and Thyme Maternity offered an entry into plus-sized office wear and maternity wear. The latest brand, Cassis, provides exposure to the same age segment as the core Reitmans banner, but with a trendier clothing lineup.
Table of Reitmans Banners, Entry Date, and Spacial Coverage
|Reitmans (1947) |Reitmans is Canada’s largest ladies apparel specialty chain. Reitmans offers Canadian women |
|- 371 stores |affordable fashions “designed for real life” in regular, plus and petite sizes. The Reitmans |
|- 25-45yrs |brand has utilized advertising strategies to develop strong consumer relationships and loyalty. |
|- 4,400 sq.ft. |All clothing is private label under the Reitmans brand. |
|Smart Set (1972) |A fashion destination for young women in their mid-twenties and is newly positioned as a |
|- 165 stores |"do-it-yourself fashion toolbox".
Smart Set offers current styles designed to mix and match for |
|- mid 20’s |work, after hours and week-end wear. All of which are designed and manufactured specifically and |
|- 3,400 sq. ft. |exclusively for the chain and carry the Smart Set label. |
|Penningtons (1996) |Penningtons is a destination store located in strip plazas and power centre locations providing a|
|- 163 stores |broad assortment of career, casual, intimate apparel and accessories for the plus-size woman of |
|- Plus Size (all age) |all ages at competitive prices. Penningtons also offers the junior plus-size product assortment |
|- 5,900 sq. ft. |known as MXM that caters to the trendy, young value-conscious plus-size customer. |
|RW & Co. (1999) |RW & CO. caters to junior ladies and men, featuring fashionable, original and quality urban and |
|- 59 stores |casual wear at moderate prices. All clothing carries the RW & Co. brand. …show more content…
|
|- 18-30 | |
|- 4,300 sq. ft. | |
|Addition Elle (2002) |Addition Elle was acquired by Reitmans in 2002. Addition Elle is Canada’s fashion leader for |
|- 123 stores |career ladies in plus-size clothing. The store offers a contemporary collection of career, |
|- Plus size (all age) |casual, intimate apparel and accessories at affordable prices. Stores are located in malls and |
|- 5,800 sq. ft. |power centre locations across Canada. The junior MXM assortment is available in 116 Addition Elle|
| |stores. |
|Thyme Maternity (2002) |Thyme Maternity was acquired by Reitmans in 2002 and is Canada’s largest specialty retailer of |
|- 76 stores |maternity clothing. Thyme Maternity sells clothing and accessories that are designed to meet an |
|- 25-40 |expectant mother’s entire fashion needs including her career, casual, lingerie, special occasion |
|- 2.200 sq. ft. |and nursing apparel needs. |
|Cassis (2006) |Cassis constitutes the Company’s newest banner and consists of mall-based stores that offer |
|- 19 stores |contemporary styles for the mature woman with a youthful mindset. |
|- 45-60 | |
|- 3,700 sq. ft. | |
A Model of Reitmans’ Spacial Coverage
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It can be seen fro the above chart that Reitmans has a relatively strong exposure on plus-sized apparel in both trendy and conservative clothing, and across age groups.
Reitmans’ latest brand is Cassis, which plugged a hole that its current Reitmans banner does not capture (trendy clothing for mature women). Areas where Reitmans currently lacks a strong brand presence (and where it likely will utilize preemption strategies in the future) are plus-sized trendy clothing for young consumers (not adequately covered by its Additional Elle or RW&Co. banners) or trendy clothing. Though Reitmans has a presence in younger clothing through RW & Co. and Smartset, these brands are not strong
competitors.
The Rise and Fall of Canadian Department Stores
The Canadian Apparel Market
During the post-war years, Canada’s apparel industry was largely dominated by two department store operators, the Hudson’s Bay Company (HBC) and Eaton’s. Both firms had over 100 years of operating history (HBC actually had a 300 year operating history and was the oldest firm in Canada), were located in every town in the country, had extensive catalogue operations and were national icons. Furthermore, HBC and Eatons were major landowners in the largest metropolitan cities in Canada and also received generous anchor tenant inducements in every new mall developed in the country. In fact, Eaton’s department store format was such a cultural icon that in 1905, the Canadian newspaper the Globe wrote: “There is hardly a name in Canada, with the possible exception of the Prime Minister, so well known to the people at large as that of Mr. Timothy Eaton.”. Around the time that Reitmans began its gradual expansion in the late 1970’s, Sears Canada launched its operations and catalogue business in Ontario, and Eaton’s opened its flagship shopping mall, the Eaton’s Centre, in the heart of downtown Toronto; to this day, the Eaton’s Center is the highest traffic mall in all of Canada.
The department store oligopoly was eventually broken following Wal-Mart’s entry into the Canadian retail market in the 1990’s and the subsequent rise of numerous big-box specialty retailers that cannibalized market share from the department stores in everything from consumer electronics (Best Buy / Futureshop), to furniture (Leons / Brick), to bedroom (Bed Bath & Beyond / Sleep Country) and apparel (Reitmans / Gap). In fact, HBC was acquired by Lord & Taylor in 2008, and Eaton’s was acquired by Sears in 1999. Both produced years of dismal results following the entry of the far more efficient US retailers into the Canadian market and the rise of specialty retailers in most of their segments.
Was Reitmans a Judo Entrant?
I believe specialty retailers such as Reitmans essentially entered the market as Judo entrants. Though Wal-Mart may also be considered a judo entrant, I would argue they fill a slightly different segment of the market than the “impulse” mall shopper, and at a far lower price level. By taking the incumbent department stores’ position as given, I believe specialty retailers such as Reitmans were able to flanking the department stores with slightly lower priced staple apparel, thereby forcing the department stores into a pricing dilemma; either to accommodate, or risk having to lower the price across their entire apparel line to match, which is difficult to do given it is widely known and acknowledged that apparel is the largest contributor to profits for the department stores. Since the department stores were loathe to reduce profits on apparel, they likely accommodated the specialty retailers in the youth segment and lower-priced mature women’s apparel (where Reitmans now dominates).
Illustration of Spatial Entry
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Though the incumbent department stores likely enjoyed a sizable real estate / rental cost advantage through decades of real estate ownership and tenant inducements in new malls (in the case of Eaton’s, owning a mall), I believe their threat of a price war would not be credible, and that Reitmans could see this.
The reason is that the incumbent firms’ “sunk cost” in real estate expenses is not a sunk cost specifically for apparel. If the apparel segment entered into a price war, the incumbent department stores could simply allocate their floor space to less competitive segments, whereas Reitmans, as a pure-play specialty women’s apparel retailer, could not.
Thus, I believe Reitmans forced a pricing dilemma by entering malls and competing directly with incumbent department stores in a niche segment in the low to moderate priced women’s apparel market. Reitmans knew that the incumbent’s threat of a price war was not credible due to (i) the price dilemma of lowering prices across their entire higher value apparel offering (particularly the highly profitable cocktail dresses and fashion apparel) which represented a very large portion of their total profits, and (ii) no true sunk costs to make their threat credible.
Judo entry requires lower costs in order to be successful. I believe Reitmans likely entered with a lower cost basis than the incumbents. Reitmans, like Inditex Inc., Gap Inc. and H&M (the three largest apparel retailers in the world, in order) is a vertically integrated retailer that designs, produces and sells all of its own clothing. These vertically integrated retailers have a far lower cost structure than the department stores that acquire branded label clothing (from companies like VFC, Calvin Klein, etc.,) and charge a markup.
|Reitmans Has Higher Inventory Turnover… |…And Higher Profit Margins, than Incumbents |
|[pic] |[pic] |
The data above shows that a price war may have erupted between Reitmans and Sears for several years prior to 1997, but shows that eventually, Sears accommodated the judo entrant.
Unable to match the lower cost structure of vertically integrated retailers, the department stores had to accommodate the judo entrants and saw their market positions eroded.
Eaton’s specifically was flanked by both Sears and HBC – when it attempted to move upscale, customers were simply not willing to pay for a high-priced department store they had known as being an affordable family destination for over 100 years.
Further Evidence of Specialty Retailers Capturing Share from Incumbents
Data on department store sales are difficult to acquire, particularly before 2000, however an older Trendex report (the leading retail consultancy service) confirms the continued and steady decline of the department stores in the apparel market. Specialty stores such as Reitmans have been capturing market share for a very long time. It should be noted that the market share loss was not to discount stores such as Wal-Mart; rather, the market share is being cannibalized by specialty stores, likely high-end fashion boutiques such as Holt Renfrew and low-end apparel firms such as Reitmans.
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Therefore, I believe Reitmans and other specialty apparel retailers utilized judo entry to force incumbent department stores into a price dilemma. Since the incumbent retailers did not pose a credible price threat, and the judo entrants had a lower cost structure, the incumbents eventually decided to accommodate, evidenced by the eventual recovery of profit margins at both Sears and Reitmans following what appears to be a large price war in the early-to-mid 1990’s.
A quick channel check at most department store chains confirms this thesis. HBC and Sears largely focus their efforts on low service (you’d be hard pressed to find an employee to provide assistance), high volume sales of mid-level branded apparel (such as Calvin Klein, Nautica, etc.), accommodating vertically integrated specialty retailers in the lower priced segments.
Unprecedented Market Share
According to Trendex North America (as of 2007), Reitmans has an 11% share of the women’s apparel market and a 25% share of the plus-sized market. This would make Reitmans one of the largest women’s apparel retailers in the country, likely behind Wal-Mart and Sears, and would almost certainly make Reitmans the largest plus-size retailer in the country. This level of market concentration, particularly in plus-sized clothing, is highly unusual for mature markets.
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Comparison to the US Market
According to NPD group, the US apparel market in 2007 can be segmented as follows:
|Total Apparel |$190 billion |
|Women's Apparel |$102 billion (53% of total) |
|Plus-Sized Women’s Apparel |$26 billion* (14% of total, 25% of women’s) |
| |(assuming same proportion of total apparel retail as in |
| |Canada, as estimated by Trendex) |
The largest specialty retailer in the United States is Gap Inc. reported 2007 revenue of $16 billion globally, implying a far lower share of women’s apparel than Reitmans maintains in Canada. There is certainly no US retailer with anywhere near a 25% share of the US$26 billion women’s plus-sized apparel market. I would argue that the figures clearly indicate that Reitmans has maintained greater market share in its niche of women’s apparel, and particularly in mature women’s apparel (generally plus sized), than any other retailer in North America.
Update Since Recession Post 2007
I believe since the above report was issued, Reitmans has once again increased its already sizable market share. The above noted market share figures are prior to the recession that began in early 2008. It should be noted that Reitmans’ same-store-sales declines were approximately -5% in 2008, which far outperformed comparable sales at US women’s apparel retailers such as J. Crew, Talbots and Dress Barn, as well as the last incumbent department store, Sears Canada; many of these competitors experienced negative same-store-sales-growth of -10% or worse.
How Did Reitmans Manage to Gain Such a Large Market Share? Why Don’t US Competitors Follow a Similar Strategy?
My thesis on why Reitmans managed to capture such a large share in women’s apparel is that in addition to being a judo entrant (along with thousands of small specialty retailers), Reitmans’ large sunk cost investments in distribution and mall real estate, combined with its advertising expenditure, allows the firm to maintain a low acquisition cost for plus-sized female shoppers and essentially preempts the entry of a new rivals. Such a strategy implicitly requires a first-mover advantage as a Stackelberg leader; the reason why I believe US firms did not follow such a strategy is simply a function of the US having a far more competitive retail environment relative to the flat-footed domestic Canadian retailers.
Clustering in Malls
As we discussed in our class, companies selling products with product differentiation will locate near one another, often flanking the incumbent in order to create demand effects and limit price competition. An equilibrium will be reached as competitors divide the market according to customer segmentation while avoiding adverse price competition. This can be seen in many industries, whether looking at casinos in Las Vegas (all located on the strip, providing marginally differentiated products), or restaurants clustered in a cafeteria (all provide quick-service food serving “impulse” customers, segmented by customer taste on that particular day).
Many department stores are located in malls where its competitors flank the incumbent with marginally differentiated products in order to create demand effects through providing a very wide selection. For the women’s apparel shopper that is overly concerned with price, that individual may choose to shop at a discount retailer such as TJ Maxx (Winners in Canada) or Wal-Mart, which tend to locate in power centers and off-mall locations. However, for those looking to enjoy a wide selection, Reitmans takes full advantage of the mall ecosystem.
Sunk Costs and the Expansion of Brand Portfolio
In the 1990’s, Reitmans invested heavily in expanding its distribution capabilities. The firm effectively played the role of Stackelberg leader by invested tens of millions of dollars in its distribution center in Montreal, which at one time was operating at far less than 50% capacity. Though Reitmans successfully outmaneuvered incumbent department stores through its cost advantages as a vertically integrated retailer, it did not have an advantage over department stores, or other specialty retailers, in real estate costs.
In order to take advantage of its Stackelberg leader position, Reitmans began to enter adjacent product segments through the launch and expansion of its Smart Set brand, and then its plus-sized brand, Penningtons. Though Reitmans was starting to gain market share and utilize economies of scale, other vertically integrated retailers such as the Gap (which opened a large distribution center in Toronto) or a variety of other US chains that could have entered Canada (such as Dress Barn, Talbots, etc.). and possibly competed directly with Reitmans.
So what changed? What allowed Reitmans to suddenly catapult into a dominant apparel retailer, particularly in the plus-sized categories, and why has Reitmans continued to maintain its market dominance?
I believe the answer lies in the 2003 acquisition of Shirmax.
The Shirmax Acquisition
Reitmans attempted to enter the plus-sized fashion-forward market several years before 2003. In fact, the Penningtons brand was an attempt by Reitmans to enter Shirmax’s strong-hold in the plus-sized retail market; at the time, Penningtons was underperforming Shirmax’s Additional Elle format.
Upon acquiring Shirmax in 2003, Reitmans was able to consolidate the Additional Elle and Thyme Maternity supply chain into its large distribution center, greatly reducing costs. Furthermore, the Company was now able to acquire mall real estate across 5 separate banners, making Reitmans one of Canada’s largest shopping mall tenants.
Looking back to the chart displayed earlier, the 2003 acquisition of Shirmax was clearly a trigger that allowed Reitmans to solidify itself as a low-cost competitor on women’s apparel, and gave the firm an almost complete spatial product offering in a mall.
|Reitmans Has Higher Inventory Turnover… |…And Higher Profit Margins, than Incumbents |
|[pic] |[pic] |
Completing the Spatial Product Offering and Creating Credible Spatial Preemption
The Shirmax acquisition appears to have allowed Reitmans to gain sufficient scale that it can now use spatial preemption, utilizing its position as Stackelberg leader through its large distribution sunk costs and lower mall rents to provide products that meet the entire gambit of ladies apparel needs, ensuring that competitors do not enter in direct competition. This is similar to the strategy employed by cereal makers such as Kellogg and General Mills where they utilized their existing infrastructure and advertising to achieve spatial preemption from almost any angle in their specific market niches.
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By clustering all of its stores in a single mall or power-center and investing heavily in advertising (particularly on its flagship Reitmans banner), Reitmans has very low customer acquisition costs across a wide spectrum of female age groups, body sizes and even income levels. The firm can scale its distribution platform across the entire customer segmentation. By acquiring so much mall real estate, Reitmans also manages to attain tenant inducements which greatly reduce their real estate acquisition costs. Furthermore, Reitmans is now able to preempt entry into mall-based stores by requiring tenant non-compete clauses (for example, Thyme Maternity requires exclusivity over maternity clothing retail banners in shopping malls).
Reitmans has Lowest Real Estate Efficiency: 2007 RBC Capital Markets Research Report
It can be seen above that Reitmans remains highly profitable despite having one of the lowest real estate efficiency levels in a shopping malls amongst specialty retailers. This would only be possible if Reitmans was receiving equivalent to anchor tenant rents, which I believe to be the case.
When combining all the aforementioned factors with the decades of merchandising experience and brand name that Reitmans has developed, I believe Reitmans has captured a sufficient cost advantage and branding advantage that is necessary for sustainable special preemption.
So, Why Don’t US Retailers Do the Same Thing?
So the success of Reitmans’ special preemption strategy begs the question, why aren’t most retailers following a similar strategy?
Looking at the retail industry, I would argue many in fact do. Companies such as Wal-Mart, Target and TJX have large apparel segments, and provide a wide assortment of products within a given price range. In this case, the spatial preemption is in the form of types of products (dresses / jeans, petite size / plus size) at a given price point (low to moderate). These firms cater to a specific type of shopper.
On the other hand, competitors such as the Gap have utilized spatial competition in malls where they often sell products through their Old Navy brand, the Gap and Banana Republic; utilizing their distribution network and scale economies to make a credible spatial preemption. Unfortunately, the Gap’s cost advantage was circumvented by the new design techniques of Inditex, which recently overtook the Gap as the world’s largest retail conglomerate. When I reviewed a research analyst’s analysis of Inditex’s strategy, it appeared to be very similar to the Judo techniques utilized by Reitmans when it competed against the incumbent department stores – Inditex utilizes judo economics to put its flagship Zara brand in a market, and then acquires local real estate to create economies of scale and a cost advantage to preempt rivals:
“In simple terms, it follows the same 'oil stain' pattern when moving into a new market. This involves opening one 'insignia' store aimed at building up its name in a new location, before setting up smaller shops of different brands to reach a certain density of outlets that allows it to create economies of scale and boost profit margins.
For a company which spends very little on advertising, its shops have always been its principal marketing tool, so many are purpose-built to look like fashion boutiques.
The key to Inditex's brand diversification lies in the group's vertical integration. Almost all the phases of developing and selling a new product are carried out in house — from design and production to logistics and sales.”
My argument for why US retailers may not have achieved a similar level of concentration as Canada is based on my assumption that the US, being an older country that is more densely populated, has simply had far too many competitors for one incumbent to adequately preempt. As a result, the retail selection has generally been fragmented. It is a point of note that the largest retailers in Canada are actually US firms (Wal-Mart, Sears, the Gap, Abercrombie & Fitch, Guess, etc.). Incumbent Canadian firms have simply historically been quite conservative and slow moving. It should be noted that the world’s largest retailers, Inditex, H&M and Gap Inc, are all vertically integrated apparel retailers that utilize a spatial preemption technique similar to the one employed by Reitmans. The fact that these firms went on to become global powerhouses, despite the fact that Reitmans was in business and pursuing this strategy long before they did, speaks to the conservative and low-risk-taking culture in Canada, a country that rarely produces global powerhouses.
In Conclusion
I have researched the retail market for years, and could think of no global precedent for Reitmans (Canada) Limited’s success in managing to not only capture, but maintain, such a large market dominance in what has always been an industry plagued with very low entry costs and diverse customer tastes, which would imply very high fragmentation.
I believe the lessons taught in Management 711 may explain, to an extent, the factors that have allowed the Reitmans phenomenon to exist. My thesis is that Reitmans utilized Judo Economics to enter the mall-based women’s apparel market against the incumbent department stores, and then used Stackelberg leadership in order to gain additional market share via low customer acquisition costs, and finally, has used spatial preemption techniques in order to preempt the entry of new rivals. I believe Reitmans can maintain a credible spatial preemption so long as it can maintain its cost advantage over its rivals.
Appendix: Reitmans Competitors (Chain Stores)
Source: RBC Capital Markets 2007 Research Report
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Appendix: Reitmans Competitors (Department Stores)
Source: RBC Capital Markets 2007 Research Report
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Appendix: Reitmans Competitors (Specialty Apparel Retailers)
Source: RBC Capital Markets 2007 Research Report
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Note that many of Reitmans’ competitors are now attempting to mimic .the Company’s strategy
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Appendix: Non-Credible Price Threats
Reitmans preemption works if the firm has a cost advantage – if Reitmans loses this cost advantage, it may have to resort to credible price threats, possibly from large sunk costs, or excess capacity. Reitmans has neither.
One thing that would make Reitmans preemption a credible threat would be large sunk costs. However, the reality is that Reitmans likely does not have a credible sunk cost given that its inventory investment in a store can be distributed to other locations in its large store network and the firm appears to have negotiated reasonable lease break-costs. Thus, if an entrant did decide to enter the market, Reitmans may decide to accommodate.
With regards to capacity – Reitmans’ flagship Montreal distribution centre currently has capacity to supply approximately 1,100 stores. As it stands now, Reitmans is very close to reaching its maximum store penetration in the Canadian market. The firm has little excess capacity and cannot enter into a volume-based price war.