Reitman’s Spatial Preemption Essay Example

Canada with more than 900 stores throughout the country. The company's objective is to offer clothing for women who are mature and plus-sized at reasonable (low to moderate) prices mainly through mall and power center stores.

Reitmans, operating in Canada, boasts annual sales exceeding C$1 billion and a presence on 929 stores throughout the country across seven banners that target women's apparel. These banners cater towards women aged 18-60, including those who are pregnant and who belong to the plus-sized market. Reitmans prides itself on offering working mothers and young women with fashion items that come at low-to-moderate prices. One aspect where it distinguishes itself is through clustering its various brand formats within the same shopping mall or power center, which effectively grants the company considerable bargaining power over mall owners. This approach also permits it to establish a retail presence across various female age groups, body types, and price levels. Reitmans' marketing campaigns are extensive, especially concerning its flagship banner, "Reitmans," and it exclusively offers its in-house designed merchandise in each of its retail segments.

The Scotia Capital Research Report of 2007 provides a Summary Matrix of Reitmans Brands. The corporation operates a total of seven retail store banners as of April 4, 2009. These banners are located in enclosed shopping malls in central and suburban metropolitan areas and smaller towns in Canada. Reitmans has expanded its product portfolio to compete closely with its core Reitmans banner. The Smart Set banner caters to a slightly younger demographic, while Penningtons offers casual clothing for plus-size women across the age spectrum covered by Reitmans and Smart Set. RW & Co. is another brand in the portfolio.

Reitmans is

Canada's largest ladies apparel specialty chain, catering to women aged 25-45 with regular, plus, and petite sizes. The brand has developed strong consumer relationships and loyalty through advertising strategies. Smart Set focuses on office casual wear while the newer brand, Cassis, offers a trendier clothing lineup for the same age segment. The acquisition of Additional Elle and Thyme Maternity has allowed Reitmans to enter into the plus-sized office wear and maternity wear markets. Reitmans currently operates 371 stores, covering a total of 4,400 sq., and offers affordable fashions "designed for real life."

Smart Set (1972) is a fashion destination for young women in their mid-twenties, with 165 stores spanning over 3,400 sq. ft. All clothing sold is private label under the Reitmans brand and is designed to mix and match for work, after hours, and weekend wear. The brand is newly positioned as a "do-it-yourself fashion toolbox" offering current styles tailored to their target demographic.

Penningtons, established in 1996, is a chain that exclusively carries the Smart Set label. With 163 stores located in strip plazas and power centre locations, Penningtons offers a broad assortment of career, casual, intimate apparel, and accessories for plus-size women of all ages at competitive prices. In addition to this, Penningtons also has a product assortment known as MXM that caters to the trendy, young value-conscious plus-size customer. The store occupies a space of 5,900 sq. ft.

| |RW ; Co. (1999) |RW ; CO. specializes in trendy and high-quality casual wear for young women and men at an affordable price point. With 59 stores across Canada, all clothing bears the RW ; Co. brand. Targeted to customers between the ages of 18-30,

each store spans over 4,300 sq. feet.

Reitmans acquired Addition Elle in 2002. Addition Elle is the top fashion retailer in Canada for plus-size career apparel, with 123 stores offering affordable and contemporary collections for all ages, featuring items such as casual wear, lingerie, and accessories. Stores can be found in malls and occupy spaces of up to 5,800 square feet.

The junior MXM collection can be found in 116 Addition Elle and Thyme Maternity (2002) stores, which are part of the Reitmans retail network operating across Canada. Thyme Maternity, which Reitmans acquired in 2002, boasts 76 stores and is Canada's foremost specialty retailer of apparel for expectant mothers.

Thyme Maternity offers a wide variety of clothing and accessories to meet the fashion needs of expectant mothers. This includes apparel for their career, casual outings, special occasions, and also nursing needs. Cassis, which launched in 2006, is the company's latest brand and features contemporary styles for mature women with a youthful outlook. Cassis stores are located in malls and there are currently 19 locations. The stores range from 2,200 to 3,700 square feet and cater to women between the ages of 45 and 60.

ft. | | A Model of Reitmans’ Spacial Coverage [pic] The chart above shows that Reitmans has a considerable exposure to plus-sized apparel in both trendy and conservative styles, and across different age groups. Cassis, Reitmans' latest brand, addresses the gap in trendy clothing for mature women that its current Reitmans banner does not cover. Reitmans is likely to implement preemption strategies in the future to strengthen its brand presence in areas such as plus-sized trendy clothing for young consumers and trendy clothing, which are

currently not adequately covered by Additional Elle or RW&Co. banners. Even though Reitmans already has a presence in younger clothing through RW & Co., it still needs to improve its presence in this area.

Despite being well-established with extensive catalogues, national presence, and as major landowners in Canada's largest cities, Hudson's Bay Company (HBC) and Eaton's dominated the country's apparel industry following the war. Eaton's, in particular, was considered such a cultural icon that Canadian newspaper, the Globe, noted in 1905 that few names in Canada were as well-known to the people at large as Mr. Eaton's. However, current brands like Smartset do not pose strong competition for these historical Canadian department store operators.

During the late 1970s, the department stores Reitmans, Sears Canada, and Eaton’s experienced growth in different ways. Reitmans expanded gradually while Sears Canada launched its catalogue business and operations in Ontario. Eaton's opened its flagship shopping mall - the Eaton’s Centre - which remains the highest traffic mall in Canada to this day. However, the entry of Walmart into Canada's retail market during the 1990s broke the department store oligopoly. This led to the rise of big-box specialty retailers, cannibalizing market share from department stores across consumer electronics, furniture, bedding, and apparel categories. Notably, Lord & Taylor acquired HBC in 2008, while Sears acquired Eaton's in 1999.

The Canadian market witnessed years of disappointing results as the US retailers entered the market, bringing in more efficiency, and the rise of specialty retailers in most segments. I believe that Reitmans entered the market as a Judo entrant along with other specialty retailers. While Wal-Mart can also be considered one, they cater to a slightly different

market segment and at a lower price level. By assuming the department stores' position, specialty retailers like Reitmans were able to flank them with apparel at slightly lower prices, putting them in a pricing dilemma. This either forced them to accommodate or risk lowering their prices across their entire apparel line. The latter is difficult because apparel is widely acknowledged as the largest contributor to profits for department stores. As a result, the department stores had to likely accommodate the specialty retailers in the youth segment and cheaper mature women's apparel, where Reitmans dominates now.

Despite the advantage in real estate and rental costs held by department stores who have owned property for decades or received incentives for new mall locations (with Eaton's even owning a mall), I believe they would not be able to effectively threaten a price war. This is a point that Reitmans would likely recognize.

Reitmans' entry into the low to moderate priced women’s apparel market in malls caused a pricing dilemma. This is because the incumbent department stores had the advantage of being able to allocate their floor space to less competitive segments if the apparel segment entered into a price war. However, as a pure-play specialty women's apparel retailer, Reitmans could not do this. The lack of true sunk costs meant that the incumbent's threat of a price war was not credible. Additionally, lowering prices across their entire higher value apparel offering, particularly the highly profitable cocktail dresses and fashion apparel, would represent a significant portion of their total profits. Therefore, Reitmans used a Judo entry strategy that required lower costs

to be successful.

It is my opinion that Reitmans started with a lower cost basis than the other retailers. Reitmans, being a vertically integrated retailer along with Inditex Inc. , Gap Inc., and H;M (the top three apparel retailers in the world in terms of size), is responsible for designing, producing, and selling all of its own clothing. Compared to department stores that source branded label clothing (such as from VFC, Calvin Klein, etc.), these vertically integrated retailers have a more economical cost structure.

,) and add a markup. It is evident from the data presented above that there was a price war between Reitmans and Sears for a few years before 1997, but Sears eventually accommodated the judo entrant. The department stores, unable to match the lower cost structure of vertically integrated retailers, had to make room for the judo entrants, resulting in a loss of market share. Eaton's was particularly affected as it faced competition from both Sears and HBC. In its attempt to go upscale, it lost customers who were not willing to pay high prices for a department store that they associated with affordable family shopping for over a century. An older Trendex report also confirms that department stores have been losing ground steadily in the apparel market, although it is difficult to obtain data on their sales before 2000.

Specialty stores, including Reitmans, have been gaining market share, not due to competition from discount stores like Wal-Mart, but rather from other specialty stores such as high-end fashion boutiques like Holt Renfrew and low-end apparel firms like Reitmans. This suggests that Reitmans and other specialty apparel retailers used a judo entry strategy to push

incumbent department stores into a price dilemma. Since the incumbents were not seen as credible price threats and the judo entrants had lower costs, the incumbents eventually accommodated. This is evidenced by the recovery of profit margins at both Sears and Reitmans after what appears to have been a significant price war in the early-to-mid 1990s. [pic]

The proposition that HBC and Sears concentrate on selling mid-level branded clothing with low service and high volume sales, while catering to vertically integrated specialty retailers in the lower priced segments, is supported by a swift survey of most department store chains. It is noteworthy that these stores frequently lack employees available to provide assistance. As of 2007, Trendex North America's research indicates that Reitmans astonishingly enjoys an 11% share of the women's apparel market and an exceptional 25% share of the plus-sized market.

Reitmans is poised to become one of the leading retailers of women's clothing in Canada, second only to Wal-Mart and Sears in size. Furthermore, it is likely that Reitmans will dominate the country's market for plus-size clothing. This is a notable achievement in mature markets, particularly concerning plus-size apparel. [pic] In contrast, according to NPD Group data from 2007, the entire US apparel market was valued at $190 billion with women's apparel accounting for 53% of this figure. Plus-sized women's clothing represented $26 billion or 14% of the total (25% within women's apparel). Assuming similar proportions hold true for total retail sales as in Canada; this indicates that America’s plus-sized women's clothing sector represents about $6.5 billion. Gap Inc., which reported global revenue of $16 billion in 2007, is currently the largest specialty retailer operating within

America but holds significantly less dominance over women’s attire than Reitmans does over Canadian shoppers.

Reitmans has maintained a greater market share than any other retailer in North America, specifically in the niche of women's apparel and mature women's apparel (usually plus sized). Despite a -5% same-store-sales decline in 2008 during the recession, Reitmans outperformed competitors such as J. Crew, Talbots, Dress Barn, and Sears Canada. The reason for Reitmans' success is attributed to its large investments in distribution and mall real estate, along with advertising expenses, resulting in low acquisition costs for plus-sized female shoppers and preventing the entry of new rivals.

Implicitly requiring a first-mover advantage as a Stackelberg leader, the strategy was not followed by US firms due to the US having a more competitive retail environment than flat-footed domestic Canadian retailers. Companies selling product differentiation products tend to locate near one another, flanking the incumbent to create demand effects and limit price competition. An equilibrium is achieved as competitors divide the market according to customer segmentation, avoiding adverse price competition. This is evident in many industries, such as casinos in Las Vegas and restaurants located in cafeterias. Many department stores are situated in malls, where competitors flank the incumbent with marginally differentiated products, providing a wide selection to create demand effects. For shoppers overly concerned with prices, they may choose to shop at discount retailers located at power centers and off-mall locations such as TJ Maxx (Winners in Canada) or Wal-Mart.

Reitmans takes full advantage of the mall ecosystem by offering a wide selection of products. In the 1990’s, the company invested heavily in expanding its distribution capabilities, becoming a Stackelberg leader. Reitmans

invested tens of millions of dollars in its Montreal distribution center that was operating at less than 50% capacity. The company outmaneuvered department stores through its cost advantages as a vertically integrated retailer but did not have an advantage over them in real estate costs. To capitalize on its position, Reitmans launched the Smart Set brand and later expanded into plus-sized products with Penningtons.

Despite Reitmans' initial progress in gaining market share and utilizing economies of scale, competitors such as the Gap and various US chains like Dress Barn and Talbots posed a potential threat to the retailer's success in Canada. However, something changed that allowed Reitmans to become a dominant player in the apparel industry, particularly in the plus-sized category. The key factor behind this success and ongoing market dominance can be attributed to the acquisition of Shirmax in 2003.

Reitmans' acquisition of Shirmax in 2003 allowed them to consolidate their Additional Elle and Thyme Maternity supply chain into a large distribution center and acquire mall real estate across five separate banners, solidifying their place as one of Canada's largest shopping mall tenants. Prior to the acquisition, Reitmans had attempted to enter the plus-sized fashion-forward market with their Penningtons brand, which was underperforming compared to Shirmax's strong hold in the plus-sized retail market.

Looking back at the chart shown earlier, it is evident that the acquisition of Shirmax in 2003 was a significant catalyst that allowed Reitmans to establish itself as a women's apparel low-cost competitor, as well as creating an almost complete spatial product offering within a mall. This has resulted in Reitmans having higher inventory turnover and profit margins than incumbents. The Shirmax acquisition

enabled Reitmans to attain the necessary scale for 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 spectrum of ladies' apparel needs, preventing competitors from entering direct competition. This strategy is similar to that of cereal makers like Kellogg and General Mills, who leverage existing infrastructure and advertising for spatial preemption within their specific market niches. By concentrating all of its stores in one mall or power center and investing heavily in advertising (specifically on its flagship Reitmans banner), Reitmans has achieved very low customer acquisition costs across a broad variety of female age groups, body sizes, and even income levels. The firm can expand its distribution platform across the entire customer segmentation.

Despite having a low real estate efficiency level compared to other specialty retailers in shopping malls, Reitmans maintains its profitability by acquiring a significant amount of mall real estate, allowing them to receive tenant inducements that greatly reduce the acquisition costs. Additionally, Reitmans is now able to prevent other stores from entering the mall by requiring tenant non-compete clauses. For instance, Thyme Maternity has exclusivity over maternity clothing retail banners in shopping malls. The 2007 RBC Capital Markets Research Report indicates that Reitmans has the lowest real estate efficiency level among specialty retailers in shopping malls. However, I believe that Reitmans receives rents equivalent to that of anchor tenants, enabling it to remain profitable. Combining these factors with their decades of merchandising experience and established brand name, Reitmans has acquired a cost and branding advantage that sustains their special preemption.

Reitmans’ successful preemption strategy prompts the question

as to why other US retailers don't employ similar tactics. However, it can be argued that many retailers do in fact use spatial preemption strategies, including Wal-Mart, Target, and TJX, who offer a variety of products within a certain price range to target a specific type of shopper. On the other hand, competitors like the Gap use spatial competition at malls by selling products through multiple brands and utilizing their distribution network to establish a credible preemption.

Inditex's new design techniques allowed it to overtake the Gap as the world's largest retail conglomerate, despite the Gap's cost advantage being ineffective. Inditex's strategy, which resembles Reitmans' Judo techniques used to compete against department stores, involves utilizing judo economics to introduce its flagship Zara brand into a market and then acquiring local real estate to create economies of scale and a cost advantage that preempt rivals. To achieve this, Inditex follows the 'oil stain' pattern by opening one 'insignia' store to establish its name in the new location before setting up smaller shops of different brands to create economies of scale and boost profits. The company spends very little on advertising, relying instead on purpose-built shops designed to look like fashion boutiques as its principal marketing tool.

The reason behind the success of Inditex's brand diversification is their vertical integration. All stages of product development and sales, ranging from design to logistics and sales, are carried out in-house. In contrast to Canada, the United States has a larger population and is an older country, leading to more competition and a fragmented retail selection. This possibly explains why American retailers have not attained the same level of concentration

as their Canadian counterparts. Curiously, major Canadian retailers are actually US-based corporations like Wal-Mart, Sears, Gap, Abercrombie & Fitch, and Guess.

Canada's Reitmans (Canada) Limited has successfully captured and maintained a large market share in the apparel industry, despite historically slow-moving and conservative Canadian firms. This is in contrast to global powerhouses such as Inditex, H&M, and Gap Inc who utilize a similar spatial preemption technique. However, the fact that these companies emerged despite Reitmans pioneering the strategy highlights Canada's culture of low-risk-taking. Despite the challenges of high fragmentation due to diverse customer tastes and low entry costs, Reitmans' success has no global precedent according to extensive retail market research.

My belief is that the lessons taught in Management 711 can partly explain the existence of the Reitmans phenomenon. To enter the mall-based women's apparel market against department store incumbents, Reitmans utilized Judo Economics and then used Stackelberg leadership to gain further market share with low customer acquisition costs. Subsequently, Reitmans employed spatial preemption techniques to prevent new competitors from entering. As long as Reitmans maintains a cost advantage over rivals, it can maintain a credible spatial preemption. The appendix includes competitor information for Reitmans (chain stores, department stores, specialty apparel retailers), with many attempting to emulate company strategy. However, a loss of cost advantage may require Reitmans to utilize credible price threats, possibly due to large sunk costs or excess capacity.

Despite having a large store network, Reitmans lacks a credible sunk cost that could make its preemptive threat potent. While their inventory investment can be transferred to other locations, the company has negotiated reasonable lease break-costs, making it easier for them to accommodate new entrants if

they decide to enter the market.

Reitmans reports that its primary distribution center in Montreal has a capacity to provide products for approximately 1,100 stores. The fashion retail company is currently nearing its maximum level of store penetration in the Canadian market, which means there is not much extra capacity available. Therefore, Reitmans cannot engage in a price war that is based on volume.