Why it’s a Bad Idea for Le Chateau to Enter the US Market: Expert

If Canadian apparel retailer Le Chateau has any thoughts of expanding into the American market, an international retail expert has some simple advice for the company: Don’t.

Randy Harris, president and owner of Trendex North America, a marketing research and consulting firm, said Le Chateau is really one of the very first apparel chains in Canada.

“It was founded in 1959 and while other companies, retailers, have come and gone, they’ve managed to survive. The problem that they had is they were always viewed as selling disco disposable type of clothing and they recognized that when H&M came into the market, and Zara, that they had to change their model. They just could not compete directly, if you will, with H&M,” said Harris.

“So they did the logical thing and they went upscale. And they improved their merchandise. They launched an ecommerce site and they focused at the same time on increasing their profitability by closing their under-performing stores. Those are the three or four things they have been doing the last couple of years. So they closed a lot of stores – the majority of which have been their outlet stores. And it seems as if the whole process of closing non-profitable stores is pretty much coming to an end. They seem to have pretty much stabilized on their store count.

“The inherent problem though is they have not been able to increase their profitability. So even though they’ve closed under-performing stores and they’ve upgraded the quality of their merchandise, their comp store sales have not increased for over a five-year period. Nor has their profitability over the last two or three years. The problem that the company has today I believe is that it is under-capitalized in the sense that it has not spent the money on upgrading its stores to match the merchandise.”

Harris said the retailer started out doing that but that process has come to a stop in terms of really doing a significant number of renovations.

“There has become a disconnect between the merchandise in the store which is nice and has been upgraded and the store itself,” he said.

Harris said the company has also not been able to undertake a marketing campaign to really get their message out to consumers that the retailer is something new – that it has improved what it’s doing.

The one positive, he said, is that Le Chateau’s ecommerce platform has proven to be successful.

In his August newsletter Canadian Apparel Insights, Harris wrote that there are a number of reasons for Le Chateau to forsake thoughts of expansion south of the border including:

• Le Chateau’s own sales history – In just the period 2014-2018, Le Chateau’s sales fell in large part because it closed 82 stores. But, it should also be noted that only twice during the period did the retailer report an increase in its annual comp store sales;

• Le Chateau’s financial situation – In 2018 Le Chateau lost C$23.8 million and during the period 2014-2018 the retailer lost C$143.6 million. If Le Chateau has any extra cash it could better be spent improving its position in the Canadian market; and

• History of Canadian retailers in the U.S. market.

“The historical track record for Canadian apparel retailers and brands has been terrible with the exception of those retailers recently who offer a higher-priced differentiated product. One only has to look at Joe Fresh’s U.S. initiative, including operating its own U.S. stores and opening shop-in-shops in JC Penney as an example of offering a brand that competed with international fast-fashion retailers and had zero awareness in the U.S.market,” wrote Harris in the newsletter.

“The U.S. niche Le Chateau would be targeting, is shrinking. Sales in U.S. department stores have gone down every year this decade. This leaves discount stores and off-price stores as possible target channels for Le Chateau branded products. Both Walmart and Target already have strong private label programs and would certainly not start carrying a brand whose recognition is almost nil in the United States. From this publication’s perspective, Le Chateau is looking to jumpstart its performance by going for a “Hail Mary” and as is the case with similar plays, the odds against its success are somewhere between horrible and bad.

“Instead of targeting the U.S. market, this publication would suggest that Le Chateau take the monies it would have spent on developing a U.S. business and consider: Launching a major advertising campaign similar to its very successful 2015 Le Chateau of Montreal brand refreshing initiative; Upgrading more of its stores to ensure that there does not continue to be a disconnect between the merchandise it sells and the store’s environment; and Re-evaluating its loyalty program to differentiate it in a unique way from its direct competitors (e.g. loyalty points equal concert tickets).

Regardless of Le Chateau’s recent track record, it is still a viable retailer, added Harris. Unfortunately, its niche has been the focus of international fast-fashion retailers including H&M. Undercapitalized, Le Chateau is probably doing the best it can, he said.

Editor’s note: La Presse first ran a French language report in early September about Mr. Harris’ opinions on Le Chateau expanding into the US, and Retail Insider reached out to him for the purposes of this English language article.