This is a tale of two retailers: Nutrition House Canada Inc. and Fonelab.

It’s neither the best nor the worst of times, but dramatically changing times for smaller retailers. They are having a tough time competing for space in Canada’s top shopping malls.

Rents in premium malls have soared. Competition for space is high. Some retailers have been pushed out altogether by international fashion chains and upscale outlets, along with other high-margin tenants such as cellphone service providers that can pay the higher rents. Malls have become skewed to the tastes of younger women (or at least their tastes as perceived by big retailers).

“The H&Ms, the Forever 21s, they come in and they’ll take 10,000, 15,000 square feet or so. They’ll take huge spaces,” said Wayne Parent, president of shopping-mall stalwart Nutrition House, a vitamin and health supplement chain. “In order to get that space, they may have to take out 10 retailers. And then those 10 retailers are all vying for a 1,000-square-foot space, which becomes challenging.”

Nutrition House has 63 outlets, mostly in malls, and it had two in Toronto’s Eaton Centre, on the north and south ends.

Yet when the lease came up for renewal for the south-end store, which has been there since 1983, the landlords didn’t renew. The space is now occupied by Teavana, the Starbucks-owned tea chain, Mr. Parent said, noting that when rental contracts come up for renewal, Nutrition House has often found itself forced to downsize or look elsewhere, with bigger or higher-margin chains taking their place.

“If the rent’s too high and you can’t make money, what’s the point?” he said.

“We pay on a per-square-foot basis triple or more [at Eaton Centre] what we pay at other shopping centres,” said franchise consultant Andy Goodman, who works with Nutrition House.

This can make the alternative of opening neighbourhood stores alongside a strip of everyday essentials such as a drug store or grocery chain seem appealing. Mr. Parent emphasized that Nutrition House isn’t leaving malls on a large scale, but the company has begun to look elsewhere, such as a store it opened in Toronto’s densely urban Liberty Village neighbourhood.

“That store ended up being a huge home run for us, because the rent was 40 per cent of what we pay in shopping centres, yet the sales performance there was almost the same [as mall outlets],” Mr. Goodman said.

Fonelab, however, is a young, small business taking a different tack. It isn’t second-guessing a mall strategy but is aiming squarely at opening more outlets in top-tier malls. The company offers repair services for cellphones, often while you wait.

“We had a bit of a choice to make,” said co-owner Doug Davis. The company so far has only two outlets, in Scarborough Town Centre and Upper Canada Mall, in the Toronto region. It is opening a third in November at Toronto’s Fairview Mall.

“The alternative is to open up on a street front and get a bigger space,” but “the tradeoff is that if we go somewhere [outside the malls], even an industrial area where a lot of the repair shops are, great, we’ll save on rent, but then we’ll really have to advertise.”

Mall rents are high, but Fonelab is counting on the high customer traffic. It also fits into the current fashion and lifestyle focus. The onus has been on maximizing the malls as economic assets, industry watchers say, so the focus turned to upscale fashion rather than the older strategy of offering a wider, one-stop-shopping merchandise mix.

And upscale and trendy fashion retailers began to be seen as essential, as U.S. and international outlets such as H&M poured into Canada.

There has been a stronger emphasis on productivity, measured by a store’s gross retail sales over occupancy costs. It is a way to compare a store’s performance against others, said Dianne Lemm, a partner in the Toronto office of Northwest Atlantic Canada, which represents retail companies looking for spaces in malls. “They want to make sure that you’re not going to decrease the value of the mall by performing less than the averages,” Ms. Lemm said.

Also, “some of the landlords were worried that they would lose market share if they didn’t have that fashion brand in the centre,” Ms. Lemm said. “There was so much demand on our enclosed mall real estate over the last decade that it drove rents up significantly,” she said.

But the emphasis on fashion may now be easing, she said. She recounted a meeting with an executive at one of the major mall landlords. The executive said that his company’s success was its fashion malls. But he added in the next breath that that may wind up being a problem. The merchandise mix was too narrow.

Yet this may be changing. It’s not solely about who can pay the highest rents, but on finding a retailer to fill a niche with an appealing new concept.

“If you’re a retailer that’s adding an interesting niche, and they feel that it adds to the experience of the centre, they will compromise for some retailers and do a better deal,” she said. “They still want retailers that pay top dollar. But they are also looking for retailers that may be new, innovative, experiential, offering new niches.”

The question is whether a concept such as Fonelab’s represents a renewed broadening of the merchandise mix or whether it is a new way of tapping into the fashion strategy. Is it a subtle return of the one-stop, everything-you-need mall, which can be more accommodating to small retailers, or is it still about the fashion and its accoutrements?

Ms. Lemm suggested the former. “I actually believe that merchandise mix is starting to become sexy again.”

The Globe and Mail
Published Tuesday, Nov. 17, 2015 5:00AM EST
Last updated Wednesday, Nov. 11, 2015 12:27PM EST