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Take off, eh: Nordstrom, Saks in race to win Canadian luxury shoppers 

September 19, 2014, 11:00 AM UTC
Tim Boyle / Getty Images

Nordstrom in Swedish means “Northern current.”

So it is fitting that the upscale department store chain is opening its first international location in oil-rich Calgary on Friday, leading a charge by U.S. retailers looking North for a piece of a hot luxury market: Canada.

Nordstrom’s (JWN) first Canadian store will be followed by five others in all in Vancouver, Ottawa and the Toronto area by spring 2017. The Seattle-based retailer thinks there is room for as many as 10 stores eventually. Nordstrom’s New York-based rival Saks Fifth Avenue is following suit, with a first Canadian store set for 2016, and another six locations possible.

Canada has always been right next to the U.S. in plain sight, with an educated, reasonably affluent population. So why the big Canadian luxury gold rush now?

Because Canadians are narrowing the wealth gap with their American neighbors, incumbent Canadian retailers have been complacent and many U.S. retailers are finding there is little room left to expand at home.

“The luxe consumer has had too little choice for too long,” Antony Karabus, CEO of retail consulting firm HRC Advisory told Fortune. “Luxury in Canada has been chronically understored.”

That has attracted all manner of foreign retailers, from Tiffany & Co (TIF) which has expanded aggressively in Canada in recent years to European luxury brands like Jimmy Choo and Versace which are coming to the Great White North with stand-alone stores.

America’s rich are clearly wealthier than Canada’s: the top 1% of Americans on the income spectrum earns $369,000 year, compared to $191,000 in Canada, according to TD Economics. But Canadians have been narrowing that gap: according to a CBRE report, the growth rate in the number of Canadians earning between $75,000 and $150,000 and between $150,000 and $249,000, i.e. many a Nordstrom shopper, is handily outpacing the U.S. in the same brackets.

Such prospects have proven tantalizing for U.S. retailers looking for new sources of growth beyond their mature market: Nordstrom has largely stopped opening new U.S. department stores, whose comparable sales have been declining, while Saks, owned by Hudson’s Bay Co, has downsized its store base to 39 locations from 55 in just a few years.

All that is making Canada an emerging luxury market, up there with China.

You’re in Canada now

Canada is full of potential for foreign retailers. Yet despite its similarities with the U.S., Canada can be full of booby-traps for American retailers that think they can just waltz into a market where everyone already knows them. Just ask Target (TGT), whose bungled Canadian entry in 2013 has proven to be a $1 billion mistake—and counting—after it opened 124 stores in practically one shot.

Nordstrom, in contrast, is being very deliberate, staggering its store openings six months apart so it can adapt lessons as its expansion progresses. Above all, Nordstrom, which has 117 U.S. department stores, was very careful about choosing the best locations in Canada rather than carpet bomb the country with new stores quickly. (It showed the same caution with Manhattan, waiting for years to find the right spot for its first store there, set to open in 2018.)

For example, in Toronto, Nordstrom is taking over the space in the heart of the downtown shopping district vacated by Sears, just blocks away from the planned Saks Fifth Avenue. Its caution also led Nordstrom to postpone the launch of its Rack discount chain in Canada indefinitely, preferring to make sure it got the department stores expansion right first. (Nordstrom still plans to open Rack stores, which are wildly successful in the U.S., and has said there is potential for 20 of them in Canada.)

Clearly, Nordstrom’s focus on the best locations in Canada is well advised. The 9-store Canadian high-luxury chain Holt Renfrew announced it was closing its store in Ottawa, where Nordstrom will open a store in the best part of town in March, while spending $300 million on overhauling other stores, including one in the Toronto suburb Yorkdale, where Nordstrom will open in 2016.

Nordstrom has a lot riding on a successful entry into Canada: its expects to lose $35 million on its Canadian project this year.

So it is being careful to make sure Canadian customers, who typically travel extensively to the U.S. and know the retailer well, get the same caliber experience as in America, lest they feel short-changed.

“It’s definitely the real Nordstrom we’re bringing to Canada,” said Karen McKibbin, president of Nordstrom Canada division.

Analysts say the single biggest reason Saks and Nordstrom, stand to succeed in Canada are that local retailers, even the high-end ones, have not given customers the best customer experience in the absence of real competition. And higher income Canadians have traveled enough now to know what they’ve been missing.

“They’re setting their sights on excellent customers service in Canada,” said Doug Stephens, president of Retail Prophet Consultants in Toronto, of Nordstrom in particular. “It’s a huge opportunity.”