SARS, mad-cow disease, forest fires and the mother of all blackouts weren’t enough to upset Canada’s retail teacart in 2003. Despite the toll these crises took on the nation’s morale, commodity sales at large retailers in August 2003 were up by 3.6% over the same period in 2002. While this isn’t a jaw-dropping increase, it indicates that the Canadian retail economy is chugging along at a solid pace.

In 2002, Canadians spent more than US$228 billion across all product categories, dropping around US$2.1 billion on kids clothing and accessories and another US$760 million or so on toys. ACNeilsen Canada’s Toy Track noted a 16% increase in year-to-date toy sales in September 2003 over last year, but results from November and December will really tell the tale. Following the American pattern, those two months account for about 52% of annual toy sales in Canada. And as in the U.S., the ‘nag factor’ sways the majority of toy-buying decisions made by Canadian parents.

So where are Canadians picking up goods for junior? U.S. mega chain Wal-Mart made its appearance on the country’s retail scene in 1994 and has since opened 213 stores and has established a Canandian corporate presence – complete with separate buying programs – to currently stand as one of the top-two mass-market retailers in Canada. (Its presence will be further bolstered this year by the roll-out of several Sam’s Club members-only discount stores across the country.) Zellers, a 314-store chain owned by Canadian retail conglomerate Hudson Bay Company (HBC), is Wal-Mart’s key competitor in the kids sector.

As far as apparel goes, about 50% of kids clothing sales take place at Wal-Mart and Zellers, with 30% going to dominant department store players U.S-based Sears and The Bay (also owned by HBC). Specialty retailers and kid spin-off stores of larger chains, like Gap Kids, account for the other 20%.

Tony Bacile, president of Montreal-based kids apparel manufacturer Romeo & Juliette, says the Canadian clothing market is stable, with an annual growth rate landing between 1% and 2%. And given the pressure that the presence of Wal-Mart puts on market price point, sales probably won’t spike out of that incremental growth rate anytime soon. ‘People are not buying fewer children’s clothes; it’s just that they’re spending less and less on them, which means total dollars aren’t going up,’ says Bacile.

Meanwhile on the toy front, distribution channels are narrow – even more so than in the U.S. While American manufacturers can at least do a moderate business at specialty retail alone, the Canadian market is too small for that.

Wal-Mart, Zellers and Toys ‘R’ Us Canada own kids toy sales, with Canadian toy manufacturers estimating that 75% to 80% of all toys sold in Canada move through these three chains. The rest are sold through grocery, drug and specialty toy retailers. (There are between 600 and 800 specialty outlets in Canada.)

For toy companies selling into Canada, striking out with buyers at one of the three giants may have dire consequences. ‘If you can’t sell one of [the three] your product, it becomes unfeasible to advertise it,’ says Chris Beardall, VP of sales and trade marketing at Toronto-based Spin Master Toys. No advertising means lower kid awareness, which further hampers sales.

But Canadian grocery chain Loblaws and its wholly owned subsidiary WestFair have been gearing up to pose a viable alternative for kids product manufacturers. Loblaws flies several banners across Canada, including Loblaw’s Superstores in Ontario, the Great Canadian Superstore in the West, and Provigo in Quebec. As the chain has shifted its strategy to focus on building super-sized, mall-in-a-box stores over the past few years, it has also started aggressively selling kids clothes and toys.

Canadian retail analyst John Williams, a senior partner at Toronto’s JC Williams Group, explains why. Mom is the big-volume purchaser of groceries, and she most likely has kids in tow on these excursions. ‘She’s also a buyer of apparel and toys. So why not buy them in these stores? The strategy is working.’

When it comes to merchandising, Canada’s mass-market retailers tend to be a little conservative by necessity. Toy shelf space is limited, and Zellers general merchandising manager Keith Seaboyer says there isn’t a lot of room for large toy displays and special fixtures. Spin Master’s Beardall adds that Wal-Mart, true to its motto, sells on a no-frills, low-price-everyday platform.

That said, LeapFrog Canada’s VP of sales and marketing Jeff Hurst and Mattel Canada’s VP of marketing Andy Alderman say the big three Canadian toy retailers are starting to warm up to the concept of in-store demos and larger, branded displays.

This past fall, LeapFrog introduced Learning Centers into all three chains. The displays contain a full range of LeapFrog product, arranged according to user age and including demonstrator LeapPads. Hurst says sales of educational toys are growing in Canada, but adds that it’s too early to determine if the Learning Centers are what’s boosting sell-through rates. But feedback from the retailers has been positive, with many commenting that parents appreciate being able to quickly determine what product suits the age of their kids.

Mattel Canada is applying the same ‘world of’ concept to retail displays across all of its business units. Alderman says Fisher-Price’s Little People displays helped spur triple-digit sales increases at Canadian retailers in 2002. And he has high hopes for the in-store demo booth for girls craft toy Ello, which has traveled to the big three’s stores throughout 2003. He thinks Canadian toy retailers will open up space for in-store demos and bigger product displays because at the right time of year, these events can help retailers move 50% more product.