Arctorious is unlocked by playing Arcade mode. You can not lose a match and much finish off the 8th opponent with a Devistation (super move) attack.
If done right, after beating the 8th opponent Arctorious will challenge you.
You can make it easier on yourself by going into settings and changing the difficulty to Very Easy and Rounds to 1.
I did it as Adam. He can combo his Forward + Heavy Punch into his Down, Down/Forward, Forward + Throw command grab for a ton of damage. His level 1 Devistation is a big clothesline attack. His level 2 is a grab that does a ton of damage.