So soon after the demise of Sears Canada and Target Canada, Hudson’s Bay Co., last of the traditional Canadian department store chains, appears to be in the kind of trouble from which most enterprises don’t recover.
HBC shares have dropped about 60 per cent since 2015. The firm has posted losses of $938 million in the past six quarters. Desperate for cash, HBC has been attempting Hail Mary passes with the sale of crown jewels among its real estate assets.
Read more: Sears Canada
In June, HBC laid off 2,000 employees. It is struggling to make a success of an ill-advised European expansion, and has repeatedly shuffled its top managers.
And a U.S. activist investor with a 4.8 per cent stake in HBC is threatening a proxy war to install directors on HBC’s board who will break up the 347-year-old company. That outcome actually seems palatable compared to the HBC chaos at hand.
But HBC needn’t be yet another story of a venerable retailer’s disappearance, done in by the online onslaught led by Amazon.com and by financier owners unskilled in retailing.
HBC has a future – a promising one – as a slimmed-down, focused retailer catering to a luxury and upper-middle class clientele. A reinvented HBC that takes after France’s Galerie Lafayette or Britain’s Harrods and Selfridges would likely work in Canada.
How did retailers get into this situation?
For decades, financiers with no retail experience have been buying up ailing department store chains, loading them up with the debt that financed their acquisition. And they’ve run the stores as a mere sideline to their hope of cashing in on the retailers’ undervalued real estate.
That model killed Sears Canada earlier this year, and is likely to destroy its erstwhile U.S. parent, Chicago’s Sears Holdings. That model is also failing Macy’s, Dallas-based Neiman Marcus Group and HBC.
Those ailing firms are land rich but cash poor. With shopping malls on the wane, buyers are scarce for mall-located department stores. Neither has there been an abundance of buyers for downtown dowager emporia noted for vast selling space bereft of shoppers.
In the meantime, running those stores requires a fearsome amount of cash. In order to boost cash flow, the investor syndicate headed by U.S. financier Richard A. Baker that gained control of HBC in 2008, just two years after first dipping its toes in retail by purchasing Lord & Taylor, has fallen back on the expedient of buying even more department store chains. That has indeed brought more cash flow, but also more debt and higher total operating expense.
As any Hudson’s Bay shopper knows, the “retail experience” at what used to be called The Bay has not noticeably improved. Even so, Baker & Co. have moved on, snapping up Saks; Germany’s biggest department-store retailer, Galeria Kaufhof, and its Belgian subsidiary, Galeria Inno; and luxury online retailer Gilt Groupe.
HBC is now a congeries of 10 chains operating more than 460 stores on two continents. None of those 10 chains are first in class. HBC management is spread too thin across chains that serve very different clienteles.
One proof is Kaufhof, an albatross almost since its acquisition. Kaufhof’s same-store sales have fallen since that ill-fated $4.1-billion acquisition just two years ago. Yet Baker trapped himself: Kaufhof may be a sinkhole, but it accounts for about 30 per cent of total HBC cash flow.
Baker has tried unsuccessfully this year to merge with the troubled Macy’s or the debt-laden Neiman Marcus – a doubling-down on a dubious business model. That same thinking has Baker expanding Hudson’s Bay and Saks Off-Fifth into Europe. But those chains are faring poorly at home. HBC’s Saks Off-Fifth, whose same-store sales also have declined, and its Home Outfitters chain are each outclassed in Canada, by TJX Cos.’ Marshalls and HomeSense, respectively.
To be fair, Baker’s team has committed, if a bit late, to a campaign to streamline back-office costs by $350 million across HBC. And HBC now generates an impressive 20 per cent or so of revenues from online sales.
But that’s hardly enough.
Put it this way: With just four stores in three British cities, the Selfridges division of Selfridge Group Ltd. posted record sales of $2.7 billion last year. By contrast, HBC’s 460-plus stores generated total 2016 sales of only $14.5 billion. You do the math. Against HBC’s 2017 loss of $516 million, the Selfridges chain posted a record profit of $301 million.
The landmark Harrods and Galeries Lafayette flagships are “destination” stores that thrive with their limited number of stores and acute focus on a single type of client, the upmarket shopper.
Selfridges Group, also operating on that successful model, is owned by the Toronto couple Hilary and Galen Weston, the third-generation merchant who also controls Loblaw and Shoppers Drug Mart.
Selfridges Group has just four department-store chains, with only 27 stores in total. They are Selfridges (U.K.), Brown Thomas (Ireland), Holt Renfrew (Canada) and de Bijenkorf (Netherlands).
As the entertainment world shifts to “event” programming, Harrods, Galeries Lafayette and Selfridge Group stores are already masters of “event retailing” that draws people into its stores or encourages them to linger.
Holt Renfrew mounts museum-quality exhibits of unique goods sourced from the remotest parts of the world. Later this month, de Bijenkorf will host an in-store concert by mezzo-soprano Lotte Bovi, followed by a spectacular light show outside the store. In a 10-day stint at Brown Thomas’ Dublin flagship, fashionista Maria Tash has been administering body piercings of “dainty diamond jewelry in unusual places.”
Given the social-media tools by which shoppers can bypass traditional stores, “Retailers must identify which in-store services and experience-led departments will draw in customers and increase ‘dwell time’,” U.K. retail analyst Honor Strachan told the U.K. journal Business of Fashion last month in explaining Selfridges’ success.
Richard Baker and his crew have had nine years to make a success of HBC. A new HBC owner would accept the $4.5-billion offer for Kaufhof, and leverage the estimated $6.4-billion value of HBC’s real estate to finance a makeover of HBC into a Harrods- or Selfridges-like Mecca.
Shedding the nine non-Hudson’s Bay chains would provide still more financing. And as the sole survivor among traditional Canadian department stores, Hudson’s Bay would capture at least some of the sales earlier directed to Sears Canada and Target Canada.
What HBC needs is a proven turnaround CEO with a lot of money and a long track record of success in retail. And to think Galen Weston, who fits that description, came close to buying HBC back in 1979. A shame he was outbid for the tarnished prize.
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