Where have all the customers gone?

Are department stores going out of fashion in Canada? With the decline of the long-established Hudson’s Bay Company, the belief certainly has some validity, as Alison Arnot finds out

The thick oatmeal-coloured Hudson’s Bay blanket, with its signature broad bands of green, red, yellow and blue, has kept Canadian children warmly snug in bed for generations. Still, few of these blankets were on Canadians’ Christmas wish-lists last year as the financially troubled company that supplies them searched for a way to satisfy shareholders and stay in business.

To say that the Hudson’s Bay Company (HBC) is Canada’s oldest corporation is an understatement. Its history dates back 336 years to when the country’s early explorers traded European goods for fur pelts with native peoples. Britain’s King Charles II chartered the Hudson’s Bay Company to exploit the resources of the Hudson’s Bay area in 1670, five years before he established the Royal Greenwich Observatory. To add a little more perspective, this was the same year minute hands first appeared on watches; two years before the birth of Russian Czar Peter the Great; and four years before the death of poet John Milton.

Today, HBC encompasses more than 500 stores, most under the banners of The Bay (mid-range department stores), Zellers (discount retailers), and Home Outfitters (home decoration). It has nearly 70,000 employees, operations in every Canadian province, and enjoys a third-place ranking among Canadian retailers, according to The Globe and Mail’s Top Companies by Industry for 2005. Unfortunately, HBC has also reported declining sales and losses in recent years, including a C$73m, or 72-cents-per-share, loss in the third quarter of 2005.

So how can a national historical icon like HBC fall on such hard financial times? “The Canadian consumer is speaking,” says Dalan Bronson, principal and senior consultant with retail consultants JC Williams Group. “[HBC] holds an emotional place in every Canadian’s heart… but people have made decisions not to shop there to the degree that they used to.”

It appears that Canadians have become less attached to their history as more competitors with lower prices entered the retail landscape. There would have been more of an outpouring of grief at the potential loss of HBC 40 years ago than there is today, says Donald Thompson, a marketing professor at the Schulich School of Business at York University in Toronto, Ontario. “HBC does not have much of the same meaning anymore,” he says. “What percentage of Canadians has been inside an HBC store in the last year? 10%?”

Despite its financial woes, HBC may have found a white knight - in an American investor with no retail experience. It started out as a hostile takeover bid, with South Carolina based businessman Jerry Zucker buying up HBC stock over the past few years to become the company’s largest shareholder. Then last October, Zucker’s Maple Leaf Heritage Investments Acquisition Corporation offered an unsolicited bid of C$1.1bn, or C$14.75 per share, for all the outstanding common shares. The HBC board recommended shareholders reject this offer, claiming it didn’t “reflect the underlying value of HBC’s business”. In December, the company opened up its books to several potential bidders, as well as Maple Leaf Heritage Investments. In the end, Zucker’s company won out with a sweetened offer of C$15.25 per share, unanimously endorsed by the HBC board in January.

While the transfer of a piece of Canadian history into American hands can be hard to take for some nationalists, the alternative may have been worse since other bidders were likely to break up the company and sell off its valuable real estate. At least Zucker says he intends to revitalise and run the HBC retail operations.

“We plan to continue the operations in a similar vane with a much bigger focus on customer service and the use of technology,” says Robert Johnston, spokesperson for Maple Leaf Heritage Investments. “On a global basis, it would be very hard to find another retailer with such a dominant real estate position in a country. HBC would be almost unique in that it controls the main downtown core of every city and is the anchor tenant in virtually every large mall in Canada. We think there is a wonderful location based business to build off of.”

Analysts are wondering, however, if Zucker knows what he’s up against. “The whole department store concept in its existing framework needs to be looked at,” says Bronson. “People are essentially not shopping at department stores the way that they once did.”

And with US based Wal-Mart offering consistently low prices in increasing numbers across Canada, The Bay department stores just don’t cut it anymore. “HBC has tried to move away from Wal-Mart to higher markup fashions and cosmetics, but the same brands are sold in specialty stores, which often have deeper assortments and better sales expertise,” says Thompson.

Going head-to-head with Wal-Mart may not be the best strategy, Bronson admits. “In order to do that you have to be as good as, or better than, they are at their own game. And that’s not an easy thing to do.”

Still, HBC’s discount retailer, Zellers, has the daunting task of competing directly with Wal-Mart. “Wal-Mart is bigger in Canada than all its immediate rivals combined,” says Thompson. “It has the best supply-side operations of any retailer in the world, the best warehousing and delivery and general logistics. When is the last time you found something out of stock at Wal-Mart? Now go into Zellers and see how many items are not on the shelf.”

Not something you want to hear as you take over a company’s operations. But Johnston says one of the reasons Zellers has not been competitive is a lack of consistency. “We see some stores that are exceptional shopping experiences and would rival any top-notch discount retailer globally. But even in the same market, we find that another store may be below par. And, therefore, consumers get a mixed brand message. We’re going to try to bring the lower-performing stores up to a higher level.”

Nevertheless, Canadians are now speculating whether HBC is headed for a fate similar to that of another Canadian icon, T Eaton Company, a company with the same department store format that filed for bankruptcy protection in 1997. Sears Canada bought the remaining shares in the flailing company in 1999 and tried, but failed, to revitalise the Eaton’s brand. The last Eaton’s closed its doors in 2002.

There are a number of ways to make a department store viable, argues Johnston. “A very small increase on the top line results in a very substantial increase on the bottom line,” he says. “Obviously, our objective will be to bring more customers into the stores… We’re going to be meeting with literally thousands of employees of the company… really trying to instil a sense of urgency when it comes to customer service.”

So do Canadians care that an American is taking over HBC? The general perception seems to be not really.

“We’ve sold a number of our Canadian retailers out. This is sort of the last one to go,” says Bob Gibson, consumer products analyst with Octagon Capital Corp. “Canadians really don’t care if it’s a Canadian company they shop at or not… Canadians really care about price.”

However, Bronson adds: “It is a wake up call for Canadian retailers. Yes, [HBC] is a Canadian icon. People may be sad to see it fall into the ownership of Americans, but they’re the ones that made it happen.”

Perhaps they can take comfort in the fact that Hudson’s Bay blankets will still be for sale - at least for now.

Alison Arnot is a freelance writer and editor based in Ottawa.