It’s the end of the Bay as we know it – and Richard Baker feels fine

Richard Baker, the 39th governor of the Hudson’s Bay Co., clearly relishes the title, not to mention the history, that comes with owning North America’s oldest company. Fifteen years after the American real estate dealmaker first won control of the storied retailer—a stretch of time that makes him the sixth-longest-serving governor in HBC’s 353-year history—it doesn’t take much to get him going on the links he sees between past and present. Baker has visited the company’s archives in Winnipeg multiple times, met with Cree leaders at one of HBC’s oldest fur-trading posts in northern Manitoba, and delved into the journals of the adventurers “who set out on a ship called the Nonsuch to travel where their safety wasn’t secured in a life that was going to be challenging but adventurous.”

“That entrepreneurial spirit is still in our DNA,” Baker says. “That’s how we think.”

It’s worth noting that as Baker evokes HBC’s perilous frontier roots, he’s relaxed on a leather couch at the Philippe Starck–designed L’Avenue restaurant, situated in the luxurious Saks Fifth Avenue flagship store in Manhattan, which Baker also owns through HBC. (Taylor Swift sightings are common, and the cast of Saturday Night Live sometimes parties here after filming the show steps away at Rockefeller Center.) Moments earlier, while whisking through the Saks shoe department clad in a vest, shirt, pant and shoe combo from designer Thom Browne, Baker stopped in his tracks to try on a pair of US$2,400 rhinestone-studded Prada shoes. “These are awesome,” he gushed.

But back to that rugged line Baker draws connecting those early adventurers to the company of today. HBC may once have laid claim to one-quarter of North America’s land mass, the 57-year-old businessman observes, but things have never been better. “The Hudson’s Bay Co. is at the greatest value and financial strength it’s ever been since 1670,” he boasts, adding the private company’s audited financial statements put its equity at US$6 billion.

Come again?

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If you happen to be a Canadian retail analyst or, for that matter, a shopper who has set foot inside a Bay store recently—a considerably smaller cohort than before the pandemic, let alone a decade ago—“strength” is likely not a word that springs to mind.

In January, Hudson’s Bay laid off around 250 corporate employees from its Canadian retail operations, followed in February by the closure of two more of its 84 Bay stores, in Edmonton and Banff, Alta. And HBC has recently been making headlines for its plan to revive the defunct Zellers brand inside two dozen Bay locations, which has sparked heaps of nostalgic curiosity on social media but also head-scratching from some retail observers who consider it a sign of desperation. When Baker talks about boom times at HBC, it’s almost like he’s talking about another company entirely.

That’s because he is, more or less. The HBC most Canadians think of when they hear the name—the national department store chain with flagship outposts in Vancouver, Calgary, Toronto, Ottawa and Montreal—well, that’s a dwindling part of HBC today. How small? “A teeny weeny, tiny bit,” Baker says, holding his thumb and index finger an inch apart. “It’s around 15% of the overall value of HBC—which, by the way, is just as it should be, because being a department store retailer isn’t necessarily a road map to great success.”

It’s a frank, albeit startling, admission, and one that will no doubt feed the widely held view in the retail community that Baker is a real estate developer, not a retailer. But it also reflects a profound shift in the business that began when HBC was still a publicly traded company and has accelerated since Baker took it private in early 2020, after a messy battle with hedge funds.

As Baker sees it, today’s HBC is “an investment company at the crossroads of real estate, operating companies and digital companies.” HBC’s luxury brands, Saks Fifth Avenue and its off-price cousin, Saks Off 5th, have benefited immensely from the spending surge among U.S. consumers during the pandemic. The company has real estate development projects underway in a number of cities. It also now controls Convene, a flexible meeting and workspace business with more than three dozen sites across the United States and Great Britain. Meanwhile, HBC is preparing to launch a cloud services business that evolved out of its Saks e-commerce operation to provide supply chain management, HR and other back-end infrastructure to third parties.

And to quote a refrain Baker utters a lot these days, “There’s more to come.”

“I plan on being the governor of the Hudson’s Bay Co. until the day they put me in the ground,” he says. “When they do, I promise the strength and viability of the HBC will be as state-of-the art and contemporary as any other company in North America.”

The only question is how much of a role that other HBC, the one Canadians are familiar with, will play by then.

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If a voyageur would scarcely recognize HBC today, it’s safe to say a lot of folks on Bay Street have tuned out the recent changes, too.

In early March 2020, seven tumultuous years after HBC went public, the company delisted its shares from the Toronto Stock Exchange and largely dropped from the headlines. Prior to that, only rarely did the news coming out of HBC sound good. Sure, its share price had fared well for the first couple of years after the 2012 IPO, as Baker signed deals to unload the 110-year-old Toronto flagship on Queen St. for $650 million to Cadillac Fairview (while leasing back the location) and to buy the publicly traded Saks Inc. for US$2.9 billion, a sum lower than the luxury chain’s Fifth Ave. Manhattan location alone was later appraised for.

Even so, red ink accumulated—the company reported a net loss in nine of its 12 last quarters before going private. An expansion of the Saks chain into Germany and the rollout of Saks Off 5th stores in the Netherlands were both flops. Sales at Lord & Taylor, then America’s oldest surviving department store chain, which Baker had merged into HBC, were a perennial disappointment. Nor did it help that the Bay’s own position was steadily weakening, with HBC’s final quarterly report in 2019 showing a 4% drop in sales compared to the year before. All that bad news sent HBC’s shares downward.

Baker strained to convince shareholders that immense value lay in the company’s real estate and brand assets, but his entreaties fell on deaf ears. “Public investors are focused on earnings as opposed to underlying asset value, and Richard is focused on the latter,” says Earl Rotman, a former HBC director. “He recognized the appropriate yardstick for HBC is not 90 days, because that creates a lot of distraction.”

Under pressure from activist shareholder Land & Buildings Investment Management of Stamford, Conn., along with Toronto-based Catalyst Capital Group, Baker’s group of controlling shareholders launched a takeover bid in 2019. After being forced to twice up his offer, Baker prevailed.

No sooner had HBC been privatized than the pandemic brought life to a standstill. All of HBC’s stores were closed. A small number would never reopen.

Perhaps the grimmest example of the Bay’s long struggles is the former national flagship store in Winnipeg. Just shy of a century old, the iconic six-storey, 660,000-square-foot building on Portage Ave. had been reduced to only two floors of active retail space when the pandemic hit. An appraisal conducted in 2019 ascribed it a value of precisely $0. Even that was overstating its worth, however, since the building carried a tax liability of more than $300,000. Just to bring it up to code would require more than $110 million. So, in November 2020, Baker’s team made the decision to close up shop for good.

For that former Bay store at least, there has been a creative and welcome reprieve. In 2021, Baker received a call from Grand Chief Jerry Daniels of the Southern Chiefs’ Organization (SCO), which represents several dozen Anishinaabe and Dakota Nations in southern Manitoba. Daniels had a proposal: Gift the building to the SCO. Baker agreed.

The deal will see SCO lead a redevelopment of affordable housing units, childcare spaces and a museum, among other features, with the provincial and federal governments pledging $100 million. “This was about reconciliation,” says Daniels. “We need more of this from the private sector. I know a lot of people talk about that, but Richard has been good about following through and has expressed a desire to build a relationship with us outside this one project.”

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Aside from positive feedback from politicians and Indigenous leaders, the donation also solved a problem for Baker. Since the store had been designated a heritage building in 2019—a move HBC opposed—the only option was to mount a costly redevelopment while preserving the structure or keep incurring property tax bills on the empty space.

This past April, Daniels symbolically traded pelts and hides with Baker in return for a gold replica fur-trade token, marking the transfer of the Bay building to Indigenous control. “While we’re proud of our longevity, HBC played a definitive role in the colonization of Canada,” Baker told the crowd, which included Prime Minister Justin Trudeau. “The impact of our company’s history is not at all lost on me.”

Baker was born into a real estate dynasty. His grandparents bought and developed residential and commercial space, and his father, Robert, a strip-mall developer, launched the family business, National Realty and Development Corp. Richard’s first love, however, was cooking, and after he graduated from Cornell University’s school of hotel management, he attended cooking school in Paris, intent on opening restaurants. Instead, Robert lured him to NRDC, where he courted Walmart to put dozens of stores in their malls. In 2006, he bought Lord & Taylor.

Around the same time, another American investor, Jerry Zucker, had shaken up Canada’s retail sector by buying HBC. Baker bought a 20% stake. Two years later, Zucker died from a brain tumour, and Baker acquired the rest. In the years since, Baker and his wife, Lisa, have raised three children, now all in their 20s. She’s an avid art collector, and 3,000 of her pieces adorn the walls of HBC’s New York headquarters. Baker, meanwhile, spends roughly half his time on the road, visiting stores and meeting with vendors and partners, often with his two white Maltese dogs, Bella and Ruby, in tow.

From the very start of his involvement with Lord & Taylor, then HBC, then Saks, it was always about the real estate. “It was a no-brainer—the real estate is so valuable,” he says. Exactly how he might unlock that value is what many in the retail space have long wondered.

Part of the answer came early on, when Baker flipped more than 200 leases for Zellers locations to Target for its ill-fated Canadian expansion for $1.8 billion, at a fat premium over what he’d paid for all of HBC, including Zellers, three years earlier. Later, in 2014, he signed the deal to sell the Bay building on Queen St. to Cadillac Fairview.

Now, more of the pieces appear to be falling into place. In the fall of 2020, Baker assembled all 42 million square feet of real estate HBC owns or controls, either directly or through joint ventures, into a new subsidiary called HBC Properties and Investments. (Other retailers like Loblaw and Canadian Tire have separated their real estate from their retail operations, and spun off their properties into publicly traded real estate investment trusts. Baker is keeping the property portfolio private, at least for now.)

Streetworks Development, a New York–based developer it acquired the previous year, went into the mix, too. Ian Putnam, who represented Baker when he bought HBC and is now a top executive with the company, was put in charge. “Richard is moving at 1,000 miles an hour all the time,” he says. “There’s only been one Christmas in the 15 years I’ve been working with him that we didn’t have a significant transaction on the go.”

A number of projects are underway, starting with what’s left of Lord & Taylor’s stores. When HBC was still public, analysts and investors bemoaned the chain’s money-losing ways. Baker flipped its Manhattan flagship to WeWork for US$1.1 billion in early 2018, before the office-sharing startup flamed out. But by the next year, Baker pulled the plug on the whole thing, selling Lord & Taylor’s operating business to fashion rental-service company Le Tote for US$100 million, while keeping control of the real estate. Within a few months of the pandemic taking hold, Lord & Taylor filed for bankruptcy and eventually closed all its stores permanently.

Of the 24 shuttered locations HBC oversees, Putnam says many are fully leased, while others are in the process of being “monetized” (read: sold). Last year, Morgan Stanley reportedly moved into 62,000 square feet of a Lord & Taylor building in New Jersey, while in Boston, HBC’s Streetworks is redeveloping three stores into medical sciences buildings.

And yet, as lucrative as those deals appeared to be for HBC, they came in tandem with the demise of Lord & Taylor’s brick-and-mortar retail business and the anguish of its hundreds of former employees.

“Baker basically ran Lord & Taylor into the ground,” says Mark Cohen, the former CEO of Sears Canada and one of Baker’s sharpest critics. “Baker is an aggressive real estate player who styles himself as a retailer. He’s inevitably done some remarkable deals for his own benefit, but nothing he has done that I can see has benefited the organizations he’s wrapped himself around.”

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Baker, for his part, stresses that Lord & Taylor went bankrupt after he sold it. And he pushes back at any suggestion he’s raiding his retail brands’ real estate assets at the expense of the companies themselves. “The proof is in the story,” he says. “I didn’t sell the pieces off to take money and build condominiums in Miami. I’ve reinvested every dollar back into HBC.”

Next on the list: a proposal to move the Saks location in Beverly Hills to make way for a Saks hotel, Saks private residence, Saks spa and Saks private club. And in New York, HBC is lobbying hard for one of three available casino licences, with a proposal that would see the top three floors of the flagship Saks on Fifth Ave. converted into a gambling hub.

Back in Canada, HBC’s real estate portfolio is also showing signs of bearing fruit. In 2015, HBC and RioCan, one of Canada’s largest REITs, signed a joint venture that saw RioCan inject $325 million for a 20% stake in 10 properties. After years of no significant progress, the partners are now planning to redevelop the Vancouver flagship store into a mixed-use development with a million square feet of office space, and the Montreal flagship location into a 25-storey office building. Both stores would keep their historic facades, but their retail footprint would shrink by more than half.

It’s still unclear to what extent the glut of unused office space in both cities, caused by the shift to hybrid work, will affect those plans. But HBC seems intent on shrinking the retail footprint of its Bay stores. “I don’t like to close any stores, and we’ve closed a very small number of stores in the chain the past decade,” says Baker, “but some are too big.”

Now that HBC is private, it no longer reports financials. But standing next to the rainbow-like iridescent glass escalators that unify the lower three floors of Saks—installed in 2019 as part of a US$270-million renovation—Baker says the company’s U.S. in-store and online sales are up significantly over 2019, particularly because luxury spending in the U.S. has been so strong. The place is hopping, even though it’s a Monday in February. At one point Baker points to a woman carrying several bags: “She might have spent $10,000 today.”

In Canada, on the other hand, downtown foot traffic and retail spending has yet to recover, and U.S. retailer Nordstrom’s decision to close its 13 stores leaves HBC and Saks as the last national department store chains standing. Baker sees that as an opportunity to grab market share. “We’re committed to Canada—not only to our existing businesses, but also to new opportunities for growth,” he says. “Before the pandemic and straight through, we invested hundreds of millions of dollars to upgrade our digital experience, and improve our offering of quality and service in Canada. We’re going to continue down that road.”

Baker may have another reason to hold onto the Bay and Saks stores. The leases give it leverage at a time when the landlords that own Canada’s shopping centres are seeking to redevelop and densify underutilized retail space. Oakridge Centre in Vancouver, which is in the midst of a $5-billion redevelopment that will transform the area into a small city, is a case in point.

In 2018, HBC announced it had agreed to amend its lease for the store in return for more than $170 million. Three years later, it was demolished, but HBC will get a shiny new two-storey Bay store within the redeveloped mall when it opens next year. Many of the chain’s locations seem well suited to extract similar concessions. “HBC has incredible assets like the flagship stores and long-term leases,” says Rotman. “Because Richard is patient, he can mine those ore bodies over time.”

If splitting stores into retail and real estate divisions struck some observers as financial engineering, the same criticism followed Baker’s move to divide each of HBC’s store brands into separate physical and digital companies. Early in 2021, private equity firm Insight Partners injected US$500 million into the newly created Saks digital platform for a minority stake, followed by US$200 million for a slice of Saks Off Fifth’s e-commerce business.

At one point, the e-commerce company Saks.com—now a separate business from SFA, the real-world store business for Saks Fifth Avenue (confused yet?)—was said to be preparing an IPO. But the collapse in tech-stock valuations put those plans on hold. Baker won’t confirm if an IPO was planned for any of HBC’s digital subsidiaries, but he leaves the door open. “On occasion there might be a reason to have a monetization event, which might be an IPO, but that doesn’t mean we sell it all,” he says. “It’s just another way to create liquidity.”

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Baker insists the approach allows the physical and digital businesses to each be financed and operated in a way that takes advantage of their strengths—profits matter more for physical stores, for instance, while rapid growth is the metric that matters most to e-commerce companies.

Retail analysts aren’t yet convinced. “I’m willing to give some benefit of the doubt here, because we live in a world that’s trying to figure out what the winning retail models are in a sector that is in a state of flux,” says David Ian Gray, founder of Vancouver retail advisory DIG360. “But are they building something for a consumer that is going to outperform the other choices consumers have, or are they building something intended for their CFO to tell a business story?”

With Baker, it may very well be both.

In the summer of 2010, Baker was two years into his time as owner of HBC when he took his then 14-year-old son Jack on a three-week, 100-store tour of his new retail domain. The youthful, floppy-haired Baker kept a blog about the adventure that’s still online, and it traces his and Jack’s journey—clad in clothing bought at Zellers and Bay outlets along the way—through stores, restaurants and all the way up to York Factory, on the shores of Hudson’s Bay, noting he was the first HBC governor to ever visit. (Jack went on to join the family business directly from school and succeeded Richard as CEO of NRDC in December—perhaps putting him on track to become the next governor of HBC?)

In his time-capsule blog, Baker the Retailer waxed poetic about Zellers’s “bright future.” Six months later, Baker the Real Estate Dealmaker would sign the transaction that saw most of the Zellers leases flipped to Target.

So it’s somewhat ironic to hear Baker once again gush about the “huge opportunity” for the resurrected Zellers as a shop-in-shop at 25 Hudson’s Bay stores later this spring. As of early March, HBC was keeping most of the details under wraps. Even so, the orchestrated revival has generated plenty of social media buzz, and HBC has fanned the nostalgia flames by polling Canadians on which classic Zellers restaurant items should be on offer at Zellers food trucks, which will be part of the relaunch. Among the winners: the Big Z burger and the hot chicken sandwich.

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Sophia Hwang-Judiesch, the recently appointed head of both the Hudson’s Bay brick-and-mortar business and TheBay.com, stressed Zellers won’t be marketed as a discount brand. Instead, the private-label merchandise, home décor, clothing, housewares and small appliances on offer will be “Target-esque” and positioned as “value at a phenomenal price,” which the company hopes will lure more young customers into Bay stores.

Expanding the Bay brand’s appeal to a younger demographic is one of Hwang-Judiesch’s top priorities. The Canadian-born former senior executive with U.S. cosmetics retailer Ulta Beauty joined Hudson’s Bay last year, first replacing Wayne Drummond as president of the physical store business, then succeeding Iain Nairn in January as president of the e-commerce division. (Since Bonnie Brooks ended her five-year run as president in 2014, there have now been five people who’ve held the top job at the Bay.)

As part of turning around the Bay’s fortunes, which were made worse by Canada’s longer lockdowns, Hwang-Judiesch must also wring more productivity out of each store. To that end, the company is undertaking a “store optimization initiative,” relying on consumer data to better tailor which merchandise to offer at particular stores. “The overarching mission is the Bay has 96% brand awareness among Canadians,” she says, “so how do we drive brand relevance?”

The problem, as retail consultant George Minakakis sees it, is the connection Canadians once had to the brand has been eroding for years and may have been severed by the pandemic. He, like other retail experts, holds out little hope that reviving Zellers will do much to reverse that. “The Bay has gotten weaker and smaller, and possibly over time I see there being just a few dozen prime stores and that’s it,” he says. “The end game is the end of the Bay as we know it.”

Baker insists the Bay stores aren’t going away. But it’s also true that HBC, the holding company, will continue to become more unrecognizable as time goes on.

In Baker’s mind, he’s returning Hudson’s Bay Co. to a more ambitious time decades ago, when HBC’s tentacles reached into the oil patch, financial services, real estate and other industries. “I’ve always imagined that if HBC, from the very beginning, had been managed by world-class executors, it would be on the scale of Apple today,” he says. “Hudson’s Bay Co. could have been so much more over the years.

“My life’s work is to make it one of the greatest investment companies in North America,” he adds. “I think we’re well on our way.”