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You have to give Richard Baker credit. At a time when many department store chains are struggling or have vanished altogether, the CEO of Hudson's Bay Co. (whose family controls close to half the stock) is an unabashed enthusiast who's not ready to give up. His predecessors, faced with the choice between trying to fix HBC's chronically underperforming 90-store namesake chain and putting it out of its misery, invariably selected the former approach – and failed. Now, Mr. Baker, who took HBC public last fall, has a plan to combine the best of both options, by buying upscale retailer Saks Inc. While there's no guarantee that a deal will happen, it's a sensible pursuit for anyone who still believes in department stores.
The Bay's big problem is that it occupies too much space, spread out over too many stores, doing too little business. Under Mr. Baker's watch, the chain has improved somewhat by focusing on fashion. But it's still a relic of a bygone era: sales per square foot of $140 last year, lagged the $165 the Bay was doing in 2005 and was barely one-third the amount posted by TJX Companies, Inc.'s Canadian operations, led by its Winners banner. In fact, TJX generated about 20 per cent more in revenues than the Bay chain, pulling in $2.3-billion despite having 55 per cent less selling space.
Bay stores may have been desired anchor tenants decades ago when they signed preferential long-term shopping mall leases; now they're just anchors. Given the shortage of good retail space in Canada, some landlords might be happy to kiss the Bay goodbye.
I've argued the Bay chain should be carved up and sold to two or three American chains that could do better with the space, but if Mr. Baker can buy Saks – which is now exploring its options – he may have a suitable alternative. It would be a marriage of underachievers: Saks, like HBC's U.S.-based Lord & Taylor chain, lags its peers in terms of sales density, profitability and stock performance.
In the U.S., there are economies of scale to be had between Saks and L&T. In Canada, Swanky, fashion-focused Saks Fifth Avenue would likely do very well either as boutiques within the Bay's high-fashion-oriented flagship stores in Vancouver, Calgary, Toronto, Ottawa and Montreal, or in some cases replacing them entirely. Focusing on major urban locations would give HBC the flexibility to counter the impending arrival of upscale U.S. retailer Nordstrom, Inc.
But the real opportunity would be in bringing the Saks Fifth Avenue Off 5th discount banner to Canada. The brand would no doubt do extremely well in a country that embraces discount retailing, and could easily replace dozens of Bay stores in secondary and tertiary markets across the country, where appropriate. Any remaining stores could then be sold to a foreign buyer looking to make a big entry into Canada, as Target Corp. did through its purchase of 220 Zellers leases in 2011. Alternatively, HBC could rebrand the leftovers, changing up their offerings to better suit their locations and free its upscale, urban Hudson's Bay stores from having their brand diluted.
Even if Mr. Baker can't get the Saks deal he wants, it's evident his strategy is to shrink the selling space devoted to a tired, underperforming brand and replace it with something more appealing to consumers. That's a good thing for shoppers and landlords. As for patriotic Canadians, those in certain areas may have to shop elsewhere, but many have already been doing that for years.
Sean Silcoff is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow him on Twitter at @seansilcoff .
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