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Calvin McDonald's decision to leave Sears Canada Inc. draws attention to the biggest problem trying to turn around the Canadian shopping-store giant: It's hard to grow a business when your boss seems hell-bent on shrinking it.
The CEO's departure, barely halfway through his three-year transformation plan for the retailer, was reportedly sparked by his frustration that the company's U.S. parent, Sears Holdings Corp., was too slow and stingy with the capital that Sears Canada desperately needs to regain its shrinking market share and keep up with rapidly expanding competition. Mr. McDonald's counterpart at Sears Holdings, hands-on hedge fund manager and controlling shareholder Edward Lampert, has demonstrated that he believes he can restore value in his faded retail empire by selling assets, closing stores and conserving capital. But by extending this same financial discipline to the Canadian subsidiary, he is effectively tying its hands against a rising tide of competition.
Many of Sears Canada's retail competitors have been investing in growth opportunities. Target Corp. is continuing its aggressive entry into Canada, prompting arch-rival Wal-Mart Stores Inc. to respond with its own Canadian expansion. Nordstrom Inc. is preparing to launch in the Canadian market. Hudson's Bay Co. struck a deal to buy U.S. luxury retailer Saks Inc., which it plans to import into the Canadian retail space. Canadian Tire Corp. Ltd. acquired the Forzani Group Ltd. sporting goods empire and is expanding its athletic wear business. Grocery retailer Loblaw Cos. has branched into drug stores (Shoppers Drug Mart Corp.) and discount apparel (Joe Fresh).
Sears Canada's response has been to get smaller. It has reduced its total corporate store count by 8 per cent, to 181 from 197, in the past 12 months. Its work force has shrunk to about 25,000 from about 29,000 at the end of 2012. It shut down its in-store electronics and toy departments. It has sold five high-profile shopping centre leases in major Canadian markets (Toronto, Vancouver, Calgary, Ottawa) back to the mall owners – freeing up prime retail space, some of which Nordstrom was all too happy to snap up to propel its Canadian launch.
It's not your typical recipe for reviving market share.
Many people believe Mr. Lampert, whose background is in finance rather than retailing, is treating Sears as more of a financial asset than a retail one. And from a strictly financial standpoint, the bulk of the company's value is in its rich real estate holdings – believed to be worth more on a standalone basis than the company's entire value on the stock market. Hence his willingness to sell off lucrative leases – and the reluctance to invest heavily in store renovations, expand into new locations or pursue acquisitions. Those things just drain the cash and complicate the asset sales. Analysts expect that sales of leases and properties will remain a priority at both Sears Holdings and Sears Canada in the future, in Mr. Lampert's pursuit to unlock value for investors.
It makes perfect sense – unless what you really wanted to do was build a retail operation that could take on the competition, attract and retain a loyal and growing customer base, and survive and thrive in an increasingly challenging and fast-changing retail market. That was what Mr. McDonald was trying to do. Too bad Mr. Lampert's plans threatened to leave him stuck in quicksand.
David Parkinson 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 @parkinsonglobe .