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Toronto, 27/10/11 - Mark Foote, President & CEO of Zellers talks while touring a store at Square One in Mississauga, Ontario, Canada. Photo By Deborah Baic/The Globe and MailDeborah Baic/The Globe and Mail/The Globe and Mail

Mark Foote is breaking new ground in retailing, even as the vast majority of his chain's stores tumble toward extinction.

The chief executive officer of discounter Zellers Inc. has the daunting task of running his 273 stores as though it's business as usual, although it's nothing of the sort. By this time next year, he will be in the midst of Canada's single largest retail liquidation to prepare for most of the stores' takeover by U.S. mega-rival Target Corp. , starting in March, 2013.

For Mr. Foote, it has meant having to write the rules for an unprecedented retail transition. In January, when Target unveiled its stunning $1.8-billion deal to buy most Zellers leases and convert the stores to the Target name, Mr. Foote faced about two years of keeping outlets operating – and profitable – knowing the end was near. Yet he still doesn't have a schedule for the closings, which will be staggered over time.

The uncertainty will have ripple effects in the entire sector. Even before other retailers feel the squeeze of the savvy Target, they will be pinched by customers being enticed to Zellers's sales. And for the broader industry, Zellers will provide a unique case study as it moves in new ways to reach shoppers – including an interactive holiday Facebook campaign – even as it winds down.

"I don't think there's a precedent for this," Mr. Foote said at his store in Mississauga's Square One Shopping Centre, one of his top performers that is among outlets being scooped up by Target. "Rarely do you have an opportunity to plan for your own liquidation with as much lead time as we have ... It's a weird time."

Mr. Foote has responded by mapping out a blueprint for change that is based largely on the model of a retail liquidation, although without the typical stress of insolvency and desperation. With estimated annual sales of roughly $4-billion, Zellers was showing signs of progress under Mr. Foote, who arrived in 2008, but for years it had been losing ground to discount titan Wal-Mart Canada Corp.

Now Mr. Foote is tackling his latest challenge by focusing on pumping up profits, even if it costs the chain a few customers. He is slashing costs and ramping up inventory levels of higher-margin categories of goods, such as apparel, while scaling back on low-margin items such as detergent, which often draw shoppers. He's shaving marketing spending, replacing the usual – and pricey – fall television ad campaign with an unusual social media blitz. Beginning Tuesday, Zellers will usher in the company's last full holiday season by allowing customers to vote on sale prices on Facebook.

The strategy seems to be paying off. Zellers' operating profit is "well ahead of expectations" and the retailer has "performed very well" in 2011, Mr. Foote said. He no longer feels the same pressure to increase market share by trumpeting loss leaders, such as deeply discounted paper towels. "Because we're not chasing market share the same way we would have been last year, it's allowed us to run the business in a different way."

But his mission of keeping Zellers profitable will not be easy. "It's complex in the sense that you have to co-ordinate a number of issues to minimize the ultimate loss," said Hap Stephen, a restructuring expert who has overseen an array of bankruptcy procedures, including the failed department-store retailer Eatons more than a decade ago. "You want to capture as much margin on a regular basis before you have to start really discounting."

In the case of Eatons, one of this country's biggest retail failures, it benefited from the flurry of publicity about its demise, which drew a flood of customers to the stores, said Mr. Stephen, of Stone Crest Capital. "Eatons didn't have to discount a lot in the first wave of the liquidation, so they did extremely well," he said.

Zellers will be able to learn from Eatons – which generated about $360-million from its liquidation sales – and other high-profile retail wind-downs. It has hired as an adviser a top liquidation specialist, Hilco, of Northbrook, Ill., which had a hand in Eatons' and many other retail flameouts. Zellers could raise more than twice what Eatons did from its liquidation business, industry followers estimate.

In the meantime, Mr. Foote has slightly stepped up Zellers's inventory levels in 2011, and by as much as 10 per cent or more in high-margin areas, such as fashion and home decor. Low-margin categories, such as household goods and electronics, are being reduced; seasonally skewed departments such as sporting goods will be downsized early next year, and toy merchandise will be kept at healthy levels because Zellers remains a top destination for those products, he said.

To deal with anxious suppliers, Mr. Foote has assured them that Zellers' purchasing for the holiday season and the first half of 2012 "continues to run on a status quo basis," he told vendors in a recent letter.

In planning for fall of 2012, "we will work closely with vendors to plan volumes and programs in accordance with store closing schedules which will become clearer over time," his letter said, noting that Zellers will get six to nine months notice of each store shutdown. The chain is expected to decide next year on what it will do with the 84 Zellers outlets not being picked up by Target or others.

"In advance of the actual closing schedule being defined, our teams have created preliminary forecasts for the entire year based on our expectations of store-closing schedules ... We continue to see significant sales upside for many businesses and vendors in 2012."

David Soberman, a marketing professor at University of Toronto's Rotman School of Management, said Mr. Foote is following a textbook model of how to prepare for liquidation by going heavy on high-margin merchandise and taking the spotlight off markdowns on items such as Tide detergent, which simply nab shoppers at the cost of profits.

"Building store traffic is of less interest to him now," Prof. Soberman said. "What he really wants to do is minimize misforecasting ... He doesn't want to be left with [low-margin]inventory when the store closes."

Mr. Foote also needs to keep staff motivated. This year, Zellers introduced retention bonuses for managers, resulting in turnover in those ranks staying close to normal levels of 2 per cent to 3 per cent, and rising slightly now to between 2.5 per cent and 3.1 per cent, he said.

Once Zellers stores close, employees will be terminated and must apply to Target or elsewhere for jobs, with Zellers offering career-transition counselling.

And while Mr. Foote is chopping marketing costs by less than 10 per cent, he's moving into new social media territory to reduce expenses and reach out to his existing customers. In doing so, he's laying the foundation for a cheaper and more direct way of communicating with consumers once the massive liquidation sales begin next year.

Zellers' ad agency, John St., came up with the social media idea after Mr. Foote asked agency president, Arthur Fleischmann, for "something different, something provocative" to tout the final holiday sale. The campaign uses Facebook and Twitter to let customers vote on sale choices, store music playlists, store decor and even record their own radio ads.

It features three fictional Zellers employees who are going through the throes of change within the company that is being taken over by "a large American retailer."

They speak candidly about tensions because "the executives from home office have got a bit weird since the deal was struck," Mr. Foote said. "They don't mince words at all," he said. "It is a weird time – why not just have some fun with it."



Zellers social media campaign, dubbed internally "festive finale" and initially "power to the people," underscores the shifting tides at the retailer.

On Facebook, it features three actors representing Zellers employees (a store manager, a cashier and an executive managing director,) who confront the situation of "a large American retailer" [Target]taking over Zellers stores soon.

It lets customers:

1. Set the sale. Each week Zellers will offer a promotion on its Facebook page. Customers will be given the chance to vote on the offer they want.

2. Pick the playlist: Customers can choose what genre of music to play in stores, including "hot pop," "holiday pop" and "new age."

3. Record radio ads. Customers can record radio spots on Facebook. Zellers will choose the top recordings and run them in national radio ads in the holiday season.

4. Set holiday store decor: Customers will have the chance to decide where to hang mistletoe and what hats employees should wear for Christmas events.

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