No easy fix seen for Zellers and Bay stores
Retail consultants say what's needed is a culture that will drive innovation
By KEITH MCARTHUR
Saturday, October 29, 2005 Page B2
If Jerry Zucker is going to be able to turn around Hudson's Bay Co., he will have to take some drastic steps to rethink the company's flagship Bay and Zellers brands, retail consultants said yesterday.
Like most department stores, the Bay is caught in a vice-grip with Wal-Mart Stores Inc. on one side and specialty chains such as Home Depot and Winners on the other.
And Zellers is having a tough time competing with the Wal-Mart onslaught.
David Gray, a retailing consultant at Sixth Line Solutions in Vancouver, says the brands require a complete rethinking that goes far beyond introducing new clothing lines and tinkering with store layout.
"It's not about the cosmetic outcome. It's not about saying the stores need to look different or the merchandise has to change," Mr. Gray said.
"I think right at the core of the business, there has to be some sort of change that builds in a structure and a process and a culture that will really drive innovation," Mr. Gray said.
Many observers expect that if Mr. Zucker is successful, he will break up the company and sell the pieces. But executives working for Mr. Zucker said yesterday that they like most -- but not all -- of HBC's current strategy.
HBC's management team has embarked on a five-year plan to expand its business.
Last year, some Bay stores introduced departments with designer products at discount prices, and its flagship Queen Street store in Toronto opened a grocery store.
The Bay also has an agreement with Federated Merchandizing Group -- the parent of U.S. department stores Macy's and Bloomingdale's -- that gives it the exclusive right to carry private brands such as Style & Co. in Canada.
Zellers has also introduced a number of exclusive brands including Cherokee, Alfred Sung Home and Stuff by Hilary Duff.
More recently, HBC began rolling out new-look Zellers stores with wider aisles, improved lighting and specialty areas such as grocery sections, enhanced cosmetic areas and takeout restaurants.
"The strategy's okay, but it needs to go beyond tweaking," said John Williams, a retail consultant at J.C. Williams Group.
"The concept needs reinvention. A department store is a grand old thing, but it doesn't excel at any one thing the customer wants."
Mr. Williams said he thinks Zellers is losing so badly to Wal-Mart that there's little hope for saving the brand. Instead, he expects Zellers to sell out, possibly to Target Corp., the U.S. retailing giant that specializes in "cheap chic" designer goods.
Mr. Williams thinks there's more hope for the Bay, but said there's no easy fix.
Department stores around the world are getting squeezed from the top and the bottom. Still, the size of the Canadian market prevents the Bay from being able to move too dramatically up-market, Mr. Williams said.
"There's not enough people in that income bracket to become a Bloomingdale's or a Nordstrum," he said.
"At the same time, they can't go down-market because the guys from Bentonville [Wal-Mart] will chew 'em up and spit 'em out. It's a very tricky situation."
All retail consultants seem to agree that HBC needs to get smaller. In particular, downtown Bay stores are far too large, with the Toronto Queen Street store occupying 809,000 square feet. "How do you fill one million square feet on Queen Street? How do you find enough fashion to go in there?" asked retail consultant Wendy Evans.
She says the Bay could move more upscale in some of Canada's biggest cities, and needs to do more in streamlining its product mix.
As for Zellers, Ms. Evans sees it becoming more like Target, which has thrived in the United Sates alongside Wal-Mart.
"To win against Wal-Mart is not what they want to do. They don't want to go head-to-head in terms of price and brand," Ms. Evans said.
Mr. Grey said that by taking HBC private, American businessman Jerry Zucker would be able to avoid the pitfalls of pleasing investors quarter by quarter and make the long-term investments necessary to reinvent the department store for a Canadian audience.
"At the end of the day, you have to ask: If a concept has played out its lifespan, is making some incremental changes really going to save you or is it just going to prolong the situation?"
Mr. Gray says HBC needs to recruit people from outside of the traditional retail ranks -- people with big ideas in areas such as marketing, technology and customer relationships.
"I think there is an opportunity to really rethink the department store. Wal-Mart obviously did that but you don't want to go out and just copy Wal-Mart."
Reinventing an icon
HBC's brands need to evolve to survive. While management is taking steps to turn the stores around, retail consultants say more drastic changes are needed.
HBC five-year profit and revenue
Sales ($billion)
2001: $7.3
2002: $7.4
2003: $7.3
2004: $7.3
2005: $7.1
Profit ($million)
2001: $90
2002: $47
2003: $85
2004: $60
2005: $60
The BayCategory: Department store targeting middle- to upper-income customers who are fashion and value conscious.
Locations: 98 stores
Store size: Ranges from 16,000 square feet in Banff to 809,000 square feet in downtown Toronto.
New concepts
In 2002, entered into exclusive agreement with Federated Merchandising to stock clothing offered at Macy's and Bloomingdales.
In 2004, introduced "Style Outlets," smaller stores within the Bay featuring designer label merchandise at discount prices.
Zellers
Category: General merchandise store targeting women between 25 and 55 who shop frequently for staple clothing and household needs.
Locations: 298 stores.
Store size: Range from 48,000 square feet to 161,000 square feet with an average size of 97,000 square feet.
New Concepts:
In 2004, Zellers launched Hilary Duff's new line of merchandise "Stuff by Duff."
Zellers is renovating stores to a new prototype format with wider aisles, improved presentation and new product offerings.
Home Outfitters
Category: A kitchen, bed and bath superstore focused around everyday low pricing.
Locations: 47 stores.
Store size: Range from 27,000 to 42,000 square feet.
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