Canada department stores head for a shake-up
By Anna Robaton

NRDC Equity Partners surprised the industry in 2006 when it bought Lord & Taylor and engineered one of the most striking retail turnarounds in U.S. history. Now the New York City–based private equity firm has trained its sights north of the U.S. border and onto a loftier goal: revolutionizing Canada’s tired department store sector.

NRDC, a relative newcomer to the department store scene, gained control of Canada’s oldest department store chain, The Bay, in July when it purchased Toronto-based retail conglomerate Hudson’s Bay Co., in which it held a minority stake. The firm has since embarked on a plan to revitalize the Bay and to export Lord & Taylor to Canada. The plan hinges on providing better brands and service at the Bay and reconfiguring the vast real estate portfolio of Hudson’s Bay Co., which will, among other things, make way for Lord & Taylor.

With the spotlight on Canada, it is easy to see why NRDC thinks there is plenty of upside there. Mall owners, which have, like their U.S. counterparts, for years watched department stores lose market share to specialty and big-box chains, are eager for the plan to succeed. “Most developers would welcome Lord & Taylor with open arms,” said Ian Thomas, chairman of Thomas Consultants, a Vancouver, British Columbia–based firm specializing in strategic planning for retail real estate. “It will give back some of the legitimacy big regional malls have lost over the years.”

Canada has only two national, full-line department stores — the Bay, with 94 stores, and Sears Canada, with 123 — plus a handful of smaller department store chains. Among the better are successful, fashion-focused players Holt Renfrew, a luxury chain with nine stores in major cities, and La Maison Simons, a more moderately priced chain of seven stores in the province of Québec.

Canada’s department store sector is a shadow of its former self, owing to the consolidation that began in the late 1980s and lasted until the mid-1990s, knocking out Eaton’s, once the country’s largest department store chain, and many others.

Sears Canada (Hoffman Estates, Ill.–based Sears Holdings Corp. is majority owner) purchased the assets of bankrupt Eaton’s in 1999 in an ill-fated attempt to relaunch the chain as a higher-end brand. Ultimately, former Eaton’s stores were closed, sold to the Bay or converted to Sears units, including some in downtowns that observers say have proved challenging for the quintessential suburban retailer.

The country’s small pool of remaining department store chains has created sameness in many markets, a problem exacerbated by aging stores and competition from foreign big-box and specialty retailers that have flocked to Canada in recent years.

Strong consumer activity has drawn foreign chains, although retail sales have softened a bit. Nonautomotive retail sales, including food and beverage store sales, hit C$270 billion ($257 billion) last year, up nearly 30 percent from 2002, or just over 5 percent on a compounded annual basis, according to J.C. Williams Group, a retail consultant firm. (The firm calculated this growth rate using unadjusted sales figures from Statistics Canada.) Yet, with the exception of high-end players like Holt Renfrew, department stores have generally failed to reap the benefits of robust consumer spending, experts say. Instead they have lost market share to competitors. Wal-Mart has taken the country by storm since it arrived in 1994. In recent years the discounter has begun rolling out Supercenters there.

For the five-year period beginning 2000, the Bay’s sales declined by just over 1 percent on a compounded annual basis, to C$2.6 billion. The Bay’s parent company was public until early 2006, when South Carolina businessman Jerry Zucker acquired and privatized it. Zucker set himself to turning around the retail behemoth, which also owns the 280-store Zellers mass merchandise chain, but the improvements were largely internal, focusing on such areas as information technology, observers say.

After Zucker’s death in April, NRDC acquired the company and formed Hudson’s Bay Trading Co., a holding company for Lord &Taylor, Hudson’s Bay Co., Fortunoff and the fledgling Creative Design Studios. The latter develops fashion products under the Black/Brown 1826, Context, Kate Hill and Peter Som labels.

The biggest problem in Canada is that there is a scant choice of department stores, says Kim D. McInnes, COO of Montréal-based Ivanhoe Cambridge, one of Canada’s largest mall owners. With Holt Renfrew at one end of the spectrum and Wal-Mart at the other, the market is “bifurcated,” McInnes says. “There is a huge opportunity to rebuild that middle part of the brand.”

It remains to be seen whether Canadian consumers will warm to Lord & Taylor, but NRDC does appear to be off to a good start. The firm declined to comment for this story, but it has announced that it will invest $500 million into Hudson’s Bay Trading, signaling that a quick exit is not among its intentions.

“They have shown they are willing to pour a ton of money into their properties to bring them into the 21st century and create an appealing shopping experience, which is what is going to differentiate the Bay from its competition,” said Kelly Tackett, a senior consultant at TNS Retail Forward, in Columbus, Ohio.

The Hudson’s Bay acquisition gives NRDC a stable of trophy retail properties, including many stores with mature, low-rent leases, in major markets from coast to coast. The firm has said it will open 10 to 15 Lord & Taylor stores throughout Canada, converting some Bay stores and possibly carving out space for Lord & Taylor in some of the Bay’s cavernous flagship stores. It also plans to open Fortunoff jewelry and home-furnishings departments inside Bay stores, which some experts compare to Macy’s in the U.S.

NRDC “sees a lot of room to operate between Bay price points and Holt Renfrew because there is nothing in between,” according to Alan Marcovitz, president and chairman of the Montréal-based Westcliff Group of Cos., one of Canada’s largest privately held real estate firms. “There is a big field for the taking,” Marcovitz said.

NRDC wasted no time hiring a team of high-powered fashion and retail veterans to figure out how to do that. In July it named Jeffrey Sherman, who has held top positions at Bloomingdale’s, The Limited and Polo Ralph Lauren, chief executive of Hudson’s Bay Co. It has also hired fashion expert Bonnie Brooks, who was most recently president of Hong Kong’s Lane Crawford Joyce Group, a leading international brand group in Asia, to head the Bay. Brooks’ career also includes stints at Holt Renfrew and Flare, a leading Canadian fashion magazine.
“She’s young, aggressive and understands the marketplace,” said John A. Torella, a senior partner at J.C. Williams Group. “She comes to this job with a real understanding of what needs to be done.”

NRDC also tapped Canadian retail veteran Mark Foote to head the Zellers chain, which has been hit especially hard by Wal-Mart, observers say. In recent years the chain has sought to fend off Wal-Mart by moving away from the discount store model and skewing slightly more upscale. Many of its stores have been renovated and expanded, and its new chief executive is expected to focus on branded apparel and on improving customer service. The company’s plans also call for rolling out a new, 125,000-square-foot prototype. “Wal-Mart has been tough on Zellers, but Target in the States holds its own,” said Marcovitz. “I don’t see any reason why Zellers with some improvements and capital behind it won’t do the same.”

For mall owners, NRDC’s plans are tantalizing. Of course, they are eager to see the Bay and Zellers re-energized, but the impending arrival of Lord & Taylor will give some an opportunity to differentiate their properties. Landlords may also want to reclaim some department store space to accommodate additional specialty retailers, should the Bay decide to downsize certain stores to improve performance. A reinvigorated department store sector may also spur the development of new malls outside downtown areas, where there is more room for growth than in urban markets.

To be sure, plenty of horse trading will go on between Hudson’s Bay Trading and landlords as the company seeks to reconfigure its portfolio, which also contains 61 Home Outfitters and 161 Fields stores. “The whole problem [for Canada’s mall owners] was they had nothing new to offer in terms of anchors,” said Harley Oberfeld, president and CEO of tenant advisory firm Oberfeld Snowcap, which has offices in Montréal and Toronto. “How many Bay-Sears malls can you build?” Canada has not seen the ground-up development of a traditional regional mall since 1990, Oberfeld says.

With a small and slowly growing population of slightly over 33 million, Canada is unlikely to see large numbers of new malls built anytime soon. Yet some observers say U.S. department store chains that have been on the sidelines may be motivated to enter Canada if Lord & Taylor succeeds there. And they doubt that name recognition will be a critical factor in determining its fate.

“Wal-Mart came here and delivered the goods and name recognition wasn’t an obstacle,” said Marcovitz. “There is some importance to branding, but if you deliver the merchandise, then you are well on your way.”

According to different reports NRDC is not renaming the Bay stores. The Bay stores across Canada might be reduced to fix Lord and Taylor in key markets.Also NRDC will put in Fortunoff areas inside Hudson’s Bay Company stores. Zellers ( similar to Target) might have more upscale items.
I think this will be good for Canada ,Hudson’s Bay Company and NRDC.

It is a good thing you said you were an Eaton’s Expert and not Hbc Expert. Some errors in your blog caused me concern.

The Hudson’s Bay Company (Hbc) (est. 1670) is Canada’s oldest corporation. Hbc owns stores across Canada under the banner names The Bay, Home Outfitters, Fields, & Designer Depot. Zellers is a wholly owned subsidiary of Hbc. Hbc purchased K-mart in 1998 and changed them mostly into Zellers stores. Zellers head office moved to Brampton, Ontario into K-mart’s former head office building.

The Bay building across the road from the Toronto Eaton Centre used to be Simpson’s (The Robert Simpson Company Limited) , When Hbc bought the company the Simpson name was used until 1991. The flagship store in Downtown Toronto (across from the Eaton Centre) was the last store operating under Simpson’s. in 1991 that store’s name changed to The Bay. The attached tower at the time of this post is still called The Simpson Tower.

For more information and history about The Hudson’s Bay Company please visit http://www.hbc.com
For more information about Zellers please visit http://www.zellers.com
For more information about Eaton’s please visit http://www.eatons.com

The underground city (PATH) of Toronto is also quite impressive both in architecture and size.

Buckminster Fuller toured the building when it openned and called it an immense shopping trap. I did a thesis on the site so enough said,

It was however the site of what was feared to become Toronto’s greatest modern fire in the 70’s during demolition of the Eaton’s Edwardian era complex.