Baker’s HBC breakup risks eating into in-store sales
It has not been fun these past 13 years watching Richard Baker fail to make a success of Hudson’s Bay Co. (HBC).
The New York private equity investor, who led a U.S. investor syndicate that bought HBC in 2008, has botched a European expansion campaign; abandoned a retail conglomerate strategy, selling retailers Lord & Taylor and Gilt Groupe and closing Home Outfitters; and come up empty in trying to extract wealth from HBC’s empire of real estate holdings.
And HBC’s core business, its Hudson’s Bay department stores, is mired in what appears to be an irreversible sales decline, despite the demise of archrival Sears Canada.
Baker’s latest gambit, scarcely more promising than what went before, is to split each of his remaining retail brands — Hudson’s Bay, Saks Fifth Avenue and Saks Off 5th — into autonomous online and offline retail companies.
Baker, 55, mentored by his father in the shopping-mall development business, said last week that his plan is to liberate the new stand-alone online stores from the constraints of their former in-store namesakes.
The bricks-and-mortar outlets, for their part, will become “discovery destinations,” intended to drive shoppers to the wider selection of HBC products available at its newly autonomous online stores.
The idea is that, run independently of each other, with their own CEOs and
management teams, the online and offline stores will be better able to focus on growing their businesses.
To be sure, that laboured exercise in financial engineering, which has occupied Baker most of this year, has done his investment group some good.
One of Baker’s private equity peers, Insight Partners, has invested a total of about $885 billion this year in the online spinoffs of luxury goods purveyor Saks Fifth Avenue and off-price merchant Saks Off 5th.
That capital injection was a blessing for an HBC that was ailing even before the pandemic lockdowns kept as many as half of its stores closed for long stretches last year.
Another challenge for Baker is that in his privatization of HBC last year, irate minority HBC investors forced him to raise his take-private share price by 16 per cent from his initial lowball bid.
That made even more pressing the current scheme to “unlock” the value of HBC’s e-commerce stores, which have perked up lately with double-digit sales increases.
A worry here, though, is whether the online stores are “cannibalizing,” or stealing sales, from their offline namesakes. The now-private HBC no longer discloses its financial performance.
HBC insisted last week that the new stand-alone companies, which risk losing some of their buying power and other synergies, will remain team players as before.
But human nature being what it is, the new companies will soon view each other as competitors.
Their marketing and merchandise buyers will be accountable to separate CEOs, after all, who will set hell-orhigh-water performance goals to vie for Baker’s favour.
And many items a shopper sees in HBC’s online stores won’t be showcased in the offline store, where a “hightouch” experience is supposed to drive online sales.
So far, Baker is alone with his breakup model. Other socalled “omnichannel” retailers like Nordstrom Inc. and Macy’s Inc. have kept their online and offline stores under one roof. They are determined not to lose co-ordination between the two.
The HBC strategy worries U.S. retail expert Walter Loeb. Writing in Forbes, Loeb said, “I am left with the queasy feeling that the plans did not consider consumer feelings as being important or relevant.”
But Baker’s breakup of his retail brands has its fans. They say HBC’s traditional department stores have been dragging down the value of the company.
“Department stores have been branded as yesterday’s business model,” retailing expert Bruce Winder, who applauds Baker’s latest turnaround scheme, told Canadian Press.
“People are waiting for them to sort of eventually shrink and go under.”
Yet Baker has shed few of HBC’s traditional department stores, whose obsolete business model dates from the mid-19th century.
It’s worth asking if the Bay’s new stand-alone e-commerce store needs the current 86 Bay outlets as discovery destinations.
Then again, who would buy them? The idea of a non-Canadian merchant buying the Bay stores as a gateway to Canada ceased to be attractive after Target Canada’s flame-out, which began with its purchase of HBC’s Zellers division.
Besides, just about every international retailer interested in the Canadian market is already here.
The “overstored” Bay does see crowded aisles during its annual Bay Days bargain bonanza.
Otherwise, though, the Bay’s large emporia are noted for their scarcity of shoppers and staff.
In fact, it might be that the population density of HBC’s vast 40 million square feet of retail space is lower than Canada’s. (A mere 3.9 people per square kilometre.)
And while it’s reasonable to assume continued growth in online retail revenues in the post-pandemic, the belief among many retailers that e-commerce is set for indefinite double-digit revenue growth is untested.
But towering over those unspoken scenarios is the remarkable impact of those Insight Partners capital infusions.
They instantly placed total valuations of $2.5 billion and $1.3 billion on the online stores of Saks Fifth Avenue and Saks Off 5th, respectively.
Mission accomplished. Value unlocked.
The obvious next step is to take the spinoffs public. In New York, Saks Fifth Avenue has been a rumoured candidate for an initial public offering (IPO) for months.
That way, Baker & Co. could cash out their investment, preferably before problems emerge in their newest business model.
Which could happen. During the seven years after Baker took HBC public, in 2012, the firm’s stock lost 35 per cent of its IPO value by the time of HBC’s 2020 privatization.
And none of Baker’s asset shuffling changes the fact that HBC still lacks the one thing a merchant most needs.
Which is a thorough knowledge of its customers that compels a merchant to offer must-have products available only at its stores, online and offline, and whose pricing formula is aligned with its loyal shoppers.
After 13 years, Richard Baker, who has bought and sold about a dozen leading retail brands on two continents, still doesn’t “get” retail. Or Canada. Or how to make sensible acquisitions.
Which is something of an accomplishment. Too bad so much of it was achieved in Canada.