For shoppers who can’t resist Prada shoes, Luis Vuitton bags and delicate gloves lined with Burberry’s unmistakable tartan, 2014 is shaping up to be a great year. But for the country’s oldest retail brand, the months ahead look dire.
The iconic Hudson’s Bay Co. is gearing up for the fight of its life as Nordstrom, the upscale Seattle-based department store chain with a reputation for impeccable customer service, prepares to enter the Canadian market this fall, while high-end Holt Renfrew launches its own aggressive expansion. For the chain formerly known as the Bay (it was renamed Hudson’s Bay last year), the timing couldn’t be worse: company executives have aimed to move the brand upmarket over the past several years in a bid to capture a chunk of the Canadian luxury market, long considered under-served by retail industry analysts.
Nordstrom’s entry alone should be enough to have Liz Rodbell, the new Hudson’s Bay president, concerned, but she’s also facing a new challenge: how to reposition the chain now that Hudson’s Bay Co. CEO Richard Baker has acquired another tony property—Saks Fifth Avenue—which he also plans to introduce to the Canadian market. Luxury sales represent the new holy grail for retailers, so the Saks purchase makes sense. But it seems unlikely that HBC can field two strong properties that target upper-end sales. And given that Baker has stated he hopes to eventually launch a global expansion of Saks, the Hudson’s Bay brand will likely take the back seat (seven key Bay stores, including its prominent Yonge and Bloor location in Toronto are slated to become Saks stores within the next two years, and some analysts have predicted more Hudson’s Bay store closures).
Moving the brand down market again isn’t an option: sales at mid-range department stores have been dropping dramatically (witness the demise of Eaton’s, Sears’s recent retrenchment and J. C. Penney’s ongoing struggles south of the border—and the rise of low-end chains like Winners and Target). Sales at Hudson’s Bay stores have been reviving, but slowly—the chain rang in $2.3 billion in retail sales in 2012 and has seen a modest increase in overall productivity across its 90 stores from sales of $122 per square foot in 2009 to $133 in 2012. With tough new competition targeting the same shoppers who have helped shore up Bay sales, it’s hard to see a bright future for the chain.“There are not enough high-end consumers (in Canada),” says Hermann Kircher, president of Kircher Research Associate in Toronto. In 2014, it looks like HBC will paint its flagship brand into a corner.
TWO MORE RETAIL TRENDS TO WATCH
Sears pulls out of Canada entirely: Retailers should make money by selling goods, not stores, but in 2013 Sears Canada made a fortune doing just that, giving up some of its most prominent locations in the process. As far as some analysts are concerned, selling leases has become Sears’s business model in Canada. In fact, when CIBC’s Parry Caicco initiated coverage of the floundering retailer in November, he ascribed no value to its operating business.
Independent retail analyst Jan Kniffen says Sears’ five store closures announced in 2013 are just the tip of the iceberg. “The leases are the most valuable part of the business, so once you go down that rabbit hole it gets dark pretty fast,” he says. Don’t be surprised if Sears abandons Canada completely when it runs out of locations to sell off.
Target rebounds: A year ago Canadians were giddy about Target’s expansion into Canada. Now many dismiss it the way they dismissed the Zellers stores the U.S. chain replaced—instead of the cheap chic they were expecting, they got higher prices and bare shelves. But analysts expect the chain will work hard to win back Canadian consumers’ affections this year, pointing out that hiccups should be expected in a rollout this extensive (more than 100 stores opened in 2013).
“They are definitely going to have to…do some marketing that shows their pricing is competitive with other retailers in Canada,” says Joseph Feldman, a retail analyst with the Telsey Advisory Group. Feldman thinks the company will turn things around, but it won’t have the impact on earnings that Target’s executives claim. Still, Target will start to right the ship by the fourth quarter before it hits its stride in 2015.