Blogs & Comment

Sears Canada can't afford to stand still

Recent management changes show the department store chain is finally preparing itself for a new retailing landscape.

Dene L. Rogers, President and Chief Executive Officer for Sears Canada Inc., speaks during the company’s annual general meeting in Toronto. (Photo: Nathan Denette/CP)

As U.S. retailers prepare to storm north across the border, Sears Canada is particularly vulnerable, and rival Canadian companies have already started shoring their defenses. Target and J. Crew will challenge Sears in terms of apparel, and back at home, Canadian Tire’s purchase of the Forzani Group creates a stronger sports and activewear business. The Bay, meanwhile, is in the midst of a significant turnaround, and Lowe’s, Rona and Home Depot continue to eat away the company’s hardware and appliance business. But Sears is finally starting to take action.

Last week, the company announced CEO Dene Rogers is leaving after roughly five years at the helm. Calvin McDonald, most recently an executive vice-president at Loblaw Cos. Ltd., will replace him. On Monday, Sears also appointed a new executive VP in charge of merchandising. The changes are a sign that U.S. parent company Sears Holdings, which owns nearly 93% of the Canadian division, “is seeking to revive the Sears Canada retail franchise and is not simply planning to harvest the company’s declining cash flow,” wrote Desjardins Securities analyst Keith Howlett in a recent note.

Indeed, the U.S. parent has been content to milk the Canadian operations without investing much back into it, particularly since the financial crisis hammered consumer spending, hurting sales at Sears locations south of the border. Last year, for example, the U.S. parent purchased a major chunk of shares, bringing its ownership stake above 90%. A few weeks later, Sears Canada announced an extremely rare (and generous) special dividend of $3.50 per share, paying out $376.7 million.

Meanwhile, the Canadian chain hasn’t received the attention it needs. Industry observers say stores are in need of a refresh, and its merchandise needs to be re-examined. Another problem is the curse of being a generalist. Department stores have been undercut by niche retailers who can offer the same products at better prices or with more knowledgeable staff, and who might carry stronger brand recognition. Sales are falling at Sears Canada as a result. Top line revenue dropped 22% from 2008 to $4.9 billion, and profit fell 63% to $113 million over the same period.

There are two paths Sears Canada can take, according to John Williams, founder of J.C. Williams Group, a retail consultant. One is to downsize and focus on just a few product areas, rather than attempting to compete with practically every other retailer in Canada. “But that would be an incredible, dramatic downsize,” he says. The other is to rigorously modernize itself, as the Bay is doing.

The latter is perhaps more likely. Jeff Doucette, founder of consultants Sales Is Not Simple in Calgary, says there are a couple of major areas Sears Canada needs to address. Firstly, while the chain has traded on a reputation for customer service, “the reality is, it doesn’t exist in the stores,” he says. “In a lot of cases, they’ve cut employees.” A renewed focus on customer service could help differentiate Sears Canada from its competitors. Secondly, the chain needs to more narrowly define its target customer, likely someone younger, and tailor its store designs and products to that demographic.

Such a turnaround could take quite a while. Just look at Loblaws, the grocery chain that has undergone a significant makeover the past few years. It’s no coincidence that McDonald, the new CEO, is coming straight out of that company. Still, Sears Canada cannot afford to waste any time. “These changes in the retail landscape are a real wake-up call,” Doucette says. “Sears realizes that if they continue to milk the Canadian business, they won’t have a cow to milk in the next 10 years.”