Retail: HBC's Cinderella moment

The Bay is reinventing itself as a haven for fashionistas, frugal and otherwise. Is anyone buying it?

There were plenty of exquisite items to marvel at during the recent media launch of the Room, the refurbished luxury department of the Bay’s flagship store on Queen Street in Toronto. A sun-filled corner showcased an array of vintage couture for sale, including a bejewelled Halston gown. Sleek mannequins displayed elaborately embroidered pieces from Canadian-born designer Erdem Moralioglu’s fall line. Bruno Frisoni stilettos crowned with hot-pink ruffles perched on a shelf like a pair of tropical birds. And, of course, there was the room itself — 21,500 airy and elegantly appointed square feet created by Yabu Pushelberg, the elite Toronto-and-New York–based design firm, whose clients include Bergdorf Goodman, Neiman Marcus and Tiffany & Co. But the real showstopper was a sequined Balmain cocktail dress, or rather its audacious $21,000 price tag — a harbinger of a bold new era at the 339-year-old department store.

Surveying the scene from a strategic spot on the sidelines was Bay president and CEO Bonnie Brooks, the seasoned Canadian retailer who took the helm of the company a year ago after spending more than a decade in Hong Kong at the high-end department store chain Lane Crawford. Serene and smiling, despite suffering from a cold, she posed for photographers and air-kissed fashionistas swooning over the space. The Room, which will be replicated in Montreal and Vancouver, is a modern reinvention of the St. Regis Room — the one-time go-to destination for Toronto ladies who lunch. Luxe touches like a concierge service and an exclusive VIP Room for private fittings, parties and trunk shows seem designed to poach from Holt Renfrew’s clientele, while a section devoted to smart, reasonably priced suits by Hugo Boss and Elie Tahari target a broader base of working women. Brooks is confident that the $5.3-million renovation and its mid- to high-fashion offerings will pay off; she’s anticipating the Room will produce $15 million a year in sales.

When American journalist and gadfly George Wayne shouted at her from across the room, “Bonnie, darling, it’s George Wayne from Vanity Fair,” she called back, “I know, I never miss your column.” Then Wayne delivered the kind of endorsement that the team behind the Room was surely praying for. “Darling, I love the space,” he cooed. “You keep this up and people will be flying to Canada to shop.”

Over the phone a few days later, Brooks laughs about the encounter. “Wasn’t that great?” she says. Although her current priority is “to increase the market positioning and validate the Bay as a fashion destination” in Canada, putting the store on the international map fits within those ambitions, too. “There is a segment of consumers who shop all over the world,” she says. “It isn’t far-fetched that people will come to Toronto to shop at the Bay.”

At a time when Canadian retail sales are flat and the country is barely tiptoeing out of the recession, these are big aspirations for an embattled company best known for its wool blankets. Yet under the leadership of U.S. retail real estate titan Richard Baker, president and CEO of New York–based NRDC Equity Partners, who bought the Hudson’s Bay Co. last July, the Bay’s ambitions get even bigger still. Its hip new Vancouver 2010 Olympic collection is already selling well beyond expectations, building momentum for the holiday shopping season. And Baker’s recent announcement that the company is considering going public as early as 2011 has reaffirmed his commitment to HBC’s longevity and heritage. (He told reporters that “it would be exciting to give the Hudson’s Bay Co. back to Canadians.”) But it’s the Room, with its focus on luxury and service, that is the symbolic centrepiece of a sweeping plan to modernize the historic retailer — a strategy that includes cutting back on promotional sales, streamlining merchandise, focusing on women’s apparel and accessories, and upgrading customer care. The question is: Will Canadians reared on Bay Days door crashers — like three-for-one nylons — buy the glamorous new image?

Despite its iconic status as the nation’s oldest retailer, the Hudson’s Bay Co., which owns the Bay, Zellers, Home Outfitters and Fields, has been floundering over the past two decades. Discount and big-box stores like Wal-Mart, Winners and Ikea have lured away value-focused customers; and at the mid-level, the Bay has struggled to distinguish itself, even though its field of competition has narrowed with its own takeover of Simpsons in 1978 and the shuttering of Eaton’s in 1999.

On a larger scale, consumers are increasingly less interested in mid-level department stores. Retail analysts say consumer tastes are too diverse, showing no loyalty to any one store or shopping experience. “Department stores are essentially a classist concept,” says Bruce Philp, managing partner of GWP Brand Engineering. “You fill a store with everything from espresso makers to underpants, all of which are directed at some proto-consumer who’s a member of a demographic tribe. I don’t think we live in that kind of world anymore. Since the 1990s, there’s been a pronounced effort by every demographic to try not to look like they’re part of one. We’re getting hard to pin down, and we like it that way, making the notion of one-stop shopping next to useless.”

Making matters worse, the Bay’s 92 stores have become notorious for their unfocused collection of merchandise and unhelpful sales staff. “The Bay lost its way,” says retail consultant Richard Talbot, of Talbot Consultants International. “There were so many brands and no cohesion.” With ugly fluorescent lights fizzling above the deserted aisles and dirty floors, Bay outlets looked apocalyptic, the kind of place where the last woman on earth might go to loot for a pair of Spanx and a grill pan.

A similar indifference to its customers contributed to Eaton’s demise a decade ago, despite a multimillion-dollar makeover, Talbot says. “The Eaton family lost the plot. They didn’t even know what the plot was. Fred Eaton came to speak to the Retail Council of Canada 10 years ago or so, and somebody was criticizing him about customer service and he said, ‘We have a very clear policy. We don’t talk to customers, and we don’t expect them to talk to us.’” Like Eaton’s, the Bay has abandoned customers to navigate its muddled stores on their own. And if sales are any indication, many customers abandoned the store in turn.

Last April, the death of Hudson’s Bay Co. owner Jerry Zucker, just three years after he bought the company from L. Yves Fortier, taking it out of Canadian hands for the first time, created more uncertainty about the Bay’s future. And when Baker, then owner of 20% of the company, acquired HBC in July, a new round of speculation about the company’s prospects ensued. In addition to Lord & Taylor, Baker also owns swank jeweller Fortunoff and the decor chain Linens ‘n Things, and there were fears that he would close Bay stores, or zero in on prime Bay locations and replace them with Lord & Taylor outlets. Instead, he surprised the Yankee-go-home naysayers by reinvesting heavily in the company and playing up its history.

To turn the company around, Baker hired retail whiz Jeff Sherman, who spent 30 years at Bloomingdale’s before a stint at Polo Ralph Lauren, as CEO of the Hudson’s Bay Co. Sitting in his modest downtown office, overlooking Toronto’s Old City Hall, Sherman says it was clear from the start that the company needed a radical overhaul: “The Hudson’s Bay Co. had been a part of the fabric of Canadian lives for a long time, but [the individual chains] were not in a place to succeed.” The problem, he says, was that there was very little differentiation between the Bay and Zellers. Even the acronym “HBC,” which the company had adopted to replace the less wieldy “Hudson’s Bay Co.,” irked Sherman. It was too homogenous and disconnected from the corporation’s heritage, a major selling point in his mind. He has since restored the full name in all marketing materials and signage.

According to Sherman, the key to a well-executed department store is “a maniacal focus on your target customer.” To that end, he separated the operations of the Bay and Zellers. Brooks came on board to head the former, and Mark Foote, who had been the president and chief merchandising officer at Loblaw Cos., was hired as the CEO of Zellers. Sherman gave Brooks and Foote direct leadership over their own teams. Brooks spent her first few months poring over data Bain & Co. gathered from interviews with 7,000 shoppers, and narrowed her focus to three customer types from a larger pool of 12 consumer groups. It’s these three groups that Brooks says the Bay will now focus on: the fashion customer who wants high-end labels, the pragmatist who wants want good quality apparel that will last a long time, and the value shopper who wants the best price. The desires of these designated groups, says Brooks, are now informing “how much business is being devoted to which type of customer, how much money is allotted to buyers, how much space is devoted to each department, and which products are going to particular store locations.”

But making changes at an enterprise as large as the Bay isn’t easy. “It’s difficult for a store the size of the Bay to be nimble,” says Toronto retail analyst John Winter, of John Winter Associates. “It’s difficult to merchandize a million square feet.” In a small market like Canada, even pinpointing a target customer is a challenge. (Can you really appeal to the fashion customer and the pragmatist?) For that matter, it’s not a given that elite shoppers will be seduced away from Holt Renfrew and smaller designer boutiques to the Bay, where they have to make their way through two floors of hoi polloi before reaching the Room. And dreams of charter flights bringing well-heeled shoppers to the Bay aside, there are only so many customers who can afford Hervé Leger and Proenza Schouler. “The downtown Toronto market is not Canada,” Winter says.

Nor is the Toronto market the Toronto market anymore, after the economic downturn last fall stalled the retail sector. Over the past 12 months, some $300 million in cuts have been made at HBC, and 1,000 workers were laid off in February. One month earlier, NRDC Equity Partners threw Lord & Taylor a US$60-million lifeline after a disappointing holiday season. Meanwhile, Baker’s Fortunoff chain filed for bankruptcy and Linens ‘n Things went under. (The company still exists online, and it recently announced that it will sell a line of housewares in Canada through Home Outfitters.) So while the glamorous scenery at the Room is garnering attention from the glitterati, whether this is the moment to turn that maniacal focus on the fashion customer remains to be seen.

Much of the hoped-for success of the Bay will come down to Brooks herself. She’s already streamlined and refreshed the stores by cutting inventory by 20%, dropping 700 of its 1,200 brands, and bringing in lines by John Galliano, Gianfranco Ferré and Ungaro. She’s also expanded high-performing areas like cosmetics and women’s apparel, footwear and bags. A hands-on retailer with a distinct eye for product, Brooks says that her advantage is that she is the store’s target customer. “We’re on a mission of product differentiation. It’s one thing to have the brand. It’s another to buy it in a way that’s modern, fresh and appeals to your customers,” she says. “ I can look at an assortment and know instinctively whether it’s going to be appealing. It sends a signal that there is a merchant running the company, and so that edit is going to be more closely watched than ever before.”

GWP’s Philp says this boutique approach, which is selective and intuitive as opposed to haphazard and quantity-focused, is the logical one for a department store like the Bay. “The only way to make that work is do what a store like Barneys New York has done and to gather together a whole bunch of merchandise that is appealing to the affluent and make it into a branded experience of its own,” he says. “Having everything available in one spot is valueless right now. But having things curated and presented as part of an experience? That’s interesting.”

Like Brooks, who frets about the state of the Bay’s washrooms and the duct tape that is holding carpet together in some stores, Sherman is also obsessed with “the customer experience.” He sounds more like a guru than a businessman when he speaks about the importance of a shop’s colour palette, signage and background music and more elusive concepts like the mood and emotion the store evokes. Sherman, who has lived in Canada for just over a year, acknowledges that Canadian shoppers are more practical and conservative than their American counterparts, and perhaps less easily swayed by marketing myth-making, but he still can’t help waxing romantic. “I’ll know that we are where we need to be when customers remember where they bought something, but not what they bought,” he says. “When they remember the excitement of the experience of buying at the Bay.”

With the new strategy now entering its execution stage, Sherman and Brooks are excited about the holiday season. Already, the Bay had one of its best first quarters ever in 2009, Brooks says, “and after a slowdown in Q2 and Q3, it’s beginning to come back. This is the fastest recession we ever had.” HBC also has the momentum of its Olympics launch — the company is the official outfitter for the Canadian Olympic team. Sherman says the Games became the “perfect handle to communicate that this is a new company. Everything that made the Bay survive 339 years — passion, loyalty, heritage, history — all of those words apply to the Olympics. So it was a perfect launch for our new direction.”

Of the street-meets-athletic-wear line of Olympic T-shirt, toques, jackets and sweaters, Brooks says, “People probably figured that the Bay couldn’t get the cool quotient right.” But in less than two weeks after it launched, she says the company did three times its business plan in terms of sales. “We’ve already made a couple million dollars more than we’d planned for the month.”

While Brooks speaks confidently of thecompany’s return to form, Sherman is more cautious. “Business is performing better than it was expected at this point,” he says, “as well as the economy will allow us to perform.” According to a recent Globe and Mail report, industry insiders speculate that the plan to take part of the company public again as soon as 2011 is an attempt by Baker to raise at least $80 million to pay down preferred shares that carry high interest rates. When asked about the IPO, Sherman says it wasn’t part of the company’s strategy, but rather an outcome of that strategy. The Bay’s stability and Brooks’s performance, as well as signs of an economic recovery in Canada, he says, likely helped convince Baker to announce it earlier than anticipated. NRDC Equity Partners is “very serious about being long-term owners of the business,” says Sherman, adding that refinancing the company via an IPO is not outside NRDC’s“typical game plan.”

The Bay may already have crossed some big hurdles, says Talbot of Talbot Consultants International. Baker’s ownership “gave the company some breathing space, some confidence back with suppliers, staff and customers, and a chance to stabilize during the global economic tsunami.” Three or four years ago, “the recession would have sunk them.” But the Bay’s biggest hurdle — like Eaton’s before it — never changes: getting people, lots of them, to shop there. “Whenever we do surveys asking people where they’ll shop at Christmas,” Talbot says, “the Bay is still streaks ahead of other stores. Then we ask them where they did do their shopping, the numbers go down because [after looking at the Bay] they’ve gone to other stores — maybe in the mall that a Bay store anchors — and comparison shopped. But they still go to the Bay first. Now the Bay just has to get them to stay.”