In the beginning, it was called the “Hudson’s Bay Company.” By the mid-20th century its retail outlets were known simply as “The Bay.” Now, as of this August, Canada’s oldest company will be all of the above: Hudson’s Bay and The Bay, both owned by the Hudson’s Bay Company (HBC), each their own separate entity.
The 351-year-old business has split its retail branch in two, separating its department stores from its website in a last-ditch effort to hop into the world of e-commerce.
The website will be called “The Bay,” where the bulk of the store’s products reside. Meanwhile, its brick-and-mortar outlets, called “Hudson’s Bay,” will become “discovery destinations” intended to drive shoppers to its wider selection of online products.
The decision to split the company in two, while it makes sense from a financial engineering perspective, has confused retail analysts and consumers. The question now is, will it save the iconic yet ailing department store, or will it hasten its decline?
After years of faltering sales and abandoned business ventures, the COVID-19 pandemic forced the company to close stores and cut costs — all while its online-based competitors drew record profits.
“It was like the perfect storm,” said David Soberman, a marketing professor at Rotman School of Management at the University of Toronto.
“There’s no store I can think of in Canada that has been hurt more by the pandemic than the Bay.”
While the parent company says the two branches will work together, The Bay and Hudson’s Bay look as though they will be almost entirely separate: different management teams, different CEOs, different mandates.
Iain Nairn, president and CEO of The Bay, will operate the e-commerce business, while Wayne Drummond will run the department stores. The extent to which they’ll co-operate will be left to Richard Baker, an American business magnate and the company’s owner of 13 years.
The separation will help accelerate the company’s digital-first technology shift, Baker said in a news release in August. But retail analysts have scratched their heads at the move, wondering why the company chose to isolate two parts of a business that, in theory, should work together.
“I worry their leadership team is looking at this too much through an operational lens, when really they need to look at it through a customer lens,” said Sandra Duff, president of Jackman Reinvents, a business management consultancy in Toronto. “It’s not clear this approach will resonate with consumers.”
Retail analysts like Duff fear the company’s most recent move could be the latest in a string of costly decisions — decisions that have slowly chipped away at the Bay’s standing in the retail world, drawing comparisons to the downfall of retailers like Sears Canada, Zellers (once owned by HBC) and Brooks Brothers.
The past few decades have not been kind to the company. Its retail sales have declined at a rapid pace, despite the demise of archrival Sears Canada. And the company has lost significant market share to competitors like Amazon and Walmart, which have come to dominate the world of online shopping. A litany of business ventures — including a European expansion campaign and a retail conglomerate strategy — were abandoned by HBC in recent years following eye-popping revenue losses.
The company went private in early 2020 as its stock price tanked, and rid itself of subsidiaries like Lord & Taylor, Gilt Groupe and Home Outfitters.
But HBC’s trajectory is not uncommon for brands of its ilk. Once a beacon for North American consumerism, the classic department store has become an increasingly outdated mode of retail shopping. E-commerce sales have rapidly increased year-over-year. The number of department store locations in the U.S. has dropped by nearly 27 per cent since 2013, and is expected to drop another 25 per cent by 2025.
In 2020 alone, a record six department stores went bankrupt in the span of months — including Lord & Taylor.
The COVID-19 pandemic made everything worse for HBC. Foot traffic in malls ground to a halt. Unlike big-box stores such as Costco, the Bay did not sell the kinds of items that would allow it to stay open even partially during the harshest restrictions.
Early in the lockdowns, HBC stopped paying rent to its landlords in Ontario, Quebec, British Columbia and Florida, prompting a string of property owners — including Cominar REIT, Oxford Properties Group, the Edmonton City Centre mall and Morguard REIT — to file lawsuits, some of which the company is still entangled in. HBC’s leases are valued at $20 million per month across 21 locations in North America.
The company contends that the business is doing well despite the pandemic. In an email, a company spokesperson said HBC recorded the lowest debt and leverage numbers it’s seen in the last five years, along with double-digit digital growth every year in that time.
Excluding the impacts of COVID-19, all Hudson’s Bay stores were profitable, the company said.
Some analysts see the latest business decision as a last-ditch effort to modernize the once-popular brand and keep it alive post-pandemic.
“The Bay’s online efforts have been substandard,” said Soberman. “It hasn’t been popular with Canadians the way that Costco and Walmart have.”
Unchaining the e-commerce business from the rest of HBC, he said, is a way to “find flexibility” in a company that has been hamstrung by an outdated business model.
Baker’s breakup model is unusual in the retail industry, Soberman said. Similar “omnichannel” retailers like Nordstrom Inc. or Macy’s Inc. have kept their online and offline stores managed by the same team in an effort to keep the two co-ordinated.
The advantage of splitting the companies, however, is that it would raise the valuation on a stand-alone e-commerce business and attract investors, said pc28retail analyst Bruce Winder.
“If you chop off the department stores, the e-commerce company can command a much higher valuation. Suddenly you’re playing in the same field as Amazon and Shopify and all these high-flying solid e-commerce companies that have done very well and will continue to do well, especially now that e-commerce has become a major channel post-pandemic,” he said recently.
The company also noted that, under Nairn’s leadership, The Bay will oversee branding, marketing, buying, planning and technology for both businesses, ensuring the online and offline brand stay connected.
“The depth of product online is much more extensive than possible with stores, however, all products sold in Hudson’s Bay stores will continue to be available on ,” a spokesperson said.
Baker has had some success with this strategy before.
Earlier this year, the company sold a minority stake in Saks Fifth Avenue’s e-commerce business and transformed it into a separate company. The move quickly drew investors; private equity firm Insight Partners invested $500 million (U.S.) in a deal valuing the stand-alone business, now known as Saks, at $2 billion.
Splitting the companies is akin to strategies at places like Loblaw Companies Ltd., where Loblaws’ grocery chain is disconnected from Shoppers Drug Mart, Soberman said.
“The people running Loblaws know that, if they want the grocery chain to be successful, they have to beat the crap out of Metro and Sobeys, while the people at Shoppers know that, if they’re going to be successful, they have to beat Rexall and Costco.
“So you have two different management teams and companies for two different markets.”
But this strategy might not pan out the same in mercantile retail. “I’d say it’s too late to pivot to e-commerce, honestly,” said Duff. “Other companies are way ahead, as HBC has focused on the department store as the one-stop shop for customers that don’t exist anymore.”
“It’s a good idea for the company. But it would have been a better idea were it done, say, 10 years ago,” said Dene Rogers, former CEO of Sears Canada.
David Tawil, president of Maglan Capital, a New York-based hedge fund, said this might be a way for the company to shed its brick-and-mortar assets and pile the profits into its stand-alone e-commerce business.
“If the company believes the bricks-and-mortar business is a melting ice cube, better to jettison the growing part of the business now than leave it as a piece of a bigger yet struggling enterprise,” he said.
If there were ever a time to change the business model, it’s now, said Soberman. One analyst recently found the company has had negative cash flow since early 2018 and has underperformed even during peak holiday seasons.
“If they continue on their current path, which is basically what Sears Canada did, then there’s a real question of whether they’ll survive in the long term,” he said.
“The world of retail has changed, and although it’s hard to move away from the model that made them the largest retailer in Canada, there’s really no other choice.”
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