World NOTES

September 28 1998

World NOTES

September 28 1998

Fashioning a gamble to survive

BUSINESS

Eaton’s bets the company on teens and fancy brand names

KIMBERLEY NOBLE

One late-summer lunch hour, Louise Rich ambled into Eaton’s flagship store in downtown Toronto, looking every inch the customer that Eaton’s managers are so anxious to see strolling the aisles of their newly refurbished stores. An avid shopper with an eye for fashion and a good job as a public information officer with the Ontario government, she had exactly 45 minutes and a number of things to buy. Rich wanted various household items, including a pretty pair of oven mitts for a gift, a toaster and a blender. Nothing fancy, just some of the basic, reliable merchandise that Canadian women have been buying at Eaton’s for as long as they and their mothers can remember.

Rich, however, did not have much luck. The housewares department where she had shopped for years had been relocated. In its place was a special clearance area jammed with jumbled racks of summer clothes. She found the new department, six floors above where it used to be, but ended up leaving the mall irritated and empty-handed, unimpressed by what management has dubbed “the new Eaton’s.” Her as-

sessment? “I still can’t find anything I want. And Lord knows, I’m a shopper. It feels like thousands of square feet of nothing to buy.”

There, in a nutshell, is Eaton’s abiding strength—and its potentially insurmountable challenge. For all it has been through, it is still the store thousands of Canadians look to when it comes time to shop. The company went bankrupt in the spring of 1997 because it could not satisfy that demand, at least not at prices its customers were willing to pay. In his effort to turn Eaton’s around, president and CEO George Kosich has chosen what looks like a risky strategy, dumping or downsizing the selection of many products that customers associate with Eaton’s—including appliances and furniture—and replacing them with brand-name clothing.

The company, which emerged from bankruptcy protection late in 1997, has closed 21 of its 85 stores, laid off about 2,000 workers and sold $175 million in new equity to outside investors—a move that cost the Eaton family half its ownership stake. Management spent the summer throwing great chunks of new cash at higher store ceilings, softer lighting and, above all, glamorous new brand-name merchandise: more clothing from Ralph Lauren and Tommy Hilfiger, bags and shoes from Kenneth Cole, crockery displays reminiscent of Boston’s Crate & Barrel.

But, as the construction dust clears, shoppers and shareholders alike are asking the same old question. In an era of category killers, dwindling loyalties and on-line shopping, is Eaton’s any closer to

providing customers with the products they want, at prices they are willing to pay?

So far, only Eaton’s management and a handful of high-fashion suppliers seem certain the company is on the right track. “We have doubled the amount of business we are doing with Eaton’s,” says fashion manufacturer Peter Nygard, who cannot say enough in praise of the turnaround. “Our merchandise is literally flying out of the stores.” But others—from suppliers to industry consultants to investors—remain unconvinced. “I am truly puzzled by their strategy,” says Toronto retail consultant John Williams. “They want to earn higher margins with more turnover. But how are they going to do that by going upmarket? In Canada, there are not enough people upmarket.”

Many wholesalers are reserving judgment until they see evidence of a turnaround. “The feeling among people like myself is that so far, nobody’s done anything to make us comfortable,” observed the head of a large leather goods supplier whose company took a considerable haircut under the deal Eaton’s ended up negotiating with its trade creditors. The stock market also has its doubts. Eaton’s common shares, priced at $15 last June, have dropped to $7.30 since management announced on Sept. 11 that it was cutting its profit forecast to $26 million this year, down from $58 million.

Regardless of what the skeptics say, Kosich is adamant the company is on the right track. And he may be correct. The man is a retail legend, with 38 years’ experience in the department store business, a fact that he often brings up in conversation. Asked in 1997 what lessons he might have learned after almost four decades at Hudson’s Bay Co. (from which he retired the day before he was hired to run Eaton’s), Kosich once snapped: “I basically taught the lessons in the Hudson’s Bay Co.”

These days, Kosich has tempered his approach. The notorious combativeness is gone. So is the belief that to make money, department stores must slash costs and prices. For Kosich, Eaton’s survival depends on being able to distinguish itself from rival chains like Sears and the Bay. Current business wisdom says that coming third, as has been Eaton’s lot for some time, is tantamount to failure. Kosich is not

$16 15,

even going to try. Instead, he is determined to take Eaton’s where no Canadian retailer has gone before, carving out a new market in a space he swears is opening up between the Bay and Galen Weston’s Holt Renfrew. Eaton’s, Kosich declares, is going to be the Bloomingdale’s of Canada. We are going to break away from the pack. We are going to be category killers when it comes to ready-to-wear.”

On top of hitching its wagon to the big brand-name stars, Eaton’s has its sites set on the lucrative youth market. ‘This is a $6-billion business in Canada, and we were hardly in it except for jeans,” Kosich says.

Management swears to the retail gods that its strategy is working: 1998 sales are up seven per cent across the board, and 20 per cent in key fashion categories. In some stores, sales of certain products jumped by as much as 143 per cent the day after Eaton’s published a glossy advertising flyer featuring new fall clothes. “No one’s seen these kinds of increases,” says Kosich. ‘Wo one." That’s true, at least as far as conventional department stores go; retail sales grew by an average of 8.5 per cent in the first half of 1998, but much of that growth comes from Wal-Mart. On the other hand, Eaton’s managers must remember that in chalking up year-over-year increases, they are operating from an extraordinarily low base.

However successful management might be in wooing away some members of the Holt Renfrew crowd, Eaton’s success will ultimately depend on traditional mid-market customers looking for the basics. “They have to move a large assortment of moderately priced merchandise in order to do the volume they need to keep going,” Williams says. As far as most analysts can see, this puts the company more or less back where it started 18 months ago—albeit with better-looking stores and a stronger balance sheet. This, combined with the fact that the U.S. retailing giants who rejected buying Eaton’s when it was bankrupt are still looking for ways to expand into Canada, raises the question of whether Eaton’s strategy is ultimately aimed at putting the stores themselves on display. At the very least, it would provide Timothy Eaton’s descendants with something they could certainly sell. □

A NEW WAY TO GO SHOPPING

Eaton’s is not only out to become a category killer in brand-name fashions. The venerable Canadian retailer, which became famous for its now-abandoned catalogue, is meeting another source of competition head-on. Last week, the company launched a new Internet shopping service: shop.eatons.com. The selection includes a range of personal and household products, all of which will be delivered anywhere in Canada for a flat price of $4.50.

The idea is to start with products that Eaton’s knows people want to buy on the Web, and expand over time in keeping with

customer demand. Says Christopher McKenzie, the company’s manager of Internet business development: “We wanted to create something that’s a bit slick and fun to use, and at the same time will help us find out what else the on-line customer wants.” The possibilities are endless. Forrester Research, a Massachusetts-based company that tracks U.S. trends, says $7.3 billion worth of goods will be bought on-line this year, double last year’s level. By 1999, sales are forecast to jump by another 55 per cent. So far, Internet shoppers seem most interested in buying computers and software products—a third of the current market— followed by travel services and entertainment products. The on-line market for books and music products comes next, and is growing rapidly, led by U.S. Internet stores such as Amazon.com. “You’re looking at a

lot of money,” McKenzie says. “In Canada right now, we have a huge opportunity.”

He blames cautious retailers for the fact that Canadians must still look to U.S. companies—and pay outrageous exchange rates, plus shipping and customs charges —to shop on-line. But he points to Eaton’s, as well as bookstore giant Chapters Inc., as proof that Canadians are catching up. ChaptersGlobe.com is due to be up and running next month, in partnership with The Globe and Mail newspaper.

For companies, McKenzie says, the big advantage of on-line retail is its flexibility, unlike traditional stores of brick and mortar. “The great thing about the Web is that if it turns out we have something customers don’t like, give us 24 hours and we can change it.”

K.N.