A crisis among the giants

Michael Salter May 13 1985

A crisis among the giants

Michael Salter May 13 1985

A crisis among the giants


Michael Salter

The deal was another sign of the poor financial health of Canada’s department store industry. Last week giant Toronto-based developer Cadillac Fairview Corp. Ltd. announced that it was buying Vancouver-based Woodward Stores Ltd. for about $270 million in cash and shares. But Cadillac plans to sell back immediately Woodward’s 25 stores, all located in British Columbia and Alberta, to a new private firm headed by Grant MacLaren, Woodward’s current president and greatgrandson of founder Charles Woodward. For Cadillac, the attraction of the deal was Woodward’s real estate assets, which consist of three shopping centres, a major interest in two other malls and some valuable land in downtown Vancouver. For the ailing Woodward’s, headed by chairman Charles Woodward, the deal promised to bring in badly needed cash to enable it to update and streamline its operations in the increasingly competitive retail industry.

The 93-year-old Woodward’s chain is one more victim of the recession-bound economy of the West, which is only just beginning to recover. The company’s profits plummeted to $2.7 million on sales of $1.1 billion last year after peaking at a record high of $22.8 million on sales of $1 billion in 1980. But Woodward’s, one of Canada’s five largest department store chains (along with The Bay, Eaton’s, Sears and Simpsons), is

also a victim of changing consumer habits which are threatening to turn large department stores into the dinosaurs of the retail industry. The hardest hit are Simpsons Ltd. and The Bay, both owned by the Hudson’s Bay Co. of Winnipeg, which are suffering from falling profits and stagnant sales. Simpsons Ltd., with 23 stores in eastern Canada, last year lost $52.5 million, up from a $30.3 million loss in 1983. The Bay, with 261 stores, saw its profit fall last year to $18.8 million from $36.5 million in 1983.

All the major department stores are scrambling to recapture the market share that has been slipping away from them in the past decade by radically revising their corporate strategies. But so far results have been mixed. Declared James Bullock, head of Cadillac Fairview Shopping Centres: “If the current trend continues and the department stores do not address their problems, then clearly there will be casualties.” What is damaging department stores most is what originally made them attractive to customers—their broad selection of merchandise. Specialty stores, with their limited but well-stocked

racks and their ability to respond more quickly to changing demand, have been attracting customers with their more personalized service. According to Statistics Canada, the share of total retail sales held by department stores fell to 10.1 per cent in 1983 from 11.5 per cent in 1976. Said Len Kubas, president of Toronto-based Kubas Research Consultants: “The typical department store does not know whether to carry Dr. Scholl’s for my grandmother or sexy Italian sandals for my wife.” Added Ian Thomas, president of Thomas Consul-

tants Inc. of Vancouver: “Department stores cannot continue to be all things to all people. They must go after a specific market segment.”

When Timothy Eaton opened the first department store in Canada in 1869 he introduced a revolutionary way of shopping. The concept of “one-stop” stores with a huge variety of merchandise under one roof struck a responsive note with consumers. At the same time, rapid expansion and volume buying enabled the stores to offer lower-priced, quality goods. Coupled with such services as free delivery, credit cards and guaranteed returns, “they had an unbeatable merchandising concept,” Kubas said.

But in the past 25 years the big department store chains have lost most of the competitive advantages they once enjoyed. The advent of bank credit cards in the 1960s, which enabled all retailers

to offer credit, removed one key advantage. And the proliferation of enclosed shopping centres destroyed the “onestop” shopping monopoly of department stores and led to the rise of their most potent competitors, the specialty chain stores.

The design of a mall—with a department store at each end and dozens of specialty stores in between—was intended to create a shopper’s haven. Instead, according to John Winter, senior associate at Clayton Research Associates of Toronto, “by setting up in malls the department stores provided for their own competition.” Added Edward Topping, executive vice-president of Toronto-based Grafton Group Ltd., which

operates such men’s clothing chains as Elks and Jack Fraser: “Specialty stores in a mall can attract customers more easily than department stores because their wide-open storefronts, blaring music and fancy window displays are right in the consumer’s path.” Department stores have also suffered because they have been slow to adapt to changes in consumer attitudes and buying habits. According to retailing experts, in the 1960s and 1970s consumers wanted to buy image and style and not mere products. With their attention to presentation and their highly selective choice of merchandise, specialty stores were better able to give them the latest “look.” And because they concentrated on fewer lines with a wider selection, they were also gradually able to match the buying power of the department stores and offer the same low prices.

As well, specialty chains catered to the growing postwar population of singles and small families. Said Garry Stamm, an analyst with Stamm Economic Research in Toronto: “Demographic trends have shifted away from the larger families that are the traditional department store customers.”

Many of the specialty chains are also better managed than department stores because they are often run by the entrepreneurs who started them. Dylex Ltd. of Toronto, for one, which operates 1,100 stores under 13 names—including Braemar, Fairweather and Big Steel Man —has grown by buying other specialty chains but keeping their original owners on as the management.

At first, department stores reacted to the rise of specialty stores and their own loss of market share by attempting to retain their traditional broad selection of items. Rather than drop unprofitable lines, they offered fewer items in each category. Said Kubas: “This reinforced the perception that they had limited selection.” Then, when sales continued to decline, in an attempt to cut costs department stores started to lay off staff and hire more part-time workers. As a result, large stores now have a reputation for slow service and staff with inadequate product knowledge, said Mary Jane Polubiec, a retail analyst with Merrill Lynch Canada Inc., a Toronto-based brokerage house. “This serves to infuriate the customer and frustrate the employee,” she said.

With their employees fearful for their jobs, the traditionally nonunionized stores have recently become the target of certification drives by organized labor. Last year the 28,000-member Retail, Wholesale and Department Store union organized 10 Simpsons and six Eaton’s stores in Ontario. In November 1,500 Eaton’s workers went on strike to get their first contract—a dispute that is still not settled.

But despite a slow start, department stores are beginning to fight back. Said James Kay, chairman of Dylex: “The department stores are still a very potent force in retailing. They are reorganizing themselves in order to hold their market share, if not increase it.” Department stores are finally dropping their less profitable merchandise lines. Hardware, fabrics, records and sporting goods are being phased out in favor of higher-profit items such as fashion, cosmetics and jewelry. In some cases lowprofit areas are being turned over to chain store competitors who can manage them better. Toronto-based Classic Bookshops, for one, operates book departments for Sears stores in British Columbia. And Laura Secord Ltd. of Toronto runs the confectionary counters at a number of Eaton’s stores.

Some department stores—notably

Toronto-based Sears Canada, which operates 74 stores nationally, as well as Eaton’s, with 110 stores—are being successfully rejuvenated by copying the specialty stores and creating small internal boutiques. Department stores in the United States, such as Macy’s of New York and Cincinnati-based Federated Department Stores, which runs Bloomingdale’s, have already happily switched to boutique-style operations.

For its part, Sears Canada has just completed refurbishing its store in the Square One shopping centre in Mississauga, Ont. Called the “New Sears,” the store is part of the “store of the future” concept developed by its parent company, Sears Roebuck of Chicago. Said Robert Knox, vice-president of public affairs for Sears Canada: “It involved reassessing thousands of our traditional merchandise items and getting rid of ones that were not selling.”

Fredrik Eaton, chairman of Eaton’s, one of the chains that has successfully adapted to modern retailing, dismisses suggestions that huge department stores will become obsolete. Declared Eaton: “The industry may be having some trouble, but it is still tremendously viable.” The new ownership team at Woodward’s is counting on that.

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