COVER

Retail's red ink

In a frugal age, only the toughest survive

JOHN SCHOFIELD March 10 1997
COVER

Retail's red ink

In a frugal age, only the toughest survive

JOHN SCHOFIELD March 10 1997

Retail's red ink

COVER

In a frugal age, only the toughest survive

JOHN SCHOFIELD

A moment of silence, please, to remember the dearly departed. First there was Simpson’s, closed by its owner, the Hudson’s Bay Co., in 1991 after 119 years in business. Woodward’s Ltd. of Vancouver bit the dust in 1992 and was then swallowed up by the Bay. That same year, Robinson’s Department Stores Ltd. of Mississauga,

Ont., closed its remaining three locations in Ontario. The casualty list goes on. Woolworth Canada Inc. shuttered 240 stores in 1993, throwing 3,000 people out of work. Kmart Canada Ltd. deep-sixed the Kresge chain in 1994. And just last month, Gendis Inc. of Winnipeg closed its 169 Greenberg and Metropolitan stores. The latest to enter the intensive care ward is what Toronto retail consultant Len Kubas calls “the icon of Canadian retailing”—the T. Eaton Co.

Ltd., which filed for bankruptcy protection last week after hemorrhaging $120 million in 1996 alone. To put it mildly, the 1990s have been an ugly decade for Canadian retailing. ‘We’ve seen an erosion in the sales of the major department stores going back five years,” says Kubas.

“They’ve just been clobbered.”

And the shakeout is not over yet. Major department stores such as Eaton’s—once the unassailable temples of conspicuous consumption—have been hit the hardest, pummelled by a host of aggressive discount chains and “big-box” specialty stores. Since 1985, major department stores have slipped from 15 per cent of total retail sales to nine per cent last year, according to Statistics Canada. On the bright side, a predicted rise in consumer spending this year and next should help many of the survivors return to profitability. But even then, retailing will remain a high-risk pursuit. Among the looming threats is the Internet, which allows shoppers to place orders directly with manufacturers, bypassing the retail middleman.

Ironically, the latest signs of turmoil in retail come at a time when recession-wracked consumers are once again beginning to reach for their wallets. With interest rates near 40-year lows, Canadian retail spending started to pick up in the last few months of 1996. Fifty-eight per cent of those questioned in a recent survey by the

Conference Board of Canada, an Ottawa-based economic research group, said that now is a good time to make a major purchase—the highest level since 1987.

Still, nobody suggests that Canadians are about to return to the free-spending ways of the 1980s. Spooked by the recession and waves of corporate and public-sector downsizing, shoppers have entered the era of “focused frugality,” says Mel Fruitman, a consultant and former vice-president of the Retail Council of Canada. Loyalty to one store is a relic of the past: shoppers go wherever they can get the best value. “The consumer is much more fickle and demanding,” says Annette Verschuren, president of Home Depot Canada, a 24-store chain that specializes in home-improvement products.

The department stores’ biggest mistake was never knowing exactly who their customers were. Kubas traces the industry’s decline to the recession of 1981-1982, when big retailers tried to stem the flow of red ink by cutting back on staff and service. “I think the day

the music died for department stores was when they started charging for deliveries,” he says. “It’s been a legacy that they’ve been carrying for the past 15 years.”

Until then, major department stores such as Eaton’s had a strong hold on the hearts and pocketbooks of middleand upper-income Canadians. They strayed even further from their traditional clientele during the hardscrabble days of the early 1990s, when cashstrapped retail chains targeted bargain hunters. “They got caught up in the price game because they felt they couldn’t stay away from it,” says Fr uitman. “The tendency has been for all retailers to gravitate to the same part of the market.”

Lured to the crowded lower end of the market, the majors barely stood a chance against the kings of price-cutting. Chief among them was U.S.-based Wal-Mart Stores Inc., which has 43 per cent of the Canadian discount market only three years after entering the country. The established chains have also been battered by a profusion of “category killers”—discount specialty chains such as Future Shop in electronics,

The Brick and Leon’s in furniture and appliances, and Sportchek in sporting goods. Consumers who once naturally gravitated to Sears or the Bay to buy televisions or refrigerators have been choosing the big-box stores in increasing numbers.

The rise of specialty and warehouse stores reached a fever pitch at the beginning of the decade. Many of them, such as the Price Club and Costco—which have since merged—

were hardened veterans of the American retailing battleground. Together, they brought a new, take-no-prisoners mentality to Canadian retailing—topped off with sophisticated inventory-management software that pared distribution costs to the bone.

But even the category killers are looking a lot less deadly in the face of today’s fickle consumers. Sportmart Inc. of Illinois announced recently that it is closing all 11 of its Canadian stores after sales dropped 25 per cent in November and December. Its Calgarybased rival, Forzani Group Ltd., has said it may close as many as 12 of its 155 stores, including some Sportchek and Sports Experts outlets. Home Depot decided last year to ease its pace of expansion in Canada, with plans to open eight stores this year instead of 10. “The life spans of retail concepts are shrinking all the time,” says Jim Okamura, a retail consultant with the J. C. Williams Group in Toronto. “Department stores had a long run, but category killers had a very short run. We see them as saturating the market already.”

In fact, an overcrowded market may be the real reason why the retail industry is in such turmoil. There are simply too many stores in Canada. “Increased competition has led to severe price discounting and a resulting contraction in operating margins to unsustainably low levels,” a study by Dominion Bond Rating Service concluded earlier this year.

In all likelihood, therefore, the bloodbath will continue. By the time its restructuring plan is complete, Eaton’s may have to close as many as 40 of its 86 outlets. Uncertainty also hangs over Kmart Canada Ltd.’s 123 stores, which have been rumored to be in trouble for over a year. Some might be resurrected under the Zellers banner, while others could be picked up by such chains as Canadian Tire, says analyst George Hartman. But not all are expected to survive.

Kubas, for one, believes there will still be an important role for mainstream department stores in the years ahead. He points to the success of Sears, Roebuck and Co. in the United States. “When Sears brought in Arthur Martinez from outside the company as CEO, he really mobilized the company and did a great job of reorganizing it,” he says. Martinez—hired away from Saks Fifth Avenue in 1992—embarked on a five-year, $5.4-billion overhaul to sharpen the retail giant’s focus on its core customers—women between the ages of 25 and 54. The company earned $1.7 billion in 1996, a far cry from the $2.7 billion in losses it racked up in 1992.

In this country, analysts are encouraged by the performances of Sears Canada Inc. and the Bay. Share prices for both companies have climbed steadily as a result of recent efforts to cut costs and improve efficiency. Sears laid off 1,200 employees last year, while the Bay and Zellers merged their head offices to trim expenses. The companies are also winning the confidence of investors with new initiatives: Sears Canada plans to open 28 home furnishing stores over the next three years, while the Bay is a participant in World Avenue, an on-line shopping mall being developed in partnership with IBM that is due to open this fall.

When all is said and done, the key to success in today’s rapidly evolving marketplace has not changed from the days of Timothy Eaton: give the customers what they want. One commodity that is increasingly in demand is convenience, says Okamura of the J. C. Williams Group. The retailers making the greatest strides are those who can save their patrons time as well as money. ‘There are a number of successful retailers out there g who are dealing with the [compet5 itive] situation,” says Okamura. “It’s I tough, but it’s not impossible.” I Those are encouraging words for £ retailers who are determined to be g more than a memory in a nostalgic ° shopper’s mind. □

GOING UP, GOING DOWN

Major and discount department store sales as 16% a percentage of retail market*

*Less automotive sales, groceries and drugs