The Changing Canadian Retail Landscape

Head Table Guests

John C. Koopman, Partner, Heidrick & Struggles and 2nd VicePresident, The Empire Club of Canada; Reverend Bill Middleton, Armour Heights Presbyterian Church; Patty Dimond, Former Director, Mothercare plc (United Kingdom); Harry Rosen, Executive Chairman, Harry Rosen Inc.; Dr. Claude Lajeunesse, President, Ryerson University; Diane Brisebois, President and CEO, Retail Council of Canada; Ann Curran, Director, Corporate Development International and 1st Vice-President and President-Elect, The Empire Club of Canada; Len Kubas, President, Kubas Consultants; Gareth S. Seltzer, President and CEO, TWS Petroleum Limited and TWS Private Management and Past President, The Empire Club of Canada; Peter Sharpe, President and CEO, Cadillac Fairview; and Bev Crone, General Manager, Retail and Distribution Industry, IBM Canada.

Introduction by Bill Laidlaw

The retail industry in Canada has played a major role in the lives of most Canadians. When you think of it, you work in order to purchase goods and services to allow you to carry on working, to provide for your family, and to enjoy yourself. Where do you go to get the supplies to carry out those things? Well the answer is pretty clear. "Retail."

In Canada we have had a number of stores to shop in, many of which have gone out of business or have been merged with other retailers. Someone growing up in Toronto in the 50s went to Eatons, Simpsons or Morgans. Well you know what happened to them!

Morgans was the first to be taken over by the Bay which gave the company a stronger presence in Ontario and Quebec. Next was Simpsons again by the Bay. Then we had the fall of the grand old Eatons.

Today there are only a few large retailers remaining. They are the Bay, Sears, Walmart and Canadian Tire and some other large box stores that are growing daily. What is the future of Canadian retail?

I selected our speaker today as the last speaker in my term as president because I wanted to hear a Canadian business leader discuss a profound issue--the future of Canadian retail.

I must admit my closeness to this issue as the Hudson Bay Company was the first company to offer me a full-time job. I had commenced my retail career as a haberdasher at the Skyline Hotel during the evenings and summer in high school, but my first major job after teaching was at the Bay.

I remember training at the main store on Bloor. We were then in the process of acquiring Simpsons and before we knew it we were acquired ourselves by Thompson. I went through the Hudson's Bay retail management training programme and I remember very well the long hours at my first store in Eglinton Square.

I can honestly say that I have never learned as much in my life as I did at the Bay. Sadly, I eventually left for a position elsewhere but I have continued to follow the progress of this great giant of a retailer.

Today we are going to hear the perspective of the President of the Hudson Bay Company. From his vantage point he has a perspective better than most to view how retail is progressing in Canada and to see as well the clouds on the horizon and how to deal with them.

Our speaker today has the responsibility of overseeing the Bay's main operations including its main retail divisions--Zellers and the Bay.

George's retail experience spans almost 30 years. He has held senior positions in Canadian and international retailing before joining the Hudson Bay Company.

He began at the Bay working with the northern stores division and moving from there to positions with the Bay, Simpsons, Zellers and Woodwards.

From 1991 to 1994 he served as President and CEO of the Victoria Commonwealth Games and in 1995 he became President of Bata Industries Ltd. In North America and Europe before taking the position of President and CEO of K-Mart in 1997.

He rejoined the Hudson Bay Company when he was appointed President and CEO of Zellers and Executive Vice-President of Hudson's Bay Company, following the Hudson's Bay Company's acquisition of K-Mart in 1998.

George was awarded the meritorious service medal and citation in 1997 by the Government of Canada in recognition of his leadership of the Commonwealth Games and his service to Canada. He also received an honorary doctorate from the University of Victoria for his leadership of the Commonwealth Games.

Please join me in welcoming our guest--George Heller.

George Heller

Thank you for that very generous introduction. Thirty-five years ago, I was seduced by Lady Retail, a cruel yet beautiful mistress whom I continue to serve today, somewhat wiser, no less infatuated.

There have been major changes in retail over the past decade. There has been a great deal written about what happened, and little if anything about why.

I thought I could add some value by discussing the Canadian retail industry, including Hudson's Bay Company, in terms of why things change, the outcomes of the changes, and a look forward. Few retailers have a 300year history. Adaptation has been our strong suit; I thought I would conclude with how Hudson's Bay Company is adapting to current and future trends.

Contrary to what many people believe, customers change retailers, not the other way around. More precisely, the customer's reality changes consumer behaviour and the best retailers react to those behaviour changes. Retail reflects society, the more accurate that reflection, the better the retailer does. Those retailers who look into the mirror and see only their reflection wither and die.

Based on the premise that changes in consumer's reality ultimately change retailing, here are some key realities Canadians lived through in the '91 to 2001 decade.

This decade was book-ended by two recessions. It wasn't until '93-'94 that Canada fully recovered and by the end of 2000, we were once again headed south economically. We saw job instability, consolidation, globalisation and seismic changes in industry after industry, creating a climate of wariness and, to a degree, scepticism.

Our population grew by 14 per cent; however, the 40-59 year age group grew by 40 per cent. Their changing shopping behaviour and lifestyle had a major effect. We increasingly urbanised with growth in suburbs at twice inner-city growth, and multi- versus single-unit housing grew twice as fast. Almost 80 per cent of population growth was in six cities, with Toronto, Vancouver and Calgary representing 60 per cent of total growth.

Average family income grew by 34 per cent to $64,000, while Consumer Price Index (CPI) rose by 18 per cent, netting most Canadians a modest increase in disposable income, most of that coming in the second half of the decade in review.

Prime rates were 12.25 per cent in January '91, 7.25 per cent in January '96 and 4 per cent in January 2002, and Canadians went on a capital-spending boom financed by debt. Inflation dropped like a stone as well.

Households grew by 24 per cent against a population increase of 14 per cent. This fuelled a boom in big-ticket items as everyone built their nests and then bought cars to get there. Consumer debt rose by 100 per cent while residential mortgage debt grew by 73 per cent.

The two-largest increases in average household expenditure were transportation along with taxes and securities. Not far behind was shelter of all kinds. Durable and semi-durable goods grew well ahead of overall spend and pricing rose ahead of total CPI.

The spend pattern changed; in the same period, clothing sales dropped 20 per cent in terms of average household expenditure and prices rose at one-third the rate of CPI.

Technology and information grew exponentially as costs tumbled and more data and more information became more accessible at bargain prices.

What are the realities that shaped the consumers that shaped retail?

Consumers who in the past few years invested in their home and car financed by debt as rates tumbled became older and warier. More of their disposable income went to capital spending, taxes, recreation and investments, and less on the balance; the home won, the closet lost. The closet lost twice--once as a percentage of spend and the second to price. The average unit price dropped quite a bit.

With higher debt levels and more spend on capital goods, taxes and securities, the older, more cautious consumers needed more value for their remaining dollars. Brands became less important, inherent value more important, and information abounded. It became about good-enough quality versus good quality. It became more about the right price than the right brand. Canadians became less vain and more practical.

So what happened to retail?

The shift in consumer spending favoured price over quality, home over closet, convenience and one-stop shopping became more important as the commute grew and even more women worked outside the home.

Shopping for "me" became shopping for the home and kids, for retirement, making the dollar go further, less vanity, more practicality. The new "digs" and car ate into discretionary spending.

Traditional department stores hit hard times and were absorbed or went under. Where department store type merchandise (DSTM) grew by over 50 per cent, department stores lost 5 per cent. The loss of department stores and specialty chains meant the end of the growth of traditional shopping centres; the last one built was in '91. Power centres, individual big box, category specific stores went freestanding and clustered together in the suburbs, all based on price, most based on home.

A great many familiar retail chains disappeared in the decade--Simpsons, Woodwards, Robinsons, Brettons, KMart, Woolco, the Dylex group--to name a few. Even Eatons, who crawled to the finish line of the decade, expires this year. Importantly, notwithstanding this Darwinian epoch, the current chains through a combination of acquisition and organic growth grew in proportion to the overall retail growth about 50 per cent. Not so in the U.S. where chain stores grew significantly slower than overall DSTM. The major change versus the U.S. is the accelerated growth of mass merchants in Canada who grew a lot faster than in the U.S. Canada found religion in price. Wal-Mart, Zellers, Costco, Winners, Home Depot, etc. grew quickly--they better "fit" the customer reality. Even the two surviving department stores grew their volume. The channel collapsed; they didn't. The department store channel will never regain its market share of DSTM; however, department stores in Canada will grow at or near the rate of DSTM.

Online shopping was a promise that never delivered. The business model of bricks and mortar won out; online became an incremental channel to bricks and mortar, leveraging their competencies and customers. Private brands grew and international brands suffered as retailers sought to offer value and price to the 90's customer. The large chain stores sought to increase their volume by broadening their offer, blurring the lines between food/general merchandise and mass/department stores. Retail got professional, supply chain management was the news, with less merchandise, faster turns and quicker replenishment.

Get good or get lost. Use technology, master logistics, and optimise the supply chain to take out costs so you can sell lower-price merchandise in volume profitably. Sam Walton understood customer reality and responded early, setting the pace.

What's next? In the next decade, population will grow at about half the pace. The bubble of population growth will be in the 55-69-year-old group. The biggest drop in growth will be in the 5-14 year olds. Inflation will remain in check as technology continues to improve productivity and keep the lid on prices.

Spending on home will continue to grow faster than on closet. Consolidation in our industry is about over. In just about every channel, you have today a strong number one and two with a huge gap between them and a number three. The incumbents will branch out into more and other categories, leveraging their competencies. Urban malls other than "A" and some "B" malls will re-invent themselves as power centres. Suburban-power-centre growth will slow and some early ones will fail. New versions of power centres will emerge with lifestyle versus price only. Price as a differentiator will be far less of an issue in the next decade than it was in the last one. The pricing band will continue to contract, the war will shift from price to product differentiation within that narrower price brand. Retailers get it. Marketing will change, highlow will fade, everyday value pricing will be the norm, and ad dollars that were spent on telling customers about price fluctuations will be redirected.

We will see technology continue to improve supply chain, but the real change will be in targeted versus mass marketing. We will move from product in place to customer in market, highlighting and marketing specific goods and services to specific customer groups and individuals based on known behaviours and customer modelling. We will move from what's in the basket to who's pushing the basket and how do I serve them better.

Consolidation meant less consumer choice. The next decade will see retailers going beyond Canada for goods and brands, bringing new brands, new formats, and new products from around the world to combat consumer ennui or boredom. Our society will continue to become more ethnically diverse, less WASP, less northern European, and retailers will respond.

Online shopping will continue to grow from a low base, mainly in unemotional purchases. Health, wellness and recreation along with financial products will grow faster than the average. We will see the beginning of inter-generational transfer of wealth and a gathering spread between the rich and the not so rich. Quality will come back into vogue. Chain stores will grow faster than the total retail growth. The big will get bigger. We will see big and small, no medium. Regional players died in the past decade. The remaining traditional department stores will improve, their average price point will be lower but they will innovate and differentiate at the price band above mass and below designer. They and their vendors will improve their price/value equation, much as mass did, but in the next price band up. There will be a new and closer relationship between department stores and international brand vendors, one that focuses on brand destination, full service, brand extension and profitability. We will no longer have to contend with convulsions of failing department stores.

Four general merchandise and two food merchants basically control the retail real estate. Any new large entrant would have to deal with them or build slowly.

Enough about the industry. What about Hudson's Bay Company? Well, in the decade that saw sales grow by 53 per cent, we grew by 50 per cent. The growth in today's retailers, as well as our own, came primarily at the expense of the unsuccessful. Our growth, while matching overall growth, did not convert adequately to the bottom line for a number of reasons.

Three years ago we decided that it was about the customer, not about us; that the real value to Canadians was the sum of the parts of Hudson's Bay Company; that the parts in aggregate needed to respond to customers and their spend pattern; that we needed to be seamless and aligned, becoming a shopping solution; there for the customer, easy to understand, easy to use. That was to be the HBC of the 21st century--one company serving a common customer in many ways through several integrated lifestyle formats built to match the spending pattern of the customer.

In order to be a shopping solution, integrated, easy, rewarding and complete, we had to transform a poor infrastructure that was built to be anything but seamless, anything but a low-cost customer-centric shopping solution.

Infrastructure is never easy to build and in early going is mostly below the surface, hard to value. We built one customer base, going from two credit cards and three loyalty programmes to one of each, usable in all our lifestyle formats and beyond with lower costs and higher customer utility resulting in a two-point gain in credit-card usage and 1.5 million new loyalty members. We have very rich data on individual customer shopping preferences over Canada's largest shopping basket, Tide to Armani. We lead in customer-relationship management; it will only get better over the next year as all of the remaining five million card members and 8.5 million reward members get their common high utility card, HBC credit, HBC rewards. We are quickly moving from what's in a basket to who is pushing the basket HBC-wide. We will better communicate when, within HBC, individual customers can find what they are looking for, sometimes before they know they are looking for it, using customer modelling. Marketing in HBC will be increasingly customised to offer relevant goods and services to known different customer segments and known shopping behaviours.

Customer shopping habits have changed. They want more home and home-related products. We opened Home Outfitters with 22 now open, and 16 more to be opened this year. Bay and Zellers both expanded their homerelated offer, big-ticket items, electronics, appliances, ready-to-assemble furniture, patio and lawn, and children's furniture. Customers want more value and lower prices. Home Outfitters is and Zellers is close to being fully everyday pricing. Bay has its everyday pricing programmes such as Bay Value, Outline, and Market Square. We've built great private brands--Truly, Cherokee, Wabasso, Mantles, Togo, amongst others, offering not only great value, but also quality and fashion ability. HBC works in unison and all merchandising decisions are made with a view to completing the needs of our one customer within HBC and then deciding which channel or channels will be charged with the responsibility of building out the brand, the commodity and the price line--always adding value to the HBC customer, always infilling more of what they need, becoming seamless and becoming a shopping solution. We are building an infrastructure that will enable us to sell the entire HBC assortment at or through any HBC outlet, expanding our reach, optimising our assortment strength and leveraging our distribution channels, including a surprisingly buoyant dotcom.

We had a technology gap--a retail science gap that left us behind the competition in terms of decision support, inventory management and supply chain visibility. We undertook to not only close the gap, but become a retail showcase. We invested heavily both in terms of management and dollars; we are doing nothing less than rebuilding the total technology and process infrastructure to a common enterprise-wide suite of merchandise and financial systems that power all our current formats and those to come--fully scalable and easy to upgrade. With one year to go to completion, we see early results; instock at Zellers and Bay is consistently over 96 per cent, inventories coming down each quarter throughout HBC, with less risk inventory, faster turns and more flexibility in open-to-buy. Only now, some three years later, are we spending more time on optimising systems than on installing systems. We're getting to be good scientists with good tools that are only getting better. Our goal of becoming a retail showcase is near.

In retail, it's location, location, location. In the past four years we have closed 136 stores and opened and expanded 198. The real estate infrastructure needed engineering; in certain markets we had too many or too few stores, or they were too small, or not in the right shopping node, etc. We are building the right mix of stores, Bay, Zellers, Home Outfitters by market to ensure the full HBC assortment is in place, in the proper proportion, a shopping solution by market. Not cheap, not easy, but infrastructure projects seldom are.

Our entire management, and increasingly our associates, see themselves as HBC, everyone in each business unit understanding their role in providing a seamless shopping solution, no longer competing, but completing each other for the benefit of the one customer. The close to 70,000 associates of HBC voted themselves into the top-20 companies to work for in Canada.

Where do we go from here? We finish the infrastructure projects and from a base of common, integrated and strategic competencies will build on the win columns.

The connected HBC customer will increasingly see relevance to the merchandise and service offers across the assortment spectrum of HBC. They will experience higher utility of their HBC credit and reward cards with more ease and more convenience as we grow strategically the outlets that honour them. The best customers by format and total HBC will increasingly see an improved value exchange. The more they solve their shopping need within HBC, the more they save and the more they get rewarded. Customer segments will see more marketing geared to what they are most interested in. We will seek and earn a lifelong relationship based on serving them better, and because we know their needs better, because HBC is valuable and relevant to them. The breadth of commodities carried, the price points, brands, and the fashion and taste levels within HBC allow us to uniquely serve the customer throughout their life stages.

As we close and complete the science gap with common enterprise-wide competencies, deal with online, accurate information and modelling tools, and a logistics and supply chain that flawlessly gets the right product in the right quantity to the right store at the right time, we will unleash the art part of the retail equation. We are increasingly spending time on pro-active initiatives versus reacting to issues. The infrastructure building programme is nearing completion and beginning to deliver value, that will accelerate.

We built the infrastructure to connect, know and communicate with each customer served within HBC, and provide a common efficient infrastructure to service our retail outlets in order to grow HBC profitably.

Concentration is now accelerated in building out and optimising each merchandise classification within our current retail channels, ensuring more of known demand by price, by product group, by brand, by style is available, and closing the gaps we created by not being unified, not being customer-centric, and not viewing total market demand.

Home Outfitters is a good start--a targeted offer of indemand products hooked into our customer and competency grid, fully aligned and leveraged.

As we continuously infill gaps in goods and services in existing formats, we will also look to add specialised formats where we see marketplace opportunity knowing we have built HBC to be "plug and play," with ever more relevant assortments, sandwiched between a connected customer base we know and can communicate with, and a 21st century set of retail competencies that are scalable and enterprise-wide.

Somewhere along the way we got confused as to what our real value was to the Canadian consumer and how to deliver that value. But no more. We are very clear and focussed on the dot on the wall. We had to transform ourselves to better mirror customer reality, which is never easy, always crucial, and something we learned many times over in the past five centuries of continuous operation, always successfully.

The appreciation of the meeting was expressed by Stanley H. Hartt, President, The Canadian Club of Toronto and Chairman, Salomon Brothers Canada Inc.

George J. Heller, President and CEO, Hudson's Bay Company.