Why HBC bought Saks

Playing defense against Nordstrom and cornering the luxury retail market You could see it happening – the slow but steady shift that moved Hudson’s Bay Co. (HBC) from the stagnant, stodgy and astonishingly uncool department store to a lifestyle hub that has in recent years attracted an entirely different clientele. Is buying Saks the right […]

Playing defense against Nordstrom and cornering the luxury retail market

You could see it happening – the slow but steady shift that moved Hudson’s Bay Co. (HBC) from the stagnant, stodgy and astonishingly uncool department store to a lifestyle hub that has in recent years attracted an entirely different clientele.

The retailer introduced The Room – high-end boutiques housed within flagship locations – dropped 800 underperforming brands, started carrying close to 70 luxury lines and introduced international brands such as Top Shop. It was an attempt to breathe new life into a dying retail chain – a feat retail experts said was next to impossible – at a time when there was very little competition in the luxury retail segment. While comparisons have been drawn to Holt Renfrew, HBC has denied its move upmarket was an attempt to steal market share.

The game started to change when Nordstrom announced it was opening locations in Canada earlier this year. HBC was in a position to either maintain status quo or make strategic moves to fight Nordstrom. This week it made its move: HBC agreed to pay $2.4 billion for Saks Co.

“They’re kind of cornering the market, positioning themselves to be much stronger in the upper scale or luxury end of department stores. It gives a card to play as Nordstrom comes into the market next year,” said retail analyst Ed Strapagiel.

Richard Baker, HBC’s chairman and chief executive, told analysts during a conference call Monday that the company will move as quickly as it can on a rollout plan that includes seven full-line Saks stores in Canada and about two dozen locations under a discount banner.

Baker has his work cut out for him. HBC, Saks Fifth Avenue and Lord & Taylor have all struggled in recent years.

“The Bay is still losing money, Saks is laden with debt and Lord & Taylor is losing on a same-store basis. HBC needs to pull this together pretty quick, make sense of it and turn it into a profitable business,” said Doug Stephens, president of Retail Prophet Consulting.

If HBC is in fact using Saks as a preemptive measure to thwart the effects of Nordstrom, why not spend the time and effort building a luxury brand that is already part of the retailer’s stable of banners? HBC has done relatively nothing with the Lord & Taylor banner in Canada aside from a few product specials like cashmere sweaters.

In Canada, Saks is a better-known brand than Lord & Taylor, said Luke Sklar, a partner at Sklar Wilton & Associates. “If you’re going to go after the best in retail, you would pick Saks,” he said.

The Saks Fifth Avenue image has become somewhat tarnished in recent years, however. During the economic slow down, the luxury retailer relied on deep discounting and coupons to lure in its U.S. customers. Stephens called such moves “panicked,” and core customers were turned off. The store is still recovering from those losses.

Yet a lot of retailers suffered during the downturn, said Strapagiel. “Everybody got out on the promotional bandwagon and tried harder with discounts to attract shoppers,” he said.

It should be noted however, that Saks’ competitors Nordstrom and Neiman Marcus have continued to thrive.

Flaws aside, Strapagiel said Saks’ brand caché remains fairly high.

Stephens agreed. Though Saks hasn’t fully recovered and is still “debt laden,” there’s still “good equity in the brand, and if [HBC is] able to resuscitate it completely, it makes a pretty good foil to Nordstrom,” said Stephens.

Canada’s capacity for luxury retail

With Nordstrom, Hudson’s Bay Co., Holt Renfrew and now Saks, has the market for luxury retailers reached its saturation point? Sklar says it has.

“The fashion market is extremely crowded and extremely fickle,” he said. “Everybody is shopping everywhere, so [Saks has] got to bring real product magic. I believe the Saks name is known but lacks massive caché.”

While it remains to be seen what kind of impact the Saks brand will have for HBC and the Canadian retail landscape, the retail experts Marketing spoke with believe the acquisition was, if nothing else, a sound real estate investment. The combined portfolio of Hudson’s Bay stores in Canada, Lord & Taylor locations in the U.S. and Saks locations would comprise more than 32 million square feet of retail space.

“No matter what, even if the bottom falls out of the business, there’s still all that real estate. That cuts down the risk of the investment,” said Strapagiel.

The retailer says it also plans to open up to 25 Saks Off Fifth discount stores in Canada that would compete with Nordstrom Rack and Holt Renfrew’s HR2 model that was introduced to Canadian shoppers last spring in Toronto and Montreal.

HBC also owns 69 Home Outfitters houseware stores and 48 Lord & Taylor department stores in the United States.

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