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Can Richard Baker reinvent The Bay?

 

MARINA STRAUSS

From Monday's Globe and Mail

 

NEW YORK — Richard Baker, the new owner of retailer Hudson's Bay Co.,mingled with the New York fashion elite as the lights dimmed for designer Peter Som's recent show, offering opinions and taking a close look at the latest in skirts and dresses.

 

It's a stark contrast to previous HBC owner Jerry Zucker, who HBC insiders had a hard time picturing with fashionistas in New York.

 

But Mr. Baker, who made his name in real estate, knows it is time for a new approach at the struggling retailer.

 

“As an entrepreneur I'm not necessarily fixated on how things were done in the past,” says Mr. Baker.

 

“We function and we think much more like a specialty retailer rather than a department store retailer. A specialty retailer is much more nimble and willing to adjust to the environment than department stores, historically. Department stores, frankly, haven't changed a whole lot in 100 years.”

 

His Purchase, N.Y.-based equity firm, NRDC Equity Partners, has snapped up a string of dusty retailers, among them HBC's underperforming Bay and Zellers.

 

The Bay operates in the department store sector which is on the wane, squeezed for years by specialty and discount chains. Zellers struggles in a low-priced arena dominated by behemoth Wal-Mart Canada Corp.

 

The need for a makeover is clear: The Bay's sales per square foot are estimated at merely $142, and Zellers', $149 – a fraction of the estimated $480 at Wal-Mart Canada.

 

At Lord & Taylor, which also lags some of its key U.S. rivals in productivity, Mr. Baker has had some success in its efforts to return to its high end Americana roots. But the 47-store chain is feeling the pinch of tight-fisted consumers and, late last month, he unveiled a shakeup at the top ranks of his firm's $8-billion (U.S.) a year retail businesses to try to shave costs.

 

Still, he is pouring money into the chains in other ways, quickly distinguishing himself from Mr. Zucker, who died last spring. While the former owner had named himself CEO despite his lack of merchandising experience, the new owner has handpicked a team of seasoned merchants at the senior levels of his retailers.

 

And while Mr. Zucker shunned publicity and focused on more mundane, although critical, matters, such as technology to track customer demand, Mr. Baker enjoys the limelight. Now he is betting on the fragile fashion sector as an engine of growth. Last fall he set up Creative Design Studios (CDS) to develop designer lines for Lord & Taylor, now, HBC and, eventually, retailers around the world.

 

Mr. Baker is “looking at every one of the properties with a different viewpoint,” says Walter Loeb, a former member of HBC's board of directors and a consultant at Loeb Associates in New York. “He has new ideas. He doesn't want to keep Hudson's Bay in its present form.”

 

Nevertheless, “this team has taken over a not particularly healthy business,” says Marvin Traub, a former executive at Bloomingdale's who runs consultancy Marvin Traub Associates in New York. “They know and understand the challenges. It will take some time to fix them.”

 

What Mr. Baker looks for in retailers is faded brands that have the potential to be revived. Early this year, NRDC acquired Fortunoff, an insolvent jewellery and home décor chain. The synergies among NRDC's various retailers are tremendous, says Gilbert Harrison, chairman of New York investment bank Financo Inc., which advises Mr. Baker. So is the value of the real estate. At HBC, it is estimated to be worth $1.2-billion, according to industry insiders. That's just a little more than the equivalent purchase price of the retailer itself. Lord & Taylor's real estate was valued at $1.7-billion (U.S.) when Mr. Baker acquired the company in 2006 – about $500-million more than he bought it for.

 

“Initially I thought, good luck,” says Mr. Gilbert. “He's bought this in one of the most difficult retail environments that we've seen for 20 or 30 years. …

 

“But he's protected his downside because the basic real estate values of Lord & Taylor and, now Hudson's Bay, certainly help prevent tragedy.”

 

Mr. Baker likes to tell the story of buying Lord & Taylor for its real estate, and then on the way to signing the deal noticed how well the stores were performing.

 

Like most other U.S. retailers, Lord & Taylor has seen business slow down recently. But its transformation to appeal to the well heeled had begun even before Mr. Baker arrived. It had dropped an array of tired brands, such as Tommy Hilfiger and Nautica, and picked up trendier labels, among them Coach and Tracy Reese.

 

Mr. Baker encouraged the strategy of expanding and upgrading higher margin designer handbags and footwear. Ditto for denim wear and funky styles in the women's “contemporary” section under hot labels such as Free People and Diesel. “My job is to understand that we need to get the best brands in the store.”

 

But he also saw the opportunity to bolster margins by stocking affordable lines in the form of CDS brands, with a focus now on Black Brown 1826 men's wear line. “I thought there was a void in the market for exactly the kind of clothes that my friends and I wear, at a right price. Why should we pay $150 for a dress shirt?” he asks, holding up one for $69.

 

Now Mr. Baker wants to borrow a leaf from the Lord & Taylor playbook for HBC. He wants to introduce better quality products with higher margins, and plans to add his design studio merchandise to the stores early next year.

 

Besides the details, he sees a whole new concept for the big Bay department stores. It would entail shrinking the Bay, possibly introducing Lord & Taylor within the stores, and adding Zellers in the basement and Fortunoff jewellery departments upstairs, with office space at the top. Lord & Taylor would serve to fill a gap in the retail landscape between the Bay and carriage trade Holt Renfrew, he says. For discounter Zellers, he seems to take inspiration from Target Corp., the fashionable U.S. discounter, by putting more focus on branded apparel.

 

But he's not averse to selling parts of the business, or real estate, if the right offer came along either. “We're always available to sell things at the right price, or buy things at the right price.”

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