Hudson's Bay to buy Kmart Canada, retool Zellers and unveil new chains

Discount Store News, Feb 23, 1998 by Robert Scally

Toronto -- Using the proposed merger with Kmart Canada as a springboard, the 328-year-old Hudson's Bay Co. is retooling its Zellers discount stores and exploring new retail ventures.

The company hopes that the Kmart Canada merger will strengthen Zeller's competitive position against Wal-Mart's powerhouse Canadian division and give Hudson's Bay the opportunity to diversify into new retailing ventures including furniture, stores, an outdoors-oriented chain based on Hudson's Bay's heritage and the sales of services.

"The sales of services is growing faster than the sales of goods," according to Bill Fields, president and ceo of Hudson's Bay. "The service sector is anything from financial services to getting your carpet cleaned to getting fences installed."

Services are currently a very small part of Hudson's Bay's overall business. However, taking a cue from Sears, which has set a goal to become the largest provider of services in the United States, the Canadian company has determined that consumers want experiences as opposed to more goods.

"Everybody wants some new experience, and we're going to try to tap into it," said Robert Buchanan, Hudson's Bay's executive vp of business strategy.

Buchanan said that the market for services in Canada could exceed $60 billion. He also said that Fields, who joined the company in June 1997, wants to tap into higher growth vehicles. "Perhaps we can enjoy that growth without an excess amount of capital," Buchanan said.

More tangible at the moment are new retailing initiatives that were already under discussion at Hudson's Bay and Kmart Canada prior to the merger announcement.

"We're looking at a number of concepts including Bed, Bath & More," said Bob Peter, chairman of The Bay, specialty. "We've been working for the past six months on Hudson's Bay Trading Post, which is an outdoor adventure kind of store. We're also looking at rolling out furniture and outlet stores."

Canadian retail analysts agreed that the merger and the new initiatives are positive moves for Hudson's Bay, which stumbled four years ago when it failed to buy the flagging 122-store Woolco chain. Wal-Mart subsequently snatched up Woolco and instantly acquired about 6% of the Canadian discount store market, said retail analyst John Winter of John Winter Associates Ltd.

The Kmart Canada acquisition, which is subject to regulatory approval, would return Zellers to the position of No. 1 Canadian discounter, giving it about 31% of the overall market after the merger vs. the current 24% share for Wal-Mart's 144 stores.

The combination of Kmart Canada with Zellers will create a 410-unit chain composed of 298 Zellers and 112 Kmart stores. Kmart Canada will cease to exist. Approximately 85% of the stores will operate under the Zellers name; 5% will be converted to Bay stores or other new formats. About 45 Kmart Canada stores will be closed, eliminating 4,000 to 6,000 jobs. The absorption of Kmart could be complete by August.

Bolstered by the former Kmart locations and the addition of a new merchandising computer system, Zellers will be well-positioned to compete with Wal-Mart, analysts said. Zellers stores, which the primarily mall-based, will be more conveniently located than many of the free-standing Canadian Wal-Marts, Winter said. Zellers also has a strong customer loyalty program, Club Z, and can promote itself as the Canadian retailer -- two factors that Wal-Mart doesn't have on its side, Winter added.

"I expect they'll position themselves as the Target of Canada," said Richard Talbot, managing director of Toronto-based Thomas Consultants International. "Target has done quite well against Wal-Mart south of the line, and the last thing [Zellers] wants to do is imitate their biggest competitor."

Despite recent developments, Zellers' prospects for future success are far from assured, analysts said.

"Wal-Mart has size and momentum on its side," Winter said.

It's also not certain that Zellers will be able to capture much of the market share that was held by Kmart, particularly since that market share has steadily eroded over the past two years.

Canada's discount store business may be healthier without Kmart, which was caught in the competitive crossfire between Wal-mart and Zellers, said Maureen Atkinson, senior partner with the J.C. Williams Group consulting firm in Toronto.

Hudson's Bay's proposed new retailing concepts are also risky. Atkinson pointed out that the North American retail landscapre is littered with ventures by major retailers that eventually flopped. The question of Hudson's Bay's ability to handle the financial challenges of the merger and new ventures also looms on the horizon.

The deal: Hudson's Bay will pay $240 million Canadian (approximately $168 million U.S.), plus the assumption of an undisclosed amount of debt, to merge Kmart Canada with its Zellers division.

The stores: The combination of Kmart Canada with Zellers will create a 410-unit chain operating under the Zellers name. Kmart Canada will cease to exist. Hudson's Bay also will launch new specialty retail concepts: Bed Bath & More, Hudson's Bay Trading Post, furniture stores and outlets stores.