Reference no: EM133509011

Case Study:

AMAZON vs. THE BAY

Amazon and The Bay were founded centuries apart. One is the poster child for innovation andthe online economy, whereas the other is synonymous with Canadian history and heritage.Amazon has already contributed heavily to the demise of The Bay's traditional competitors, suchas Sears Canada, and is a leading force in the bankruptcy of Toys "R" Us in the United States. Infact, retail shopping malls are experiencing reduced traffic, and the trends do not look promising(especially for department stores). According to Ed Sonshine, founder and CEO of RioCanREIT, the shopping mall era is essentially over. It may be a long decline (although CoVid-19 didnot help), but he saw the writing on the wall years ago when his real estate company began tosell off assets outside of Vancouver, Edmonton, Calgary, Toronto, Ottawa, and Montreal(referred to as VETECOM). As phase two of that plan, RioCan REIT also selected 25 propertiesand started the process of rezoning them into what Sonshine sees as the future: mixed-usedlocations with residential and some shopping and office space thrown into the mix. Sonshine is asuccessful businessperson and does his homework, but he is not alone. The writing has been onthe wall for years. Back in 2017, Credit Suisse released a report predicting that more than 8,600brick-and-mortar stores would close their doors by year end. Ivanhoe Cambridge (the global realestate company) also began trying to sell its stakes in three large Canadian malls for an estimated$1 billion. What does this all mean? Retail outlets (especially major department stores) like TheBay must make a dramatic shift. But how?

CoVid-19 Hurt In-Person Retail and Helped Online Retail

As if the trends were not bad enough, along comes a pandemic that shut down malls and madein-person shopping experiences either impossible or less appealing month after month for wellover a year. Of course, unlike all of us, The Hudson's Bay Company was around for previouspandemics and major health crises, including the smallpox epidemic of 1780-1782 and theSpanish flu epidemic of 1918-1920. But the pressures are different now, and questions arose ifthis might mean The Bay's permanent shutdown, with the 350-year-old company unable orunwilling to pay some rent obligations in late 2020.But don't count it out yet. The Bay has always found a way in the past; it holds a special bondwith Canadians and might get extra support others would not.

Amazon: Leading the Retail Revolution

Amazon's revenues in 2020, the year the pandemic took over our lives, amounted toapproximately $386 billion. To get a sense of its tremendous growth, just consider that thecompany had revenues of $20 billion a bit over a decade earlier and stood at $178 billion in2017. That is impressive growth! In only 25 years or so, for better or worse, Amazon hasseverely impacted the retail sector, just as Google transformed the world of media. Amazonexpertly collects and analyzes individual and marketplace buying patterns and tracks shoppingpreferences. Algorithms then predict purchasing patterns that allow for effective suggestions.

Amazon has already disrupted the retail sector for books, clothing, and entertainment byeliminating sales forces, reducing real estate costs, and replacing warehouse workers with robots.It is also disrupting the relationship between brands and brick-and-mortar stores and is trying toconvince the world's biggest brands to further bypass retailers; it wants the makers of these topbrands to shift their thinking from how a brand will look on a store shelf to how brands can bestbe shipped by consumers. A few years ago, Amazon made a big move into the food andpackaged goods market. Its purchase of organic food seller Whole Foods is another threateningstep in that direction. Companies such as Loblaw, Sobeys, and Metro are on full alert.

The Bay: History and Path Forward

Growing up in Canada, we all learn about the Hudson's Bay Company in our high school historyclasses. Any company that survives a decade or two is to be applauded, but an organization thattraces its history back to 1670 must be acknowledged from a business perspective. (Of course,that does not excuse the exploitative and colonial actions in its high-profile past.) In addition,holding the title of North America's oldest company does not mean that The Bay has a ticket tofuture success. To survive for another 100 years, or even 5 to 10 years, the company must evolveand confront this retail revolution.

With the exit of Sears Canada from the Canadian retail landscape and the quick entry and failureof Target in Canada, you would think that The Bay would be in a great position. It is not. Parentcompany HBC, which also includes the retail brands Saks Fifth Avenue and Lord & Taylor, mayhave had total sales of $5.4 billion in 2019, but the key financials were not rosy. Most analystspoint out that, in a world where online sales are increasingly replacing in-person sales, large,expensive downtown spaces and high-rent suburban spaces just don't add up.Therefore, part of the new strategy for HBC is to trim its large spaces (especially downtown onthe upper floors of its massive stores) and focus more on retail space on the main and secondfloors. In a deal with Rhone Capital LLC and New York-based WeWork Inc., HBC's primespaces in New York, Toronto, Vancouver, and Germany will be converted into WeWork sharedoffice workplaces catering to entrepreneurs, freelancers, and small businesses. This is a viableway to improve the bottom line and increase efficiency, but the question remains: How doesHBC draw people to the remaining space?

When Helena Foulkes took over as CEO of HBC in 2018, she was shocked to see the state of thecompany's technology infrastructure. The e-commerce site crashed on a regular basis, and theU.S.-based Lord & Taylor stores, owned by HBC, lost an estimated $5 million in sales on BlackFriday alone when their systems crashed. Step one was to fix those issues, but Foulkes hadbigger plans. HBC is also investing to transform into a true online marketplace (an Amazon forslightly more premium products). The company is opening its site to third-party vendors, whichessentially adds hundreds of brands and thousands of products on HBC.com. HBC already hadabout 225 million website visits per year and a loyalty card membership of 5.6 million people.This is attractive to vendors. In addition, it will greatly expand visits, which can only benefit thecore HBC stock as well.

Finally, Foulkes and her team also decided to sell off assets like German-based Galeria Kaufhofand flash sale company Gilt.com. It is also closing underperforming Lord & Taylor stores. In2021, it announced plans to sell the flagship store in New York for $850 million to WeWork.The results? Saks is doing well. HBC profit margins are improving as well. It is a tricky period.As HBC adds brands, it must also make sure to maintain its position in the market and not todilute too far.

Rethinking Physical Locations: Customer Engagement

All retailers are searching for the next level of differentiation. Even though Amazon isresponsible for this sense of urgency, the company is not standing still. For example, it is alreadyexperimenting with self-driving delivery. So how can The Bay capitalize and improve on itsstrengths? Authentic human interaction in a retail setting is key. So, the questions The Bay andother traditional retailers need to answer are: How can we improve our customer engagementlevels? How can we improve those interactions and create the conditions that will lead to morecustomer loyalty? How can we possibly provide that experience during a health crisis?The Bay has a special place in the hearts of Canadians. Students will continue to learn about theHudson's Bay Company in history books, but if The Bay is to survive as a retail brand, it willneed to continue to make tough business decisions and wise strategic marketing moves.

QUESTIONS

1) Why are online retailers taking so much market share from the traditional brick-and-mortar stores?

2) Do you think that legacy stores such as The Bay will be able to compete with online stores in the future? How do they have to change to be more competitive?

3) If all goods were available to purchase online, would there still be products and services you would want to buy in person? How can online retailers become more competitive against traditional stores for items that people still prefer to buy in person?