Part 32 (1/2)

CHAPTER 18.

DISASTER AND.

DELIVERANCE.

”There are no mei-chants here. You're all a lot of'bookkeepers. ”

-Harvard Professor Walter Salmon, spealing to an HBC executive think-tank

FOR MOST OF THE FIRST TWO YEARS after they had attained control of the Hudsons Bay Company, Ken Thomson and John Tory were ecstatic about their new purchase. Contrary to everyones expectations, they seldom intervened in board decisions, and Thomson evidenced no desire to become the Company's Governor. ”I'm not on any ego trip,” he said after George Richardson left the post and was succeeded by Don McGiverin. ”I've got so much in my life that I'm grateful for and so much to be occupied with, that I don't need or want to be Governor. The future of the Company is largely in Don McGiverins hands. Ile's an awful1v nice guy n.o.body could represent the Company better.

I'm much happier to have him do it than myself ”

Thomson and Tory joined the board but, with one exception, seemed happy merely to be consulted, their input limited mainly to deciding the extent of dividend payouts and monitoring major capital expenditures. The exception was Tory's concern about Sinipsons. The first item on his agenda was to advise McGiverin to merge the twenty-three-unit department-store chain

529.

530 FAREWELL TO GLORY.

with The Bay.* ”We're absolutely delighted with our long-term investment . . happy with management and very hopeful the year's results will be quite satisfactory,”

To r , v told the Financial Post in 1979, when the Company's operations showed a net of $104 million on sales of $3.4 billion.

By the early 1980s, inventorV was turning over more slowly and interest rates had started to climb. That was a serious matter. The interest payments necessary to cover the $2.3-billion debtMcGiverin and his board had incurred expanding the retailing empire quickly overwhelmed everv other balance-sheet item. By 1982, The Bay had move~ into a serious negative earnings position (a net loss of $128 million), and at a directors' meeting onjune 22, Tory finallystepped in. ”We can'tkeep growing by incurring more and more debt,” he warned the board, threatening drastic measures if there was no hottom-line improvement by the end of the year.

What Tory came to realize was that the Company's management had become obsessed with expanding its share of market at the expense of profit. The quest for greater sales became a ' iihad. The Company, which had once confined its special pricing to semi-annual Bay Days, launched Super Dollar Days, In-Store Warehouse Sales, Big Deals, Scratch and Save Days, Price Blow-Outs and quarterly Bay Days each of which lasted two weeks. Customers reacted by cherry-pick-ing the merchandise that was deeply discounted (up to 50 percent) and pa.s.sing over the items with big mark-ups. To heighten the impression of a stock of bargain goods that had to be moved quickly, stores were over-inventoried; the typical sales floor looked like an untidy warehouse, with

*Had T)ry's advice been followed, $iOO million in operating losses and $000 million in interest carrying costs over the next decade might have been avoided.

DISASTER AND DELIVERANCE 531.

merchandise left in cartons to block the aisles. As they were picked over, the items usually spilled onto the floor, where they were trampled on-or stolen.* The pressure to produce advertising flyers promoting the many sales grew so intense that their pages were crammed with mistakes. A four-page HBC flyer published on August 20, 1989, for example, contained thirty-seven errors that had to be corrected in subsequent newspaper ads.

Such tactics proved costly in terms of both immedi ate profit and the YIBCs long-term reputation. Richard Sharpe, who then ran the competing Simpsons-Sears (later Sears Canada) chain, reacted by issuing orders that his company would not even try to match the HBC price cuts. ”We ignored them,” he says. ”They were giving the goods away and losing pailfuls of money. We lost some market share, but we were making money.” Still, no expense was spared in trying to pump up the HBC , s sales totals, which in 1984 had climbed by $1.4 billion since the'rhonison purchase-while earnings of $104 million for 1979 had turned into a loss of $107 million in 1984.

When one high-ranking Company executive defended that strategy of continual growth and praised the merits of spreading overhead costs through continual expan sion, Torv shot back, ”You can't eat market share-and you can't eat overhead, either.” Not being a retail mer chant, Torv didn't really know what was possible in the departmen t-store trade, but he did know that as desir able as a growing market share might be, profit was much better-particularly since current cash flows were not enough to service existing debts.

*There was a story going the rounds ot”Ibronto's fas.h.i.+on district about the sales manager of a dress supply house, who told his staff, ”There's a Bav buyer coining in this afternoon to see our line; lay it out on the floor, so she'll know what it will look like when it gets into the store.”

532 FAREWELL TO GLORY.

FOR A TIMF, THE COMPANY was barely under control, lacking direction or sensible forward momentum. Its executives had been taught how to expand the business, not how to change it. The Company's troubles were so serious that everyone was looking inward to prevent collapse, instead of outward to trigger resurrection. Most of the organization men who were moved in to run various departments had the necessary know-how, but they lacked soul. Walter Salmon, who taught retailing at the Harvard Business School, said as much, addressing the HBC , s executives at a 1982 think-tank. ”The problem with this company,” he declared, gazing at the gathered suits, ”is that there ate no merchants here. You're all a lot of bookkeepers. ”

Sir William Keswick, the retired British Governor, observing the tribulations of his beloved Hudson's Bay Company from his retirement at Theydon Bois, shook his head in disbelief. ”We handed over the Company in apple-pie order, and they went wild with it. If you borrow money at a certain percentage and invest at half that percentage, sooner or later it doesn't work. That's sort of elementary. But that was what they (lid.”

”They imbued the staff with the notion that fiscal accountability was the highest virtue, and forgot that retailing is really s...o...b..z,” complained s.h.i.+rley Dawe, a brilliant marketer who had joined the HBC as a trainee and rose to be a vice-president. ”Don McGiverin had a wonderful rapport with everybody,” she fondly remembered, ”but lie kept getting further and further away from the action.”

One problem wasThe Bay's inability to keep up with the changing tastes of Canadian consumers. The Company still behaved as if its main compet.i.tors were other department stores when retailing was being fragmented in new directions, with specialty marketers such as Dylex, the Grafton Group, Leon's, The Brick and thousands of DISASTER AND DELIVERANCE 533.

imaginative indepen dents winning sales. Despite the Herculeariefforts to raise it, between 1978 and 1984 The Bay's, market share of Canadian retail sales actually declined to 5.3 percentfrom 5.7 percent-while profits plummeted at the same time.The Company dida lot of silly things, such as abandoning its pharmacy counters, which mav not have produced an especially high gross (9 percent) but had been great traffic builders.

Some areas-like the cosmetics department at the Winnipeg store with its $12-million face-lift-were overbuilt; others, such as the untidy, often filthy main floor in the Victoria store, were ignored. ”If there is an example of abrogated opportunity in the history of corporate Canada,”

concluded a 1983 study of the HBC bV Torontos Yorkton Securities, ”surely it is the Hudson's Bay Company.”

The I IBC becarne so obsessed with cutting costs that the basic rationale for its department stores-friendly service and a wide selection of merchandise-was lost. The Bay stores switched almost entirely into soft goods, emphasizing fas.h.i.+on at a time when more and more families were nesting in their homes, stocking many of the hard goods the HB(was abandoning, Even the fas.h.i.+ondriven clothing business faced an uncertain future. ”n.o.body knows what women want to wear any more,” commented MarlIN n Brooks, a leading Toronto fas.h.i.+on designer. Service at most Bay stores became virtually non-existent as thousands of knowledgeable and loyal employees were laid off and part-tiniers took their places. The temporary subst.i.tutes may have been untrained and disinterested, but unlike permanent emplovees they cost the company no pensions, paid statutory 1~olidavs, vacation times or other fringe benefits. Barry Wilson, manager of The Bay at Bloor and Yonge in Toronto, reported a 43 -percent staff turnover at his store in 1987.

It was not alwa~ s easy for Bay management to dismiss longtime employees.

One of the mainstays of the 534 FAREWELL TO GLORY.

downtown Vancouver store, for instance, was Helen Carson, who had managed the wool department for twerity-eight years and had a large following of local knitters. The Bay wanted to fire her because her salary had reached the maximum, but that would have cost a considerable severance allowance.

Since she reftised to quit, she was transferred to the children's wear department, where she had to move heavy boxes. Carson eventually injured her lower back and had to resign for medical reasons, leaving behind an untended-and unfrequented-wool department. Lynn Scully, who successfully built up the same store's book department, had taken great pride in her work. ”My grandfather was a fur trapper and the whole faintly was excited when I got the job. We loved The Bay and I remember when it was a prestige store and people would actually come in just to buy our shopping bags.” But Scully left, as so many other department managers did, because not Only had unrelenting cost-cutting made effective merchandising impossible but the Company had also turned into an impa.s.sive and uncaring bureaucracy. In her last year at The Bay, Scully was reporting to nineteen different managers.*

Many people left the Company with understandable bitterness, none more so than Mark Bluines, who later started the successful Mark's Work Wearhouse chain. Blunies had been forced out of his job as a junior manager at the Calgary store because his many ideas and ambitions didn't fit the fIBC mould. This diverted him from his objective ofbecoming the youngest-and only Jewish-senior executive of The Bay. Ile was not pleased. ”For many years afterwards,” he recalls, ”ifl felt a little lazy, and was thinking,'Geez, I'm not going to bother openingup in Quebec,' or something like that, I'd drive down to the Bay store and just ride the escalators.

The hate would w:ish over me and would fuel Lip my emotions, reineiribering all the times I had answered the page 'Blumes, call 555,' onIv to have tuy nose rubbed in it. So I'd come back and tell my staff, Tet's go for it!'

DISASTER AND DELIVERANCE 535.

All through this time, the head-office bureaucracy continued to balloon.