The Bay goes global with big gamble on Galeria Kaufhof

The stock market loves HBC's purchase of Germany's leading department store chain Galeria Kaufhof. But will shoppers here and there buy in?

Many financial analysts had already rated HBC shares as a "buy" for investors. The stock price climbed 10 per cent the day the deal was announced.

We're ... questioning the relevance of department stores in a world where we have online convenience.- Doug Stephens, retail futurist

The $3.36-billion acquisition announced this week will be almost completely financed by the sale of a number of Kaufhof stores into a REIT (real estate investment trust) that's partially owned by HBC. It's the type of business prowess that has defined the leadership of HBC's owner and chairman, American real estate mogul Richard Baker.

"He made a killing by selling the Zellers' leases to Target," says Alex Arifuzzaman, a Toronto retail analyst. "And then he releveraged that into buying Saks." Meanwhile, the real estate value of the Saks Fifth Avenue flagship store in New York City has been pegged at more than what Baker paid for the entire company.

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But some retail industry insiders were left wondering if the deal will actually change the experience for Canadians shopping at The Bay.

Department stores struggling

"We know that department stores are under siege," says Doug Stephens, a self-described retail industry futurist who appeared on The Exchange with Amanda Lang this week. "We're talking about an entire channel coming apart at the seams, and really questioning the relevance of department stores in a world where we have online convenience and we have very strong specialty retail."

Stephens notes that Germany is no different when it comes to department store trends and questions whether HBC can be successful with its latest acquisition.

"Kaufhof is under the same sort of pressure in Germany. Is HBC really the company to go in and reinvent Kaufhof if they haven't reinvented themselves yet?" he asks.

The Bay has a three-part strategy for re-inventing itself, according to a spokesperson:

• Renovation. The chain is in the midst of a coast-to-coast reno project at most of its 90 locations. Stores will be brighter with wider aisles and better displays.
• To be a "fashion destination." The Bay claims to have the biggest shoe department in the country. It's also focusing on menswear and accessories, and has imported both the U.K. Top Shop brand and American bridal salon Kleinfeld into its operations. "Cool, young brands" are being introduced to lure Millennials.
• E-commerce. A new division called HBC Digital was announced last year, to drive an online sales effort across all of the company's business units, including Saks Fifth Avenue, Lord & Taylor, Hudson's Bay and HBC outlets. "We feel this group not only creates near-term benefits, but also will enable HBC to become more nimble in the digital marketplace," commented Baker in a news release.

Is that all there is?

Some observers though were less than impressed.

"They are taking steps, but are they the envy of the retailing world? Not by a long shot," says customer strategy adviser Mark Satov. "They are at least investing in their brand and looking to give people a reason to shop there."

But Satov believes that Baker's real estate moves with HBC do take some of the pressure off the chain to perform at the retail level.

"Real estate isn't saving retail, but good real estate will make good retailers look better and bad retailers look OK," he said, noting the sad state of Sears' finances has been somewhat improved by the company's decision to sell off some valuable leases.

Other Canadian retailers have also looked to real estate as a cash cow. Loblaw created a REIT last year to finance its takeover of Shoppers Drug Mart. Canadian Tire has also launched a REIT.

In the end though, analysts agree that retail chains survive on the strength of their sales. Canny manoeuvres with real estate are impressive, but the real test will come on the shop floor here, and throughout HBC's newly expanded empire.