The Hudson Bay Company

Company Background Information

The Hudson Bay Company is a leader in offering branded merchandise under three retail

business units in North America. They operate Canada`s largest, national branded retail

department store, Hudson`s Bay across the nation. In the United State, they operation the fashion

department stores, Lord and Taylor. They also operate Home Outfitters, a kitchen, bed and bath

superstore.

The Hudson Bay Company hold the distinction of being North America`s oldest incorporated

company and one of the oldest in the world. Founded in 1670 in Canada, the organization began

in the fur trade by bartering with Native for fur in the Hudson Bay region. (The Hudson Bay

Company, 2013) In 1821, they merged with their main competitor, the North West Company,

becoming a commercial fur trader that spanned the continent. (The Hudson Bay Company, 2013)

The demand for fur was losing ground by the end of the 19th century due to changing fashion and

taste. The company focus began shifting to turning their fur trading posts into sales shops that

were stocked with a wider variety of goods that could be bought with cash, not skins. (The

Hudson Bay Company, 2013) The company began an aggressive modernization campaign in

1912 with their expansion across Canada and resulted in six department stores in Victoria,

Vancouver, Edmonton, Calgary, Saskatoon and Winnipeg. The company continued on this

expansion through various strategic acquisitions throughout the years. (The Hudson Bay

Company, 2013)

Beginning in 1970, HBC began focusing on retail with the acquisition of Zellers, Simpsons and

Robinson’s throughout the decade. (The Hudson Bay Company, 2013)The 1980’s saw the return

to their core business and any non strategic assets such as the Fur Trade, natural resources and

real estate (The Hudson Bay Company, 2013)were sold during the economic downturn. Strategic

expansion continued during the 1990’s with more acquisitions of Woodward’s and Kmart

Canada in a bid to strengthen market share. (The Hudson Bay Company, 2013) HBC has since

explored new shopping channels by offering a customer loyalty program, Home Outfitters, and

Designer Depot (2004-2008). In 2003 HBC Signature, a private brand inspired by the Company's

unique heritage, was introduced. And in 2005 HBC was chosen Premier National Partner of the

Vancouver Organizing Committee for the 2010 Olympic and Paralympic Winter Games. (The

Hudson Bay Company, 2013)

Fact Sheet

- Owned by NRDC Equity Partners

- Canada`s oldest corporation

- Founded in 1670

- Currently has 3 banners: Hudson’s Bay with 90 stores across Canada , Home Outfitters

69 outlets across Canada, Lord & Taylor 48 stores in the North Eastern United States

- IPO November 2012 raise $365 million or 19%

- Sold many of its Zellers leases to Target for $1.83 billion

PESTEL Analysis Notes

Political:

Government regulates imports and exports

Licensing

Need to sell Canadian products

Concern over growing consumer debt

Expensive international shipping

Currency exchange may/may not attract international buyers

Tariffs in other countries may discourage international consumers (import dues)

Economic:

Recession began in 2008 = Fluctuations in sales due to global financial crisis

Impact of globalization = Globalization opens up new markets but also introduces new

competition

Taxes and fees for the sale and distribution of products

Prices of goods and services

Inflation

Fashion cycles

Exchange rates

Interest rates

Unemployment rate

Social:

Changing consumer tastes and style trends on a regular basis

Consumer movement to shopping at designer stores rather than department store

Corporate responsibility and giving back to the community

Customers more aware and concerned about where products are made

People like to shop at Canadian owned stores

Changing demographics – aging population, ethnic diversity and more new comers

Consumer demand for differentiated and diversified products and services

Consumer demand for personalized shopping experience

Social media/networks

Technology:

Internet, Smart Phones, wireless connections enabling consumers to purchase anywhere which

requires mobile website and shopping capabilities

Social networks

Customer reward programs and credit cards

Credit cards given have higher interest rates than those given from banks

Privacy/ security of online shopping

Self check out

Improved Distribution channels

Merchandise `right sizing`

Presence of online market

Extending online shopping beyond domestic market (i.e. shipping outside Canada which is

presently an untouched market)

Advancement/improvements in delivery times and methods both domestically and

internationally

Environmental:

Increasing customer awareness of the impact companies have on the environment

Animal Rights- the sale of fur in stores

Pollution – production and manufacturing of their subsidiary partners to be included

Products that are carried and their impact on the environment

Green movement - Charging for plastic bags & promoting reusable bags

Printing flyers on recycled papers and use of “green bags”

Power smart energy efficient company practices

Legal:

Consumer protection and privacy laws

Employment Acts – minimum wages increasing across Canada

Human Rights

Restrictions on acquisitions, partnerships, mergers

AODA regulations & similar across Canada

Intro to Retail Industry

The Hudson Bay Company (HBC) operates department stores in Canada, department stores in the highly competitive and fragmented North American merchandise and retail industry. Canadian department stores account for 13.7% of retail sales compared American department stores which represents 8.5% of U.S. retail sales. With department store sales in the U.S the low percentage of department store sales can be attributed to increased competition from big-box retailers, and e-commerce websites. In addition, department stores are faced with the threat of volatile consumer spending, driven by the level of disposable income, brand equity, trends and seasonality. Department stores must predict fashion trends and time the release of goods according to seasonal trends to successfully attract consumers.

Type of Industry

Hypercompetitive Many large department stores- Target, Wal-Mart, The Bay, Sears, Nordstrom, Niemen

Marcus, J-Crew, Winners, Marshalls, Home Sense, IKEA, Canadian Tire (home products)

Aggressive pricing from competitors like Wal-Mart Aggressive advertising from Target, Wal-Mart, Winners, Marshalls, etc.

Industry Cycle Stage

Between “Shake-Out” and “Maturity”- More towards maturity… Increasing rivalry, standard products, higher entry barriers (for smaller companies),

market share and cost key

Attractiveness of the IndustryMODERATE

The fact that the industry growth is rapid and profit potential is high increases the attractiveness of the industry for big department stores to extend their geographical presence into the Canadian market. There are two major drawbacks: the facts that the department stores industry is highly competitive, and that it has many good readily available substitutes.

DRIVING FORCES

Dynamic industry analysis involves determining how the major underlying factors affect the industry and its competitive condition. There are a lot of driving forces that might positively or negatively affect the department stores industry. Dynamic analysis makes company managers aware about possible changes in the external environment and helps them get ready in advance. The most powerful agents of change for the department stores industry are the following:

1. One of the main driving forces is the changes occurring in the economy. Market volatility impacts the ability to raise and borrow capital. Instability of the economy may also impact sales and profits as a result when customers are not spending.

2. Fashion apparels are a driving force for department stores today. Consumers are expecting quality, quantity and variety of designers and brands in a department store. These store need to keep an eye on the trends by utilizing their experience to predict the next big fashion trend in order to stay competitive.

3. Emerging new technology capabilities and applications can be a major driver of changes. The Internet can affect the department stores industry by availability of on-line shopping. Consumers will have more detailed information regarding products and can comparison shop at their convenience. The availability of mobile sites so customer can shop anywhere.

4. Increasing globalization is another factor that might bring changes to the industry. Globalization increases the diversity and number of competitors. For instance, global department stores chains expand intensively and become serious competitors for local department stores. Generally they have well-known brand names, which make their entry and expansion less difficult. Globalization can also increase the customer base for the Bay.

5. Entry or Exit of major players might affect market share of the major competitors within the department stores industry. Entry of a new company shakes up competitive condition by adding diversity.

Government policies and regulations should be taken into consideration when it comes to factors that can bring changes to the industry. These rules make entry barriers higher. They also increase costs of operation.

Porter Five Forces Analysis

Threat of entry - Medium

Scale and Experience

Easy for small specialized boutiques to enter into market as they are not seen as threats. Large department stores have experience and can enter into market with more ease than

smaller boutiques. They will be more competition for HBC. Examples, Target opening in 2013 and Nordstrom deciding to enter Canadian market.

Only larger department stores have the necessary investment to enter the market. Expensive for new entrants to enter the market due to the volume and sales needed to

reach the same economies of scale as the Bay. The Bay has many years of experience and due to that they have been through the

learning curves and have become more efficient at the process.

Access to Supply or Distribution Channels

Very easy to access different distributors of home products, make-up, and clothing. Certain designers and therefore a degree of quality may be difficult for new entrants to

obtain because of designers’ existing contracts with HBC. The Bay has specific designer collections that they host which can produce customer and

supplier loyalty. The Bay has established long standing relationship with distributors and also has access

to variety suppliers in the industry. Smaller companies may struggle to access the vast distribution channels the larger

organizations have access to.

Expected Retaliation

Small clothing boutiques or furniture stores have little to worry about in regards to retaliation.

Larger department stores can expect aggressive marketing and business strategies from HBC to stay competitive.

The Bay has to be careful with the marketing and competitive pricing wars that occur with some of the larger department stores such as Wal-Mart and as such they have to take a proactive approach to their marketing and pricing strategies.

Legislation or Government Action

Department stores from the USA can expect challenges in this area as they will be expected to sell a certain amount of Canadian products and therefore product offering and price offering will be different than their stores in the US. This could end up not meeting the expectations or matching the “hype” of Canadian consumers.

The government can restrict the number of International products that come in if the Home countries products are not represented to a certain level.

Differentiation

HBC offers brand name products to customers. Loyalty points cards. Loyalty credit cards with points earning capabilities. Competitors would have to develop stronger brand portfolio to compete. Competitors would have to develop equally competitive loyalty program. HBC foundation - Corporate responsibility. Long lasting brand name in Canadian history and connects though Heritage line HBC Financial Services – Accident, Health, Pet, Travel, Seniors insurance

Threat of Substitutes - High

This is due to low cost retailers such as Wal-Mart and soon to be, Target. In addition, smaller boutiques and speciality stores are able to offer customers personalized experience at a similar cost. Most of the department stores provide the end user with products that have the same quality for less which gives the customer no reason to stay with the same store and also there is no switching cost, the more intense the competitive pressure posed by substitute products.

Price/ Performance Ratio

Several existing competitors that offer less expensive products to HBC. New opportunities for even higher end department stores where products would be more

expensive. Opportunity for less expensive department stores that still offer brand name products. Small boutiques or speciality stores may not seem like a threat to HBC but as customers

like to buy from stores that are locally owned or from stores that have more of a social conscious, this is a substitution.

Competitive Priced competitors. Niche high end stores. Specialty Stores. Smaller low cost chains.

Extra-Industry Effects

The Power of Buyers - High

Generally, the buyers in the department store industry are individual customers, who rarely have any real bargaining power but that is changing as more alternatives to traditional department stores are available and new technology allow them to search for the best prices. Concentrated Buyers

There are a number of large department stores that sell specific product lines and the amount of stores they have create a very concentrated buyer environment.

There are concentrated buyers with products that are specific to only the company For example the Bay had rights to the last Olympics to sell licensed merchandise.

Low Switching Costs

Department stores have moderate switching costs because they have a lot of power when negotiating due to high volume of stores, a lot of money goes into advertising designers and product lines. Switching suppliers would cost them a great deal of money and also certain loyal customers.

The Bay due to its size has med – high buying power because of the volume of products and supplies that they need for each of their stores across Canada.

Buyer Competition Threat

There is potential that HBC could buy the designers which supply them their clothing so the threat of this happening is fairly high.

Due to the number of suppliers associated with the Bay it is highly unlikely they will be able to supply themselves although they may have the resources to do so.

The Power of Suppliers - Low

The power of suppliers is low because department stores have the power to negotiate lower prices from suppliers as they can buy larger quantities. Department stores usually have a variety of suppliers and no single supplier provide huge the majority of products. The more differentiated and valuable a particular product, the more bargaining and pricing power suppliers have. In a given situation, the power of suppliers varies from weak to moderate because of the following factors: There are a number of companies that ready to offer all supplies and they are willing to work

with department stores. It is not difficult to switch purchases from one supplier to another Suppliers can be a valuable part of sellers’ production process

Concentrated Suppliers

There are several suppliers with a range of prices and quality for products.

High Switching Costs

Refer to low switching costs- MODERATE. In some cases for the designer products the switching costs would be higher because of

the potential loss of loyal customers and are willing to pay a premium for them. In the cases of the lower end products there are usually a lot more suppliers available therefore the cost may not be as high.

Supplier Competition Threat

Suppliers do not have much power as many designers would jump at the opportunity to sell their products HBC stores as they cover such a widespread geographical area including Canada and the USA.

The suppliers really don’t have much competition as there are many designers and companies that would like to see their products sold within a large department store.

Competitive Rivalry - High

The department stores industry is highly competitive. There are a lot of players of different capabilities competing within the industry. Factors indicated below explain the intensity of rivalry: The competitors are numerous. The greater the number of competitors, the higher the

probability that one or more companies will be engaged in a strategy intended to enhance their market standing.

Buyer costs to switch brands are low. The less expensive it is for buyers to switch their purchases from one seller to another, the easier it is for sellers to steal customers away from rivals. Rivals have diverse objectives and strategies.

The firms in this industry have high fixed costs.

Competitor Balance

There are a number of large competitors such as Sears. Wal-Mart was constantly competing with Zellers and Target is expected to be a direct competitor starting in 2013. As Nordstrom moves into Canada in 2014 (Allison, 2012), HBC can probably be expected to be more aggressive to protect its Bay and Home Outfitters stores.

The competitors that are equal size to The Bay are creating competitive pricing wars to become larger and dominant over others.

Industry Growth Rate

The industry for US department stores moving to Canada is growing exponentially. Canadians have been travelling for so long to the US to shop at these famous department stores and as they are moving into Canada there is a lot of excitement.

Industry between “shake-out” and “maturity” stages as rivalry is increasing greatly and market share is becoming increasingly important.

The Bay is in its maturity stage and as such the rivalry is increasing especially with the US brand stores appearing in Canada.

Market Share is becoming more important to the Bay as they want to maintain the same level and not lose out to the US branded stores

High Fixed Costs

High fixed costs in obtaining retail space in Canada’s major cities The Bay experiences high fixed costs with the purchase or rent of space in prime

locations within the major cities of Canada. The other fixed expenses are the operation of the stores including lighting, air

conditioning, heating etc...

High Exit Barriers

Cancelling leases for retail locations is one of the largest costs and exit barrier for department stores such as these. An example of this is Zellers terminating their leases

with landlords across Canada. Terminating their leases with their largest landlord, RioCan has cost them approximately $9.3 million for only 5 Zellers stores (Strauss, 2012 ).

Selling the fixtures within the stores for example coat hangers, selves etc... that where designed specifically for the space

Low Differentiation

Price competitors offering brand name products such as TJX companies; Winners, Marshalls and Home Sense, have the upper hand when it comes to differentiation, however product differentiation is low as many of these large department stores entering the Canadian market have the same types of designer products.

The Bay has differentiated them in a way that many customers may not switch between competitors.