The fall of Hudson’s Bay: How Richard Baker presided over the failure of a retail icon

When Hudson’s Bay Co. governor and executive chairman Richard Baker sauntered into a ballroom in downtown Toronto in 2012 dressed as Willy Wonka, he was in the mood to celebrate.

Back then, the department stores were profitable. HBC still owned this historic building – the imposing Neo-Romanesque flagship store eight storeys below on one of Canada’s busiest corners, along with the adjoining Simpson Tower where he was presiding over this large gathering – plus plenty of other valuable real estate across Canada.

Mr. Baker, an American developer who had led a takeover of Hudson’s Bay in 2008, was now on the verge of taking the company public.

He ordered chocolate bars wrapped in gold foil for the occasion, which were handed out to members of the Bay’s management. The message was that they would all be part of an exciting and lucrative future for the country’s oldest retailer.

But just like Roald Dahl’s eccentric chocolatier, Mr. Baker touted a promising vision that turned out to be more tumultuous than advertised.

After an initial push to modernize and turn around the Canadian retail business, Hudson’s Bay began a steady decline that culminated last month, when the company filed for court protection from its creditors. The future of the historic Canadian business is in jeopardy.

The crisis was years in the making. In 2016, just four years after distributing those golden tokens of the retailer’s future, its parent company recorded a $516-million net loss. The Bay hasn’t made money since.

All the while, Mr. Baker has insisted questions about the company’s financial precarity were “illogical,” partly because it owned a trove of valuable real estate.

And over the years, the company executed a series of real estate deals that generated significant cash – by selling off all or part of its buildings in Canada, and by using special rights on its department store leases to extract payments from landlords who wanted to redevelop their malls.

But at the same time, it spent heavily. The parent company took on debt to acquire Saks Fifth Avenue, and further expanded with other acquisitions that former insiders say drew focus and investment away from Hudson’s Bay.

Now, with the Bay on the brink, those who worked inside the company say the retailer didn’t have to end up this way. The Globe and Mail spoke with nearly a dozen people who described how Hudson’s Bay squandered opportunities to turn the business around.

“There was more than enough capital generated through monetizing assets in the Canadian business to make the Bay as a department store very successful,” said Mark Foote, a veteran retail executive who spent four years with the Bay as president of Zellers before the discount stores were sold to Target Canada. “They monetized a lot of things in that company, and the money didn’t go back into the business. It went into acquiring a whole bunch of other retail banners,” he said.

Under Mr. Baker’s ownership, the Canadian stores looked increasingly shabby; reports emerged of broken escalators and ventilation systems. As HBC bled cash, fewer and fewer parties were willing to lend money to the company.

And soon, the Bay was on its own.

Last December, when the parent company closed a US$2.65-billion deal to buy Neiman Marcus Group, the Canadian operations were carved out from the combined business, now called Saks Global. Then, three months later, Hudson’s Bay filed for creditor protection, saying the 355-year-old company would soon cease to exist unless a buyer or investor stepped forward with a plan for the future.

Mr. Baker declined to comment for this story.

It has been a brutal time for the retail industry, and for department stores in particular. But former insiders say they do not believe the Bay’s woes are entirely external. And they question how a storied – if dusty – Canadian retailer that extracted hundreds of millions from its valuable real estate assets over the past 16 years, and whose parent company acquired the likes of Neiman Marcus, Saks and Bergdorf Goodman, could have been allowed to decline so significantly.

“It’s unfathomable,” said Bonnie Brooks, former Bay president, chief executive officer and vice-chair of the board at HBC, “that an exceptionally rich company endowed with amazing real estate and tremendous historic value, could survive 355 years as the oldest continually operating company in the world, and then be reduced to its tragic position today.”

“This was not a real estate play,” Mr. Baker told an industry conference in 2009, the year after he led a $1.1-billion takeover of Hudson’s Bay. He wasn’t just buying the buildings; he was committed to refurbishing the stores and turning around the operations, he told the audience. In those early months, the company cut $300-million in costs, fired roughly 1,000 employees and dropped more than half the brands the stores carried: “This was a get-your-hands-dirty cleanup of an operating company that had not made hard decisions in hundreds of years.”

Right out of the gate, Mr. Baker put in place a leadership team with retail bona fides, appointing seasoned merchant Jeffrey Sherman – who had previously led Bloomingdale’s and Ralph Lauren – as CEO, hiring former Canadian Tire president Mr. Foote to lead Zellers and bringing in respected Canadian fashion executive Ms. Brooks as head of the Bay. That move split the management of the department stores and the discounter, which had previously been run in tandem.

“I think that the amount of energy it unleashed, to have people completely focused on their given banner, made a tremendous difference,” said Mary Turner, current president of The Shoe Company, who worked with The Bay for a decade, including as executive vice-president of merchandising and head of business development.

Ms. Brooks got to work revitalizing the stores as a fashion destination. The Bay relaunched The Room in 2009, a luxury department to draw high-end shoppers to its flagship urban stores; wooed younger customers with a deal to host boutiques inside The Bay for British fast-fashion label Topshop in 2011; and scored a partnership in 2013 to open a Kleinfeld Bridal boutique at the Toronto flagship store, giving a boost to its wedding registry business.

The moves drew in customers who had previously abandoned the Bay. As it gained fashion credibility, desirable brands that hadn’t considered working with the stores were more open to selling their products there, Ms. Turner said. And even on a tight budget, the team cleaned up the sales floors, making them more pleasant and easier to shop. Mr. Baker relished the Bay’s history and his title as its 39th governor, and clearly wanted the retailer to thrive, former executives say.

“He was all in,” said Evelyn Reynolds, who led business development and the home division during her nine years at the Bay.

But for all Mr. Baker’s insistence that his acquisition had not been a real estate play, the value of those assets quickly became clear.

In 2011, Hudson’s Bay reached an agreement to sell 189 Zellers store leases to Target Corp. for $1.8-billion – more than Mr. Baker’s NRDC Equity Partners had paid to acquire the entire company just three years earlier. The deal would provide “substantial capital” to invest in the department stores, Mr. Baker said in a news release at the time.

It was the first of a number of real estate deals that reaped billions for HBC over the years.

In 2014, the year after the company announced the acquisition of Saks Inc. in an all-cash deal valued at US$2.9-billion, including debt, HBC took out a US$1.25-billion, 20-year mortgage on its flagship Saks Fifth Avenue store in Manhattan. An independent appraisal valued the building at US$3.7-billion at the time, more than HBC had paid for all of Saks.

HBC also drew value from its Canadian real estate. In 2014, the company sold the downtown Toronto store and office tower to Cadillac Fairview Corp. for $650-million, leasing back the store and office space. And in 2015, HBC signed a joint venture with RioCan Real Estate Investment Trust, giving the REIT a stake in 10 properties for $325-million.

But while both deals generated cash for the company, in some cases they led to higher rents on the Bay stores on those properties, according to former executives – squeezing profits considerably.

Hudson’s Bay also continued to do deals with landlords related to its leases. In 2018, a landlord paid the retailer $151.5-million to amend the store lease at Oakridge Centre in Vancouver, in order to redevelop the site. Last year, QuadReal Property Group paid Hudson’s Bay in excess of $100-million more to give up its Oakridge lease altogether, according to a source with knowledge of the deal. The Globe is not naming the source because they were speaking about confidential matters. Other landlords have also paid the Bay for redevelopment rights.

In 2023, the company disclosed that its real estate division generated between US$300-million and US$500-million each year by monetizing property and leases in the United States and Canada.

But former executives say they did not always see more money going into the Canadian store operations as a result of those deals. “It was never clear to us where that went and how it was used, because it certainly wasn’t obvious to us that it flowed through to us, to execute anything for any of the banners,” said Ms. Turner, who was with the company when the deals for the Zellers leases and the downtown Toronto store and tower occurred.

“Do I think that he had an idea and a vision about being a retailer? Yes, I do,” Ms. Reynolds suggested of Mr. Baker. “Do I think he suddenly figured out that it was much harder than he thought it was? Yes, I do. And that’s when I think he pivoted back to his comfort zone of real estate, which clearly was what was going to make him money, and cared less about the retail component in Canada.”

After early progress in the Canadian stores, and amid international expansion, HBC ran into trouble. Losses mounted. Department stores across North America struggled as e-commerce grew, and as popular brands built their own stores and websites to sell directly to consumers. As the company underperformed, the stock fell from close to $30 per share in 2015 to as low as $6.22 in 2019.

Rationalizing that it would be easier to fix the business without the scrutiny of public markets, Mr. Baker proposed taking HBC private. His offer for the 43 per cent of shares he and his allies did not already control kicked off a high-profile fight with some dissident shareholders, who called for Mr. Baker’s removal. After hiking his bid, Mr. Baker won shareholder approval for the privatization.

The deal was funded with most of the cash on the company’s balance sheet, including hundreds of millions of dollars generated from the sale of HBC Europe, and some additional debt. But as it was finalized, a tsunami was already headed for the retail industry. The COVID-19 pandemic shuttered stores, and pushed many retailers that were already on shaky footing into creditor protection. Like other Canadian companies, the Bay received government support, but it burned through cash amid waves of mandated store closings.

Meanwhile, the physical stores – which still make up the vast majority of the Bay’s sales – were deteriorating. Some stores were left without air conditioning during the summer or heating during the winter, and broken elevators and escalators remained unrepaired for months or even years, said a former employee who was laid off earlier this year. The Globe is not naming the employee because they signed a non-disclosure agreement with Hudson’s Bay.

Elliot Grundmanis, who spent eight years at HBC, including as CFO of Hudson’s Bay between 2020 and 2022, said the company did invest in the Canadian business.

“From 2015 through 2020, Hudson’s Bay spent $100- to $150-million a year on various capital investments, but it’s expensive to maintain large department stores while also building out an online distribution facility and all the other related tech investments for e-commerce,” he said. “Part of it, too, is that you hit a little bit of a wall, where many of these stores were last properly renovated 20 or 30 years ago. You start to hit major repair inflection points, and you’ve got to prioritize.”

Cost-cutting also affected service in the stores, where customers complained of not being able to find anyone to help them. The company has laid off thousands of employees in recent years. During peak hours, managers and backroom staff were sent to the sales floor, where some had little experience or training, the employee said.

“Were there issues with COVID? Were there issues with income? Absolutely,” Ms. Reynolds said. “But nowhere near the point where it could have caused the business to implode the way it has. If the money had been invested effectively, and the stores and the e-commerce had worked in tandem, the business could have been saved.”

By 2023, Hudson’s Bay had fallen significantly behind on payments to its vendors, a classic sign of a retailer in deep trouble. The only party willing to provide liquidity to the retailer at the time was its landlord, Cadillac Fairview, which extended a $200-million term loan.

“At the end of the day, significant investments were made into Hudson’s Bay before, during and after COVID. Unfortunately, it just became an untenable business to put additional capital into,” Mr. Grundmanis said.

Meanwhile, Mr. Baker was eyeing further expansion south of the border. Last July, the parent company announced its US$2.65-billion deal to buy Neiman Marcus. HBC financed the deal with equity capital – from new investors that included Amazon.com Inc. and Salesforce Inc., and from existing investors, as well as debt. When the deal closed in December, it split Hudson’s Bay from the new Saks Global, a move that the company said would reduce leverage and provide “enhanced liquidity” to the Canadian business.

Liquidity was not sufficiently enhanced, however, to prevent the Canadian retailer from scouring the market for critical financing just weeks later, unsuccessfully. Hudson’s Bay filed for creditor protection, revealing it was months behind on rent payments and was at risk of running out of cash to pay employees.

The retailer is now liquidating stores, and looking for a buyer or investor to save at least part of the operations. Its future is at significant risk, as are the livelihoods of more than 9,000 employees.

Bonnie Brooks, for one, does not believe the decline is a result of department stores being dead.

“I think there is still a place for a terrific department store in Canada, one that is specifically targeted to its core customer base and is aligned with the price points and product assortments they want, and that doesn’t exist elsewhere in the Canadian market,” Ms. Brooks said. She added that in the past, the Bay captured a vast segment of customers across the country.

“If this market sees a value and quality offering aligned to what they want, I believe they will support it,” she said, “especially if it is Canadian.”