Company Of Adventures - Merchant Prince Part 32

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 fashion 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 Shirley 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 fashion 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 fashiondriven clothing business faced an uncertain future. "n.o.body knows what women want to wear any more," commented MarlIN n Brooks, a leading Toronto fashion 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.

D.G. (Pete) Buckley, a Bay vicepresident, once burst into McGiverin's office to dramatize the point. "Look, Don," he told the Governor, ,,when I first arrived at your head office, we had an internal phone directory five pages long. This one, published today, has two hundred pages and that doesn't include the whole data-processing group. We've got a problem."

"I was absolutely appalled by many of the att.i.tudes and directions within the I 1BC," recalls David Thomson, Ken's elder son, A ho was training on the job in the HBC organization at the time. "There seemed to be a distinct separation between the people who felt themselves visionaries and the line operators facing the customer. The latter were less involved in the decision-making process, which in fact they were Funding. The world was turned on its head. The system had come to a great human impa.s.se."

Pierre Mignault, a brilliant merchandiser and later president of the Price Club of Canada but then head of the HB(:,s Quebec region, felt a similar frustration with "the grids of people coining at me from all angles out of that huniongous lbronto head office. It was unreal. You didn't even know who to call about anything important. The Company became too big and too fat and didn't have the human- resource structure to handle its rapid expansion." Mignault experienced a good example of Bay bureaucracy in 1983 when the roof of the Place Vertu store started leaking. Ile had to put twenty buckets on the shop floor to catch the water whenever it rained, but couldn't find the appropriate vice-president in charge of fixing leaky roofs. Even though the local fire department temporarily closed the store because of the danger of the ceilings collapsing, Mignault never did get head office to sanction repairs to tile building. He gave up the attempt after a year and ordered it done on his 536 FAREWELL TO GLORY.

own. "Of course it cost much more than it would have originally," he recalls, "because after a year of dripping water, the carpets had to be replaced and I had to buy huge fans to get rid of i he musty smell. It was awful. It was embarra.s.sing."

To offset the neglect and losses, the Company launched an internal money-raising prograin that took the form of disposing of the balance of its SimpsonsSears stockfor $211 million to Sears, Roebuck, realizing a $48-million profit, and cashing in-for $455 millionthe 7.7 million preferred shares in Dome Resources it had received in 1981 on the sale to the Calgary company's parent of its remaining interest in Hudson's Bay Oil & Gas.

That Dome transaction was a milestone in Canadian business history, because it was ultimately responsible for the toppling of the high-flying Calgary energy company and its even higher-flying chairman, Jack Gallagher. Dome had groA n from a one-man operation in the early 1950s to a major energy plaver, but its corporate behaviour remained dominated ~y that same man, Jack Gallagher, whose dreams of grandeur knew no limits. At the heart of his fantasies was the desire to make Dome larger in Canada than Imperial Oil. To achieve that goal, in 1981 Gallagher went after Hudson's Bay Oil & Gas, a subsidiary of Conoco, the former Continental 011, based in Stamford, C onnecticut. f fe easily won control (5 3 percent) of HBO(; but only by doubling Dome's debt load to $5.3 billion, a level that required interest payments of an agonizing $3 million a day. To lighten that load he desperately needed access to HBOG's $300million annual cash flow, and that meant buying out all the minority shareholders, including the largest single block-the 10. 1 percent still owned by the HBC.

Just before Gallagher had made his move on Conoco, he had offered -rory, through a Bay Street intermediary, DISASTER AND DELIVERANCE 537.

S27 a share for the Company's 11130G stock. Tory, who had done his own calculations, considered it to be worth at least $50, though he had at one time been willing to sell HB(:,,, position at $40 to $45. Now he dug in.

Tory seldom loses his temper, but he still turns red thinking about that $27 bid, particularly since it was made just three days before Gallagher offered Conoco the equivalent of $52 for its 11130G stock. "That really stiffened our backbone," he recalls, "and when I met Gallagher I told him in no uncertain terms that I thought this was not the way ethical businessmen operated." He refused a trade of Dome shares for 1113Cs stake and would accept only a complicated retractable prefer red-stock formula that made the HBCs 7.7 million Dome shares worth $57.50 each on or beforc December 31, 1984, with the money paid out of an escrow account that Dome management couldn't touch in the interval. Gallagher later claimed the deal was largely responsible for Dome's downfall, but for HBC the 1983 Dome redemption provided a badly needed infusion of $45 5 million in cash.*

By 1984, the I IB(:',s pre-tax losses over the preceding four years amounted to more than $320 million. Thomson and Tory had grown exasperated with management's intransigence. One ofthe big problems was that the cost of the money involved in the I 113Cs expansions was never included in profit projections. Regional and departmental managers would make presentations to the board forecasting glowing revenues and operating profits for new store expansions without even mentioning returns

*The 1113Cs onl~ remaining oil investment was the small Calgary-based Canadian Roxy Petroleum (named after the Roxv Arcade, a New York roller-skating rink where its promoter, Robert Peters, had spent an enjoyable evening), bought in 1980 and sold seven Nvars later to Westcoast Transmission for $82 million at a smail profit.

538 FAREWELL TO GLORY.

on capital invested, interest costs, cash flows or tax considerations. At 5 P.M. on November 29, 1984, Tory, who had brought up the issue so many times he was fed up with bleating about it, arrived late at a Bay committee meeting attended by Governor Don McGiverin and HBC vice-presi dents Wally Evans, Rolph Huband, Marvin Tiller, Don Wood, Al Guglielmin and Lorne Klapp.The outside directors present included Ian Barclay of Vancouver, Marcel B61anger of Montreal and Dawn McKeag of Winnipeg. They had met to hear the presentation of C.W. "Chuck" Gerhart, then general manager of the Ottawa region, who reviewed his area's retail growth, projected sales and operating profits five years into the future, cheerfully predicting a net increase from $3.5 million to $12.1 million by 1989-this for a district that had a profit peak of $5 million in the past and had not recently been reaching its own sales targets.

For Tory, that was it. Keeping himself under tight control, he politely inquired whether Gerhart cared to acknowledge the fact that current profits had been realized only after investment of about $30 million to improve the main Ottawa store, linking it to the Rideau Centre, and pointed out that this expenditure had involved considerable financing costs. When the Ottawa manager replied with the equivalent of a shrug, , ro ry gave him a stern lecture about the impact of financing charges on cash flows and bottom-line profits. "It really wasn't Gerhart's fault," he later admitted. "He was just part of the HBCs corporate culture. They were living in a drearn world-only looking at operating profits and pretending everything else would take care of itself."

The next day, just after a revised quarterly profit outlook was tabled showing a further $50-million dip in a rapidly accelerating financial slide (the loss for the nine months ended October 3 1, 1984, was $7.67 a share, compared with $4.20 the year before), Tory addressed the DISASTER AND DELIVERANCE 539.

Company's full board. It was the toughest speech he'd ever given, and would in retrospect become recognized as a watershed in the Hudson's Bay Company's long history. "IAhen we ~icquired HBC," one of the directors recalls his saying, "it had just taken over Simpsons. I thought HBC was well managed and could help Simpsons, which had inferior management. Instead, the Bay's management screwed up Simpsons, and I've lost confidence in the LIBC management. The major shareholder,A ould not consider investing another cent in HBC at this tii-ne. I will review the situation with Ken and our people and will have recommendations for the Board at our next meeting In January."

He stressed that the continned existence of the FIBC was at risk because n.o.body seemed to be focusing on the real problem-that the Company simply wasn't generating enough cash to cover its dailv requirements. An irriniediate freeze was placed on capital spending; drastic cuts in corporate overhead were ordered; nem guidelines were established to focus objectives on cash flows and net earnings rather than sales totals and operating profits.

"When you look back," Thomson later rurninated, 41 it's a legitimate question to ask why we let it go so long. When we made the investment, we believed the HBC was a well-managed company, and there was very little rea- son for us to think otherwise, as profits grew in the first few years.

Then, ill of a sudden, with the downturn in business and upturn in interest rates, the sins of the past came home to roost. Now that doesn't make for a pa.s.sive investment. Professional management was failing to meet budget objectives by increasingly wide margins. When I said the management of the HBC is great, I was right-I just got the tense wrong. Don McGiverin and his people had done a superb job, but the Company had turned into a sort of ivory-tower bureaucracy. We could have tried to get -,i hot-shot retailer from the States to 540 FAREWELL TO GLORY.

take his place, but that wouldn't have been right. We could have sold off The Bay's real estate and broken up the Company, but I didn't want to do that. We could have merged the 11BC with Yhomson Newspapers, but that wouldn't have been fair to the shareholders who had invested in our publishing abilities. No, the best thing was to stick with it, and build it up again."

Right after that November 30 meeting, Tory had an encounter with McGiverin over costs of the Company's computer operation, which were climbing at an alarming 20 percent annually. -lbry wanted independent costcontrol experts to review the computer systems, but McGiverin refused to allow them access.

Tory and Thomson quickly realized that the Governor's head would have to be included in any effective reform package. "I don't really think management realized how desperate the financial situation had become," Ken Thomson recalls. "They thought, 'Heres a 300-year-old company, and nothing will happen'-so they just kept doing things as before. We had waited and waited and waited, but finally we had to take action. Lookit, out of respect for the kind of person he is and what he had done in the past, we didn't want to hurt Don McGiverin. But he had to go, and he was gentlemanly enough, big enough to realize changes had to be made. We were able to maintain our mutual respect and friendship."

And so the merchant prince was stripped of his crown, if not his t.i.tle.

Feeling prouder of his run than bloodied because of the way it had ended, McGiverin lost not an ounce of dignity in the process of giving up his authority. "I hung in too long, I really did," he told a friend on the morning after his demotion. "But then, not every persons built for all seasons. If I had thought there was a better way of doing things, I'd have done it. G.o.d, I've been forty-five years in this thing, and I've been at it twenty hours a day. Still, the Chief Executive Officer DISASTER AND DELIVERANCE 541.

can never have a bullet-proof vest. I've had a good run, and when they asked me to stay on as Governor, I told them I'd be delighted."

At a crucial board meeting on January 2 5, 1985,Tory, speaking on Thoinson's behalf, announced that McGiverin had relinquished his post as Chief Executive Officer but would continue as Governor in a non-executive capacity. In his place, two executive vice-presidents-lain Ronald and George Kosich-were being appointed to run the Company, with the former to be in charge of Zellers, wholesale, furs, real estate, the northern stores and the disposal of non-strategic a.s.sets, while the latter would take over control of the HBC's department stores Including SiMPSODs as well as credit and information services. The directors (except Ronald and Kosich) thought this was a silly idea because the Company would not have a single responsible executive. They only approved the new structure subject to Tory's taking on the chairmanship of the management committee of the board, thus effectively turning himself into the Company's CEO, since neither Ronald nor Kosich could implement major policy shifts without first checking with him. For the next half-decade, John Tory, in effect, ran the I] 13c. It was a stormy five years, but in the end he saved the Company.

THE TORY-DOMINKrED RONALD-KOSICH partnership represented a dramatic shift in direction, since Don McGiverin had by then been running the Company for fifteen years. While few had ever questioned his skills as a retailer, McGiverin had, since 1978, opted out of his chosen profession, spending nearly all his time and energy on takeovers. As a result of that neglect-plus the effects of the recession and the Company's astronomical debt load-the HBCs credit ratings were downgraded 542 FAREWELL TO GLORY.

from AAA to a humiliating B. Between 1980 and 1982, operating profits declined 97 percent.*

Apart from cutting costs of its existing retail operations, The Bay under both McGiverin and Tory had also drastically trimmed the number of its operations. The Shop-Rite catalogue stores were closed in 1982 and its Marshall Wells hardware subsidiary was sold in 1985. Its travel business and its share of Eaton Bay Financial Services, Computer Innovations, Hudson's Bay Distillers and Toronto Credits were disposed of the same vear.t In the suminer of 1987, The Bav sold off its wholesale division, established in 1907 to handle liquor as well as grocery distribution, later adding candies and tobacco. With annual sales of $800 million, it was a big operation, but it never made much profit. After a partnership between Norman Paul, brother of a former president of Zellers, and Jimmy Kay (then chairman of Dylex) bought it for $133 million (about half of it down), the pair took not quite a year to run it into the ground, forcing its 1,200 employees on to the street and causing a $45-million writedown on the 11BCs books, though much of it was later recovered.

Late on a Friday e-, ening in January 1987, Marvin Tiller, head of the Northern Stores Division in

*At one point in 1986, things got so tight that the Company applied to take a $35-million surplus out of its employee pension fund. The application was withdrawn only when the Pension Commission of Ontario warned that it would be refused.

tThe Bay's real-estate holdings, except those buildings occupied by its stores, were folded into its subsidiary Markborough Properties in 1984 and six years later Markborough was turned into a separate public company through the spinning off of its shares to the HBCs stockholders. With 78.4 percent of the parent company's stock, Ken Thomson could claim the same percentage of Markborough, which allowed him to realize a tax-free $315-million capital gain.

DISASTER AND DELIVERANCE 543.

hiin Ronahl, Exet-litive Kice-President, HBC

Winnipeg, got a call from lain Ronald, the HBC's exec utive vice-president, advising him to be in his office at 8:30 A.M. the following Monday. "When I got there, Ronald abruptly advised me that the Northern Stores Division had been sold and that the new owners would be arriving in half an hour," Tiller recalls. "I told him that we'd like to have done an employee buyout, but sure enough, thirt ' v minutes later Ian Sutherland and Raymond Dor6, representing Mutual Trust of Waterloo, Ontario, rolled in, ready to take over."

Sale of the Company's historic Northern Stores Division had first been discussed at a management committee meeting on September 12, 1986. Ronald reported that he had been approached by a group of investors organized by Mutual Trust and that while profits for the operation might reach $35 million, it didn't have much 544 FAREWELL TO GLORY.