Eaton's Hard Times
Mere hours before the official reopening of its fashion floors in Toronto's Yorkdale mall last week, there appeared perhaps the perfect illustration of Eaton's quest to remake itself. Downstairs, the array of cosmetics and fashion accessories was deliciously tempting. Upstairs, on the department store's just-renovated fashion floor, more than 30 designer lines ranging from cK Calvin Klein to Ellen Tracy were enticingly displayed. But, as shoppers puttered amid the perfume, the aroma of paint hung in the air: workers were brushing last-minute coats on the escalators. "The store looked modern and up-to-date with good displays, not sensational, but good," says retail consultant John Williams, of Toronto's J. C. Williams Group. "But the tough sledding is only starting."
The full extent of Eaton's challenge was driven home last week when, on the brink of four glitzy store reopenings across the country, T. Eaton Co. Ltd. announced the unexpected resignation of its chief executive officer, George Kosich. The departure of the 64-year-old Kosich, who was hailed as a savior when he joined the firm in June, 1997, led many analysts to conclude that he was paying the price for his overly optimistic predictions about Eaton's economic health. Kosich was not available for comment but it seemed clear that he had lost his golden touch for the retail trade. One startling example: Eaton's downtown Toronto store was still under renovations late last week - a mere month before Christmas. "What is very unusual is that you would part ways with your chief executive officer before Christmas," says retail consultant Richard Talbot of Thomas Consultants International Inc. in Unionville, Ont. "Normally, this is your best sales period - the time of year in which you sink or swim. To find the CEO gone before Christmas tells me that there are very serious problems with the policies he has just put in place."
The concerns were magnified by the fact that, in the same news release, Eaton's warned that its third-quarter earnings would be lower than it had expected - although actual figures will not be released until Dec. 10. It added that those disappointing earnings will affect the company's forecast for its fiscal year ending Jan. 31, 1999 - but it provided no new estimate. That sombre advisory marks the second time in six months the venerable firm has revised this year's forecast: two months ago, it downgraded its projection of $58 million in profits to an estimated $26 million. But, in an interview with Maclean's, Eaton's senior executives stoutly maintained that the department store chain is on the right track. "We believe that our strategy is the right one," said board chairman Brent Ballantyne, who is managing the company until it finds a new CEO. "We have a strong financial position - with virtually no debt. And we have all kinds of room on our ($250-million) line of credit."
Such upbeat talk cannot dispel the gloom that has lingered like paint fumes over the 129-year-old company since it sought bankruptcy protection in February, 1997. The subsequent adjustment has been painful. Hired in June, 1997, days after his retirement from the Hudson's Bay Co., Kosich laid off about 2,000 employees, closed 21 of the chain's 85 stores and took the firm out of bankruptcy protection late last year. He then oversaw the sale of $175 million in new equity to outside investors, shaving the Eaton family's ownership stake to about 52 per cent.
Most importantly, Kosich decided to shed low-margin lines such as electronics, furniture and appliances, and revamp stores to emphasize higher-margin products such as fashions and cosmetics. Last week, Eaton's managers blamed much of the company's third-quarter losses on the lingering costs of giving up those lines. They also noted that consumer confidence has diminished - and that much of the vital space in their stores was under renovation. "Those things are done and that is now behind us," declared chief financial officer Hap Stephen.
But while many analysts applaud Eaton's general direction, they emphasize the store remains saddled with formidable problems. And they say Kosich must carry much of the blame. The principle difficulty is the sheer number of underperforming stores. Under bankruptcy protection, Eaton's could have broken leases with its landlords, pulling itself out of smaller malls and communities where sales lagged. Analysts believe that Kosich should have shut another 25 stores when he had the chance. Now, if Eaton's closes stores, landlords can sue. "Their top 10 or 15 stores are among the best in the country," says a retail analyst who requested anonymity. "The trouble is that the bottom 25 stores are so bad that the good ones barely make up for losses."
Then there is Eaton's marketing strategy. Last summer, as $100 million in renovations were under way, the chain ran an expensive ad campaign in the mainstream media directed largely at teenagers and young adults. "Diversity" was now the watchword: the tone was urban punk. Other ads promoted Eaton's higher fashion lines, quietly shifting the focus to wealthier buyers. Many traditional customers were puzzled. Intrigued consumers were thwarted: the chain had advertised its new look before it fixed up its old stores. "Customers would walk into the stores and say, 'This is not what the ad looks like,'" says retail consultant Talbot. "Eaton's alienated all those middle-aged, middle-income customers that they should have been attracting."
In a harsh retailing climate, Eaton's is struggling to differentiate itself from the competition. At the same time, it has the added problem of ensuring that stores with widely different customer profiles receive differing mixes of goods. In effect, Eaton's must juggle the type and the price of goods in each store, depending on the market. As its four flagship stores in Toronto, Montreal and Vancouver reopened their fashion floors, glossy ads in major newspapers touted "Eaton's - the new store for fashion." Meanwhile, stores in smaller communities and less ritzy malls contained a higher percentage of more moderately priced goods. As Stephen himself noted: "We have to tailor our blend to each particular store."
Although Stephen added cautiously that the board would examine the merits of any takeover offer, analysts see few prospective buyers on the horizon - because few retailers would want to own underperforming stores. The most promising candidate is Minnesota-based Dayton Hudson Corp. - which owns both discount and higher-end chains - but it has no plans to expand into Canada. Augustin Manchon, director of the retail group at Deloitte Consulting, believes buyers may be holding back until Eaton's re-seeks bankruptcy protection and closes money-losing stores. "Right now, anyone who comes in has to buy the whole company," he says. "But, under bankruptcy protection, different buyers including Canadian department stores could pick off different stores, starting with the money-making ones. So there is no urgency for anyone to make a public move." In such circumstances, Eaton's can only hope that it has an exceptionally merry Christmas.
Maclean's November 30, 1998