June 15, 2015 / 10:59 PM / 2 years ago

HBC may face challenge replicating its successes in Europe

TORONTO, June 15 (Reuters) - Hudson’s Bay Co’s $3.2 billion acquisition of Germany’s Kaufhof opens a path to expansion in Europe, but the route will be treacherous as the department store operator tries to replicate its North American success on a continent where others have failed.

The deal, announced earlier on Monday, comes at a time when HBC already has its hands full revitalizing and expanding Saks Fifth Avenue stores, which it acquired in 2013, as well as investing heavily in an ecommerce build-out.

And while the company said it has “an abundance of ideas” to drive growth in a notoriously tough market, some are skeptical, especially given that even U.S. retail giant Wal-Mart, was forced to exit Germany in 2006, frustrated by strict labor laws, thin margins and a failure to capture market share.

Kaufhof, with 103 stores in Germany, today shares many similarities with Hudson’s Bay when Chairman Richard Baker bought the storied, but stagnating Canadian retailer in 2008. Baker and his team have since reinvigorated a once-flagging brand, stolen market-share and won over higher-end clientele.

But while ecommerce is growing fast in Germany, which is Amazon’s second-biggest market, stores such as Kaufhof have been slower than their North American rivals to integrate their online offering fully with their stores.

Sally Seston, a principal at Retail Category Consultants, says HBC has shown it has the skills to turnaround Kaufhof, but she fears an overseas takeover while HBC was still integrating Saks will put a huge strain on resources, especially as it lags in e-commerce.

“Kaufhof is losing significantly to e-commerce competitors, and HBC hasn’t cracked that in Canada,” she said. “That’s not something they have a lot of expertise in. So it’s going to be a real challenge to catch up and then raise the bar.”

HBC, which also owns U.S. retailer Lord & Taylor, however says it plans to invest in ecommerce, export some of its North American brands and introduce the Saks banner to Europe.

“We think there’s a real opportunity to grow our business here. There would be no room for Hudson’s Bay, or Lord & Taylor in these markets, but we think there’s great potential opportunity for Saks Fifth Avenue and Saks Off 5th,” Baker said, adding there is untapped room for upscale luxury retail in the European country.

Despite this, Seston and other analysts note cultural nuances may prove challenging, such as a preference to pay in cash.

“The approach to department store operations in Europe is vastly different than that in the U.S., including tighter policies around clearance activity and discounting,” said Joan Payson, a research analyst at Barclays in a research note.

$1 = 0.8865 euros Reporting by Solarina Ho in Toronto; Editing by Alan Crosby

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