Hudson’s Bay Co. still has an appetite for acquisitions.

This story first appeared in the October 28, 2014 issue of WWD. Subscribe Today.

One year to the day after purchasing Saks Fifth Avenue for $2.4 billion, Richard Baker, governor and chief executive officer of the Toronto-based retailer, said the quickest way to grow is by purchasing a complementary retail business.

“We’re in no rush to buy anything, we have plenty on our plate right now,” he said. But “we’ve proven growth through [mergers and acquisitions] works.”

Baker said he believes the “synergies” that are created — the company is on track to save $100 million a year by merging the operations of its three retail businesses — is “one of the most effective ways for us to grow today and it brings us so much opportunity to drive efficiencies. It allows us to create value where others can’t. This value can then be reinvested into our core retail business.”

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The company has owned Lord & Taylor since 2006 and Hudson’s Bay since 2008 and now operates a business with more than $8 billion in annual top-line sales. “We’re a supercharged strategic buyer,” he said.

But acquisition is just one way to expand, Baker said. Driving digital growth is also a major opportunity, he said, along with expanding the Saks Off 5th business, bringing Saks full-line and Off 5th stores to Canada, and investing in the existing store base to better serve the customer. Capitalizing on the strength of the company’s real estate portfolio is also a strategic advantage, he said.

Hudson’s Bay Co. is based on “three business lines.” The first is the “foundation” of the company, its retail business. “Second, our mergers and acquisitions that support our growth strategy, and third, our real estate holdings and expertise that are a great sense of value and financial flexibility. The combination of these three business lines create what we believe is the winning, innovative business model of the future for retail companies.”

Baker related a story about a visit to Bentonville, Ark., about 25 years ago when he was given a store tour by Wal-Mart founder Sam Walton, who asked him: “Richard, do you know who the boss is?” Baker smiled and said, “Yes, Mr. Walton, it’s you.” But Walton shook his head and shot Baker down. “The boss is the customer and if you don’t make that customer happy every single day, that customer is going to fire you. It’s a perspective that’s really stuck with me to today.”

Baker took that lesson to heart and has tried to inject that philosophy throughout his company. “Like at Wal-Mart, at Hudson’s Bay Co., our customer is the boss and there’s never been a time when the boss has never expected so much,” he said.

That’s even more true today when shopping choices are so plentiful.

Baker said Hudson’s Bay Co. is working to connect its brick-and-mortar and digital channels in order to better serve customers’ needs. “Your customer is shopping across channels,” he said. “And we have to keep those customers shopping with us. The only way to win is by connecting these two channels.

“We believe the most powerful formula in retail today is dominance in both channels, online and in-store, in businesses that work together seamlessly. It takes systems, process and discipline, lots and lots of discipline, but without a doubt, it’s the best way to serve the boss — the customer — and represents the most important competitive advantage over online-only players.”

He said digital is a “huge area of focus for us,” and the Web “already influences the majority of in-store sales. Our digital sites draw more traffic than all our brick-and-mortar stores put together. We are hyper-focused on growing this business.”

Baker projected that digital will represent 20 percent of the company’s business within the next four years. And one way to reach that number is by luring the digital-only customer to visit a store. This, he projected, can lead to “10 times the spend” of just a digital purchase.

“Customers are shopping across multiple channels: luxury, department store and off-price,” he said. “Whether she’s buying a pair of Steve Madden shoes at Hudson’s Bay, a Michael Michael Kors handbag at Lord & Taylor or a spectacular Fendi fur at Saks, our strategy is to keep these customers shopping with us, no matter what they’re shopping for.”

Even so, Baker said the “demise of the department store has been greatly exaggerated, and there’s nothing like the magic of a store.” People still like to go shopping and experience the social aspects of the experience. He said he recently accompanied his 15-year-old daughter to a Lord & Taylor in Connecticut to go shoe shopping. “Being in a department store, it’s all about women’s shoes,” he said. “It was like being in some spectacular Willy Wonka candy store. And like an epiphany, I got it.” He said the customers all interacted, weighed in with the comments about the particular styles and generally enjoyed the experience. “What we own in stores can never be replicated online,” he said.

But it’s important that the store experience be a positive one. This can happen by creating an atmosphere of “hospitality,” where customers feel “taken care of and are treated warmly.” Toss in some entertainment in the form of events, product launches and exciting visual presentations, and the opportunity is even greater for the 100,000 people that visit one of Hudson’s Bay Co.’s stores every day.

That number is destined to be even larger. “Over the next five years, we will be able to offer our customers a luxury experience, a department store experience, an off-price experience, either online or in store,” he said, given Hudson Bay Co.’s breadth of portfolio. “We will be the most diversified pure-play retailer in North America.”

Baker added that “the Lord & Taylor customer will treat herself to a luxury item at least once a year. Our job is to make sure when she crosses formats, she does it with Saks.” Similarly, the goal is to convert the shopper who seeks out promotional pricing at the full-line Saks stores or Lord & Taylor into a Saks Off 5th shopper. “We think the best way to win in this environment is to give our customers choices. Operating in a variety of formats allows this to happen.”

More customers will be given that choice as Baker rolls out his plan to expand the off-price division and bring Saks stores to Canada. Those were two of the primary reasons Baker was so interested in buying Saks when it became available. “It allowed us to enter the global luxury market as a major force. We knew luxury was a space we wanted to be in and acquiring Saks was the most efficient way. And we loved the real estate,” he said, “especially that big, beautiful building on Fifth Avenue.”

Baker, whose background is in real estate, said, “Retail and real estate are perfect partners,” and the company’s “portfolio is a great source of value.” He said all told, Hudson’s Bay has 15 million square feet of property in North America, which can be a cash cow.

He pointed to Target Corp.’s $1.85 billion acquisition of 189 Zeller’s leases — the off-price arm of Hudson’s Bay in Canada — as proof of the value of real estate. “And the public market consistently underestimates the value of the assets,” he said. “It also frees up capital to be redeployed to further our overall strategy.”

Baker has also committed to reinvesting $2 billion in cash over the next five years to upgrade the stores and systems of his portfolio. That money, he said, will come from the “free cash flow” that is generated as a public company.

He said the company will also “substantially roll out” the number of Off 5th stores and “selectively roll out” new Saks Fifth Avenue and Lord & Taylor stores as it continues to invest in online initiatives, making the existing stores more productive and “periodically” making some “large-scale acquisitions.” Baker said those can come from North America or internationally. “We look at department stores and businesses throughout the world that would fit in well,” he said.

In response to a question from the audience, Baker also explained the thinking behind the opening of a full-line Saks store at Brookfield Place in lower Manhattan. He said the “energy and vibrancy” of the area and “the mass of people down there is unbelievable. We think we have a customer down there and we look at that zone as [equivalent to] the market area of Boston.”

The area is so ripe for business, he said, that the company is also planning to add an Off 5th a few blocks away near the Century 21 flagship.

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