Locked in legal fight over rents, HBC's big plan to survive COVID-19 may be to go small

It would be easy to look at The Bay's dispute with landlords across the country and make some assumptions: that it can't pay its bills, or that it's being crushed by the pandemic-sized wave crashing into retail everywhere. The truth is a bit more complicated. Retail experts say COVID is a crisis, but it's also an opportunity.

"Retail was changing drastically before COVID came along," said Avis Devine from the Schulich School of Business at York University in Toronto. "All COVID did was expedite it to warp speed."

HBC went private just weeks before the pandemic started pummeling the economy, with retail one of the hardest-hit sectors. Sales fell off a cliff as stores were closed to stop the spread of COVID-19.

To soften the blow to its bottom line, HBC says it tried to reach what it calls a "fair and mutually beneficial compromise with landlords."

In many locations, deals were struck. In others, disputes over millions of dollars in unpaid rent boiled over. Courts were asked to weigh in. Eviction notices were dispatched.

In a statement to CBC News, Ian Putnam, President and CEO of HBC Properties and Investments, said "HBC believes the burden posed by the pandemic should be shared fairly by both landlords and retailers."

And that may be so, but retail analyst Mark Satov says there's more at play here than that. In his view, it's been clear for years that The Bay needs to shrink its foot print. About a year ago, as the company reeled from a $226 million quarterly loss, Satov said this:

"I think if they could snap their fingers and say we have half the number of stores and all of them were half or three quarters the size, they'd be doing great."

So, he's not at all surprised to see The Bay looking for ways out of less-than-ideal leases in less-than-perfect locations. And that willingness to walk away from some of these leases gives The Bay all the leverage in the dispute, says Satov.

"The landlords … are going to look at them and say 'Listen, if you don't pay your rent, we're going to evict you,'" he said. "And The Bay says, well, when are you going to scare me, because that's what I'm looking to do."

Last of its kind in Canada

Department stores like The Bay are still an integral part of shopping malls. As a sort of "anchor tenant," department stores take up one giant corner of the property. Customers come to shop there and get drawn out into the rest of the mall. 

But two key forces are working against that trend. Retail is shifting online, a transition that's hastened dramatically under COVID. The other issue is department stores like The Bay just aren't the draw they used to be.

Devine says customers used to go to one big store to buy everything, now they go to malls to get particular products. She says there's no better example of the new "anchor tenant" than the Apple Store.

"That's the new destination," said Devine, an associate professor of real estate. "And people are going to other stores in that mall because they've been drawn there for Apple."

As that new reality set in, other big department stores like Target and Sears couldn't keep their heads above water. Now, in Canada, The Bay is the last of its kind. Devine says that's the best thing it has going for it now.

"I don't think department stores are ever going to— or in the next several decades, are ever going to completely disappear," she said. "And if they end up being the only real ... mainstream department store left in Canada, then because of that they will survive."

Satov's business gives advice to companies trying to navigate tricky situations. He says The Bay appears to be tackling the core crisis, but keeping a keen eye on how to emerge as a healthier, stronger, leaner retailer. Is it a winning strategy? Satov hedges his bets.

"They have a shot at a winning strategy," he said. "They are struggling to survive and they're doing what it takes. And I think that's the right thing to do."