It’s big news here in Canada – Zellers is coming back. The once defunct department store is being resurrected as pop-ups that will appear in The Bay and an online store. But this raises an obvious question: why is Zellers coming back?
It’s not like the McRib, the pumpkin spice latte, or another beloved seasonal specialty. I’ve never heard of a store being brought back from the dead.
At first, I didn’t understand why Zellers was coming back, but I now think it could be a good idea. This is a fascinating opportunity to deconstruct business strategy, and I expect it has much to do with marketing and branding. Let’s take a look at what’s going on.
Disclaimer: I should note that I hate department stores. I always have. They are filled with overpriced and ugly junk, lacking any personality. I think I can separate my distaste from the business analysis here, but I wanted to mention my bias.
What is Zellers? A Brief History
For those outside Canada or young Canadians, you may ask, “what is Zellers?” It was a chain of department stores owned by the Hudson Bay Company (HBC). Zellers was positioned at the low-end budget, approximately in the same tier as Walmart.
“Same tier as Walmart” should hint at why Zellers died the first time around. Walmart’s entire business model has been attacking department stores with lower prices and better selection. Love or hate them, Walmart is extremely good at tearing apart chains like Zellers.
Zellers was hemorrhaging money throughout the 2000s until HBC shut down the chain and sold the real estate to Target in 2013, which was moving into Canada. Target, in turn, lasted only two years in Canada due to the same forces that crushed Zellers, plus a healthy dose of managerial incompetence. They shut down operations at most locations in 2015.
The death of Zellers and Target are just two chapters in the brutal history of Canadian department stores. Woodward’s closed in 1993, Eaton’s in 1999, and Sears Canada kicked the bucket in 2018.
A handful of Zellers locations stuck around as liquidator stores until 2020. This last act may sound inconsequential, but it provides clues about how Zellers could be used.
Why is Zellers Coming Back – A Terrible Idea?
My first reaction when I heard Zeller’s was coming back was, “this is a terrible idea.”
As noted above, the Canadian department store market seems awful. Walmart is still around. Amazon has grown from about 80 billion per year in revenue in 2013 to almost half a trillion in 2022. Relaunching a failed department store now sounds… idiotic?
Maybe the idea is to “take advantage” of the recession that seems to be afoot. HBC’s leading stores fit into the luxury category, so perhaps this is a move to generate business during a downturn. While that makes sense, it leads to an obvious question – what about after the recession? Should they set up a bunch of stores to have them fail again in 2-3 years?
It should be stressed that Zellers didn’t disappear by some merger or a branding reorganization. The stores went out of business! Many news stories about Zellers’s relaunch have cited the love for the company and nostalgia for the brand. Why did the company fail the first time if these were so powerful? Nostalgia may be enough to get people in the door once or twice, but it will not keep the company in business.
Pop-Ups and eCommerce, Not Stores
What flipped my read of the situation was when I realized Zellers was not coming back as a standard store but was instead going to operate as a pop-up in the Bay and online store. This drastically reduces overhead costs and the overall risk.
Obviously, running a department store is expensive. You need a large chunk of property in a mall, which may require paying into a long-term lease. The stores then need to be supplied and decorated. You must staff up, which is notoriously tricky in Canada’s labor market today. On top of all this, you have the logistical backend, with warehouses, transport trucks, and central management.
By operating as a pop-up/eCommerce outfit, Zellers’ expenses will be a tiny fraction of what they otherwise would be. No stores, much less decoration, limited staffing… everything will be a much smaller investment. The backend logistics and eCommerce functionality could also plug into the Bay’s existing logistics.
Of course, this is still a big project. There is plenty that needs to be done. But it is much more manageable than rebuilding a store from scratch.
The Discount Retail Business
Discount businesses are far more complicated than they seem on the surface. The space is intensely competitive. Discount stores are essentially in a constant price war, which means the margins on individual sales are slim. This means every store needs to generate a ton of sales to stay afloat, and costs need to be as low as possible.
Why get into this business if it is so ruthless? One advantage is that it is “counter-cyclical,” meaning they tend to do well when the rest of the economy is doing poorly, such as during a recession. This can be seen in Dollar Tree’s stock, which was roughly flat from the mid-1990s to 2008 but grew 5x from 2008 to 2013.
The ideal discount store would follow the “Spirit Halloween” strategy: appear when the timing is right, then hibernate the off-season. It would also need enough brand recognition so people would know to shop there.
Zellers’ in-store pop-ups with eCommerce stores could be the perfect hack. The overhead is extremely low: they don’t need to pay for any storefront property, and you can plug into the existing eCommerce infrastructure of The Bay. The whole apparatus can be scaled back again when the economy improves.
Positioning and Brand Preservation
Hang on, why are we going through the trouble of bringing back Zellers? If discount retailing is so appealing in a recession, why not use one of the regular operating department stores such as the Bay?
Now you run into problems with positioning and branding. The Bay is currently positioned as an upper-middle-income department store. Discount shoppers won’t know there is a new discount wing at the Bay because they don’t shop there. It would take a lot of advertising spending to convince people that The Bay has changed.
On the flip side of this change, you now have a branding issue. Regular shoppers at the Bay who saw the discount displays will start to think the store is lowering its quality and getting cheap, which is a turn-off. In addition, repositioning down the income chain is much easier than moving back up. It would not be easy to undo the move once the economy recovers.
Zellers also already has brand recognition as a discount store, so they don’t need to “explain” what the store stands for. The positioning is already clear (or as clear as it can be for a zombie brand). Questions like this are easy to test, so HBC is likely confident that the right consumers remember Zellers. Substantial marketing spending will still be necessary, but it will not be as confusing as rewiring an existing brand. At the same time, The Bay gets to maintain its position as a moderately classy image, using Zellers as the brand behind any cheap merchandise it sells.
Between 2013 and 2020, a handful of Zellers locations stuck around, acting as liquidation centers. For those who aren’t familiar, a liquidation center is a store that sells excess stock at rock-bottom prices, usually starting at 50% off. The company is likely not making money off these purchases, but the objective is getting any money for unwanted products.
This could be one of the functions of Zellers, particularly the eCommerce channel. Excess stock from other HBC stores could be sent to a warehouse where it is sold online. This kind of business would hugely damage The Bay’s reputation. Zellers can do the dirty work instead.
Important note: I should admit I don’t know anything about retail. Logistics would matter a ton, as liquidation businesses rely on squeezing out every cent possible from unwanted goods. Sending excess stock from HBC department stores to a warehouse to sell online at a steep discount could be an efficient machine for lighting money on fire.
Media, Nostalgia, and Marketing
It is also possible that the Zellers gag is just a marketing move. They could use pop-ups at a couple of stores, roll out a tiny eCommerce offering, do that for a couple of months, and call it a day. The novelty of bringing back the store could generate enough buzz that this entire maneuver pays for itself in earned media attention.
There is also some nostalgia for the brand. I don’t know how powerful this is, but it should be enough for people to visit. Some of these pop-ups could also be used as promotional experiences, bringing shoppers back to… the 90s, I guess?
I have no affection for Zellers, so I will leave it to others to develop something interesting. The risk is low, and there is potentially substantial upside, so why not try the experiment?
The Return of Zellers Experiment
Of course, these are just ideas. It is not yet clear what HBC is trying to accomplish or how people will react. The entire strategy may end up being a confusing mess. What is clear is HBC is trying something novel, which I appreciate. This shtick is not for me, but I hope established businesses take the cue to think more creatively about their business models. Even if this is a bad idea, the risk is low, and it will be a fascinating experiment in marketing and branding.
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