Analyst Comment by Michelle Grant – Head of Retailing Research
Hudson Bay Company announced its purchase of the department store banner, Galeria Kaufhof, from Metro Group for Euro2.83 billion, including debt, on 15 June 2015.
Overall, this is a good move for Metro AG and Hudson Bay Company. Kaufhof only accounted for 5% of Metro’s sales in a fading channel with sales by department stores in Germany expected to decline by 2.3% over the next five years. The proceeds from the sale will help pay down debt, which in turn, should free up more resources to help Metro’s cash and carry and electronics businesses compete successfully in hypercompetitive markets. Hudson Bay gets a strong asset in the German department store channel from which to launch its European operations with the financing of the deal coming from sales of the prime German real estate assets. But the company does face an uphill challenge for sales growth due to a shift away from the department store channel in Germany and stiff competition from apparel and footwear specialists, such as H&M. To spur growth for the Galeria Kaufhof banner, Hudson Bay will need to have a deep understanding of how Germans shop, execute well on a multi-channel retailing experience and stock merchandise at prices that can compete in a fierce competitive environment.
Another venue of growth though, for the Hudson Bay Company in Europe, is the introduction of its Saks Fifth Ave and Saks OFF 5th Avenue brands in Germany and Belgium, which the company announced alongside the deal. Again, it will be important that Hudson Bay Company understand the shopping habits of German and Belgian consumers to be successful with these brand launches. The German market is notoriously competitive with cost-conscious consumers.
But Hudson Bay will remain realistic
According to the terms of the agreement, the Hudson Bay Company will not close stores or lay off employees for three years. If the company, though, hasn’t found a way to return growth to the Galeria Kaufhof banner in that time, it is likely that Hudson Bay Company will concede to market realities and close unprofitable stores unless there are strategic reasons to keep them, such as marketing purposes or click and collect depots.