Rise of the Machines: HBC’s Salvation or Destruction?
Under pressure from the emergence of automation and e-commerce can HBC embrace the trends which threaten its business to gain a competitive advantage?
Changing Retail Landscape
The World Economic Forum estimates that 30-50% of retail jobs are at a high risk of computerization. Over the next ten years, the rise of automated technologies has the potential to displace over 6 million retail jobs within the United States. In-store and distribution centers roles remain the most vulnerable positions to the emergence of e-commerce and automated machines as traditional roles become redundant and expendable[1].
The retail industry has faced pressure in recent years from various disruptive trends such as increasing competition, increasing costs, and the rise of e-commerce. Retail companies across the country have cut thousands of jobs and announced hundreds of store closures to combat the challenging operating environment. In 2017, several prominent retail companies including Toys R Us have filed for bankruptcy[2].
Hudson Bay Company (“HBC”) is an international department store retailer with sales of ~$14 billion and operations in North America and Europe. Over the last 5 years, HBC’s stock price has declined over 30%[3], underperforming the S&P TSX by 60%. HBC underperformance can be attributed to its declining same store sales growth and weakening margins, negatively impacted by the vast adoption of e-commerce and automated machines. It is critical that HBC adopt innovative strategies to enhance its digital presence, optimize its cost structure and improve its supply chain to remain competitive in this new environment.
Short Term Strategy
In the short-term, HBC has focused on bolstering its digital platform. In 2016, HBC acquired online flash sale retailer, Gilt. Gilt has a member base of over 9 million members and generates $500 million in sales in which ~50% of orders are from its mobile platform[4]. The transaction reflects HBC’s strategy to grow its online presence and leverage Gilt’s mobile capabilities to access more consumers.
Expanding aggressively into e-commerce is crucial for HBC as customers are increasingly shopping for products online. Retail e-commerce sales in the United States is expected to grow 10% per year to a $638 billion industry by 2022[5]. The growing importance of e-commerce has forced retail businesses to evolve the “final mile” of their supply chain. Traditional brick and mortar retailers are required to bolster their online product offering and digital consumer experience to compete with online retailers such as Amazon which facilitates roughly 43% of all US online retail sales[6].
Long Term Strategy
In the medium-long term, HBC is focused on increasing speed and reducing costs across its supply chain. In 2016, HBC unveiled its first robotic fulfillment system at its Canadian distribution center. The distribution center featured some of the most advanced automated distribution technology in the retail sector. The system is 12 to 15 times faster than a tradition manual process and will enable the company to deliver orders 3 times faster than distribution centers using the next best robotic technology[7]. The new automated system will allow HBC to significantly cut costs across its distribution network as traditional manual tasks become expendable and deliver products to customers faster. HBC has plans to install the second robot fulfillment system in Pennsylvania, DC in 2017[8].
HBC’s continued distribution center investment is required to remain competitive in an industry in which companies have adopted robotics in their supply chain to improve efficiency. In 2014, Amazon rolled out fulfillment robots at select distribution centers, cutting operating expenses by ~20%. Amazon estimates it can achieve $800 million in cost savings if it rolls out robots across its entire distribution network[9]. As the retail industry continues to shift towards automation it is imperative that HBC continues to invest in new technology to remain competitive and serve customers cost-effectively.
Opportunities amidst Challenges
In order to thrive in the challenged retail environment, HBC should adopt the following strategies.
- Invest in Automated Kiosks
- Improves customer buying experience as Kiosks provide customers with detailed information about products and services offered
- Increases convenience as customers can check out without a cashier and without waiting
- Decreases labor costs as stores will need less professionals to service customers
- Continue to aggressively invest in distribution centers automation
- Improves ability to compete with Amazon and large e-commerce players
- Improves ability to process increasing online demand
Key Considerations
As automation and e-commerce becomes more prevalent, HBC will continue to face various uncertainties:
- What new technologies should HBC invest in to gain a competitive advantage over competitors?
- How should HBC manage any potential negative publicity as the company shifts from manual to automated processes?
- How will e-commerce continue to evolve? How will consumers use mobile devices to buy goods in the future?
- How can HBC improve its digital platform to attract more consumers and compete for consumers in the online marketplace?
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[1] Michael Shavel, “Retail Automation: Stranded Workers?”, IRRC Institute, May 2017, https://irrcinstitute.org/wp-content/uploads/2017/05/FINAL-Retail-Automation_Stranded-Workers-Final-May-2017.pdf, accessed November 15, 2017
[2] Lauren Thomas, “Here are the retailers that have filed for bankruptcy protection in 2017”, CNBC, September 2017, https://www.cnbc.com/2017/09/23/here-are-the-retailers-that-filed-for-bankruptcy-protection-in-2017.html, accessed November 15, 2017.
[3] Based on Google Finance as of Nov. 13, 2017
[4] Press Release, “Hudson’s Bay Company to Acquire Gilt”, HBC, January 7, 2016, http://www.businesswire.com/news/home/20160107005521/en/Hudson%E2%80%99s-Bay-Company-Acquire-Gilt, accessed November 15, 2017.
[5] Industry Report, “Retail e-commerce sales in the United States from 2016 to 2022 (in million U.S. dollars)”, Statista, October 2017, https://www.statista.com/statistics/272391/us-retail-e-commerce-sales-forecast/, accessed November 15, 2017.
[6] BI Intelligence, “Amazon accounts for 43% of US online retail sales”, Business Insider, February 3, 2017, http://www.businessinsider.com/amazon-accounts-for-43-of-us-online-retail-sales-2017-2, accessed November 15, 2017.
[7]Press Release, “Hudson’s Bay Company Unveils First-in-Canada Robotic Fulfillment System at Scarborough Distribution Center”, HBC, November 4, 2016, http://www.businesswire.com/news/home/20161104005600/en/Hudson%E2%80%99s-Bay-Company-Unveils-First-in-Canada-Robotic-Fulfillment, accessed November 15, 2017.
[8] Investor Presentation, “HBC Spring 2017 Investor Presentation”, HBC, April 10, 2017, http://investor.hbc.com/common/download/download.cfm?companyid=AMDA-1ETYKL&fileid=936676&filekey=568961BB-5752-42FF-8F13-FA902250134F&filename=HBC_Spring_2017_Investor_Presentation.pdf, accessed November 15, 2017.
[9] Eugene Kim, “Amazon’s $775 million deal for robotics company Kiva is starting to look really smart”, Business Insider, June 15, 2016, http://www.businessinsider.com/kiva-robots-save-money-for-amazon-2016-6, accessed November 15, 2017.
Thank you, Nate! I found this essay really interesting, and it feels like the flip side of my essay, which is about the further digitalization of a major e-commerce player in China. With the further penetration of online shopping, especially mobile shopping, both traditional players, such as HBC, and e-commerce players, like Alibaba and Amazon, are investing heavily in digitalization. What is your view on the future competitive landscape, if traditional retailers have a shot? Some reports argue that e-commerce players have digitalization in their DNA and traditional retailers are often slower in adopting new technologies, if not just “copy” what e-commerce players have done already. Specifically, will acquisition help traditional retailers ease the pressure of going online? For example, HBC’s acquisition of Gilt has not been very successful. In addition, I found your second question “How should HBC manage any potential negative publicity as the company shifts from manual to automated processes?” very interesting, and this is the same issue Amazon and Alibaba are facing when they are trying to roll out the cahier-less retail stores.
I think the increase in automation is unfortunately an unavoidable part of our future. As you mentioned, there is no real argument against the increase in efficiency that automation offers companies. Robots do not get tired, they don’t need healthcare, and they are much cheaper than people. I can’t help but worry about the long term consequences of this, however. The rise of automation disproportionately favors the people at the top. People who make their livelihood in low skill jobs get replaced, margins increase, and shareholders profit. Putting people out of work has cascading effects. It lowers the tax base, and it can lead to an increase in crime as people become desperate to replace their income. I think if we get to the point of overwhelming automation, and corresponding overwhelming unemployment for people in certain brackets of society, we may come to see some seriously negative side effects of automation.
Thanks Nate for the article on HBC, as you know I worked there in the omnichannel strategy and innovation team for the last two years, so I’d love to connect in further depth on your comments. 🙂 For now, I’ll touch on a few of the items you mentioned.
Continue to aggressively invest in distribution centers automation: While I agree that all retailers should be looking for opportunities to optimize their supply chains to reduce costs in the long-term through automation, HBC is already leading the charge in this area, and I would challenge that this is the largest opportunity they have in the coming years. With the installation of the technology that you mentioned in your article, HBC actually will own the largest high-speed technology fully automated pick and pack DC system in North America. Certainly they should stay abreast of additional supply chain efficiencies, but I actually believe a much bigger long-term opportunity exists in the inbound strategies – obtaining revenues. If our focus was solely on optimizing the back of house, we would loose sight of the retail business model.
We hear “omnichannel” thrown around a lot, but its am imperative strategy for retailers, because it makes the customers so much more valuable. On average, a customer spends 5-6X more with a company if they are an omnichannel customer versus single; this was in line with what we saw at HBC as well. Kiosks will only serve the customers that are already in the store. We need to get them there.
The real benefit of being a house of many brands is that we’re able to actually recognize these synergies in back-of-house operations. Certainly HBC should always be looking for additional technology enhancements, but the real value is actually being created when we bring all these banners together: now we can operate on one website deploying features across all banners in a single update, reduce production costs by only shooting and setting up items once given the amount of product overlap, centralize our DCs, create more buying power with our vendors, and learn across all customer behaviors to continuously optimize the online experience.
In as bleak of an environment that we see in retail today, I believe the only way HBC will survive is to continue growing through acquisition. By creating a retail conglomerate these recognized synergies will only continue to multiply, and free up capital to actually invest in new technologies.