I’m not quite sure where I want to go with this. I think we may wind up with many more questions than answers. However, one thing I am sure of is that we are living in crazy times, in many profound ways, including the transformation of the retail industry. The recent formations of SPARC and SaksWorks are crazy-times strategies to “unlock value” (which is often counterintuitive to operating a successful retail business).

Retailers or Real Estate Moguls?

Let’s start with Richard Baker, Executive Chairman of HBC. We’ve been tracking his HBC real estate moves since he acquired it in 2008. One could argue in Baker’s case that the future of retailing might be driven by the dynamics of real estate deals, financial engineering and the general buying and selling of assets for profit gains. What happened to creating great consumer shopping experiences?

[callout]Here is how Richard Baker now describes the business he is in: “HBC is not a retailer but a forward-thinking holding company at the intersection of technology, real estate and operating companies.\”[/callout]

And then there’s David Simon, CEO of Simon Properties. Simon’s creation of SPARC is a wildly misguided way to try to save losing brands. I wrote about the Simon Property Authentic Brands Retail Concepts that the bunch of losing brands piled into ABG’s leasing operation, many planned to be placed in SPG’s losing JC Penney brand, which still anchors many of SPG’s losing malls, was a train slow-rolling to disaster.

Both Simon and Baker are well-respected real estate moguls, considered brilliant and have been highly successful in their respective businesses. However, first and foremost, they are not retail experts. Recently, each has declared a couple of arguably whacko ideas to “unlock value.” Straight talk: They are moving assets around to somehow make them more valuable.

Manifest Destinies

Baker has been using a musical chairs strategy from the beginning of his formation of the Hudson’s Bay, Saks Inc., and Lord & Taylor troika. Under HBC he has separated retail and real estate (values). From the get-go, LINK I compared his retail-to-real estate default game plan to Eddie Lampert’s ultimate retail-to-financial engineering default (Richard Baker Is My Name – Real Estate Is My Game)

Both Baker and Lampert bought into retailing big time, declaring they would return the multi-billion-dollar retail icons they acquired to their former glory. Both proceeded to personally oversee their retail businesses (reminder, they had no retail expertise), and both finally defaulted to their real talents by unlocking value using the real-world expertise they understood: real estate and financial engineering. Lampert has been able to manage down Sears in a roughly three-decade decline. The slow death avoided a quick collapse and was perhaps a gentler way for employees to get out before the end of the day. It should be noted that Eddie himself made a lot of money by unlocking value that found its way into his personal pot of gold. That’s another story.

Razzle Dazzle Retail Real Estate Moves

So, Mr. Baker, as head of National Realty and Development Corporation (NRDC Equity Partners) began what could be described as razzle, dazzle retail real estate moves in 2006 when NRDC acquired Lord & Taylor. In 2008 it acquired HBC (Hudson’s Bay Company), which Baker then appointed himself as Governor, Executive Chairman and CEO. It included 220 Zellers discount chain locations, which were then sold to Target in 2011 for $1.8 billion (a personal pot of gold for Baker). Then in 2012, NRDC put Lord & Taylor under HBC’s umbrella and in 2013, HBC acquired the Saks chain.

Oh, yes. Let’s not forget the brief foray into Germany. HBC partnered with a Toronto-based REIT and the Simon Property Group in 2015 to acquire Gallerie Kaufhof, Germany’s biggest department store chain. Without spiraling into another story here, suffice it to say, Baker leveraged this deal—buy some of it, keep some of it and sell some of it — all resulting in an influx to his pot of gold. Kaufhof’s retail business? Who knows? Who cares? I exaggerate to make the point that this was clearly a real estate move not a value-adding retail strategy.

Are you exhausted yet? It’s kind of mind-bending to keep up with. However, one true thing can be said: these rapid-fire razzle dazzle deals did confirm Baker’s status as a real estate expert and mogul on the retail stage. But it did not elevate him to the status of a retail expert, nor has his retail troika been a resounding success during his leadership.

Just as quickly as Baker formed his retail conglomerate, he also learned that retailing is a tough business. And the three HBC nameplates just muddled along, to put it nicely. In my opinion, the decision to organize the three brands under one CEO was a mistake. Each one had its own unique value proposition and market position. This, along with their size, unique complexities, and different strategic directions, merited a seasoned and strong CEO for each.

The Strategy: Separate, Silo, and…Unlock Value

One of Baker’s real estate concepts for unlocking value is to separate the real estate from the retail business by forming a real estate investment trust (REIT). By separately placing a higher value on the real estate (in addition to providing another revenue source for the REIT by leasing the real estate back to the retail business). Sadly, this tactic can easily backfire, draining ailing retail businesses of operating cash and potentially pushing them into bankruptcy—read: Mervyns and others.

In 2015 HBC developed a joint venture with RioCan REIT in Canada and the Simon Property Group, the leading REIT and mall developer in the U.S., that included 42 Saks Fifth Avenue and Lord & Taylor stores (including locations in very favorable malls, at the time, such as Roosevelt Field and Tysons Corner).

As a real estate move, this was a powerful partnership for HBC. And even though the pandemic hit the entire retail industry like a nuclear bomb, Simon’s estimated dominance in the A and B+ malls should help the Group’s survival and possibly its return to success on the other side of the health crisis.

HBC’s participation in that REIT and its malls will evolve accordingly. On the other hand, the retail businesses, now Hudson’s Bay, Saks and Saks Off 5^th is another matter. Baker put together a consortium of investors to take HBC private for roughly $1.5 billion, which indicated that its retail assets were not doing so well, and they needed to make major investments to transition out from under the pressure of Wall Street and shareholders. Baker was quoted in the WSJ: “This is the time in retailing to reinvent, to upgrade our presence online and in stores, and create a better, more exciting company. Being private, we’ll be able to do that.”

We shall see. He recently made another “unlocking value” move by separating the online and offline assets. I recently wrote about Saks: Unlocking Value, for Whom?.

and said, “I believe Richard Baker’s move to split the Saks Fifth Avenue and its ecommerce business into separate companies, which he calls “unlocking value,” is simply applying a fancy buzzword, disguising what will ultimately lead to a real estate play. The reality is somewhere, way down deep in his real estate DNA, he clearly sees his personal cash-generating machine where it always has been — in real estate. So, don’t fall for unlocking value in the retail enterprise as a strategy to improve and accelerate the growth of the retail business.”

He is separating the on and offline businesses of Saks, Saks Off 5^th and Hudson’s Bay. I also cautioned, “In fact, everybody in the industry whose heads have not been stuck in the sand know that success in the future depends on a seamless and totally integrated store and online business, as one holistic ecosystem.”

We Work Where?

Baker’s most recent move is a co-working scheme with WeWorks, called SaksWorks. WeWork will run the locations in some select Sak’s locations, but not in the shuttered Fifth Avenue Lord & Taylor. Our seasoned writer, Warren Shoulberg wrote in a recent Forbes article, “WeWork” stations inside former Lord & Taylor store locations (and select empty spaces in Sak’s stores) is a way to utilize that now-empty space. And in doing, it is not alone in trying to repurpose excess store space. But one could question whether offering office space in what is one of the worst commercial real estate markets in recent U.S. history is the best use of that space. Other property owners who are converting dead retail space into residential, hospitality or health services uses may be on a better track for success.” Amen Warren.

Platforms, Retail Redefined?

So, here is how Richard Baker now describes the business he is in: “HBC is not a retailer but a forward-thinking holding company at the intersection of technology, real estate and operating companies.” I guess he doesn’t view retailers as operating companies. A “platform” may be the new definition of “retail.”

But the end of the day, Mr. Baker is in the real estate business. It’s in his DNA. And he can make billions doing real estate razzle, dazzle deals. If the retail operations sitting on his real estate diminish his company’s value, he will opt for real estate over retail any day. Easy come, easy go.

Finally, if you want to know how and why I mentioned SPARC in the headline, please read to your heart’s content: ABG, SPARC and JCP Fading into the Sunset .