Understanding the decline of Zellers – a discontinued retailer

Throughout highschool, I had the good fortune of working at Zellers – a discontinued Canadian retailer. After three years of working there, I was handed a termination letter – stating the the store was closing down. Infact, almost all Zellers were closing down as they were sold to Target – an American retailer expanding into Canada.

Naturally, I was curious as to what happened to this Retailer and what I could learn from it. Here is what I articulated.

Events leading to the decline of Zellers

The decline of zellers began in 1994, when Wal-Mart Inc. entered the Canadian retailing by purchasing about 100 Woolco locations. Most Canadians – including my friends and family – were attracted to the options and quality of American retailer. Before, they had to cross the border to explore and purchase american retail products. Now, it was just across the street – in their city!

The competition from Wal-Mart was fierce for Zellers for the following reasons;

  • Wal-Mart had deeper supply chain – meaning that they controlled the cost and supply of many of their products
  • Wal-Mart could complete on price – Zellers retail sales volume stagnated around $2.5 billion a year due to its relatively small market of Canada. On the other hand, Wal-Mart was coming to Canada with a retail sales volume of $16 billion.
  • Wal-Mart could invest more in customer service – the cost savings from the above two allowed Wal-Mart to reinvest the profits into better customer service. For example, having a customer greeter or customer host at each retail location

Given the above strengths of Wal-Mart, Zellers had to be strategic in how (and if) they were going to complete. What would their strategy be?

How could Zellers remain competitive against Wal-Mart?

Once Wal-Mart entered Canada with the competitive advantages (stated above), Zellers was forced to compete on Wal-Marts terms. In this competition, Zellers did not have many options (or strategical advantages) to win over Wal-Mart. Zellers could try to;

  • Compete with Wal-Mart on price – Zellers could try to compete on price but given it’s smaller market size and fewer cost advantages, they could not compete and win on cost. They could (and probably did) reduce their prices but that would result in profit loss and ultimately their ability to re-invest into the business.
  • Compete with Wal-Mart on customer service – In a retail business, it is hard to compete on this alone. If you don’t have the fundamentals or retailing (i.e turn and gross margin) figured out, good customer service may help temporarily but the customers will eventually complain or choose the other retailer due to cost savings.
  • Change their retail focus to avoid direct competition – Zellers could try to pivot or avoid retail product categories that compete directly with Wal-Mart. For example, they could try to become a grocery store or a hardware store instead of a discount department store. However, this would be a significant investment that would require re-branding and re-marketing Zellers to customers. Also, it will require new logistical and supply-chain planning.

In summary, if a customer could get something for cheaper and with better customer service and experience from Wal-Mart, why would you shop at any other retailer – including zellers?

Hence, as customers began to purchase from Wal-Mart, the slow decline of Zellers began. Given the above strategical options for Zellers, it did not have much to do than to let the decline play out and explore options when forced to do so.

In my last few years at Zellers, I recall that the Zellers I was in was a bit of a ghost town. We had a restaurant, pharmacy, and a grocery department.

However, all of those departments rarely got sufficient traffic. For example, no one came to Zellers for a full-grocery trip, but they did go to Wal-Mart for that. The Zellers restaurant that was designed to dine-in 50 people rarely had any more that 2-3 people at a time. The customers who came to Zellers restaurant were mostly elderly who had memories of Zellers or Zeddy – the zellers mascot from their childhood.

The final chapter of Zellers – the closing down

In 2011, after 17 years of competition with Wal-Mart and struggling to find its competitive niche, Zellers announced that they were closing down and selling their leases and retail locations to another American retailer, Target. It was an ironic and symbolic announcement for the Canadian retailer industry – having lost to one American retailer (Wal-Mart), the stores would soon resurrect with another American retailer.

This concludes my learnings and reflections of why Zellers declined and eventually closed down. Do you have a perspective and an insight that I might have missed? Please do share it in the comments.

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