Eaton's and the vultures: a cautionary tale. (Eaton's of Canada Ltd.)

Eaton's made two terrible blunders. The first was to misjudge the changing retail environment. That led to insolvency. The second was to misjudge what might happen if they used insolvency to restructure the business on the backs of their suppliers and leaseholders. That led to the ending of an era.

After 127 years in business, the 85-store T. Eaton Company department store chain filed for court protection on February 27, 1997. The court filing said simply, "The applicants are insolvent." Eaton's obtained protection from its creditors, which were owed $340 million, until June 30, and it must file a new business plan by June 15.

Eaton's has long been as Canadian as hockey. The founder, Irish immigrant Timothy Eaton, purchased the dry goods business of a fellow churchgoer in 1869 and was the first in Canada to sell merchandise for cash at a fixed price rather than by the credit and bargain system. By the 1930s, Eaton's was thought to have a 50% share of all Canadian department store sales. The four Eaton brothers currently running the company are fourth generation, and two of their sons, Fred D'Arcy and John David, fifth generation, are also involved in the retail business.

Eaton's and the Eaton family have transcended the role of merchants. The famous Eaton's catalogue, introduced in 1884, brought images of the outside world to much of rural Canada. The biggest retail public relations activity in Canada was the annual Eaton's Santa Claus Parade in Toronto, sponsored by the chain from 1905 until 1972. In 1994, a postage stamp was issued to honor the Eaton's retail chain.

Eaton's was too big, too historic to fail.

The history and reputation of the chain and the family produced special relationships with their bankers and creditors - relationships that were to sour quickly. The Bank of Nova Scotia (Scotiabank) had been banking Eaton's for only two years, but the Toronto Dominion (TD) Bank's history with the retail chain goes back to the First World War. At one time, Timothy Eaton was on the TD Board. Dick Thomson, CEO of the TD Bank, has for years sat on the board of the parent company, Eaton's of Canada Ltd.

At the time insolvency was announced, about $168 million was owed to the two banks, with most of the balance to trade creditors. Eaton's had reported a $128-million pretax operating loss for 1996 and $80 million for 1995. One-third of Eaton's stores were losing money, more than a third only breaking even, and a few, led by the Eaton Centre store in Toronto, were profitable. Eaton's had 1996 sales of $1.7 billion, down from $2.3 billion five years earlier. The retailer has 5,600 full-time employees and 9,700 part-time.