‘Zombie firms': Hudson's Bay among Canadian business that are ‘severe drag' to economy
Tom Goldsmith, founder and principal of Orbit Policy, joins BNN Bloomberg to discuss the economical impact of 'zombie firms'.
Hudson's Bay was a 'zombie firm' that was struggling to keep the lights on for years before its inevitable shuttering, one expert says – and Canada is home to many more.
Tom Goldsmith, founder and principal of Orbit Policy told BNN Bloomberg that retail outlets like The Bay and many other retail outlets did not respond innovatively in the face of competition, which led to its ultimate, rapid downfall.
'In the base case, you have a story of venture capital coming in and asset stripping, essentially, and really kind of taking away the productive capacity of the organization,' Goldsmith said.
What is a 'zombie firm'?
The term 'zombie firm' was first coined in the 1990s in Japan. According to Statistics Canada, it was used to describe economically underperforming businesses when they were being kept alive by government and bank loans.
Goldsmith describes them as 'mature firms that persist and are a severe drag to our economy.'
A StatCan report from 2023 says zombie firms have been increasing over the past few decades in advanced economies like Canada's, claiming that they influence the national productivity, subdue wages and restrain the growth of healthy firms.
The same report claims that between five and seven per cent of all Canadian businesses are zombies, which could potentially be the highest in the world.
'While the share of zombies among all firms has been declining since 2011, the share of zombies among publicly traded firms has steadily increased,' the report said, adding that between 18 to 36 per cent are publicly traded firms that fit the description of the zombies – most prevalent in the mining, oil and gas extraction sector.
How can businesses be kept from going under as the market shifts?
A combination of factors keeps older businesses like Simons afloat, amid the influx of newer business models, Goldsmith says.
'(It's) just business leadership, the quality of actual leadership and strategy and decision making,' he says.
Meanwhile, Goldsmith says only 25 per cent of firms get a return on their investment for AI adoption.
'A lot of that depends on the quality of the strategy you have,' he said.
According to Goldsmith, deploying new technologies and taking advantage of new opportunities is paramount when dealing with AI. Like Simons, the companies need to have a virtual presence and an e-commerce position that attracts consumers.
Meanwhile, a company like the Bay starts out as a viable business, then comes the privatization and the debt imposition, according to Goldsmith.
'Part of this picture is the fact that some of these firms have been bought by leverage buyouts,' he said. 'They might have had revenues that were able to pay their debt payments before being thought about. After that, they then get turned into these companies that act as this drag on the economy.'
Could AI adoption become an impending issue?
It depends on the type of firm it is. However, the evidence suggests that zombie firms are a good thing, he explains.
'They freeze resources,' Goldsmith said. 'It frees talent, it frees capital that could be better spent elsewhere. Other firms that are good are going to struggle.'
Goldsmith says it will all come down to the workforce and the talent hired by the companies when it comes to AI adoption.
'AI is a tool, especially in technology sectors. Where, how it fits in your workflows is so varied that there needs to be a collaborative engagement between management and workers to actually make the best of it,' Goldsmith said.
'Are firms actually doing that? Are they having top-down mandates? Forecast strategies? That's a big question. How do we make the most out of this technology?'
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