In the bidding race for Galeria Karstadt Kaufhof, the insolvency administrator’s choice fell on old friends of the department store chain. Presumably because they promise to maintain as many branches as possible. However, this means that the future of department stores is even more in jeopardy.
According to media reports, the entrepreneurs Richard Baker and Bernd Beetz are to take over the insolvent department store chain Galeria Karstadt Kaufhof through a consortium. “A bizarre combination,” as retail expert Jörg Funder says. The expert fears that under the direction of the two things will continue as in previous years, as he explains in an interview with ntv.de – and that instead of a prosperous future for the department stores, their downfall is imminent.
The new investors are old friends for Galeria. The American Baker owned Galeria Kaufhof through the Canadian retail chain Hudson’s Bay Company (HBC) from 2015 to 2019, until the chain was taken over by René Benko’s Signa Group and merged with Karstadt. Beetz was Kaufhof supervisory board chairman in 2018/19.
“Back then, Baker failed without a hitch,” says Funder, who heads the Institute for International Trade and Distribution Management at Worms University. His idea of establishing new brands from the Anglo-American region did not work. “The German customers didn’t know them,” says Funder. “That just created more complexity in the department store.”
Don’t the investors themselves believe in the department store?
The expert assumes that the investor was primarily interested in the properties that still belonged to the department store chain at the time. Although Baker comes from the department store sector, Funder does not believe that the investor believes their business model is sustainable. Beetz, in turn, worked primarily at the cosmetics company Coty and was therefore an expert in consumer goods, not department stores.
Funder suspects that the two were awarded the contract by the insolvency administrator because they agreed to take over more branches than they could hold in the long term. The expert himself had estimated the rumored number of more than 60 of the 92 remaining branches – albeit in 2008. But today, after the corona pandemic and with changes in consumer frequency in the city centers, the number is far too high. While a good 15 years ago over 100,000 residents were enough for a department store, today more than 200,000 are needed.
“Then we are no longer at 60 viable branches, but rather at 20,” says Funder. “That sounds like a stillbirth if you want to continue operating 60 branches.” The investors’ concept is not yet known, but the retail expert expects a similar approach to the Karstadt takeover in 2010 by investor Nicolas Berggruen. “I still feel sick today because he was portrayed in the media as a social investor,” says Funder.
High number of branches instead of a future concept
Even back then there were significantly better concepts for Karstadt, but Berggruen still won the contract because he wanted to keep most of the branches. Funder emphasizes that it is difficult to make money from operational business even when companies are doing well. Because they have to pay a levy for the costs of the headquarters based on their respective income, so that a seven percent profit quickly turns into a very low to negative amount.
Trading expert Jörg Funder
(Photo: Private)
But investors want to make money with their investments. Funder therefore believes it is likely that the operational business of Galeria Karstadt Kaufhof will also be sold in this case for a symbolic purchase price of one euro and the trademark rights will be sold separately. “Bergruen had to pay around five million euros for Karstadt’s trademark rights.”
In such cases, a company usually buys the trademark rights, which are leased to the operational business. In order to be able to write the name Galeria Karstadt Kaufhof to the branches, the department store chain would have to pay several million euros in the first year, for example. “You can make money with financial constructions, but they are not investments,” criticizes Funder. Short-term loans would be declared as investments, but companies would then have to pay high interest rates on them.
The department store concept has had its day
The industry expert can hardly imagine how Baker and Beetz want to make money with their operational business. In his estimation, even 20 viable branches would no longer function as an independent department store, but only through the leasing of good space and concession models, i.e. external providers displaying their goods in the department store for a fee. The company’s own product range and purchasing would then be eliminated or limited to low-risk product groups. Products with low value and high turnover include socks, for example. “I think anything else is breakneck,” says Funder.
The future of department stores would lie in good service and committed employees. “Decreasing their numbers further and further was the death knell,” says Funder. “Investors have always only saved on people and not worked on a concept.” That’s why, in his opinion, it’s no wonder that one or two of the remaining 12,800 employees lack the necessary service mentality after numerous rounds of austerity measures. “If you’re shaken for years, you’ll eventually start to feel dizzy.”
What you can’t get elsewhere can be sold well in department stores, i.e. only a few product categories such as haberdashery and household goods, and occasionally home accessories. “It just doesn’t sell to the extent that you can run a large department store with it,” explains Funder. Fashion now makes up 70 percent of the offering there, but there is no difference to the competition. “There you get what you can buy anywhere else.”
Individual alignment for each location
What would be necessary is an individual adaptation of the range to the respective location, explains Funder, with a view to the rest of the retail trade in a city. This cannot be assumed with Baker and Beetz – in the eyes of industry experts, they act more like soldiers of fortune. “Both Baker and Beetz were unable to present a real concept in the past, but only implemented special interests when it came to real estate, for example.”
Such business practices also included investors renting out the properties to their own department stores at excessive rents. “Benko basically did the same thing afterwards. There was no strategic concept, it wasn’t about the operational business, just about the real estate.” How many branches are retained after the third bankruptcy also depends on how much the excessive rents fall.
“But the rents only go up“It will be a fragment,” emphasizes Funder. “It will be much more important to get consumers excited about department stores again.” As long as the customer votes with his feet, so he decides whether he wants to Whether you shop in a department store or not, rents only play a secondary role. “In the first step, it is important to generate sustainable sales.” A final decision on the future of Galeria Karstadt Kaufhof will be made at the creditors’ meeting at the end of May.