Germany's two major department store chains Kaufhof and Karstadt have sealed a merger to salvage their operations amid fierce competition from e-commerce players. The tie-up will include a cash injection and job losses.
Image: picture-alliance/U. Baumgarten
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The owners of Kaufhof and Karstadt — Canada's Hudson's Bay and Austria's Signa Holding — have announced that they've sealed a "merger of equals" to combine their European retail and real estate assets, with Signa now owning 50.01 percent in the joint venture and Hudson's Bay holding a stake of 49.99 percent.
Karstadt boss and Signa's head of retail operations Stephan Fanderl was named as chief executive officer (CEO) of the new entity, in a statement released by Hudson's Bay (HBC) on Tuesday.
HBC CEO Helena Foulkes said the two companies were excited to bring together two "iconic banners to create Germany's leading retail business."
"We are creating a stronger retail entity that is better positioned to capitalize on market opportunities," she added.
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Fashion is meant to be exciting - and make customers open their wallets. But business has been sluggish for retailers in Germany. Will an old sales concept from the US bring a fresh breeze into the struggling industry?
Image: Getty for SAKS OFF 5TH/A. Rentz
Stylish, but cheap
What looks like a run-of-the-mill department store has been hailed as "one of the most exciting retail concepts in Europe this year" by a trade magazine. In June, "Saks Off 5th," a US fashion outlet, opened its first German store in Düsseldorf. Designer wear from seasons past is sold "off-price," retail speak for "at a discount."
Image: Getty Images for Saks Off 5TH/A Rentz
Models and celebrities...
... attended the opening near the city's Königsallee, a street known for its high-end fashion shops. Wayne Drummond (center), president of "Saks Off 5th" Europe, said the stores were "a new concept for Germany" and could help to "revive inner-city shopping streets." The company has more than 100 shops in the US and plans to open another five in Germany and the Netherlands this summer.
Image: Getty Images for Saks Off 5TH
Tradition and change
The first German store is located in a historical building. The facade dates back to 1915, when Jewish entrepreneur Paul Carsch started selling "elegant apparel for men and boys." In 1939, he had to flee Nazi Germany. Horten, another retailer, profited from the disappropriation of Jewish businesses. The name is still emblazoned on the portals, but locals refer to the building as "Carsch House."
Image: DW/A. Becker
Department stores in crisis
In the 1990s, Horten merged with Kaufhof, a department store chain which operates a big shop just around the corner from Carsch House. When Kaufhof fell on hard times, it was picked up by Canadian retailer Hudson's Bay Company in 2015 for 2.8 billion euros ($3.2 billion). The Canadians promised huge investments and fresh ideas for Kaufhof's more than 100 stores.
Image: DW/A. Becker
Buying spree
Two years before the takeover of Kaufhof, Hudson's Bay Company had bought US retailer Saks for $2,9 billion. Saks operates the "Saks Fifth Avenue" luxury stores, but also has experience with off-price outlets. The first "Saks Off 5th" store opened for business in 1990. It is this idea that Hudson's Bay now brings to Germany.
Image: picture alliance/empics
Competitors are all eyes
It's anyone's guess if the combination of upscale store design and discount prices will be successful in Germany. Here, outlet stores are usually found in industrial areas out of town. TK Maxx is present in city centers, but its stores also look cheap. Karstadt, another embattled German retailer, wants to follow the trend and experiment with outlet stores of its own later this year.
Image: Getty Images/Saks Off 5TH
Ouch, couch-shopping...
"New concepts such as 'Saks Off 5th' will not bring an increase in overall sales", says Joachim Stumpf, head of retail consultancy BBE in Munich. "Already cut-throat competition in German textile retail will get even tougher." That's bad news for struggling department stores, which have been losing customers for years. They just stay home and shop online.
Big plans, less money
During the next few years, Hudson's Bay plans to open 40 "Saks Off 5th" stores in Germany. A major investment, but the money is tight. The company lost 516 Canadian dollars (360 million euros) last year, mainly because of problems in its off-price segment, which includes "Saks Off 5th." But Hudson's Bay has a long track record of weathering change: It started as a fur trader back in 1670.
Occupying prime locations in most major German cities, Kaufhof and Karstadt have fallen on hard times in the last decade, fueling speculation that the rival chains would be forced to merge. Kaufhof runs 96 department stores in Germany and 19 in Belgium, while Karstadt owns 79 stores and a series of sports outlets.
In the statement, HBC didn't disclose a new name for the new company, which German media have already dubbed "The German Department Store AG."
According to company figures, Karstadt and Kaufhof generated about €5.4 billion ($6.2 billion) in total sales in 2017, employing 32,000 people in 243 different locations across Europe.
The new company's CEO, Stephan Fanderl, said that now "hard work" would begin to master the "operational challenges amid a demanding market environment."
Although he didn't disclose any details about his strategy, there are already reports about planned staff cuts and lower pay for workers.
German daily Süddeutsche Zeitung reported last week that the merger would result in around 5,000 of the 20,000 jobs at Kaufhof being slashed. The remaining employees would face pay cuts, it added. The cuts were expected at the headquarters of the two groups, as well as in logistics and sourcing.
German department stores on their way out?
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Remnants of bygone days?
When Hudson's Bay bought Kaufhof in 2015, it hoped to make the department store chain the centerpiece of an expansion into Europe. But the company is battling its own losses and faced a campaign from activist investors to boost its share price by extracting value from its real estate holdings.
By contrast, Signa owner Rene Benko — who acquired Karstadt in 2014 — has managed to bring the business back into the black in the last financial year after making cuts, giving the stores more of a local flavor, teaming up with partners and promoting e-commerce.
Nevertheless, the rapid expansion of online retailers such as Amazon, as well as fierce competition on prices from smaller chains like Primark, will remain the new company's main worry.
Therefore, the merged entity said it was planning to "future-proof" its retail business in the digital age by expanding its online services to become a "leading omni-channel retailer."
