Markdown Madness

The Cutthroat Business of Cost-Cutting

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Another Swedish invasion. Source: CC BY-SA 3.0

Few Germans have heard of Rusta, but that could soon change. The Swedish discounter opens its first location in the northern city of Lübeck on Thursday, offering a hodgepodge of merchandise, from wall paints and garden furniture to pet food and power drills — all at bargain-basement prices.

In a way, Rusta is the markdown version of that other Swedish retailer, Ikea, which is already a global powerhouse. The home improvement company even emulates Ikea in borrowing its brand colors from the Swedish flag.

“We have big plans for Germany,” CEO Göran Westerberg told Handelsblatt. “And our new shop in Lübeck is only the first step.”

Rusta is just one of many newly-expanding discounters in Germany. Dutch cost-cutter Action opened 60 shops in the past year, with 150 more in the works. Primark, an Irish fashion retailer, will add hundreds of thousands of square meters of retail space in seven new locations next year. They are crowding into a country that already has two successful homegrown discounters, Aldi and Lidl.

The reason is that low-price retailers view Germany as a global launching pad. It is Europe’s largest economy with its biggest population. While the market of its consumers are culturally frugal, together Germans have plenty of collective buying power. The markets for home and garden furnishings, among others, are growing at a good clip (see chart).

But the new entrants have different strategies. Sweden’s Clas Ohlson, specializing in home improvement, has opted for three locations in downtown Hamburg, while others focus on shopping centers. Rusta’s first location in Lübeck, a city of around 240,000, is no coincidence: The company is targeting not large cities and top locations, but small and medium-sized cities where the death of niche retailers means plentiful vacancies.

“It would be a mistake to go into a large city, that is the most expensive way to expand,” Mr. Westerberg said. “As a rule the smaller the city, the more successful.”

Foreign discounters “lock up sensationally cheap rents,” Joachim Stumpf, managing director of the retail consultancy BBE Handelsberatung, told Handelsblatt. “They push into gaps where no one else wants to go.”

The newcomers have also learned a lesson or two from Germany’s fallen retailers, such as Butlers, which recently went bankrupt, and Strauss Innovations, which chose locations in pedestrian zones within big cities that turned out to be too expensive.

But homegrown rivals are not ready to cede their turf to foreign invaders just yet. Poco, Roller and Sconto are all well established in the discount furniture and home accessories space. Poco is expanding in Germany’s third wealthiest state, Baden Württemberg, while Roller recently beat out IKEA in a secret shopper’s test of customer service by German broadcaster ZDF.

As the retailers fight it out, the winners will be German shoppers.

 

Barbara Woolsey writes for Handelsblatt Global in Berlin. Florian Kolf leads Handelsblatt’s coverage of the retail, consumer goods, luxury and fashion markets. To contact the authors: b.woolsey@extern.vhb.dekolf@handelsblatt.com