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Galeria Kaufhof and Karstadt close to merger

FILE PHOTO: Shop-windows of German department stores “Karstadt” and “Kaufhof” in Trier
The window shopping's over. Source: Reuters

The once grand department stores of arch-rival chains Galeria Kaufhof and Karstadt have sat, often side by side, on the main streets of large German towns for decades. Until the 1990s, they were the go-to shops if kids needed new soccer sneakers, mum wanted cosmetics or dad was after a suit. Then came the internet.

Today, smaller branches of both chains are looking tired and dated, victims of the shift to cheaper online retailers and a failure to keep apace of trends. Only a handful of flagship city-center stores keep the glamorous tradition of department-store shopping alive.

But the future of the German department store may be about to change. According to reports, Galeria Kaufhof, owned by Canadian retail group Hudons’s Bay, and Karstadt have agreed to form a joint venture.

Karstadt owner Signa, controlled by Austrian property tycoon René Benko, will manage the business and own a bit more than 50 percent of the new joint venture. Additionally, he will buy half of two property funds, which own several dozens of Galeria Kaufhof stores. Even Hudson’s Bay’s Dutch stores could end up in the new company, business weekly WirtschaftsWoche reported. In return, Hudson’s Bay Company, which also owns the chain Saks Fifth Avenue, will receive almost €1 billion.

Insiders told Reuters news agency that up to 15 stores would be closed and job losses were to be expected. Neither company commented on the reports. Galeria Kaufhof employees might face salary cuts if the newly formed company adapts Karstadt’s collective wage agreement, which offers lower average pay than at Kaufhof.

Buy one, get one free

The deal to create “a German department store” makes sense as both firms are in need of a boost. Crisis-hit Kaufhof, the bigger with 96 stores, makes a loss, and Karstadt, with 79 stores, turned its first profit (albeit just €1.4 million) in years in 2017. But both have valuable real estate portfolios, especially Kaufhof, whose flagship Galleria stores have plum spots in many of Germany’s most fashionable shopping districts.

HBC bought Kaufhof in 2015. But little has gone right since: numerous management changes have unsettled the firm’s 18,000 workers and it’s bleeding money. In addition, HBC has been blighted by a sales slowdown in its home market. Investors have long been calling for Galeria Kaufhof’s sale.

Meanwhile, Karstadt has been steadily digging itself out of a hole. The firm was in need of a serious restructuring when Signa took over in 2014, and retail expert Stephan Fanderl was hired to sort out the mess. He streamlined the product line, hired out floorspace to other retailers and cranked up online business, allowing Karstadt to make the small profit last year. Mr. Fanderl is likely to be closely involved in the new venture, insiders said.

Signa had long been sniffing around Kaufhof, believing that a tie-up could put department stores back on the map in Germany. It offered €3 billion in February, but was rebuffed. It seems Mr. Benko has now finally got his way.

David Reay is an editor at Handelsblatt Global. To contact the author: reay@handelsblatt.com

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