Retail reboot

Karstadt's Savior?

karstadt_HB
My customers are always right.
  • Why it matters

    Why it matters

    The Karstadt department store chain has been undergoing a restructuring programme since it was declared insolvent in 2009. But cost savings and a new retail concept may not be enough to save it.

  • Facts

    Facts

    • The department store chain has more than 80 stores across Germany.
    • Last year Karstadt suffered losses of €130 million ($165 million).
    • As part of its cost-cutting programme, six stores will close next year.
  • Audio

    Audio

  • Pdf

Karstadt is Germany’s biggest department store chain, with more than 80 stores. But it has hit hard times, and last year suffered a €130 million ($165 million) loss. It is now implementing a restructuring programme, which last week led to the announcement of six store closures, with more likely to follow.

During the interview in the Hyatt Hotel in Düsseldorf, the 51-year old was open and candid, he just wouldn’t let the restructuring and future concepts for the troubled retailer out of his hands that he had presented to the supervisory board on Thursday and had brought with him.

Mr. Fanderl, when was the last time you were in one of Karstadt’s stores?

A week ago in Cologne, where I live with my family.

And did you buy anything?

No, it was a standard store visit to one of our profitable locations during which I discussed with the store manager the changes he had made and what he has planned.

Not all of the Karstadt stores are, in fact, profitable. You are moving from head of the supervisory board to the chief executive’s chair. Why are you inflicting that on yourself?

There can be no talk about “inflicting.” The Karstadt brand is an icon, even if it has had a lot of pain inflicted on it in recent years.

By whom?

I’m not going to make a big show of coming to terms with the past but Karstadt has lost almost 30 percent of its customers aged between 35 and 40, and also the over-50s, since its insolvency in 2009 . . .

. . . who are actually considered very loyal.

Exactly. According to experience, they are our best and most loyal customers and we have to get them excited about Karstadt again. The company hasn’t been able to do that in the last four, five years . . .

. . . when the investor Nicolas Berggruen was owner?

Karstadt had lost sight of its core target group during that time, and is now  paying the brutal price.

And now that you have taken over, everything will get better? You are the third CEO in the last 12 months alone.

Now, with René Benko we above all have a new owner who is following a plan I can work with. It has taken time, but everybody – even the employees, the works council, and the union – has recognized that Karstadt urgently needs to be restructured. That means we have to act now. And we can. That doesn’t mean my future post won’t be any less taxing, but the jobs with the greatest challenges are also always the most fascinating.

What can you do better than all your failed predecessors?

Karstadt needs someone who knows the market, customers and competition. I grew up in German retail. My family have been in the trade for five generations. I know what it means to fight every day for customers. Maybe my management style will also help; to bring people along but to call the shots when things have to move fast. Our restructuring program, called “Fokus,” is a pretty big deal, even for German retail. But I have the experience and the determination to carry out the program.

More than 20 of the 83 Karstadt department stores are losing money and are on probation. How much time do you give a store for a turnaround?

That depends on how much of a financial cushion Karstadt has as a whole. We are currently more stable than a year ago and don’t have to decide ad hoc. Every retailer has a list with locations that don’t earn money. But our list, with more than 25 percent of all our stores, is long, much too long – some of them are even in the “deep red.” No retail company can endure such a burden in the long run.

Does that mean you will be quickly shutting down some stores after all.

Yes. In the coming year we will first of all be closing two department stores and two so-called bargain centers, and the two K-Towns (subsidiaries specializing in young fashion). These stores have been in the red for a long time and according to our analysis there is no possibility of turning them around – among other things because of the buying power, the competitive situation at the location, or because, as with K-Town, the concept wasn’t accepted.

This decision will affect some 350 employees. And there are another eight to 10 stores where the situation is similar. We will look for individual solutions for each location; for example, by discussing alternative uses for the location with the landlords and whether there is a possibility of getting an early exit from the rental agreements.

Restructuring is one thing, winning back customers is another. Why will you succeed where all those before you failed?

Andrew Jennings (a former Karstadt chief executive) had dreamed of an international department store in Germany but it didn’t suit the local customers. Eva-Lotta Sjöstedt wasn’t at Karstadt long enough to put any strategy into action, but she had a couple of good ideas that we have now considered in our plan. What is new is that we not only know the way forward but now for the first time are also resolutely working on what we are efficient at and will take that path.

Can you be more specific?

There are two groups of customers in a department store: the customers who want to be inspired and the customers who just want to take care of their shopping needs in comfort. We will divide all our stores countrywide into these two categories. We will then have “Karstadt 1881, the Experience Store” in cities like Munich or Hamburg and “My Karstadt” in Mannheim or Rosenheim, a local shopping center that is more orientated toward comfortably satisfying shopping needs.

After only two months of new ownership we have now presented a comprehensive, 100-page concept for Karstadt called “Fokus+” in the supervisory board meeting.

 

Karstadt DPA
Karstadt hopes Germans will shop ’til they drop. Source: DPA

 

Sounds like a major restructuring calling for investments for which there has been no money up to now.

For years, German retail has had to create more value for their customers out of continually fewer means. There is hardly an industry that is run more efficiently. That is a development that only a few outsiders understand. You don’t have to invest €3,000 per square meter floor space to make a department store attractive again.

But renewal always costs some money.

That’s exactly why we must bring Karstadt out of the red and clean it up. Catch up with what has been neglected in the past couple of years. Following the successful restructuring, Signa (owner René Benko’s group) will invest hundreds of millions in the coming years in the future concept that was presented, after having already made €300 million available for Karstadt.

In the long run, however, investments have to come from the operating business as in any other business; investments have to be earned. Our restructuring plan is aimed at achieving an operating return of 2.5 percent to 3 percent.

When is this goal supposed to be achieved? Karstadt is still suffering substantial losses.

It will certainly take three years. I guess 2017. But it will only happen if we act quickly and resolutely now.

That also means more job cuts. How many?

The competition is working with around 15 to 20 percent less staff and that is certainly a benchmark for efficiency targets. That will impact, as I have always said, not just the stores but also our service center in Essen. The important thing is not just to cut jobs. We must consider how we can adapt the work processes in the stores. For that you need people who know how the retail business functions.

In that respect, that is probably the biggest difference between the former heads of Karstadt and me. I always benefit in my daily decisions from the fact that I have done every job on the sales room floor.

Will there be another collective restructuring agreement as there have been so often in Karstadt’s past?

Karstadt closed the last business year with another drop in sales and remains in deficit. We have to talk about cutbacks in Christmas and vacation bonuses and about extending the freeze on wages beyond 2015. The talks are in progress, with a modicum of success until now but we are back at the negotiating table. I am sure that we will be paying our employees wages that are normal in German retail after the successful restructuring.

The default risk of Karstadt suppliers is covered until fall of 2015. What happens after that?

The credit insurers are not worried about our liquidity. Our contracts are currently running on a yearly basis and the extension should be easier for us next time than it was this year. And we are optimistic that we will soon be able to discuss longer-running contracts. But that also depends on how the upcoming Christmas business runs.

I see us as well positioned. The weather can still help us to sell our fantastic winter collections. In the coming fall and winter months we will be showing the customers that we have become much better.

There are only two department store chains left on the German market. While Karstadt is struggling, Kaufhof has fought its way to solid ground. Is the Metro subsidiary a role model for you?

When it is a matter of working for one’s own customers, making no radical changes but always with an eye to making the product range, price and service always a little better, then, yes, Kaufhof is a guiding light and has worked well in the last couple of years. Better than Karstadt. But no one has yet discovered the magic formula for the future of the department store in Germany.

Let’s suppose you really are able to save Karstadt. Do you consider the often discussed merger with Kaufhof to be the right next step?

That is one of the fantasies that are driving the German retail market. For Karstadt, at the moment, that is far off. The management is completely concentrated on the restructuring and future plans for the Karstadt Warenhaus.

 

Thomas Tuma is a deputy editor of Handelsblatt, Kirsten Ludowig is an editor on the companies and markets desk. To contact the authors: tuma@handelsblatt, ludowig@handelsblatt

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