Karstadt-Kaufhof

This man will save or bury Germany’s department stores

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René Benko, a self-styled transformer of relics. Source: Smetek

At the age of 41, René Benko is many things: a high-school dropout, a self-made billionaire, and one of Europe’s hottest property tycoons. He may also turn out to be the savior of Germany’s traditional department stores.

For some, the Innsbruck-born Mr. Benko is an Austrian Donald Trump: a ruthless dealmaker with a €4 billion personal fortune and a taste for the high life, in command of a sprawling, opaque empire of companies and investments with revenues approaching €12 billion ($13.8 billion).

It can take a while, but Mr. Benko usually gets his way. For the youthful tycoon, last month brought the fulfillment of a long-standing ambition. The successful €3.5 billion bid for the Kaufhof chain of department stores by Mr. Benko’s Signa Group (also known as Signa Holding, see graphic below) has paved the way for a merger with Karstadt, the other major German chain that he acquired in 2014.

In an exclusive interview with Handelsblatt, his first in five years, Mr. Benko said he was optimistic about the future of department stores, in spite of competition from cut-price brands and internet retailers.

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The "outmoded" Galeria Kaufhof on Berlin's Alexanderplatz. Source: DPA

The Austrian entrepreneur said he was “absolutely convinced” that department stores can thrive, above all because of their place in vibrant city centers: “We’re talking 200 locations here!” Mr. Benko enthused. He said the merged company would retain both brands, describing them as “enormously powerful.”

Although analysts have predicted large-scale store closures, Mr. Benko said this would not happen. He said his company’s revival of Karstadt showed it could keep department stores open, and he would fight to save every branch: “We can do it, because we stand for dependability, reliability and a social conscience.”

Unlike Mr. Trump, Mr. Benko wasn’t born into privilege. The child of a municipal civil servant and a kindergarten teacher, he dropped out of high school to pursue his entrepreneurial dreams.

He began with luxury renovations in his hometown of Innsbruck, moving on to develop healthcare centers. Within a few years, massive capital investments, secured from wealthy acquaintances, allowed him to buy up a local department store named Tyrol, which became the anchor for a much wider urban makeover.

As the financial crisis unfolded, in 2008 Mr. Benko snapped up a bank headquarters in Vienna at a knock-down price. Teamed with Hyatt, he turned it into one of the Austrian capital’s swankiest hotels, the centerpiece of an exclusive new shopping district known as the Golden Quarter.

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Vienna's Golden Quarter, home to hot Benko property. Source: Gregor Titze

Staff and customers of both Karstadt and Kaufhof will hope that, once the merger is approved by competition authorities, Mr. Benko can work magic on the battered remains of Germany’s department stores, which have suffered from decades of decline.

Thirty years ago, there were five major department store chains in Germany – Kaufhof, Karstadt, Hertie, Horten and Quelle – old-fashioned retail giants offering a range of commodities under a single roof.

Even then, however, suburban shopping malls were making department stores seem like outmoded relics. The early 1990s saw a swift wave of consolidation. By 1994, there were just two chains left: Kaufhof and Karstadt, whose downtown flagship stores were sometimes located right beside each other.

A merger was the obvious solution. The idea was explored at various points, but always fell through. Meanwhile, the rise of internet retailing provided another, more deadly rival to the grand old bricks-and-mortar stores.

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Kaufhaus des Westens, another jewel in Mr. Benko's crown. Source: DPA

Amazon appeared on the scene, and by 2012, had as much market share as Kaufhof and Karstadt combined. The internet giant has now left them in the dust, with revenues now three times that of the two German chains. Other online retailers, like fashion heavyweight Zalando, have eaten even deeper into revenues.

After having several bids rebuffed, Mr. Benko swooped on the ailing Karstadt chain in 2013. The same year, Kaufhof was bought by the Canadian investment group Hudson’s Bay Company (HBC), with promises to revive the flagging business.

But while Karstadt began to turn a corner under Mr. Benko’s Signa, Kaufhof continued to fail. With loss-making businesses elsewhere, HBC seemed unwilling to make the investment to drag the business into the 21st century.

Mr. Benko repeatedly approached HBC’s management with bids for the chain. But Richard Baker, HBC’s boss, reportedly had an intense dislike of the Austrian upstart. “He’d rather dance across Fifth Avenue in a wedding dress than sell to Benko,” one insider told German news magazine Der Spiegel.

Restructuring measures at Kaufhof only worsened the situation, and the chain continued to bleed hundreds of millions of euros. This year, Mr. Baker ate humble pie, traveling to Vienna to cut a deal with his hated rival.

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For all his flash, the Austrian billionaire may have discovered a secret that Germany’s beleaguered retailers had overlooked. City department stores must offer more than commodities for sale; they need to become a new kind of luxury urban “marketplace,” seamlessly meshing with online retail. He insists the Tyrol in Innsbruck, redesigned by starchitect David Chipperfield, shows how it can be done, with its 33,000 square meters (355,000 sq ft) of luxury retail space drawing customers in record numbers.

For this to happen in Germany, major investment will be needed. Many Karstadt and Kaufhof outlets are run-down, with buildings dating from the 1970s. Signa hopes synergies from the merged administration, purchasing and IT can save €200 million a year.

Mr. Benko promises that Kaufhof employees will experience a very different style of management: “We will speak the same language as staff, work toward the same goals, and we’ll keep our promises,” he told Handelsblatt. But he insists there is no alternative to the deal: “Without the merger, Kaufhof has no future. We cannot forget that,” he said.

Florian Kolf leads a team of correspondents covering the trading and consumer sector for Handelsblatt. Thomas Tuma is a deputy editor in chief at Handelsblatt. Brían Hanrahan adapted this story into English for Handelsblatt Global. To contact the authors: kolf@handelsblatt.com, tuma@handelsblatt.com

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