Kaufhof kaput?

Trouble in the Department Store

Galeria Kaufhof, Berlin
Does not contain kryptonite. Source: DPA, Jochen Zick

As a cautionary tale about the risks of doing business in a foreign culture, consider high heels. North American fashionistas have been snapping up every pair they can afford. But German women have preferred lower-elevation footwear. That left Kaufhof, Germany’s largest chain of department stores, with excess inventory. And it left Kaufhof’s Canadian owner, Hudson’s Bay Company, puzzled about what the problem could possibly be.

Sales of high heels are just one of many problems Kaufhof has. HBC, as the Canadian owner is known, bought Kaufhof and its 97 department stores in 2015 from German retail powerhouse Metro. It hoped to profit in particular from Kaufhof’s real estate, with 59 of the properties under shops included in the €2.42 billion deal, most with prominent locations in the busy pedestrian shopping streets of German cities. But of late things have been going wrong.

Part of Kaufhof’s problem is that 41 of its locations were folded into a joint venture with Simon Property, a US REIT (real-estate investment trust), which jacked up the rent. The higher rents are now being blamed for the €47 million loss (before tax and interest) that Kaufhof reported during the first five months of the year. Parent HBC was not happy.

“The strategy at Kaufhof up to now targeted an increase in the property value of the department stores,” said Gerrit Heinemann, a professor at the University of Applied Sciences in Krefeld who specializes in management and retail. Meanwhile Kaufhof’s online business “has been almost scandalously neglected,” he said. That’s only exacerbated HBC’s battle with online businesses such as Amazon and German nemesis Karstadt, which has 79 stores.

The HBC internal “Triple Twenty” strategy foresees 20 percent of net sales from in-house brands by 2020.

One unhappy investor is Jonathan Litt from Connecticut. His investment vehicle, Land and Buildings, owns 5 percent of HBC. On July 31, Litt threatened to ask shareholders to replace board members via a proxy war if HBC doesn’t improve its balance sheet by focusing on its domestic market. “The company,” Litt wrote in an open letter to investors, “should exit Europe by selling Galeria Kaufhof real estate, operations, or both, with proceeds distributed to shareholders.” It was the second such letter this summer from Mr. Litt.

Kaufhof itself says everything is fine. It’s begun opening discount department stores branded its Saks Off Fifth Avenue in Germany and will begin relying more on in-house brands. It hopes to trim its stable to 14 from 23 of those brands to become more nimble, according to internal information seen by WirtschaftsWoche, a sister publication to Handelsblatt Global. The plan is to sell those brands internationally. So they will have labels in four languages and include unified sizes so that they can be sold in HBC outlets in North America, Germany and the Netherlands, where it’s opening its first stores this year. The push is part of the HBC internal “Triple Twenty” strategy, which foresees 20 percent of net sales from in-house brands by 2020.

Martin Fassnacht, a professor at the WHU business school in Dusseldorf, says the idea could boost profit and reduce dependency on outside manufacturers. Renovating aging department stores could also attract more buyers, he said, as long as they go after entire buildings. “A single updated department or floor is going to do little to impress consumers,” Mr. Fassnacht said.

Another headache for HBC and Kaufhof is its arch rival Karstadt, a German department-store chain that was bought by Austrian investor Rene Benko in 2014. Karstadt appears to be spreading rumors that HBC is unable to make payments on a real estate loan from Stuttgart state lender Landesbank Baden-Württemburg, according to internal information seen by WirtschaftsWoche. The idea seems to be to damage HBC. Benko’s Signa Holding has refused to comment on the accusations, but HBC’s lawyers are threatening legal action if they can link Signa or Benko to the rumors.

The list of problems goes on. A trade-credit insurer called Euler Hermes recently capped the amount it would insure on deliveries to Kaufhof. That spooked businesses dealing with Kaufhof, and Kaufhof manager had to work the phones to reassure them. “We are and remain a reliable partner for you,” Kaufhof wrote to its suppliers in a letter obtained by WirtschaftsWoche. “The positive developments of the changes we’ve launched will soon become apparent in our results.” As soon as German women make a run for high-heeled shoes.

 

This article originally appeared in WirtschaftsWoche, a sister publication to Handelsblatt Global. To contact the author: henryk.hielscher@wiwo.de

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