European Retail Briefing - July 2014
Analyst Comment
 
Karstadt – at tipping point?
What we’ve seen 
●	In early July, Karstadt’s ‘new’ CEO, Eva-Lotta Sjostedt, departed after five months at the company, with a farewell announcement that signalled expected investment in the stores was not forthcoming from the chain’s majority owner Nicolas Berggruen. 
●	The chain’s minority (25%) owners, Signa Holding, are mooted to be preparing to buy the chain for a nominal sum. 
●	In 2013, Karstadt sold a majority stake in its sports stores and its three premium department stores – KaDeWe, Alsterhause and Oberpollinger – to Signa.
●	In mid-July Karstadt chairman Stephan Fanderl said there would have to be “painful cuts” at the chain and that Karstadt is looking at the profitability of 20 of its 83 stores. 
●	Karstadt has gone from profitability to loss-making since Nicolas Berggruen bought the chain out of insolvency in 2010. 

A crowded middleground 
Karstadt’s closest rival is Galeria Kaufhof, owned by Metro Group. Like Karstadt, Kaufhof is a mid-market department store chain, but it is marginally upscale of Karstadt. 

In sales and customer numbers, Kaufhof has a slight lead, having outperformed Karstadt a little in recent years. In 2013, Kaufhof’s sales were €2.9 billion to Karstadt’s €2.7 billion (est.).

FIGURE 1: The consumer: Department stores bought from in the past 12 months – Karstadt and Kaufhof, February 2014
 
Base: 2,000 internet users aged 16+
 
Source: GMI/Mintel

But neither department store is growing fast. And both have owners apparently considering divesting the chains. The mid-market in German department store retailing is proving sluggish. 

Strategy so far
Eva-Lotta Sjostedt’s public statements indicated a strengthened multichannel proposition at Karstadt – and building in a strong online offering is where a number of major store-based German retailers have disappointed. So this was a necessary move. 

Sjostedt also indicated a move towards tailoring store ranges to local markets and hinted at a broadening of focus beyond apparel: Sjostedt’s predecessor, Andrew Jennings, had focused on improving fashion at the chain, and this included bringing in new apparel brands while exiting underperforming electronics categories. 

But stores will also need investment to improve top-line performance, and Karstadt’s current owner would appear to have limited interest in capital investment. 

Strong competition in fashion 
Apparel is clearly at the heart of Karstadt’s offer: to do well as a business, it needs to appeal in fashion. But it tried to develop its apparel offer under its former CEO and it has continued to stagnate. It is stuck in the middle as less general retailers chip away.

●	H&M has done well in Germany, overtaking C&A as the country’s leading clothing specialist by annual revenues back in 2010.
●	Pureplays are very popular for clothes shopping in Germany: consumer research for our Clothing Retailing – Germany, October 2013 report found Amazon was the third-most popular retailer for clothes shopping overall (not just third-most popular online), behind C&A and H&M. 
●	Primark is expanding in Germany, having entered the market in 2012.
●	Further complicating where to position Karstadt is the presence of long-established value chains, such as Kik and Takko, in the clothing specialist sector.

The end of Karstadt? 
Given Karstadt looks adrift in a dwindling mid-market, could we see buyers of its stores close the chain entirely? 

●	Signa Holding has experience of acquiring large properties for conversion to shopping centres – we doubt all 83 Karstadt stores would be suitable for conversion to malls, but some might be worth carving up into smaller stores.
●	A sale of the chain could result in a non-department store retailer buying the stores – could this be an opportunity for Primark to acquire a tranche of large stores? After, all in the UK Primark has recently bought an entire shopping mall (the Pavilions centre in Birmingham) in order to install a flagship store as its anchor store. 

What we think
●	Doing nothing is not an option long-term, if sales growth and profitability are to be restored.
●	But we also wonder if pumping money into a midmarket generalist, such as Karstadt, would yield dividends, particularly given there is a middleground competitor in Kaufhof and it is not doing well either. 
●	Karstadt has already tried reviving its clothing offer, apparently to little financial benefit. 
●	So these latest events could be the precursor to the final demise of Karstadt – to be broken up and converted into shops run by other retailers.