Karstadt deal may be too late to save iconic chain | Business| Economy and finance news from a German perspective | DW | 07.09.2010
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Karstadt deal may be too late to save iconic chain

Germany's iconic Karstadt department store chain is saved for now, but there is reasonable cause to doubt the company's future in its current form. Its new owner plans to invest 65 million euros, but more may be needed.

A Karstadt store and a street sign

Karstadt stores need millions of euros in renovations

Although the German department store chain Karstadt was rescued from insolvency by a deal finalized on Friday, it remains to be seen how billionaire investor Nicolas Berggruen will bring the company back to life.

Many of Karstadt's stores are in dire need of renovation and its workforce is demoralized. Some experts doubt whether department store chains can ever prosper in today's marketplace.

Nicolas Berggruen

Nicolas Berggruen plans to renovate the stores with a 65 million euro investment

The acquisition brings an end to 15 months of uncertainty over the future of the 130-year-old company. Berggruen negotiated extensively with Karstadt's creditors, including Valovis Bank and the Goldman Sachs-led Highstreet constoritum, which is the landlord of 86 of Karstadt's 120 stores.

Friday's deadline set by an insolvency court in Essen had to be extended by 12 hours before the last of Highstreet's more than 100 investors signed off on the deal.

Now Highstreet is expected to sell all of its Karstadt real estate, according to Christian Democratic Party (CDU) politician Thomas Heilmann. When it will do so depends on market conditions, but it is unlikely to happen within the next two years, he said.

Modernization needed

Berggruen's initial plans include modernizing Karstadt's operations with a 65 million euro investment. Shopping at Karstadt needs to be "current, modern and exciting. We need more life in our stores," he told the German newspaper Bild am Sonntag.

But Rainer Bartle, a consultant with BBE in Munich, said he's not convinced Berggruen's plans will succeed in making the chain profitable.

After years of financial difficulties, Karstadt's stores won't be cheap to renovate, he said, pointing out that the chain would need to invest some 350 million euros to give each outlet a modernization budget of 3 million euros.

A Karstadt investor

Berggruen had to collect more than 100 signatures to make his purchase

"It would cost significantly more than Berggruen is willing to invest," he told Deutsche Welle. "It won't be enough. There's no concept which states what he's planning."

Another hurdle is coming to terms with the company's 25,000 employees, who are represented by the powerful Verdi trade union. Karstadt has been in dire financial straits for a long time and is sure to have lost many of its best employees, according to Bartle.

"At the moment Karstadt is completely unappealing as an employer," he said. "The company was performing poorly long before it entered insolvency. And what do employees do in a situation like that? They find another job. Those left over either have too much to lose - are senior employees - or they couldn't find anything else."

Bartle said he expects Berggruen to split the company up and sell parts of it. Possible spin-offs might include the KaDeWe luxury store in Berlin or the company's 32 Karstadt Sport stores.

Berggruen has said himself he only plans to own Karstadt temporarily.

Many small companies have made a success of individual department stores in Germany's mid-sized cities, but Karstadt's approach is flawed, Bartle said. The company still devotes large amounts of sales space to multimedia departments, although comparable wares are available for lower prices at electronics chains like Saturn or MediaMarkt.

"Those are things Karstadt should have separated itself from a long time ago," Bartle said.

Trade union optimistic

A Karstadt walking with a bag sporting the store's logo

Karstadt needs to modernize its product range

Verdi spokeswoman Cornelia Hass, however, is optimistic that Karstadt can be turned around. She acknowledged investment in the chain has been lacking for some time and said she believes renovation and modernization is absolutely necessary.

"We believe the company can be modernized, and that the company must be modernized," she told Deutsche Welle. "We also believe there is enough space available in the German market. Karstadt's new owner is not dependent on difficult-to-obtain credit, and so the money needed for new investment will in fact flow."

In addition to basic structural renovations, Karstadt's stores and sales floors need to be redesigned.

"The simple fact is a lot needs to happen in this next period of time to get investment flowing again," she said. "The inventory needs to be looked at and adapted to what customers are looking for. That's the main thing now."

Author: Gerhard Schneibel
Editor: Sam Edmonds

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