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Business

Trouble for German Electronics Darling

For years Medion has been a retailing star, peddling bargain computers through a deal with discounter Aldi. But in recent weeks, cracks in its business model have surfaced.

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Medion computers are among the most popular items sold by Aldi

From the time Essen-based Medion sold its first computer at the discount supermarket chain Aldi in 1996, the company has been considered the darling of the German computer and home electronics industry.

With revenues of €3 billion ($3.7 billion) in 2003 and profits of €106 million ($131 million), Medion has become the country's biggest manufacturer of PCs, DVD players, home stereos and other products. It also has the third-largest market share of PC sales in Germany, trailing only Fujitsu-Siemens and Hewlett-Packard.

Though the company's founder, Gerd Brachmann, 44, keeps the same kind of famously low profile as Aldi's highly reclusive founders, Theo and Karl Albrecht, his business formula is no secret. The company snaps up computer or electronics parts of the best quality in Asia for the lowest prices and then assembles the final product in low-wage factories.

The result: laptops for €999 ($1,233) and other desirable products that pack in more power at prices a lot cheaper than competitors offer. To top things off: Medion's products consistently rank high in consumer reports.

Bumps in the road

But there's trouble in paradise. At the end of July, the company issued an earnings warning saying its estimates were "too ambitious," and that it was having trouble moving products off the shelves at Aldi and other German chains. The German government also announced an insider trading investigation against the company following major fluctuations in stock value.

To make matters worse, on Thursday the German financial magazine Manager reported that Medion had lost a major contract to provide 100,000 televisions during the Christmas season to Aldi -- long its most loyal customer.

Taken together, the news came like a bolt of lightening -- the drop in consumer spending had finally hit Medion. There's been serious consequences: In less than a month's time, Medion has seen the value of its stock halved, falling from about €31 ($38) a share in late July to only €15 ($18) on Thursday, after news of the lost contract went public.

With Thursday's news, analysts question the future of Medion's partnership with the discounter Aldi. The company's fortunes are deeply entwined with those of the Albrecht brothers, who's chain is responsible for around 65 percent of revenues. But company executives have downplayed those concerns, issuing a statement that the relationship with Aldi's two German operations, Aldi Nord and Aldi Süd, is still "absolutely intact," "solid," and would continue exactly as is has in the past.

International expansion

Nonetheless, with no recovery of the German consumer market in sight, Medion has sought in recent years to expand its base business internationally in order to diversify and expand earnings. It is also implementing strict cost-management to improve the bottom line.

Medion has secured distribution deals with the French retailing giant Carrefour, Dixons and Staples in Britain and Aldi's US operation, which includes 625 stores. The company is also in the process of striking a deal to sell its products through Best Buy, one of the US's largest consumer electronics retailers.

But those deals haven't been enough to cushion the shock of Medion's dampened sales in Germany, where economic growth is just slightly better than stagnant. In July the company disappointed analysts with news it was only able to increase revenues during the first two quarters by 5 percent, to €1.256 billion ($1,550 billion), with after-tax profits of €33.9 million ($41.8 million) compared to €39.2 million ($48.3 million) the previous year.

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