Who profits from the decline of the German department store? Asks Antonia Branston
“The Germans are not shoppers,” according to billionaire Nicolas Berggruen, who last month finally succeeded in acquiring the beleaguered Karstadt department store chain. And yet despite their relatively thrifty reputation, German consumers have continued to increase their spending on beauty and personal care products throughout the recession.
According to Euromonitor International’s research, beauty and personal care sales in Germany generated faster growth than the average for western Europe in 2009 as per capita spend rose by 3%. Even sales of premium products bucked the trend, up by 2% last year compared to a slight decline at regional level. Berggruen will be hoping that this trend continues as he tries to revive the fortunes of the country’s second biggest department store chain.
Karstadt has spent the last year in administration, following the failure of its parent company, Arcandor. Bidders came and went, but the German market has been an inhospitable environment for department stores for some time, and many investors thought better of dipping their toes into the icy water.
Year by year, sales through the channel have dropped, but 2009 was crunch time. Aside from the troubles of Karstadt, high profile Japanese import Mitsukoshi cut its losses and exited the market, while third ranked player Hertie closed the last of its stores after going bust. Only market leader Galeria Kaufhof, backed by the might of German-based multinational Metro AG, has avoided major difficulties, but still the best that can be said for its sales is that they are not declining as fast as the rest of the market. And Metro has made no secret of the fact that it will be willing to divest Kaufhof if a suitable bid comes along.
The two fastest growing channels in beauty and personal care retail over the past decade have been discounters and drugstores, but these are mass market formats and do not stock premium brands. Although German consumers are pragmatic when it comes to buying beauty products, and often buy discounted brands in some categories while sticking to premium brands for other product types, there is little brand overlap between these channels and department stores.
The real beneficiaries of the department store decline have been Germany’s beauty specialist retailers, led by the Douglas chain. While department stores are primarily located in cities, a quarter of German citizens are still rural dwellers and are more likely to visit their local town to shop where they are more likely to find a Douglas, or a competitor, than a department store.
However, although the number of beauty specialist retailers has continued to increase slowly, their growth seems to be as much due to an increasing consumer attraction to niche brands, particularly those with organic or wellness attributes, as an aggressive drive to hoover up any share lost by department stores.
Market leader Douglas, for example, has posted a better than expected 2.9% increase in sales through its German beauty specialist stores, yet its expansion plans seem firmly focused on non-domestic markets and seven stores in Germany were closed over the year.
This suggests that there is room within the German premium beauty products retail environment for a department store resurgence, meriting the €400m that Berggruen has said he will invest to revamp the Karstadt chain over the next five years.
Berggruen, and Karstadt, have some significant obstacles to overcome. The younger generation of consumers, in their 30s or under, tend to view Karstadt as a retail dinosaur, targeted at an older age group and lacking relevance to their shopping habits. The cachet enjoyed by the three super premium department stores owned by the Karstadt group – including Berlin’s world-famous KaDeWe – has not extended to the mainstream Karstadt chain.
It is true that older consumers command a particularly high proportion of consumer spending in Germany, making it well worth department stores’ while to cater for their tastes by offering a comprehensive range of natural and wellness brands and well established premium labels, but in the long-term, the channel also needs to regain its relevance to a younger consumer base.
The German market may offer little inspiration, but Karstadt can look overseas for ideas. Debenhams in the UK, another mid-market store that was struggling to stay in touch with its customers, boosted sales by strategies such as revamping its clothing lines through a selection of strongly marketed designer collaborations under the ‘Designers at Debenhams’ tag, but accompanied this move to attract a younger clientele with improvements in the store as a whole. Customers heading towards the clothing racks pass through a well stocked beauty department featuring an on-trend mix of premium beauty brands including Benefit, Bobbi Brown and Viktor & Rolf, brands that can already be found at KaDeWe but not at Karstadt.
Meanwhile JC Penney in the US has increased its appeal to younger consumers via a collaboration with LVMH beauty specialist retailing banner Sephora to operate shop-in-shop outlets in its stores.
Karstadt stores have an average size of 15,000 square metres. This is a challenging amount of space for a struggling banner to work on its own, but offers potential to create a strategy tailor made for the German market.
Because of the power of the older consumer in Germany, a dual positioning could be the way forward for Karstadt – one half classic department store run along similar, albeit revamped, lines to the current stores, and the other half with a more youth oriented positioning, and perhaps a new fascia too, with footfall to the beauty department (or perhaps it would be a Sephora shop-in-shop) driven by more on-trend, fashion led brand collaborations and in-house ranges covering apparel as well as beauty products.
In this way, Karstadt has the potential to clarify its positioning with an existing consumer base and also develop appeal with a new one, boosting sales of premium beauty products along the way. When it comes to profiting from the decline of the department store, the rest of German retailing has shown little interest in grasping the opportunity, so maybe ironically one of the winners will be Karstadt.