Year 1 for Hudson's Bay Company and Kaufhof
Transatlantic anniversary: HBC boss Jerry Storch and Kaufhof CEO Olivier Van den Bossche (second and third from the left)
It was therefore with mixed feelings when one learned exactly a year ago to this day that Canada's leading department store operator Hudson's Bay Company (HBC) had purchased Metro Group's unloved daughter Galeria Kaufhof for €2.9bn, including debt.
After all, the German trade had only recently experienced Nicolas Berggruen's bizarre and fateful purchase of rival Karstadt. And the last 20 years bear witness to a string of failed foreign investors from Walmart to Marks & Spencer. It seemed at the time as if HBC was dashing into the abyss like a troop of Canadian Mounties in a snowstorm.
Twelve months later, our newspaper received a formal invitation to brunch at Galeria Kaufhof head office in Cologne. The principal hosts were Gerald (Jerry) L. Storch, CEO of HBC, and Kaufhof boss Olivier Van den Bossche. Was it all to announce a happy first anniversary, or a rapid return flight to the other side of the Pond?
A Galeria Kaufhof facade in Frankfurt
There was another reason for their palpable confidence though. Despite a terror alarm in Europe and fewer tourists, as well as an abnormally warm winter, Van den Bossche indicated that sales at Germany's largest and Europe's number five department store are on the up.
Then former Toys "R" Us boss Jerry Storch merrily chimed in with HBC's plans to invest €1bn in Germany over the next five to seven years.
This will be used to open up to 40 off-price outlets under the successful US banner "Saks Off Fifth" as well as to refurbish the existing network of 100 department stores on the German high street.
"Saks Off Fifth, selling premium fashion at discount prices, has huge potential because there is nothing really comparable to this concept in Germany," says Wayne Drummond, CEO of Saks Off Fifth Europe. The first four outlets will open in Frankfurt, Stuttgart, Heidelberg and Wiesbaden.
Galeria Kaufhof CEO Olivier Van den Bossche: "We don't deplete sales staff, we add them"
Changes will include a greater range of "international and less conservative" fashion brands and "optical improvements" aimed at enhancing store ambience and creating a "special customer experience".
New look: A sneak preview of the Galeria Kaufhof basement in Düsseldorf due to reopen on November 3
Service will also be extended to the ladies' lingerie department in 17 outlets by around the end of the year. This is after tests at five stores led to a "double-digit" increase in sales.
Parallel to this, galeria-kaufhof.de, which Van den Bossche says is progressing well and could account for 10 per cent of sales medium-term, will be built into a "seamless experience" for customers.
The Canadians clearly believe that investment in store ambience and more sales staff is the key to "dramatic" success in international department store retailing and that Germany will be no different. Here, Storch points to the revamp of HBC's flagship store at home in Toronto where annual sales have "tripled".
Refreshingly, given the way that most German retailers regard their staff as a cost factor rather than as an asset, HBC intends to recruit more personnel in Germany (total current staff: 20,085, of which 14,1733 are in sales).
HBC boss Jerry Storch: "You must drive your top line, if you want to boost your bottom line"
"Too many companies are focussed on the wrong side of the P&L. They are so intent on defending profits that they cut costs in the wrong places, especially staff. Then they watch glumly as both sales and profits fall together. The moral of the story is therefore: Don't decrease store sales! You must drive your top line, if you want to boost your bottom line."
When challenged as to whether it was a lack of faith in the format that Galeria Kaufhof have not announced the opening any new department stores in Germany, Storch was quite candid: "We do not refuse to open new department stores on principle, but there are very few sites available on the German high street. Given the chronic overstorage in our sector, new opportunities will inevitably arise when some of our competitors fail."
International investor: HBC Chairman Richard Baker in front of a Kaufhof department store in Germany
Unusually for a private equity investor, Baker took HBC on a multi-billion spending spree over the border that has included the purchase of venerable US brands Lord & Taylor and Saks Fifth Avenue.
So far the gamble has paid off. Further investment, while carefully cutting back-end costs and looking for synergies, has galvanised operations. Current headwinds in the US department store sector do not seem to have fazed the long-term investor.
Baker's strategy is clearly to buy prestigious and historic brands on mature retail segments which are overstored and/or undergoing radical structural change. He then combines them within a "store-in-store" concept, rejuvenates their assortments by adding exciting international brands, strengthens their online offer, and invests in service and ambience.
Where better than department stores in an online age, and where better than Germany? Galeria Kaufhof, which had suffered from many years of underinvestment under former parent company Metro Group, was particularly attractive.
HBC's new European hub: Galeria Kaufhof HQ in Cologne
So, after watching like a hawk for many years, Baker pounced across the border following the bankruptcy of former Dutch retail icon Vroom & Dreesmann (V&D) in February. This will give HBC the opportunity to open 20 "Hudson's Bay" and "Saks Off Fifth" outlets in the Netherlands by May 2018.
Thirteen leases have been signed to date, and the début will be in Amsterdam in August 2017. Around €300m will be invested in modernising the stores, the lion's share of which will be financed by the landlords. (An opening is also planned in Luxembourg).
If we follow his logic, then Baker's next move, at least in Europe, must surely be Scandinavia. But will he succeed long-term in Germany? After all, a lot of intelligent people have tried and failed over the years to succeed in this segment. Also heavy investment in stores has not always resulted in a corresponding rise in sales, let alone profit.
In discount-dominated Germany, shoppers may well appreciate the value-for-money proposition of Saks Off Fifth. But, beyond famous exceptions, such as rival Karstadt's KaDeWe in Berlin, Alsterhaus in Hamburg or Oberpollinger in Munich, local consumers have often instinctively jibbed at any "consumer temple" approach.
New brands: Introduced to Galeria Kaufhof since 2015
The €1bn investment planned by 2021/23 is clearly a step in the right direction and an explicit expression of faith. But by any estimate, the Canadians will need to up this figure considerably if they intend to revamp the whole, chronically underinvested store base, and they must make this clear to their shareholders on the Toronto Stock Exchange (TSX: HBC).
As international investor Maurizio Borletti, who has bid for both Kaufhof and Karstadt in the past, shrewdly puts it: "The main problem of Karstadt and Kaufhof in Germany are low sales densities per square metre, which are not sufficient to finance good service, marketing and promotion or rent."
Baker, however, has already succeeded in creating a buzz at his German HQ which is currently being renovated and transformed into a "European service centre". In fact, it was a true pleasure to see a bullish and happy management team at last in Cologne without them looking like they need a long course of Prozac.
If Baker can succeed in creating the same kind of buzz among decimated and downtrodden sales staff on the shop floor, then the man just may be in with a chance.
Related article in German: "HBC will in Europa aggressiv wachsen" by Mike Dawson, page 8, Lebensmittel Zeitung, no. 39, 30.09.2016
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