July 9, 2014

Karstadt merry-go-round keeps on turning

Eva-Lotta Sjöstdet (photo: Karstadt)
Eva-Lotta Sjöstedt: Couldn't get the man in the background to define his colours
Now that didn't last long, did it? Eva-Lotta Sjöstedt's brief, but heart-warming guest appearance as chief executive of troubled German department store chain Karstadt has come to a dramatic end. After only five months, the likeable Swedish lady has thrown in the towel. The announcement of her sudden departure on Monday came with bitter recriminations against principal owner Nicolas Berggruen.

The former IKEA executive had always looked a somewhat naive figure in a trade dominated by ruthless middle-aged men. She tried to give a human touch to the thankless task of reviving the ailing fortunes of the high street retailer. Whereas previous top management seemed remote and aloof members of the international jet set, Sjöstedt demonstratively manned the tills and tried to relate to Karstadt's long-suffering staff.

Sjöstedt's brief tenure at the helm is now over. The bitterness in her departing letter is palpable, and the wording is damning.

Words full of foreboding

After having obtained "full knowledge of the economic fundamentals", she writes that "the prerequisites for the path I had wanted to take no longer exist". Sjöstedt claims that Berggruen had promised "full support for my strategy and investment plans for the 83 (Karstadt) department stores", implying that this had now been withdrawn.

Had Karstadt not been in continual crisis over the four years since it was bought out of insolvency by US-German billionaire Berggruen for the symbolic sum of one euro, her strategy might have paid off. Sjöstedt's immediate predecessor, Andrew Jennings, failed to make Karstadt a young fashion destination. The Anglo-Saxon brand labels the luckless Brit introduced hardly account for 1 per cent of total annual revenues. Sjöstedt wanted to get back to basics and revive Karstadt's appeal to the everyday German consumer.

Certainly, her classic pots, pans & fashion strategy looked more hopeful than Jennings's Sex & the City girlie approach. Working on the basis that customers on the North Sea coast might have different needs to those in the Alpine foothills, she also attempted to regionalise local store offers.

So what happens next?
Meanwhile all eyes are riveted upon the next meeting of the Karstadt supervisory board at the end of July. Its members will have to decide on future strategy and how this will be financed. The Board will also have to discuss the budget for the business year beginning the 1st of October, 2014.

Talks will be held against an embarrassing backdrop of public debate in the media as to solvency. Mercifully, liquidity still seems to be sufficient to finance ongoing operations. One indication of this is the continued loyalty of credit reinsurers. Euro delkredere, for instance, is providing cover for suppliers up to September 2015.

A new lease of life will be given in late autumn when Signa Holding and partners pay the second tranche owing to the company for their recently acquired 75-per-cent stake in Karstadt's sport and premium outlets. The real question is then, what will happen after that?

As revenues continue to fall, there is little scope for revamping a store base that has been neglected for more than 15 years or for modernising internal systems. Estimated net revenues for the year to the 30th of September, 2014 could be less than €2.2bn and losses might reach higher double-digit million levels.

Thus it would be the fourth year in succession that Karstadt has gone into the red under tight-fisted Nicolas Berggruen. This is quite an achievement when one remembers that the would-be political philosopher acquired the company in a robust state of health. In autumn 2010 Karstadt had no debt to speak of, and the worst loss-makers within its predecessor had been stripped away during insolvency. More than €200m in profit had been carried forward and investable assets were in roughly the same order of magnitude.

Today Berggruen Holdings, content to receive alleged annual licence monies of €9m to €12m for the use of the Karstadt brand, seems loathe to invest in the business. Without new investment, a clear strategy, or a CEO, it is hard to imagine what the future will hold for Germany's second-largest department store operator.

What price René Benko?

Enter colourful Austrian retail estate tycoon René Benko and Signa Holding company. The investor group centred around Benko and his even more colourful Israeli partner Beny Steinmetz holds a 75 per cent stake in what was once the best of Karstadt. This includes three premium department stores (KaDeWe in Berlin, Alsterhaus in Hamburg, and Oberpollinger in Munich) and 28 sports outlets as well as the real estate for a further 21 department stores.

Signa has announced that it wants to invest a total €300m in the store base by 2015. Half of this was earmarked for the premium stores and half for the remaining 83 standard Karstadt stores in which the holding owns an important minority stake of 25 per cent.

According to company sources, Benko's European property portfolio is valued at more than €6bn. He is also the largest private owner of real estate in the centre of Vienna. The 37-year-old self-made man from Innsbruck specialises in the acquisition of ailing department stores with top inner-city sites and turning them into shopping centres.

It is claimed that, should Berggruen sell his remaining 75 per cent stake in Karstadt, Benko and Steinmetz could acquire the 83 standard department stores for a symbolic price of one euro. Presuming Benko & Co. are interested in buying what they seem to be happy investing in, how do their chances stand? 

Four years ago, trade union Verdi and former Minister for Labour & Social Affairs Ursula von der Leyen succumbed to Berggruen's Siren song as bidder for Karstadt. They did so despite a higher offer by Italian investor Maurizio Borletti because Berggruen promised to retain more staff.

The beauty of any René Benko solution, of course, is that Karstadt's 17,000 employees could also be reassigned within his newly created shopping centres. And, unlike anyone else it would seem at Karstadt, at least the man has a concept...

Related article in German: Lebensmittel Zeitung, Nr. 28, 11.07.2014, von Mathias Vogel

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