May 23, 2014

Otto Group invests in clicks & bricks

Hans-Otto Schrader, CEO Otto Group (photo: Otto Group)
Hans-Otto Schrader: "The future of retailing is neither purely physical nor purely online, but omni-channel"
Almost like a profession of faith to an old religion in an ever more cyber world, German retailer Otto Group intends to open more stores on both sides of the Atlantic. This is an unusual step when competition from the internet is forcing many retailers to prune their store base and to reduce or reassign sales space.

"Physical stores are most certainly not dead," CEO Hans-Otto Schrader proclaims. All too often such statements represent little more than the attempt to make the best out of a bad job: A traditional retailer is saddled with 20 to 30-year rent contracts and/or has invested huge sums in bricks & mortar, so management sing an appropriate song.

Although Otto Group runs around 400 stores under various banners and numerous shop-in-shops, they only account for 11 to 12 per cent of net revenues (€12bn). Online makes up nearly two-thirds of the business which also gets the lion's share of the capex (more than €300m for 2013 to 2015).

So why does Schrader say that it is "essential to fly the flag and open more stores"?

Planting more flags in the cities

Otto is certainly putting its money where its mouth is. Its sheego subsidiary, for instance, started life as an online pure player, but opened its first shop-in-shop last year. The retailer, which sells fashion to ladies over size 40, wants to have 200 more by the end of 2015. Schrader doesn’t even exclude opening stand-alone shops in the future. "We want to make sheego a genuine retail brand, and a physical presence is extremely helpful in doing this."

Sister company myToys also began as a pure internet retailer, but now runs a dozen stores in Germany. More could follow in due course. The SportScheck sports clothing chain already has a network of 17 outlets which could be expanded to 25 or 30 over the next six years.

Otto is also increasing physical store investment on the other side of the Pond, where US subsidiary Crate&Barrel has to contend with considerably more internet competition than in Germany. The home accessories and household goods retailer already makes 30 per cent of its annual revenues via e-commerce.

Absolutely indispensable

Although this share is set to rise, Schrader says that is "absolutely indispensable" for Crate&Barrel to continue investing in stores. "Home accessories and households goods are available everywhere on the net. But we also sell them in our shops where customers can ask staff for advice – a service which can’t be matched by online pure players. This greatly amplifies the perception of Crate&Barrel as the brand category for household goods."

Schrader is surprisingly forthright in his definition of group marketing strategy: "Stores increase the rate one can win new customers, and it is easier to retain brand loyalty via a multi-channel approach. In an age where any price can be met on the internet, brands become even more important. If you try and compete on price alone without a strong store brand, it will quickly hurt your margin. So the future of retailing in our view is neither purely physical nor purely online, but omni-channel."

Bone of contention

Lebensmittel Zeitung believes that this approach caused friction within Otto Group’s Board and that not all of its seven members were entirely happy about allocating more money to physical stores. This is adamantly denied by Schrader: "Of course, there was discussion, but in the end the vote in favour was unanimous. There are no two worlds, and all channels mutually profit from each other."

The strategy is clearly working for the multi-channel retailer with a colourful portfolio of more than 100 internet shops. Group revenues increased by 1.8 per cent for the year to the end of February 2014, with the financial services and customer logistics divisions both jumping by around 15 per cent.

On a currency-adjusted basis and excluding losses in relation to the restructure of Groupe 3Si (formerly 3 Suisses International) in France, global retail net revenues would have grown by 3.3 per cent. Even in price-dominated Germany they rose 2.3 per cent, which beat the overall market. Group ebit also edged up 1.5 per cent to €392m.

Mail-order catalogues 2.0

These results fill Schrader with pride. "Despite the critics prophesying the demise of our mail-order catalogue businesses Schwab, Baur and Otto, we have proved that we can successfully transform them in today’s e-commerce age."

This self-praise is well-earned. Few online players make money, while many physical retailers suffer from online competition. To make good money in both clicks & bricks is therefore quite an achievement. It only goes to prove that there’s life in the old retail dog yet.


Related article in German: Lebensmittel Zeitung, Nr. 21, 23.05.2014, von Jan Mende & Manuela Ohs


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