November 2, 2011

Talk with Printemps investor Maurizio Borletti

Maurizio Borletti, CEO Borletti Group (photo: Borletti Group)
Visionary investor: Maurizio Borletti at the Printemps flagship store on boulevard Haussmann
Maurizio Borletti is the personification of what the Germans call "old money". Cultivated charm belies his own description of himself as a "salesman".

The Italian investor thus made a somewhat incongruous figure when he burst upon the German retail scene last year with a bid for insolvent department store chain Karstadt.

In the event, he lost out to US-German investor Nicolas Berggruen in June 2010 after a highly-publicised bidding war.

Is the co-owner of French department store icon Printemps on the acquisitions trail again in Germany?
 
Market leader Metro Group has long wanted to sell its lacklustre Galeria Kaufhof department stores. But potential investors find the high price the owners are asking about as sexy as stale beer.

The clock ticks at Karstadt

As, however, here has been a growing power struggle among Metro's principal shareholders and top managers since October 2010, the pressure to sell has surely increased. Current speculation about a potential investor includes Greek shipping magnate George Economou.

The time bomb at arch-rival Karstadt also continues to tick with various financial advantages arising from the insolvency agreement due to fall away soon.

Meanwhile, new CEO Andrew Jennings struggles to learn German and understand the intricacies of German retailing. His paymaster, Karstadt owner Nicolas Berggruen, gives philosophical interviews to a media seemingly only interested in his unconventional lifestyle.

Luxury department store empire

Maurizio Borletti has never made any bones about his wish to create a luxury department store empire in Europe. He is not alone. Berggruen and other rich department store operators such Galen Weston (Selfridges, de Bijenkorf etc.), doubtless want something similar.

In what will inevitably be a long-distance race it will be interesting to see who makes the running.

INTERVIEW


Signor Borletti, how does it feel to be only 44 and a multi-millionaire?


I’ve never thought of it that way and I am not sure you can say that! I come from a family which has been building companies since 1865 and over five generations, so I have had the privilege of benefiting from their hard work.

However, I have always considered that the money I have inherited as a kind of trust that I need to use well and develop.

Obviously, this doesn’t mean that you can’t use it for your own pleasure and family, so it is not totally Calvinist, but family discipline in this regard has always been quite rigorous. In fact, our family culture is quite typical of Italian family businesses, especially in the Milan-Turin region.

What is behind your family office?

Our family set up a so-called “amministrazione” in the mid-1800s – long before the word family office became trendy. It manages assets for the family and in particular helps individual family members with their entrepreneurial projects.

The decisions of the family members are made quite independently, but our “family office” provides centralised structures to make decisions and to follow-up on investments.

So it is more of a support than an active management vehicle. Our office is very private and only deals with family and very close friends. It advises on assets of around €800m in a very diverse set of businesses from real estate to agriculture or investments in stocks and shares in different economic sectors.

Why then did you create Borletti Group Management in 2003 as a management & investment vehicle which acts independently of your own family?

In 1993, my cousins asked me to turnaround Paris-based silver flatware and home accessories company, Christofle.

Once I had achieved this after ten years as CEO, I realised that, exciting as it is to be a hands-on entrepreneur, I wanted to step back from running businesses on a day-to-day basis in order to work in a more Chairman-like capacity within an overall investment role.

Your first really big deal in this new role was a 30 per cent stake in the €1.1bn purchase of French department store chain Printemps in 2006. You have since invested €280m in the business. Where was this money channelled, and why?

Borletti Group and our partners RREEF have invested 280 millions euros in 5 years. Around 85 per cent was dedicated to revamping the stores. Close to half of this was allocated to our Paris flagship store on boulevard Haussmann.

The rest was invested in IT and back-office operations. When majority partner RREEF and Borletti Group arrived, Printemps knew the value of its shirts, but didn’t know how many it had or their sizes!

Was this because former owner, François Pinault, had underinvested in the business?

No, he had invested some money to keep the business going, but there are always limited funds to allocate within a portfolio company like PPR Group and one invests them where one believes they are going to create the best return.

From a certain point onwards, Pinault’s priorities shifted within PPR from retailing to fashion brands. If you don’t focus on a group division and make it your core business, then it is right to sell it on to someone who will.

In fact, however, it has been a win-win deal because we continue to distribute successfully his luxury fashion brands within our rapidly-expanding business. This has allowed me to retain excellent relations with Monsieur Pinault and his group.

Printemps has posted double-digit growth over the last two years. Sales density at your Paris flagship store has risen to around €14,000/m². How did you achieve the turnaround?

As per my vision of the department store as a brand platform, we upgraded the brand offer. We resisted the temptation, so fatal to others, of trying to offer everything to everyone in one place. The name of the game is editing and selection in a way which has a clear logic behind it.

We believe in top brands such as Rolex, Louis Vuitton, Gucci, Prada, Miu Miu, Dolce&Gabbana, Dior or Chanel, but we also want to maintain accessibility and therefore maintain a relatively wide price range.

Having a wide range of prices allows us to maintain high traffic in our store which I consider a key to success even for the luxury brands who in any case need to conquer new customers every day.

We have also radically reduced the number of our special offers. When we first bought Printemps in 2005, both the company and its larger rival Galeries Lafayette had 150 promotion days per year. We have now reduced these to 50, but Galeries Lafayette still has 150!

Luxury brands are all very well for boulevard Haussmann, but you have bought into a chain of 16 outlets…

We take a pyramid approach to our stores of “good, better, best” according to the individual catchment area. Wherever you are, however, you need to offer the public a combination of brands that will attract them within each category.

They must also be ones which he or she will not be able to find everywhere, so that there is a real reason for him or her to come to you and buy them.

Exclusive, cool, special, different – you can do all of these at various price points. Swatch is an inexpensive watch, but it is not a cheap watch. A Mini is not an expensive car in absolute terms, but it’s very expensive within its category.

This obviously means giving up successful brands such as Zara or H&M that are too common elsewhere.

I also believe that the keys to success are services and consumer relationship and this has to be extended to all stores!

How many branches have been revamped to date, and what new ones do you have in the pipeline?

All of our outlets have been refitted in order to meet safety regulations and to give a minimum level of presentation. A larger second refurbishment phase is under way, and we are currently working on our fifth outlet.

Our boulevard Haussmann flagship store has only been partially re-done because it is a massive 43,000 square metros, and we can only proceed floor-by-floor.

To date, we’ve refurbished three floors (luxury and accessories), or around 9,000m² of floor space, and are working on a second round of 9,000m² in the lady’s fashion area.

Any new store openings in the pipeline?

We have a few, but, like Italy, France has a complicated planning system. The nearest one to opening is in St. Jean de Cagnes, between Nice and Cannes. This is very exciting as Galeries Lafayette successfully runs two of its most important stores in the region and we are not really present there.

Any closures?

Ideally, we should like to keep all our stores and trade them up. However, certain outlets such as our store in Poitiers do not have the catchment area and the potential to have a profitable department store within the logic that we have chosen.

Keeping such a store would need enormous investment to continue trading, and this would hinder our plans on the other stores.

In what timeframe could you exit Printemps, or are you a long-term investor?

As the economist Keynes used to say: in the long-term we shall all be dead! That said, we could easily spend the next seven years on store renovation alone.

In March 2005, Borletti Group Management joined a consortium to buy Italy’s leading department store, Rinascente. This July, Central Retail Corporation purchased Rinascente at a price equivalent to twelve times ebitda. Why did you oppose such a lucrative deal when you only had a 4 per cent stake?

After entry in 2005, the investment consortium was joined by a private equity operator. At the time, it seemed reasonable to bring them in rather than having them as a competitor, but they had a much shorter vision than we did.

By 2011, we had admittedly achieved more at Rinascente than we had originally set out to do. But we had also identified a number of further improvements that needed to be made. So I wanted another four or five years in order to complete the optimisation of the company.

However, this vision was not shared by the other shareholders. When one runs a time-based fund, you often have a time limit which is motivated by fee structures etc.

Also, the largest shareholder, Investitori Associati, had suffered severe losses on a number of their other investments, and so they were probably under pressure to sell.

So why didn’t you try to buy the whole of Rinascente?

That’s exactly what I tried to. I set up a consortium with some pretty important names, including both private equity and a number of top luxury brand groups.

We tried to enforce our shareholder’s agreement, but had to take our case to court in order to defend our interests against the other shareholders. Unfortunately, under Italian law you cannot ask a judge to enforce these; all you can do is obtain damages.

In the end, the other shareholders decided to sell to Central Retail Corporation who had raised their bid to a record 13 times ebitda.

In order to avoid a law suit for damages, which in Italy can take more than ten years, the other shareholders decided that it was better to come to an agreement with me and avoid the hassle.

As the grandson of the founder of Rinascente, would you have wanted to have kept Rinascente as a family heirloom?

Of course there is a sentimental value, but most important is clearly that Rinascente had growth potential for the next four to five years.

My vision is to create value through transforming businesses and to keep them successful and profitable for the long term. This is my added-value and my primary role. In Rinascente I should have liked to have completed this work.

Be this as it may, the sale quintupled your stake in the equity after only five years. What are you going to do with the money? Will you invest it in Printemps or stock up your war chest for future acquisitions?

Believe it or not, I have put the proceeds into wonderfully safe "Bunds" (long-dated German government bonds)! I am not a hedge fund manager or a gambler on the stock exchange.

Either I can invest in a project to which I can bring value-added and for which I am ready to take a controlled entrepreneurial risk, or I invest in secure assets, which I really appreciate …at least, that is, until I can find better opportunities to put the money to work!

Yet you made a highly-publicised bid for German department store operator Karstadt in 2010. Why do you believe the Karstadt business failed?

Former CEO, Thomas Middelhoff, was wise to sell its smaller "Hertie" stores, which former management had acquired. However, the saddest turning point was when he sold part of the real estate without reinvesting the proceeds in the business.

Had he done so, the company could have been extraordinary, and the remaining 50 per cent of the real estate which Karstadt still owned would have increased in value correspondingly.

The main problem, however, was a lack of focus. Middelhoff created Arcandor, a diversified group in which Karstadt was only a non-strategic part. Inevitably, a portfolio company, which included a travel agency etc., could not focus sufficiently on the Karstadt business.

Why do you believe that Karstadt’s insolvency administrator, Klaus Hubert Görg, favoured Nicolas Berggruen’s offer over your €100m one? After all, you and Gordon Brothers offered €35m more, and you know a lot more about retailing.

Firstly, you must remember that our original offer was not made by Borletti Group, but by Highstreet Holding, a real estate investor in whom we have a stake of only 2 per cent. This offer was made on the condition that changes would be made in labour flexibility in order to improve customer service.

For example, only around half of the total working hours was on a Saturday. This doesn’t make sense because Saturday is always the most important day of the week. So we demanded more flexibility from the work force.

This requirement was not regarded as anything particularly difficult to meet at a local corporate level. However, there were national union representatives and politicians among the decision-makers.

These included Margret Mönig-Raane, vice-president of the German trade union ver.di, who strongly backed the Berggruen deal because he promised not to change labour conditions.

He also obtained strong support from the Minister for Labour & Social Affairs Ursula von der Leyen which certainly had some influence in the decision.

I very much respect the professionalism of German unions, but, in this case, I still believe that our offer would have been in the best interests of the company and that ver.di was defending its own interests rather than Karstadt’s.

How then did your second bid come about?

The landlords originally demanded conditions which were totally unacceptable to Berggruen. So Görg found himself in a situation where he had written a contract with a buyer whose conditions he could not guarantee. That’s when we and Gordon Brothers submitted a new offer.

In my opinion, this was better in many aspects than the one which Berggruen had put on the table. It was here that Görg played a decisive role by blocking our offer; in fact, he didn’t even want to see it, so we had to publish it!

He then defended himself by saying that he was bound by an exclusive contract with Berggruen not to talk with us.

Perhaps this was the case?

In the beginning, yes, but then the Berggruen contract expired, so Görg could have considered our offer had he wanted to. Instead, he renewed the exclusivity of the original Berggruen contract until Berggruen eventually succeeded in pressurising the landlords to accept his conditions.

This was a pity because we would have invested considerably more giving Karstadt better chances of survival.

Why didn’t you?

We could not have committed on more at the time, but our original offer of €100m would only have been a first tranche.

We were confident that this phase-one investment would have produced sufficient transformation within the business to allow for a Phase Two financed by further capital from our investors.

How much extra investment do you feel would be needed to turn the Karstadt business around?

It would require a total of around €1bn. Half of this could be generated by the business over time, and the other half would have to be brought in as fresh money from outside the company. So our initial bid of €100m was merely to demonstrate that Karstadt could be turned around.

A further €400m would have been required over the next five to six years to roll out the strategy, depending on the general economy and the state of consumer spending.

Apart from Gordon Brothers, you have always maintained strict confidentiality regarding the other partners involved in your bid. Why so secretive?

Don’t worry, I am very cautious about who we invite to co-invest.  Our consortium included the Borletti Group family office and the family offices of other European private investors.

Our investment agreement restricts us from disclosing the names of our investors with one notable exception, which is Tamburi Investment Partners, who are listed on the Milan stock exchange and who have therefore disclosed their investment.

How would you have improved the Karstadt business?

Karstadt needs a very thorough repositioning. It has some of the best locations in Germany, which is a key factor, even though most of them have not undergone significant renovation for more than 20 years.

In the long term, all the locations would have to be refurbished completely and adapted to the new positioning of the chain.

As this process will need five to seven years to implement, a number of operational quick fixes would have been necessary, especially on the ground floors, which provide between 30 and 50 per cent of total sales.

Also, at least three or four stores would have needed to undergo substantial refurbishment in the first 18 to 24 months in order to give a proof of concept.

More fundamentally, we would have needed to merchandise the stores differently, extending the offer to include higher-end brands and even certain luxury brands. The access price point wouldn't have fundamentally changed, but the median, mean and top price points would have risen considerably.

In all segments, including the lowest ones, we would have had to have been much more selective on the brands in order to give the customer a real service in terms of editing.

In fact, I already had the support of most of the brands I needed. This is essential because, when you have the ten key brands supporting you, the others will come in.

Also, the brands will not roll out in 60 or 70 stores without any proof of concept, which makes the initial refurbishment of the first pilot locations key.

All this would have been necessary to differentiate Karstadt from its rival and frequent neighbour, Kaufhof, in terms of offer, service, and feeling.

If you enter a Karstadt or a Kaufhof in Germany today, you don’t really feel the difference. If you blindfolded a customer, so that they couldn’t see the store sign at the entrance, they wouldn’t know which is which once they were inside.

What is wrong with the German department store segment? Why do you think Neiman Marcus, Selfridges or John Lewis make good money, when most German stores do not?

There are successful stores in Germany, such as Breuninger or Peek & Cloppenburg, who offer excellent products, attractive stores and good customer service. The main problem of Karstadt and Kaufhof is low sales densities of around €2,500/m² ($343/ft²) which are not sufficient to finance good service, marketing and promotion, or rent.

Do you believe that Berggruen will be successful in turning Karstadt around?

The real question is whether the current CEO, Andrew Jennings, will be able to implement what he knows he has to do as an internationally very competent manager.

This will also depend on his capacity to drive a very German management team, which will inevitably be very different from what he has been familiar with in South Africa and the USA.

Secondly, he will at a certain point in time need more money.

That doesn’t sound too optimistic…

Admittedly, Berggruen has made a big bet and put his reputation on the line, but I wouldn’t have made a bid for Karstadt, if I hadn’t believed in its potential.

He has a great asset in his hands and a good starting point because the company originally had around €800m in cash and no debt. He has the raw materials to transform the business into a big success; he clearly believes that he can do it, and I wish him well.

You have met Berggruen on occasions, how do you view him as an investor?

Berggruen didn’t need Karstadt to become rich. He comes from a wealthy family and has been a brilliant hedge fund manager and creative investor for many years. I admire his courage and skill, and he has certainly shown that he has vision.

He has managed to convince people such as ver.di, Ursula van der Leyen, and, originally, also Rewe Group CEO Alain Caparros of Rewe. These certainly aren't easy people to convince!

Could you make another offer for Karstadt?

I must confess that my first experience of attempting a larger business deal in German retailing hasn’t been very gratifying, and I certainly wasn’t made to feel welcome. I genuinely think that our offer made more sense.

Surely, also, the whole point of insolvency is to find the best possible solution for an indebted company? This didn’t happen.

However, things can change. On the business side, I believe I know what needs to be done at Karstadt, and I continue to believe that it has big potential.

How do you view Karstadt’s arch-rival Kaufhof?

Kaufhof has the same type of productivity problems as Karstadt. It is better run operationally, because the parent company, Metro Group, is a pure-play retailer.

However, Kaufhof’s situation very much reminds me of Printemps when it belonged to the PPR empire. It isn’t a strategic priority within Metro, which in any case is going through a challenging period at the moment. So Kaufhof is not getting the money it needs to make the necessary changes.

How much does Kaufhof need?

A turnaround would probably require a similar sum to what Karstadt needs, i.e., around €1bn. So the purchase price of the asset is particularly critical because any buyer would have to invest a considerable amount in the business in order to bring it up to standard.

Obviously, Kaufhof still owns the real estate, which is a source of value. But again, if the purchaser has to pay for both the real estate and the business, and then has to put further money into it, the numbers just don’t add up. So the price Metro wants for Kaufhof seems too high to me.

Why don’t you make a bid for Kaufhof? After all, it’s up for sale…

I would only be interested if the price was lowered substantially. We were in touch with some of their advisors even before the Karstadt negotiations. I know what their expectations are for the company, and I think that currently we are not close enough on price for it to make sense for us to negotiate.

They are perfectly aware that I am potentially interested, but they also know that I know the business and its true value.

El Corte Inglés is said to have negotiated three times with Metro Group for the purchase of Kaufhof. Do you believe they are a serious buyer?

They most certainly have the money and operate a similar big store format to Kaufhof in Spain. Also, they are only active on their home market, which is in crisis.

However, deals also depend on the personal situation of the buyer. El Corte Inglés is still led by one of the founders and owners, Isidoro Álvarez, who is in his late seventies. It will all depend if, at this stage of his career, he will be up to risking his life’s work in a new venture.

Do you believe that a merger between Kaufhof and Karstadt would solve both their problems, or only cause new ones?

Obviously, there would be advantages in terms of synergies, but numerous catchment areas would also overlap. Closing sites isn’t as easy a solution as it would appear at first. If you have two sites adjacent to one another, closing one will not double the sales of the other.

Also, store closures are very expensive in terms of social consequences and of financial cost in redundancy compensation, rental contracts etc.

Therefore, the crux would be to find a clear differentiation between Karstadt and Kaufhof. So they would both need to be repositioned in order to avoid cannibalisation. Some locations in weaker catchment areas might need to be closed, but I believe this would happen anyway regardless of a merger.

Would you be interested in acquiring German fashion chain Breuninger?

They are a great retailer, and have a very nice flagship store in Stuttgart. However, I have never heard that they are up for sale, and I believe the owner, Mr. Van Agtmael, is enjoying the results of having successfully repositioned the business.

Department stores are particularly deeply rooted in their own national retail culture. Why have you always had a vision of a European department store group?

It is true that department stores have a strong national basis and even vary from city to city. However, the smallest national differences are found at flagship level in major international cities.

Therefore, KaDeWe in Berlin has more in common with our outlet on boulevard Haussmann than a Karstadt store in Düsseldorf and a Printemps store in Lyon.

This is because the higher you go in terms of positioning, the more brands you have in common and the more uniform is customer behaviour. The lower you go, the more local everything becomes.

Also, the back-office requirements for an international chain of flagship stores would be very similar. Therefore, hypothetically, it would be interesting to merge KaDeWe in Berlin, Harrods in London, Det Ny Illum in Copenhagen, and de Bijenkorf in Amsterdam in one single company.

Finally, why did you give us this interview today?

A lot of things have been said about Borletti Group in Germany! It was important to me to clarify certain aspects of the Karstadt issue.

Also, it is always challenging and a good exercise to have to explain to what I am doing and which vision of the sector I believe in.

As we are always interested in new opportunities, I hope I will have been convincing in attracting new German and international investors to my future projects.

 
Related article in German: Interview by Mike Dawson & Christiane Ronke in Lebensmittel Zeitung, no. 42, 21.10.2011


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