The good old days

It was last year’s surprising coup. When René Benko and his Signa Holding announced, after countless failed attempts, the planned merger of the big German department store chains Karstadt and Kaufhof to an astonished public in late summer of 2018, even the otherwise best-informed industry experts were taken aback.

The agreement with the Canadian department store owner Hudson Bay’s Company (HBC) made Benko Europe’s department store king–virtually overnight. It is a good fit for the decisive Austrian that Signa will own 50.1 percent of the newly formed Deutsche Warenhaus AG. HBC has to content itself with 49.99 percent of the shares. However, this deal is still quite risky for Benko.

Department stores were and are considered to be the industry’s real “dinosaurs”. The times when multi-brand properties in the hearts of European cities performed reasonably well are long gone. Furthermore, dusty concepts, an ageing customer base, and the consistently growing online retail sector severely impact virtually all department store chains in Europe.

The name of Benko’s trump card is Stephan Fanderl. The manager of the new joint venture of Karstadt and Kaufhof already proved his talents impressively during the restructuring of the ailing Karstadt chain. After 12 years in the red, Karstadt finally achieved a moderate profit in the business year 2017 again. A rigorous austerity program and renting shop space to retailers like dm, Aldi, Edeko, or Apollo Optik as well as a gradual increase of online retail marked the turning point. After merging the two department store giants, Fanderl now needs to go right back to the start.

Currently incapable of surviving

“Galerie Kaufhof cannot survive in its current state on the long run,” says the Fanderl, the manager of the joint venture. Short-term, triple-digit million investments are inevitable. Fanderl’s strategy: The group wants to bundle the most important management and administrative structures of both department stores at the previous Karstadt headquarters in Essen. The former headquarters of Kauhof in Cologne is about to become a competence center for digitalization and e-commerce.

Furthermore, the entire gastronomy and grocery business will be managed from here. In the course of this restructuring phase 2,600 full-time employees will be laid off–that amounts to roughly every fifth job. The restructuring does not include the closing of any stores. The only stores that could potentially be closed are those with expiring lease agreements.

“Not every Kaufhaus is identical. Department stores in top locations of major cities still work well. These spaces are so attractive that they could be used for other purposes as well, if necessary. This could quite possibly mean that not every floor of a former department store is entirely dedicated to retail,” says Frank Emmerich, Head of Retail Germany at CBRE.

“However, the situation in small and mid-sized towns is quite different. Even though department stores in these cities are significant customer magnets on many shopping streets, they can still get into trouble. Visitor frequencies generated by department stores are essential for the retail market in small and mid-sized towns. If a department store closes, frequencies decrease in city centers of small and mid-sized towns. Finding subsequent use for them is difficult and therefore further decreases the attractiveness of the respective city center. This can be the start of a vicious cycle,” says Emmerich.

This kind of partial desertification of high streets is what may loom over Great Britain. The crisis of British retail has also hit the island’s big department store chains with its full force.

Store closures have become commonplace

“We have to modernize our real estate portfolio to ensure that we have suitable and exciting locations for our clients,” said Marks & Spencer’s boss Steve Rowe already last year. This is why one has to “close smaller stores where we do not offer the entire product range, and show customers in bigger stores what Marks & Spencer stands for.”

Rowe’s restructuring concept includes the closure of up to 100 stores until 2022. Over the last few months, British communities already experienced what Marks & Spencer means by that. 30 British stores already closed their doors, including locations in Andover, Bournemouth, Covent Garden, Newmarket, and Portsmouth.

“Proposing to close stores is never easy for our colleagues, customers, or the local community, but it is vital for the future of M&S,” added Sacha Berendji, the M&S Retail, Operations and Property Director, recently. The first closures primarily affected stores that provided fashion, household goods, and groceries under one roof. Besides eight more closures that are already confirmed, M&S will continue its closures and announced the closing of 17 further locations in mid-January.

“The tenant mix in shopping centers is significantly more diverse than in department stores. A shopping center’s many different services and restaurants alone are hardly or not at all available at department stores. The reason for this limitation is that a department store’s shop-in-shop spaces cannot provide any units with more than 150 sq m. In shopping centers, however, one can rent areas with up to 500 sq m, plus shop windows and storage areas. Many shopping centers also include supermarkets, which one rarely finds in department stores,” says CBRE’s retail expert Frank Emmerich.

The British department store group House of Fraser was also caught off guard last year. The changing shopping habits of the Brits caused House of Frasier’s downfall. As a result, the British sports retailer Sports Direct International swallowed the chain, reportedly, for 90 million pounds. The British department store chain Debenhams is also in deep trouble.

Mike Ashley, the manager of Sports Direct, is substantially involved in Debenhams. He removed Debenhams’ chairman Ian Cheshire from office in early January of this year. Angry stakeholders and substantial declines in sales ultimately sealed the fate of Cheshire. Even though the board of Debenhams only recently initiated a strategic shift and propagated the closure of 50 stores and the introduction of a new store design concept. Its ultimate realization will now be handled by someone else.

Are department stores dead?

All in all, this does not bode well for European department store giants. Is this the death of department stores? It is hard to say, but they seem to have reached the end of the line–at least in their traditional form, according to retail experts. The good old department store that could be found in almost everywhere, where food and household goods, toys and gardening tools, and almost anything else one could need waited patiently for its customers, is definitely a thing of the past. Supermarkets and shopping centers made sure of that.

It is therefore a fact that the economic upheavals of department store owners resulted in the end of an entire era. After a few precursors, they had their magnificent start in Europe in Paris in the second half of the 19th century. Department stores like “Le Bon Marché”, Printemps or Galeries Lafayette were designed as monumental temples of consumption by the most modern architects and artists and they are still touristic highlights of every journey throughout Europe. Macy’s was founded around the same time in New York, followed by GUM in Moscow and KaDeWe in Berlin.

The architectural presentation and sensual experiences of department stores have been inspiring–not just consumers. Even today, these monuments of the 19th century still stand their ground in Europe’s major cities. The situation of department stores of the 20th century is very different. They fight for survival in small and mid-sized towns and seem to hopelessly lose the battle against online retail and contemporary retail concepts. Even the trend of retail returning to inner cities cannot do anything to change that development. The metamorphosis of department stores into contemporary inner-city shopping malls is anything but easy.

“Combining or repurposing department stores with or into shopping centers is difficult because their floor plans are vastly different. Department stores usually have five to seven floors, but even then, they cannot provide enough space to be adapted accordingly. Furthermore, shopping centers need extensive communal areas, which are mostly impossible to realize in department stores,” says Emmerich.

But what does the future hold for department stores? Even experienced experts do not have a solid answer to that question. However, one thing is sure: Department stores cannot be revived without multi-channel offers as well as clear and understandable positioning. And while the big European chains lick their wounds, new and modern types of department stores–like Hema, Flying Tiger or the high-end department store Manufactum–are already filling the gap left by their traditional predecessors.

Possible ways into the future

The Hema group has been owned by a private-equity company since 2007. It is currently represented in seven European countries with 700 stores and focuses on affordable pricing as well as comprehensive assortments of goods. It ranges from fashion and office supplies to home accessories, kitchenware, and cosmetics–all of it exclusively from their own brands. Manufactum, “the department store of good things”, was founded by Thomas Hoof in 1987 and originally focused on mail-order business.

By now, the company operates several department stores in Germany and is owned by the Otto group. In a way, it’s a European version of Muji. But also Flying Tiger from Copenhagen is now playing in the big leagues. The Danish design chain was founded by Lennart Lajboschitz in Copenhagen in 1987. Its original name was Zebra and it did not start out as a department store but a repair service for umbrellas. Then the product range was expanded. Today, the company is its own brand and many of its 3,000 products are created by in-house designers and sold exclusively in Tiger stores.

In short: The big, tumbling European department store chains have quite a bit of homework ahead of them.

How Japanese depātos became department stores

Where did the history of department stores actually start? Hardly anybody would guess that they originally came from Japan. It all started in 1683 with the foundation of Echigoya, which later became Mitsukoshi, today’s oldest department store chain in the world. Its slogan was “Genkin kakene nashi” (“Cash sales at fixed prices”). Matsuzakaya was already founded in 1611, but it was still common practice to sell on credit during the Edo period. Invoices were only issued twice and settled instantly. Previously, cash was predominantly used by lower-class carnies and for itinerant trade.

Department stores made it possible for the middle class to spontaneously buy high-quality products like clothing without entering long-term business relationships. Therefore, the term “department store” originally comes from the Japanese word “depāto”, which means department store. Even today, cash is still transferred bashfully in a box at Japanese banks, restaurants as well as said depātos, and it is considered impolite to count it.

Japanese department stores are characterized by their extensive services and vast product range. For example, their services include welcoming ladies in neat uniforms, who bow to every new customer, and so-called “elevator girls” who push the buttons in elevators.

Independent of this development, department stores were founded almost simultaneously in England and the USA. The hardware store Bennett’s in Derby, for example, was founded in 1734. Howell & Co, the first full-fledged department store opened on London’s Pall Mall in 1796. This department store’s success was mainly due to price advantages based on high discounts for buying in bulk from manufacturers, imports, and a broad product range. The rest is history.