Galeria Kaufhof’s Düsseldorf store is a prime example of how even a partial layout upgrade can work wonders. It completely overhauled its shoe department, relocating it to the basement level. Shoe sales close to tripled as a result, according to Richard Baker, chairman of the Hudson Bay Company retail group that owns Kaufhof.
Kaufhof’s store in Düsseldorf set the standard for modernizing HBC's European activities, an ambitious project that can't happen quickly enough. The Canadian company stepped in to buy Germany's largest department store chain in 2015 and hopes to use the brand as a springboard to build a European fashion powerhouse. It hopes to increase its revenues in Europe by 20 percent over the next two years and is investing around €400 million ($420 million) this year alone to do it.
HBC has a track record of turning around stores in North America, but in Europe it has a massive challenge on its hands. Large department stores like Kaufhof and its rival Karstadt in Germany are caught in a downward sprial, in desperate need of an overhaul to keep pace with smaller, more fashionable boutique rivals and online shops attracting a younger clientele. Whether the extra money it's planning to invest will really do the trick is questionable.
“It won’t be enough to conquer all challenges,” said Joachim Stumpf, managing director of consulting business BBE Handelsberatung.
Big department stores can’t compete with the glitz and glam of smaller boutiques at shopping malls so they struggle to attract young customers.
HBC is in danger of trying to do too many things at once. Aside from modernizing existing stores, the company is trying to introduce two enitrely new brands to Europe. More than half the €400 million this year will go toward opening 11 new stores of HBC itself in the Netherlands. HBC will also open five locations of its designer outlet chain Saks Off 5th in Germany this year. That doesn't leave much for modernizing existing stores and improving its digital footprint.
“In addition to the renovation and modernization efforts, the company will encounter increased marketing expenses, along with the integration of online platforms currently effecting the whole retail industry,” Mr. Stumpf noted.
Yet the biggest problem for big German department stores like Kaufhof and its rival Karstadt is that the clock is ticking on transformation. Unable to compete with the glitz and glam of smaller boutiques at shopping malls, they're struggling to attract young customers. Falling revenues then mean they have limited funds for the necessary upgrades.
HBC Chairman Jerry Storch admits it's a challenging time for department stores and there's a lot of work to do. Modernizing such huge locations is a massive undertaking; Even the Düsseldorf chain showing promise has only managed to refurbish its basement level so far. And there are 100 stores in total across Germany to get through. Mr. Storch has pledged €1 billion to Kaufhof over the next several years to complete the process.
The company’s 2016 results reflect these challenges: HBC’s European revenue fell last year, with market conditions and the money put into modernization efforts identified as culprits. The company's overall operating profits remained positive, Mr. Storch noted in presenting HBC's annual results, but it reported an operating loss of €300 million for its European business. HBC did not disclose how much of the loss came from Kaufhof, but company insiders said it's deep in the red.
Competitor Karstadt, which runs 79 stores in the country, also suffered a fall in revenues last year and had to close several stores. Strict cost-cutting measures meant the company was able to return to profitability after years of continued losses. Karstadt boss Stephan Fanderl announced a small operating profit of €52 million for 2016.
The core problem for both retailers is their large footprint. Karstadt wants to get rid of part of its more than 1 million square meters, or 10.9 million square feet, of retail space, but it's proving a difficult process. Prospective buyers are scarce. “I wouldn’t take over retail space within a department store,” the managing director of a mid-sized retail company said. “The space productivity is so low it’s hard to survive.”
Department stores have to ask themselves how they can lure customers back to their stores. And not just any customers, but the younger generation in particular.
One idea is the shop-in-shop concept, which has shown promise at the Kaufhof store at Alexanderplatz in Berlin. Fashion retail brand Topshop occupies 1,300 square meters of space across three floors at the Kaufhof store. The concept is expected to generate between €9 million and €10 million during the first year – Mr. Storch of HBC said that 30 percent of customers who come to shop at Topshop also stay to shop at Kaufhof.
While the concept might work at urban locations, Kaufhof’s more rural stores will have a hard time copying the format, says Jörg Funder, retail management professor at the University of Worms. Investing the money to rebrand in out-of-the-way locations is simly not worth the effort.
Mr. Funder doesn't believe the basic department concept is dead just yet, but modernizing existing stores won’t be enough to bring broad success. He estimates that only 60-70 classic centrally-organized department stores across Germany make sense – about a third of those that exist today. If HBC wants to keep 100 running, it'll have to dramatically re-invent the concept to survive.
That job will fall to Wolfgang Link, who will take over HBC’s European activities, including Galeria Kaufhof, starting in May. HBC has high hopes for the 49-year-old executive. “He’s a brilliant guy,” Mr. Storch said. “He’s an expert in both traditional and digital retail channels.”
Mr. Link's task isn't just modernizing the stores on the ground. He'll be charged with taking the analog department store business into the digital age in Germany. And then there are the two new businesses starting entirely from scratch.
The biggest challenge will be introducing the Hudson’s Bay brand to the Netherlands, where HBC has leased 18 former locations of the now defunct V&D chain. The other new brand, Saks Off 5th, is entering the European market with 40 stores.
Mr. Link has the pedigree. Prior to his hire at HBC, he worked at toy retail chain Toys “R” Us, and also had stints at German chains Metro and Mediamax. He also reportedly the wholehearted support of HBC, unlike his predecessor. Mr. Link will need that support if he really hopes to turn the ship around.