Paper Tiger Death of a Mail-Order Titan?

Germany's leading catalogue retailer failed to anticipate the switch to online shopping. Now, profits are falling at the Otto Group and its CEO, Hans-Otto Schrader, is fighting high costs, a stronger dollar – and Amazon and Zalando.
Special offer – online.

 

Hans-Otto Schrader, the chief executive of Otto, Germany's leading catalogue retailer, believes the days of double-digit growth for online fashion sales are over. Competition is tougher on Germany's €8 billion market – and Mr. Schrader is settling in for a long hard fight against competitors Zalando and Amazon. The only question for Otto: Is it too late?

 

Handelsblatt: Do you own any shares in Zalando?

Mr. Schrader: No, why do you ask?

You said you wanted to buy some so you could ask about the package return rate at Zalando's shareholder meeting.

Well, I was only kidding, maybe I wasn't clear enough. I wouldn't invest in Zalando shares for my personal investment account.

Does it annoy you that people point to Amazon and Zalando as examples of successful online retailing, but Otto isn't?

No. I'm responsible for what the Otto Group does. The key question is whether we, as an international trading and services company, are well positioned for the future. I can answer that question in the affirmative. I know what our strengths are, especially on the Internet. We already generate €6 billion, or $6.78 billion, in revenues today with more than 100 web shops.

Is the competition fair? Amazon, as a publicly traded company, has better access to financial resources and also isn't committed to any wage agreements.

You can't compare two things that are so different. Amazon sells its own mobile phones, does video streaming, markets films and offers cloud services. We're not involved in any of those areas.

Did you miss your opportunity to market an Otto mobile phone?

No, for the Otto Group that would be a mistake. We're a retailer and a service provider, and that's what we focus on. Besides, the market for mobile phones and video is extremely competitive. When markets are already structured that way, you either have to do something exceptionally good – like Apple – or pump an exceptionally large amount of money into marketing. Considering where we're coming from, neither one is an option.

Does it make more sense to compare Otto with Rocket Internet? After all, like Otto, it's an online company with a large number of private brands.

Rocket also has a different model. They develop companies and later sell them at a profit. That isn't our business model.

But you also invest venture capital.

Yes, but our core business is to pursue successful concepts for the long term.

What are the differences between Otto and Rocket?

Our main focus is not to finance start-ups just to sell them or take them public later on. We don't want to be bystanders in the start-up community; we want to be players. This way, we get access to strong new businesses, experience, and the best minds. And our commitment energizes our group companies, and vice-versa. This makes the whole group more interesting, both for us and for the start-up community.

 

Calling for a good deal.

 

 

Your next big project is Collins, a fashion web shop. But you're not getting much support from the economy for that these days.

We successfully launched Collins and we have also gained market share with several of our established companies. But as the largest textile dealer in Germany, we aren't completely unaffected by market trends. Sales of clothing and shoes are declining this year, for the third year in a row, and even the days of double-digit growth in the online fashion business are over. The gold rush seems to be over.

What does that mean?

The online fashion market is consolidating. Aside from the big players, like Otto, Amazon and Zalando, and vertical retailers like H&M and Zara, only fashion brands with their own shops can survive. It's getting harder to enter the market as a new player. I don't expect to see another online competitor capable of generating revenues in the triple-digit millions join the market in Germany. But our Collins project will succeed.

How?

We are strong enough to invest a sum in the triple-digit millions. And we have people on board with bags of innovative spirit, like Benjamin Otto, the son of owner Michael Otto, and entrepreneur Tarek Müller. No other company in Europe is as good at personalizing a web shop as Otto. We also cooperate closely with fashion producers and, in some cases, have direct access to their warehouses.

Is this also reflected in the numbers for Collins?

We've exceeded all forecasts.

What were those forecasts?

I don't talk about that publicly. But I can say one thing: We intend to reach sales in the triple-digit millions in the medium term. And we'll do it.

One idea is for partners to program their own applications for the Collins platform. Are you finding enough partners?

Yes. However, we would like to see more clever ideas, ideas that are talked about in the marketplace. But there has already been some movement in that direction today. We weren't considered very innovative in the past, but now "Exciting Commerce," an industry blog, has named the Collins "About you" project its "Startup of the Year."

Your contract expires at the end of 2016. Is Collins a test of Benjamin Otto's abilities? Will he be your successor?

To be honest, I'm very surprised by those speculations. I don't concern myself with this issue. The partners' committee and the supervisory board will make that decision at the appropriate time.

Will you leave your position at the end of your contract?

I can certainly imagine that I would keep working, although I also have a plan B.

Well, there is certainly plenty to do. You've announced that profits will be down in the current fiscal year. Why is that?

We continue to invest hundreds of millions a year in IT, in expanding Hermes, in existing and new business models and in the Yapital payment system. But these are future investments and we intend to stick to them. I don't want to introduce any long-term mistakes just to improve the bottom line today. We can't cut back on investments without falling behind.

How does it look on the income side?

It's very clear that revenues are declining. To address the problem, we have decisively addressed structural problems in France by getting rid of the printed main catalog, for example. This cuts into sales and revenues. The weak ruble is having a very strong impact on us in Russia, where we will also lose money this year.

Would you withdraw from Russia if the political situation escalated?

We have decided not to, though we would significantly reduce our investments, if necessary. We spent six years developing that market, and we will be there in full force when the situation improves. I think we have the worst of the political escalation behind us. Still, you always have to be prepared for a worst-case scenario, which is why I didn't issue a prognosis for the current fiscal year last May.

Give us one now!

I can say today that we still have some painful revenues losses ahead of us during the current fiscal year.

Are you also struggling with the weak euro?

Yes, because we buy textiles, in particular, in dollars on international markets. We do not assume that we can pass on this price increase in purchasing to customers. There is too much competition in Europe for that.

Your new executive board member in charge of retail, Neela Montgomery, who is British, comes from a supermarket chain. Her hiring came as a surprise, given how distinct Germany's retail market is. Was the company mainly interested in hiring a woman?

Absolutely not. The partners wanted to secure the best possible candidate with international experience – and they were also interested in finding a female candidate. In the end, we were convinced by her competence and her personality.

Does the addition of women change anything for you in the executive board?

Of course, mixed groups behave differently. Everyone tries to be a little more charming.

 

Kirstin Ludowig covers companies and markets for Handelsblatt, specializing in retail; Christoph Kapalschinski covers consumer goods, textiles and food. To contact the authors: [email protected], [email protected]