Retailer Troubles Fire Sale at Otto

The world's second-largest online retailer Otto wants to sell underperforming operations after it booked its first-ever net loss due to a weak Russian ruble and competition from Chinese online retailer Alibaba.
No reason to smile: Otto chief executive Hans-Otto Schrader.

Chief executive Hans-Otto Schrader left no doubt this week about his displeasure over the Otto Group’s first after-tax loss in 65 years at the mail order and e-commerce giant.

“I am very unhappy,” said Mr. Schrader. “The losses were a very painful experience.”

Hamburg-based Otto – the second largest online retailer behind Amazon – missed its goal of outperforming the retail market. The group – which includes subsidiaries such as U.S.-based home furnishings and accessories retailer Crate & Barrel, low-cost fashion chain Bonprix and logistics firm Hermes – incurred bottom line losses of €200 million on barely changed revenues of €12 billion, or $13.4 billion in the broken book year, which ended on February 28.

At the group’s annual news conference on Wednesday, Mr. Schrader promised to do what it takes to turn business around – and that means selling subsidiaries with poor future prospects or finding partnerships for them.

He said he wants to return all three of the group’s divisions to profits this year and increase revenues by 3 percent. On the offensive, the 59-year-old chairman of the management board announced it was his way of earning an extension on his contract.

Majority owner Michael Otto is expected to decide that in the fall, in consultation with the supervisory board.  That’s how long Mr. Schrader has to find solutions for the problems he clearly identified this week.

A quarter of the group’s business is in crisis, he said. Among the reasons are declining revenues in Russia due to the ruble’s loss in value against the euro. At the same time, rival Chinese online retailer Alibaba is launching an attack on Otto’s market dominance in Russia. Amazon and Zalando have emerged as rivals on the German market.

The group’s mail order subsidiary in France also needs restructuring, but layoffs there are particularly expensive due to the country’s strict job protection laws.

In the United States, Otto is in the process of correcting an unsuccessful product range policy of its upmarket furniture chain, Crate & Barrel.

 

065- WTB 2013

There are problems in Germany too: Sportscheck, a retailer of sportswear and equipment, is suffering losses after problems with new product management software, which was supposed to be the ideal link between stores and the online business.

The parcel delivery subsidiary, Hermes, also needs 19 new product distribution centers to remain attractive and efficient for online mailers. It competes with FedEx, UPS and DHL of Deutsche Post. Hopes for the future – like the new online shop, About You – cost a lot in the start-up phase.

Mr. Schrader has already taken action on several fronts. He has replaced managers in the United States, France and at Sportscheck.

In Russia, short-term planning is the order of the day and expansion plans have been cancelled. But Otto’s chief said he wants to hang on to business there for at least two to three more years, in hopes of a turnaround.

Mr. Schrader also wants to cut back on peripheral subsidiaries. A half dozen of the group’s 123 companies could be put up for sale or get new partners, he said.

Otto Office could be the first to go. Target customers of the mail order company for office supplies are corporate clients and not a natural fit for the group, said Mr. Schrader.

There also could be a quick solution for the struggling cell phone pay service, Yapital. Discussions with a potential partner, which could generate more users for the app, are at an advanced stage.

It’s not a question of freeing up capital, said Mr. Schrader. It’s about turning the business around.

In most problem areas this can be done using the company’s own resources. The group does, after all, have liquid assets. Despite the losses, Otto’s annual report shows half a billion euros in gross cash flow, not least because better planning has significantly reduced levels of capital tied up in inventory.

On an operations level, things look worse. Earnings before interest and taxes fell from €401 million last year to €79 million. Both the retail business and service divisions involving Hermes lost money – only the financial division, the group’s smallest, was profitable.

A bright spot was the debt collection business, EOS, which also works for third parties.

“EOS is a profit generator of special importance to the Otto Group, especially in the current situation,” said Mr. Schrader.

So the trend for Otto to earn money with services will continue. With the new advertising marketer, Otto Group Media, Mr. Schrader wants to use customers’ data to offer brand manufacturers targeted banner advertising – initially on the company’s own pages, and later on other websites.

“Otto cannot earn much money currently just with product sales. But it can do so with its customer base,” explained Jörg Funder, professor of trade management at the University of Applied Sciences in Worms, in southeastern Germany.

“Otto is using its customer base to generate revenues, which the group can invest in new future-oriented business areas. That is the right strategy.”

 

Christoph Kapalschinski covers consumer goods, textiles and food for Handelsblatt. To contact the author: [email protected]