Yet another insolvency procedure at Galeria heralds the final phase of the evolution of mid-segment department store chains in Germany, international retail expert Erik Van Heuven warns.
A week ago, German department store chain Galeria sought protection from its creditors again. Its owner, Austrian real estate company Signa, is being crushed under a mountain of debt and can no longer meet its financial obligations. Receiver Stefan Denkhaus will now look for a new investor, but this will not be an easy search. Almost a decade after the bankruptcy of Dutch V&D, is another monument of Europe’s department store sector about to disappear?
Galeria’s Belgian CEO Olivier Van den Bossche claims that several parties are interested in taking over the company as a whole. Moreover, Denkhaus reported on Monday that the group still has enough cash to last until the summer. These are hopeful signs, but one has to ask himself: how relevant is a department store chain like Galeria still today? How many of their stores are really viable? RetailDetail asked retail expert Erik Van Heuven, former CEO at Inno and Karstadt and co-author of the book “The Future of Department Stores” (Lannoo Campus, 2020).
“I fear it will not be easy”, Van Heuven says. “I think we are reaching the last phase of the evolution of department store chains in Germany. When I started at Karstadt (Kompakt) in 2007, there were still hundreds of department stores in Germany, often two in the same city. In 2019, when René Benko took over the last part of Galeria from Hudson’s Bay, there were still around 240. Today, there are 108, including the sixteen Belgian Inno department stores, so the number of stores has more than halved in the past five years. Turnovers per square metre and visitor numbers are declining year on year, meaning one cannot be blamed for thinking the concept of mid-segment department stores has had its best days. Soon we will come to the final stage, where there is only a future for a small number of premium department stores in prime locations in major cities.”
Indeed, this is already the third bankruptcy proceedings in four years, meaning hundreds of millions from the state and suppliers have not been repaid. And yet, they had to return to the negotiating table with these parties. “Do the suppliers want to go along for the fourth time? Remember, there had already been a bankruptcy in 2009 as well.” The receiver will first seek an investor for the whole chain, but if that fails, he will try to sell the best parts. Van Heuven thinks that only the profitable branches in the best locations can survive. “Most of the wheat has already been separated from the chaff. From 92 branches now it should still be possible to save somewhere fifty to sixty departmet stores in this phase.”
Worst possible timing
This time, the company’s management will not lead the restructuring alone. Receiver Denkhaus will plot the future and look for interested buyers: “Olivier Van den Bossche claims they are lining up, and there probably will be some interested parties, but there is a real chance that these will include several so-called ‘distressed debt experts‘, such as Gordon Brothers, Alteri, Dröge Group… Finding true strategic investors with a strong financial base, like Breuninger, Central Group or P&C, may not be as likely. The context is not helping, with high interest rates, high construction costs, expensive materials… This is the worst possible time to find good investors, and the banks are not cooperating at all.”
Strategic investors may well look with interest at the best twenty or so stores in larger cities. In those prime locations, you can really go for premium. “You have to create relevance and add experience, but is that possible in the smaller and medium-sized cities? The problem is that many stores still have an outdated concept and are often far too big. They often have less relevant departments besides fashion and decoration, that lower the profitability per square metre. We are talking about tens of thousands of square metres that are surplus. I know Olivier Van den Bossche has worked hard on this issue, as have Armin Devender and his team of Inno in Belgium. A lot has already improved, but the competition is also moving fast, often faster, and that makes it so difficult.”
To become successful again, department stores need to emerge as ‘local heroes’, Van Heuven believes. “I no longer believe in the greatest common denominator of a chain. I like the example of L&T in Osnabrück: that is a wonderful department store with 100 % local relevance and an absolute customer focus. Osnabrück is not a big metropolis, but that city is in L&T’s DNA. This is a mid-segment department store that has restaurants, a fantastic sports centre where you can take surfing lessons, and a gym: it is just really worthwhile. A department store should be part of the local community and guarantee top service. ‘Do not sell products, sell memories‘, Central Group’s Vittorio Radice said in our book, and he really hits the nail on its head.
“I love the department store and I hope a relaunch succeeds, especially for all those skilled and passionate employees. Department store people are special people, with a big heart for their business. I have seen employees as well as customers weeping at closures.” The disappearance of Galeria would also be a disaster scenario for cities: “In Germany, every medium-sized town often had two large department stores, likely with five floors and an average of 15,000 sqm of sales area. If such a huge store disappears, you get craters in your urban shopping centre. People used to manage to then turn that into a mall, for example, but it often results in a vacancy. For mayors, this is a drama: how can they make their city attractive again? There is a need to redevelop those buildings.”
Inno has a future
And what does the expert think of Galeria’s Belgian subsidiary, Inno? “It will struggle without a parent company: it will be an orphan. Still, I think Inno has a future: you cannot compare that chain to Galeria, which has really huge stores. In recent years, Inno was not forced to close even a single store. Moreover, they have made some substantial upgrades in the meantime, especially in Brussels. More still needs to be done, though, and faster. Look at Antwerp, for example: what potential that location on the Meir has, if they really manage to turn it into a ‘premium local hero’!”
Inno is now up for sale, but whether they will be able to sell all sixteen stores remains to be seen. “It is a nuanced story. Inno has an experienced management that is making beautiful changes, but it also belongs to a tradition that is no longer followed by everyone – let alone being considered trendy. Moreover, the real estate does not belong to the group: that is owned by Redevco, which might make a takeover a little more difficult. I wish both Galeria and Inno that they find a strategic investor who can let us enjoy our beloved department stores for as long as possible. But we are entering the final phase in these say revolutionary times in retail since the inception of the department store.”