Discount or luxury

KaDeWe, Berlin's premier department store, appears in every travel guide to the German capital. Some 40,000 visitors turn up there every day and in the pre-Christmas season, up to 180,000 people go there to shop.

At the entrance, small exclusive shops - Gucci, Louis Vuitton and Cartier - vie for big-spending customers with 4,000-euro ($5,500) watches and 2,000-euro handbags. Up on the sixth floor, shoppers get together over champagne and lobster cocktails in the store's gourmet food section.

KaDeWe - short for "Kaufhaus des Westens," or "department store of the West" - is a real "pearl," said Karl-Gerhard Eick, the new head of Arcandor, the group that owns the Berlin shopping landmark.

Although exact numbers haven't been made public, word is that KaDeWe is still turning a profit, even as Arcandor itself faces imminent insolvency.

Nevertheless, Arcandor is looking to get rid of not just KaDeWe, but also its other premium department stores, Oberpollinger in Munich and Alsterhaus in Hamburg. It aims to focus more on the mid-level market segment.

Straying from the trend

Industry analysts, however, doubt this strategy will bear fruit.

"It's pretty surprising to me that classic department stores like Karstadt and Hertie seem to have missed the trend in this area," said consumer researcher Ingo Balderjahn from the University of Potsdam. "They were still using relatively old-fashioned concepts, while the market has long since developed in another direction: either discount or luxury."

For years, German food discounters like Aldi and Lidl have also been selling clothes, electronics and household appliances at bulk-rate prices, luring customers away from the major department stores. In addition, low-priced apparel chains such as KIK, Takko and Ernstings Family have expanded their business in Germany.

Until the 1970s, department stores accounted for 14 percent of total retail sales in Germany, whereas today their share amounts to only about 3.3 percent.

Still, most German cities have pedestrian zones in their downtown areas, where department stores continue to draw vast numbers of shoppers.

Good for everyone else's business

In Potsdam, just outside of Berlin, the pedestrian zone presented a dismal picture in the 1990s: grey facades, and empty or boarded up shop windows. Today, however, it's pulsating with life. Tourists stroll through the area, linger in the cafes and spend their money in the boutiques that line the streets.

According to one study, the number of passersby has more than doubled in the past 10 years, and one reason for that was the opening of a Karstadt department store there in March 2005.

"The department store is a big crowd-puller in town," said Eva Gerber, who runs a jewelry business in the area. "And I always say that those who endured the sluggish business before Karstadt came should get a medal for perseverance. So the store has, at any rate, had a positive effect on the whole street."

While Karstadt may have attracted both visitors and investors to Potsdam, that doesn't mean the company itself is doing well. It declined to comment on the matter.

Sales figures indicate that another department store chain, Kaufhof, which is owned by the wholesale group Metro, is doing somewhat better - and has even expressed an interest in buying up Karstadt's 121 failing stores. However, earlier this week, Arcandor chief Eick rejected rumors of a possible merger.

Future may be in discount

At the Kaufhof department store on Berlin's Alexanderplatz, visitors are ushered in by a doorman.

"A few years ago, [customers] would have found tables piled high with bed linen or one-deutschmark items at the entrance," said store manager Detlef Steffens, who had the location completely renovated. "You won't see anything like that here. The customers don't want those things at a downtown department store."

Steffens completely revamped his store's product line a few years ago. It no longer sells furniture, rugs or lamps, which are generally not the sort of things city center shoppers are after, he said. Instead, there are more clothes, displayed according to brand.

KaDeWe, Kaufhof's big competitor, has gone one step further. There, some manufacturers offer their products at their own expense. The idea may have helped sustain KaDeWe, but it isn't necessarily a panacea, said consumer researcher Balderjahn.

"I think only a very, very small number of these well-known department stores will be able to continue to assert themselves in the same way as KaDeWe," he added. "The vast majority of stores will have to operate at a lower discount level in order to survive."

Author: Karsten Zummack (kjb)

Editor: Nancy Isenson