Decline of department stores

Once a symbol of prosperity for Germany's middle-class consumers, the Karstadt department store chain has been fumbling with one lifeline after another for years.

After taking over its struggling rivals Hertie and mailorder giant Quelle in the 1990s, Karstadt went through a major restructuring before going into administration in 2009. Since then, it has changed owners twice and now finds itself on the brink of insolvency yet again.

But the problems facing the once iconic retailer run far deeper than mere mismanagement. Department stores on the whole are forfeiting ground to other, more dynamic forms of retail.

Online shopping, brand-specific outlets, discount stores and now ubiquitous shopping centers are all luring customers away from the traditional department store.

"There's no doubt that department stores are facing competition on a lot of fronts," said Torsten Waach van Wasen, a consultant with the firm Alvarez & Marsal. "Retailers have to move to multi-channel sales, both online and offline, in order to prosper."

Karstadt searches for white knight

Karstadt's new owner, Austrian real estate investor René Benko, paid a single euro for the money-losing company last August. He bought it from billionaire investor Nicolas Berggruen, who had also acquired it for one euro in 2010 from the company's then-insolvency manager - and subsequently failed to make the major investments in reviving the chain that he had promised.

In a June 2013 interview with Germany's Bild tabloid, Berggruen said he had underestimated the problems at Karstadt.

"I didn't know how ill Karstadt was after twenty years of mismanagement," he said.

Berggruen was an investor, not a manager. He hired others for that role - including former IKEA manager Eva-Lotte Sjöstedt, who took over as CEO in February 2014. She stepped down just five months later, saying in her parting letter that after having obtained "full knowledge of the economic fundamentals", she had concluded that "the prerequisites for the path I wanted to take no longer exist."

Among her priorities had been to ensure that the offerings in the physical stores would match Kartstadt's online assortment, and an improvement in customer service.

One of Karstadt's problems could lie in its purchasing model. In recent years, buying had been centralized, so all the stores were given the same assortment to sell - with the exception of Karstadt's specialized sports stores and three high-end luxury emporia, which Berggruen put into separate companies.

But not every city's consumers have identical tastes, nor does every store have the same gamut of local competition to deal with. Regional or store-specific buying could be a better strategy, according to retail analyst Joachim Stumpf of BBE Handelsberatung in Munich.

Stumpf said Karstadt has failed to invest adequately in renovation of its stores for over a decade, and badly needs to regionalize its offering, improve the shopping experience with better services and store design, and enhance communications with its clients.

Karstadt Sport and Karstadt Premium have done well in their separate corporate vehicles, but the 83 remaining stores collected in the Karstadt GmbH corporate portfolio need major investment.

Stumpf thinks six or seven of them could be re-assigned to Karstadt Premium and brought upscale under the KaDeWe luxury brand. Another fifty or so stores need upgrades, but should continue to be aimed at a middle-class target market, he said.

That leaves 20 or 30 stores which Stumpf expects will close.

"Because of their high-street locations, the owners of the land and buildings currently occupied by those 20 or 30 Karstadts will likely look for other retail occupants," Stumpf said.

Jörg Funder, director of the Institute for International Trade and Distribution Management at the University of Worms in western Germany, likewise thinks it makes sense to divide Karstadt GmbH's remaining 83 stores into three categories.

In one category, there are perhaps twenty stores in good locations whose land and buildings the new owner, Benko's Signa Holdings, actually owns. Most of the physical land and buildings were sold to an investment consortium called Highstreet in 2006 by Karstadt's previous owners. Some of those locations have been repurchased by Signa.

Those locations, Funder says, could continue to operate as retail department stores under Signa's ownership.

In a second category, there are some two dozen stores that Metro, the owners of the Kaufhof department store chain, have hinted they would be interested in taking over. Funder says he wouldn't be surprised if Signa eventually sells those stores to Metro.

Alternatively, Signa may buy the Kaufhof chain from Metro - something Benko had attempted to do in 2011, so far without success. Either way, Kaufhof and some Karstadt stores may eventually find themselves within a single corporate vehicle.

In a third category, there are the remaining forty-odd Karstadt stores, which Funder says present a very difficult business case.

"I may be wrong, but those stores may end up shut down at some point in the next few years, after which the land on which they sit would perhaps be redeveloped for other uses," Funder said.

Decline of the department store

Mismanagement has certainly been a contributing factor to Karstadt's demise, but department stores on the whole have been declining in Germany and the rest of the world for decades.

From 14 percent of Germany's retail sales in the mid-70s to 2.7 percent in 2013, the downward trend is clear. Hertie, Horten, Wehmeyer, Bilka - department store names that accompanied generations of German shoppers are gone.

Analysts now openly speculate about Karstadt eventually joining that list of extinctions.

There is no general decline in retail that could explain Karstadt's struggles. Retail in general is still growing, albeit slowly. In 2000, total sales in Germany were 428.3 billion euros ($541.7 billion), according to the German national retailers' association (HDE).

By 2013, sales had risen to 450 billion euros and HDE now expects to see 1.5 percent growth by the end of this year.

Rise of online retailers

Online sales are growing faster than any other retail sector and make up 9 percent of total retail sales. Analysts expect the online sector to grow at a rate of 17 percent year-on-year in 2014 - up from 12 percent in 2013.

"In the long run, the retailers that will succeed are those that successfully establish a combined online and an offline presence," said Jörg Funder.

"Even Amazon is now starting to set up storefronts," he said.

Discounters are increasing their market share too, offering bargain-priced wares in smaller assortments than department stores. There are also shopping malls, which instead of selling a full range of goods under a single name, offer various brands from a number of retailers.

Department stores, experts say, will have to re-invent themselves in order to survive.

One way forward could be the "store-in-store" model, according to which a department store offers floor space to a wide variety of independent retailers in exchange for a cut of their gross sales. Another option could be exclusively catering to wealthy customers.

Either way, it seems these once iconic consumer paradises have their best days behind them.