Hudson’s Bay Company and Signa Holding have agreed to merge Germany’s two major department store chains, Galeria Kaufhof and Karstadt, as they seek to respond to fierce competition from e-commerce players.
Germany’s department store sector has been suffering from store and online competition for years and the fate of both operators has been questioned repeatedly.
Occupying prime locations in many major German cities, Kaufhof and Karstadt have fallen on hard times in the last decade, fuelling speculation that the rival chains would be forced to combine. Kaufhof runs 96 stores and Karstadt has 80.
The deal will unite retail operations with annual sales of around €5.4 billion and the combination will be 49.99% owned by Canadian retail giant Hudson’s Bay, while Austrian Karstadt owner Signa will hold the remainder.
The agreement also includes the sale of stakes in HBC’s European real estate assets to Signa and will result in net proceeds of €411 million for HBC.
“This partnership is a smart, strategically sound opportunity to equip both companies with the capabilities to strengthen operations and overcome the challenges in the German retail market,” HBC chief executive Helena Foulkes said in the statement.
Signa will manage the day-to-day operations of the combined business, with Karstadt chief executive Stephan Fanderl leading the new retail company.
RPA Perspective HBC’s decision in 2015 to buy Kaufhof always seemed to defy logic at at a time when European department stores find themselves under pressure from all sides. Its huge investment in new stores was led by Gerry Storch, who is no longer with the business.
When HBC bought Kaufhof it hoped to make the department store chain the centrepiece of an ambitious expansion into Europe. But the company is battling its own losses and faced a campaign from activist investors to boost its share price by extracting value from its real estate holdings.
The company opened a slew of revamped stores but consumers balked at high prices and despite Storch’s adamant defence of physical retail, the strategy seemed optimistic at best, in our view completely counter to current trends.
By contrast, Signa owner Rene Benko — who acquired Karstadt in 2014 — has managed to bring the business back into the black in the last financial year after making cuts, giving the stores more of a local flavour, teaming up with partners and promoting e-commerce.
Nevertheless, the rapid expansion of online retailers such as Amazon, as well as fierce competition on prices from smaller chains like Primark, will remain the new company's main worry.
Therefore, the merged entity said it was planning to "future-proof" its retail business in the digital age by expanding its online services to become a "leading omni-channel retailer."
The owners of the merged company have agreed to inject the cash, with HBC and Signa due to provide €100 million each, according to local reports citing people close to the negotiations.
An additional €200 million will come from the sale of two properties currently owned by a consortium led by Hudson’s Bay, according to the reports.