Michael Eriksson's Blog

A Swede in Germany

German department stores (and COVID-19)

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As a follow-up to an excursion in an earlier text ([1]):

Barmen’s is, obviously, not the only city center that risks severe damage or structural changes due to the COVID-19 counter-measures. A good example is the recent claim that about half of Germany’s department stores might close (cf. a German source [2])).

As historical background, for a large portion of the 20th century, Germany had a flowering department-store business, with a number of large* individual stores and a number of chains. Over time, these consolidated almost entirely into two chains, Karstadt and Kaufhof, which both ended up struggling.

*At least by the standard of the day. While some, like the famous KaDeWe, are large even by today’s standard, others need not have been.

When I moved to Germany, in 1997, this consolidation was already mostly completed, but older names were often still in use. For instance, the big Karstadt store in Frankfurt still carried the “Hertie” name. Since then, I have seen these names disappearing, more and more stores closing, and an endless stream of news about Kaufhof and its poor profitability (including repeated owner changes and almost-bankruptcies*).

*Reminding me of the German saying “totgesagte leben länger” (roughly, “those believed dead live longer”), as it has come back from apparent death more often than Michael Myers.

About a year ago, these two chains began a merger process, which automatically would imply a reduction of business, e.g. to avoid having two large department stores from the same chain in close vicinity to each other.

Now, factor in the damage done by the COVID-19 counter-measures and we have the situation discussed in [2], where about 80 of the remaining 170-or-so stores might close.

Even apart from the drop in the level of competition and the risk that the overall “shopping opportunities” (I know of no good word) are reduced, this is highly unfortunate, because there has been a long drift towards small stores that are almost pointless to visit. For instance, a typical German* mall has just a few decent-size stores and then a barrage of “hole in the wall” stores, often with a strongly overlapping set of products, often differentiated only by what brand or which few brands are offered. (This particularly when it comes to clothes.) Effectively, a customer can take a few steps inside the store, look left and right, and determine that there is nothing to bother with. Alternatively, there is one thing to look at, which in nine cases out of ten turns out to be a waste of time, e.g. because of an excessively high price.

*I suspect that this is not limited to Germany, but my experiences from other countries are much more limited.

With a larger store, the chance of finding something worthwhile are larger, the product and price ranges are wider, it is easier to make price comparisons, …

These problems are artificially made worse, because even the larger stores (department stores included) often sort products by brand instead of e.g. type. Let us say that I want to buy a pair of trousers: in a good store, I would find wherever the dark, somewhat business-like trousers were, go to the right size grouping, and look through the various item with an eye at aspects like looks, price, and quality. In a typical larger store, as is, I have to go to section for brand 1, find the right product type, find the right size grouping, look through it, then go to brand 2, lather-rinse-repeat. In a small store, I would go to the one brand, find the right product type, find the right size grouping, look through the mere handful of candidates, and then make a decision whether to (a) buy from this particular store, (b) go to a different store, hoping to find something better, (c) go to several stores, try to make comparisons, and then go back to the best alternative. No wonder that eCommerce is beating brick-and-mortar …

Of course, in a larger store, ideal or actual, I would also stand a good chance of making several purchases at once: if I need a new pair of trousers, I can also pick up a few shirts. Not so with a smaller store, because it is unlikely that I would find both in the same store. (Sometimes, they are not both present at all in a non-trivial scope; but, even when they are, I am unlikely to find a good match for both in a single store.) In a big department store, I could find not only trousers and shirts but also e.g. a lamp and a few DVDs.

To discuss the reasons behind these developments goes beyond the scope of this text, and would likely require a lot of research, but I do note the push towards shopping-as-an-experience (rather than shopping-to-get-a-needed-product), the increased influence of the individual brands in the trade and the brand obsession of many irrational customers, and a deliberate tactic by at least some stores and/or brands to make comparisons harder, as they know that they would not come off well in these comparisons.

From another angle, chances are that increasing costs of business (notably, rent) in the more attractive city centers has favored high-markup articles, implying e.g. that the generic clothing store has been closed in favor of a Prada store.

This, in turn, could be a contributor to the failure of the department stores, as they have often stuck to a high-markup* strategy, making it unnecessarily expensive to buy there and forcing entire product ranges out. (For instance, many department stores do not sell lamps.) Now, I understand the wish to optimize profitability, but this type of action has often amounted to cutting off the branch one sits on. In particular, from my point of view, the attraction of a department store is rooted in the idea of “everything under one roof”—that I can go to one store and get all my purchases done in one go. This ideal, however, was only weakly adhered to even in 1997—today, not at all. When I do not have “everything under one roof”, when I still have to visit several different stores, and I have to pay a considerable markup for what I do buy, why should I bother? There we have one customer less, less revenue, a need to optimize profitability even further, and the vicious circle continues.

*Notably, department stores often come with a double markup: one for the brand, as highly over-priced brand products are favored, and one for the store.

As is, the likes of Walmart are closer to the department store ideal than department stores are—and at much better prices. But: the likes* of Walmart are rarely found in city-centers, requiring use of a car to reach some far off, obscure location … Sadly, I had one of these just a few kilometers away, when I first came to Barmen, but it has since closed—incidentally, leaving the (otherwise very small) mall that it anchored almost dead.

*Specifically Walmart is likely not present in Germany anymore, but stores with a similar “hyper market” concept are, if likely not to the degree of e.g. the U.S.

Excursion on suicidal optimization:
The aforementioned type of optimization, which damages long-term business development, is quite common, even to the point that the net-effect might be negative* or that a niche for upstart competitors is accidentally created. One of the first examples that I encountered was the railway connection between the very small town of Kopparberg, where I lived for most of my pre-adult life, and the rest of the world. Early on, the train had a number of halts at even smaller places. Every know and then, one of them was cut from the schedule—presumably,** because too few passengers traveled to and from them. Possibly, in any given case, this was a rational decision, but it had the effect that overall passenger load was reduced and that fewer passengers used the other stations, making the next cut that more tempting.*** The result was a continual deterioration of both revenue for the business and service for the population—and the creation of a niche for a competitor, who has by now been trafficking quite a few of these stations since the 1990s.

*Which is by no means a given, as the optimization presumably also has positive effects. It is, e.g., conceivable that the German department stores would have failed even faster without them, that the vicious circle resulted from a damned-if-do-damned-if-you-don’t dilemma.

**Likely helped by a wish to reduce travel times on the main line.

***I note that this was deep in the country-side, where almost everyone had a car, and that it was rarely worth the trouble to take the car to the next station: unless the intended train travel was very long, one might just as well go the entire distance by car as go to a further-away station by car and then taking the train from there.

Excursion on the main topics:
As to the main topics of [1], and with a strong connection to e.g. [3], I note that there have been several interesting political decisions recently, e.g. the new, insanely large, and hopefully-to-be-blocked-by-the-senate U.S. COVID-19 rescue package, or the recently finalized German pension increase. In the latter, the monthly payout is hiked for many former low earners*, the increases are, so far, unfinanced, will almost certainly come from tax hikes for the rest of the population, and they are implemented despite the extra expenditures through COVID-19. Apart from the boost in working-class votes, would it not be better to put it on ice until we know what happens with the economy and what resources will actually be available? Of course, the extra costs to finance this reform will leave others with less money available, a lesser ability to secure their own future, and a greater need for government support, be it now or in the future.**

*This also raises questions of fairness, incentives, etc.: On the one hand, many of those benefiting have done the best that they could, and might deserve a leg up in their old age; on the other, many have not. They will also have paid in much less in the pension system than most others, many will already have received considerable handouts during their working years, and this might make future generations the less likely to work hard to secure their own future, as they are taught to rely on the government to put food on the table.

**This particular reform, alone, is unlikely to have much of an effect, but the overall pressure on the citizens is enormous: a major reason why the current level of pensions, social security, health insurance, … is “needed” is simply that the population pays so much in taxes, pension fees, social-security fees, health-insurance fees, …, that their ability to build own buffers and to pay running costs through earnings is limited. In a twist, this is a partial parallel to the previous excursion, as every change makes the situation worse for the population. (But it is, arguably, an anti-parallel when comparing the train company and the government, as the government benefits from the increased reliance of the population on the government.)

Written by michaeleriksson

May 16, 2020 at 11:02 am

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