Kaufhof Warenhaus AG, the group of retailing and service companies formerly known as Kaufhof Holding AG, was born from a July 1996 merger that created one of Europe's largest trading groups, Metro AG. Formed from the combination of Kaufhof Holding AG and several other companies, parent company Metro AG reported 1996 sales of more than DM62 billion ($44.6 billion), and employed approximately 135,000 people. Kaufhof Warenhaus AG is a large component of Metro AG's department store division, with branches in the best city-center locations alongside such other Kaufhof associate retailers as Vobis Microcomputer, the Media-Markt-Saturn Group, Reno shoe stores, DineA caterers, and Kaufhalle AG's discount department stores.
Kaufhof traces its roots to the mid-19th century, when large, elegant department stores called grands magasins sprang up in Paris, offering luxury goods. The founding of the German department stores a few decades later was in direct contrast to the rise of France's "cathedrals of commerce," as Emile Zola called them. In Germany all of the great trading houses developed from small retail stores in the eastern provinces of what was then Imperial Germany.
Leonhard Tietz's case is typical. In 1879 the 30-year-old from Birnbaum, Warthe, opened a tiny textile shop in Stralsund with a start-up capital of 3,000 thalers. The shop had only 25 square meters of sales space. It sold thread, buttons, trimmings, woolen wares, and all the articles needed for men's and women's tailoring.
What differentiated Tietz's business was the new retailing methods employed. He ran his business according to the principle of high turnover on a small profit, based on fixed prices and cash payment. This method had, in fact, been put into practice before in the large Parisian department stores. This was, however, a surprising innovation in eastern Germany, where people still haggled over prices and put their purchases on credit. As the extent of the company's purchasing power was a decisive factor in its ability to offer low prices, Tietz formed a buying cooperative with other members of his large, extended family, which included the founders of Hertie. Articles that could be sold in bulk were ordered by the cooperative, prompting the development of new, cheap articles. The manufacturers welcomed the chance to sell to such big purchasers.
Tietz also expanded his field of business through the opening of numerous branches. This took him into the Rhineland, an expanding economic center promising good bulk sales its growing number of inhabitants and their increasing purchasing power. Tietz set up 11 branches between 1889 and 1909 in western Germany, and in 1891 moved the headquarters of his company to Cologne.
Carving Out a Niche at the Turn of the Century
Leonard Tietz used the same business methods wherever he founded his branches. He rented small shops in the best areas to sell haberdashery and linen. The public would come in droves to these shops on their opening, and following this the complete range of goods offered would be introduced. Wherever necessary, Tietz would move the stores into bigger premises, and eventually acquired his own real estate. It soon became an experience in itself to shop at Tietz. When the Cologne store opened in 1895, its own small electricity works enabled arc lights and electric light bulbs to light the store brightly. Elevators transported the customers to all floors, free of charge. The saleswomen--few salesmen were employed--wore black dresses as their uniform. On a trip to Milan, Tietz admired the Galeria and decided he wanted to own a similar building with a glass cupola and gigantic windows. He fulfilled his dream by having a Jugendstil--the German equivalent of art nouveau--building with an arcade constructed on Cologne's main street. This was his first real department store, and with its luxurious furnishings it was considered one of the most important landmarks in the town. It was torn down just ten years later to make way for an even larger department store. By this time Leonhard Tietz had his stores built by the most renowned architects of his time.
For the Düsseldorf store, the management approached all German-based architects with an invitation to participate in a prize competition to create a work of great artistic merit without regard to cost. Joseph M. Olbrich, the most famous exponent of Jugendstil architecture, was chosen to design the building, and the new department stores in Cologne and Wuppertal-Elberfeld were built by Wilhelm Kreis. These large buildings are now classified as historical monuments. Further branches under the wholly owned subsidiary Grands Magasins L. Tietz, founded in 1900, were opened in Belgium, where a huge department store employing 1,000 people was built on the occasion of the World's Fair in Brussels in 1910.
The range of merchandise expanded. Tietz began to offer all-inclusive packages, for instance a set including kitchen furniture, a cooking range, and 323 pieces of kitchen and household equipment. With the introduction of various articles, including bicycles, tinned food, and ready-to-wear clothing, the department store offered new services to its customers. Tietz imported the latest hat and clothing fashions from Paris, where he owned his own buying house. He imported Oriental rugs, precious glassware from Italy, and majolica and fancy goods from Japan.
Influenced by the efforts of the Deutscher Werkbund, founded in 1907 to organize avant-garde art exhibitions, "beauty and quality" became the company's catch-phrase. Kaufhof was the first retailer to organize avant-garde art exhibitions in its stores, and Leonhard Tietz had his portrait painted by Max Liebermann. Tietz looked after his employees' interests by offering benefits, including health care, that were by no means taken for granted at that time. The company's extensive social programs developed gradually from this time onward.
In 1905 the firm Leonhard Tietz became a public limited company with a capital of one million marks, but remained a family firm as the shares were taken up by the Tietz family. At this time the company employed a work force of 2,400 and had sales of 24 million marks. In 1909 the Tietz shares were introduced onto the Berlin stock exchange as the first publicly traded German department store stocks.
Leonhard Tietz died on November 14, 1914. His eldest son, Alfred Leonhard Tietz, had been well prepared for his future responsibilities. After studying at the University of Commerce in Cologne under Eugen Schmalenbach, the pioneer of modern business management education, Alfred Tietz then went on to be trained in various large U.S. department stores.
The period following World War I was marked by unrest, hyperinflation, and economic crises. Nevertheless, the network of branches was continuously extended. In 1925 Tietz traveled with a team to the United States and came back with many fresh ideas. The already common practice in the United States of training employees for their jobs was adopted, and Tietz's sales personnel and executives were carefully trained for their tasks. Business and sales training, knowledge of the merchandise, economic geography, and the importance of good taste were impressed upon the company employees. The team also studied fixed-price retailers such as F. W. Woolworth, and established the EHAPE (Einheitspreis Handels Gesellschaft mbH), a fixed-price bazaar in Cologne. It became a successful subsidiary of Kaufhof and would later trade under the name of Kaufhalle AG.
When the National Socialists (Nazis) forced Jewish businesses to give up their property in 1933, the owners of Firma Leonhard Tietz engaged Abraham Frowein, president of the International Chamber of Commerce, to represent their interests. The latter stood up for them at great personal risk, made it possible for Tietz's heirs to emigrate, helped establish them on a sound financial footing abroad, and later helped them to gain compensation. After 1933, Kaufhof's shares were held by Deutsche Bank, Commerzbank, Dresdner Bank, the Frowein family, and many other private shareholders. During World War II, bombs destroyed most of the company's 40 department stores. Only five survived intact. The branches in the east were lost.
Following the 1948 currency reform, the company, which began calling itself Westdeutsche Kaufhof AG in 1933 and from 1953 Kaufhof AG, expanded into towns in the north and south of the Federal Republic of Germany. After the years of deprivation and lack of goods, customers came in droves to the rebuilt and newly opened stores.
Rebuilding in the Mid-20th Century
The well-stocked department stores were as appealing as they had been before the war. "Kaufhof offers everything a thousand times over under one roof" ran the company slogan. Special events such as French, American, and Italian weeks; art exhibitions; and autograph sessions with famous artists attracted many into the stores. Above all, the large grocery departments with their wide variety of cheeses, sausages, breads, fresh meat, fish, and delicatessen products, and the increasingly elegant restaurants and cafes, enjoyed great popularity.
A very important factor in the company's success was imports, especially from the Far East, which allowed the company on the one hand to supply goods at low prices and on the other hand to aid, through its large orders, the development of the manufacturers and factories in these countries.
In 1979, the company's centenary year, Kaufhof AG owned 86 branches and its turnover reached DM8 billion. The business climate for the department stores, however, became less favorable at the beginning of the 1980s and forced Kaufhof to follow a new strategic direction. During this time of great change Kaufhof acquired two new large shareholders--Metro Vermögensverwaltung GmbH & Co. of Düsseldorf (Metro) and its bank, the Schweizerische Bankgesellschaft AG. By the early 1990s, Metro owned more than 50 percent of Kaufhof Holding, and would eventually become the parent company.
The department store crisis arose from the emergence of competitive new types of businesses in the retail trade. Specialty businesses managed to gain a stronger foothold than before, and self-service markets, offering cut-price goods rather than comfortable surroundings and service, sprang up on greenfield (out-of-town) sites and on the edges of towns. The increase in automobile use brought a new attitude toward shopping. While parking space in cities became more limited, businesses on the edges of towns allowed customers to take their purchases directly from the check-out to their cars.
As a result of this development, Kaufhof began to diversify into other areas of trading and into the services sector. As early as 1970 Kaufhof took a shareholding in ITS (International Tourist Services) Länderdienst GmbH of Cologne, which offered an extensive, worldwide travel program. ITS itself was set on expansion and had acquired shareholdings in various tourist companies both at home and abroad. The company was joining forces with business partners to build hotels in popular vacation areas, and vacation sites in subtropical-type aqua parks.
As part of the reorganization of Kaufhof, the existing restaurants and cafes in the Kaufhof and Kaufhalle stores were changed into self-service restaurants, then in 1983 and 1984 transferred to the Kaufhof Gastronomie Service-Gesellschaft mbH (KGSG), of Cologne, a wholly owned subsidiary of Kaufhof. There were KGSG restaurants not only in the 118 stores belonging to the group, but also in four other locations.
At the same time, new concepts were developed in the department stores. The stores no longer aimed to sell everything under one roof, but concentrated on selected profitable areas that were in strong demand. The grocery departments, which previously had yielded high returns and had been very popular, became to some extent simply departments to attract regular customers, rather than profitable portions of the business. In many department stores space was rented to outside grocery retailers. In the course of the restructuring, nine of the company's previously traditional department stores selling the whole range of goods became independent in 1987-88, under the name Kaufhof Mode und Sport GmbH. They began to offer a selective range, concentrating predominantly on fashion and sports goods.
Kaufhof Holding AG was incorporated in 1989, and 73 department store operations were transferred to the newly created Kaufhof Warenhaus AG, then a wholly owned subsidiary of Kaufhof Holding AG. In 1989 Kaufhalle became a joint-stock company, and in 1990 25 percent of its shares were offered on the stock market in order to strengthen the company's financial position for embarking on new projects. The company owned 127 branches in the former West Germany and many more in the new federal states, including one in Stralsund, the town in which Leonhard Tietz began his business in 1879. Particular areas on which the company was concentrating included electronics, computers, and photographic goods.
Kaufhof Holding AG had a 62.3 percent shareholding in Media-Markt-Gruppe, based in Ingolstadt, which had 37 sites at home and abroad. In 1990 Kaufhof Holding AG merged its subsidiary Saturn-Hansa Handelsgesellschaft für technischen Freizeit-und Haushaltbedarf mbH, a leading company in these specialty areas, with the Media-Markt-Gruppe. Kaufhof also owned 50 percent of Vobis-Mikrocomputergruppe, of Aachen, a dynamic specialty market group with 56 branches at home and abroad. "Mac Fash" Textilhandels GmbH, of Cologne, was a wholly owned subsidiary that sold fashionable clothing at its 21 stores.
In 1989 Kaufhof acquired 61.5 percent of the capital of Oppermann Versand AG, Neumü#ter, a mail-order house specializing in promotional goods and advertising gifts for trade and private customers, with numerous subsidiary companies and franchise partners abroad. It also acquired holdings of 60 and 70 percent in two companies in the Hawesko-Gruppe of Hamburg, an importer and exporter of wine, champagne, and spirits which also operated a mail-order business. Buying in department stores and buying by mail-order were originally considered the two opposite extremes of retail trading. Once it became evident, however, that mail-order was becoming more popular, Kaufhof Holding also took shareholdings in mail-order companies in the most diverse areas. It acquired a 76 percent holding in Friedrich Wenz GmbH & Co., which had been selling jewelry, gifts, clothing, and furnishings of high quality by catalog from the jewelers' town of Pforzheim since 1925. Kaufhof also acquired a 50 percent stake in Reno Versandhandel GmbH in Thalweiler-Fröschen. This lucrative mail-order shoe firm, operating from close to the shoe metropolis of Pirmasens, also owned a specialty store chain with 188 branches, 34 of them abroad.
One of the factors in Leonhard Tietz's success was the elimination of the then-all-powerful wholesalers through mass purchasing at advantageous prices direct from the manufacturer. By the early 1990s Kaufhof had entered the sphere of wholesaling as part of its strategy of diversification and had taken shareholdings in the wholesalers for its various areas of business. One commitment in this area was the company's 80 percent shareholding in Rungis Express Gesellschaft für Frischimporte mbH, of Meckenheim, a company that delivered freshly caught seafood and high-quality fish, exotic fruit, vegetables, meat, cheese, and top-quality champagne several times a week to exclusive restaurants and delicatessens.
In the early 1990s, the development of a modern electronic system of selling goods, the improvement of merchandise, and the motivating of the work force to become more customer-oriented showed the great importance still attached to the activities of the Kaufhof-Warenhaus AG, with its 73 branches in western Germany and further branches opening in eastern Germany from 1991. With the addition of banks, travel bureaus, theater ticket booths, insurance, and many other services, the department stores became multi-functional service centers.
With its total of 636 stores, Kaufhof Holding AG in the early 1990s was set on a course of further expansion. The Kaufhalle subsidiary offered a range of goods geared towards more sophisticated customers. The structure of Kaufhof, with its various sales divisions--department stores, specialty stores, mail order, wholesaling, tourism, and other services--put it in a good position to operate successfully in the five new states of the Federal Republic of Germany. Kaufhof, which already had 48 branches in Europe outside Germany, was also set to be well-represented with the merging of sales areas within the European community's internal market.
One area in which Kaufhof attracted attention during the early 1990s was in the realm of information systems. Under the leadership of MIS director Ralf-Rainer West, the company developed an intranet that gained the admiration of observers throughout the business community. West, who stated that he wanted to develop a system that would be as useful as possible to the people for whom it was intended, chose Microsoft Windows as its graphical operating system. Within 78 department stores, the personal computer (PC)-based local area networks (LANs) were connected via digital ISDN lines. By the late 1990s, many companies would be adopting this sort of client/server architecture, but in 1993 Elizabeth Heichler of Computerworld could describe Kaufhof's system as "a customized desktop environment that pushes the frontiers of technical innovation." As Heichler described it, "When users sign on [to the computer system], the Kaufhof network shows in color a nearly full-screen, three-dimensional picture of an office with a man sitting at a desk fitted with items such as a printer, calculator, pen and paper, filing cabinets and telephone. Clicking on these pictures launches applications such as word processing and electronic mail." Other features included a company internal magazine "no longer limited to a given number of pages or any particular frequency--whenever the group responsible for the magazine is ready with another page or piece of information, it notifies users via a flag on their mailbox."
As in the realm of its information systems, Kaufhof's financial reputation in the early to mid-1990s was a solid one. Hence when it issued European medium-term note (MTN) bonds in late 1993, Corporate Finance magazine referred to "the quality of the names" of the companies issuing--Kaufhof, the engineering company ABB of Sweden and Switzerland, and J. Sainsbury retailers of Great Britain. In 1995 General Electric, eager to enter the largely untapped German credit-card market, purchased 80 percent of Service Bank from Kaufhof Holding for $50 million.
And then Kaufhof Holding, so often the company making the acquisitions, itself became a subsidiary. Metro Group had acquired a controlling interest, and in October 1995, it announced that it would merge its Kaufhof and ASKO subsidiaries with its cash-and-carry business. On July 19, 1996, this merger took effect when Kaufhof Holding AG joined ASKO Deutsche Kaufhaus AG and its subsidiary Deutsche SB-Kauf, along with Metro Cash-and-Carry, to become Metro Holding AG. The well-known Kaufhof name was retained in Metro's department store division, Kaufhof Warenhaus Group.
Metro Holding AG one of the largest, most diversified trading companies in the world, had operations in some 18 countries, including the People's Republic of China and Romania. It announced that in 1997 it would concentrate on developing the synergies of its constituent companies by concentrating on integration of holding company functions; procurement (optimizing its supply chain) and private-label management; and synergy in the realm of services such as information technology and logistics. Within Kaufhof Warenhaus AG, it promoted the "Galeria" concept--already familiar in the United States--of employing numerous display islands, "each a distinct world of its own," in its retail stores. Kaufhof Warenhaus in 1997 had 145 branches, and more than 1.3 million square meters of selling space, with sales in excess of DM9.3 billion. Its employees numbered almost 29,000.
In 1997, the Kaufhof Warenhaus Group introduced the first corporate closed-circuit television system in the German retail sector, broadcast digitally and received via satellite. Programming included product training sessions, advanced courses, and live broadcasts. It also gave employees an opportunity to give input through phone or a fax hot line.
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