Karstadt Aktiengesellschaft is Germany's largest publicly traded retailer, with 569 stores in Germany covering 2.5 million square meters of sales area. Its 1994 merger with Hertie Waren & Kaufhaus GmbH ranked it among Europe's largest retailers. Karstadt is principally known for its department and specialty stores, and this sector accounted for 68 percent of its annual sales in 1995. Specialty outlets include three home furnishings stores, 19 sporting goods outlets, 12 carpet centers, and several other focused retail shops. Yet Karstadt, through its subsidiaries Neckermann Versand AG and NUR Touristic GmbH, is also active in the mail-order and travel businesses, which accounted for 17 percent and 15 percent of 1995 sales, respectively.
The company originated in northern Germany in the late 19th century; its development since then has been determined largely by changes both in the economic climate and in attitudes toward retailing in Germany. Phases of expansion and diversification have alternated with periods of crisis, cutbacks, or consolidation. Major shareholders in the group are Commerzbank and Deutsche Bank, holding 10 percent each.
Mid-19th Century Origins
Rudolph Karstadt, founder of the company and a pioneer of department store retailing in Germany, was born near Lübeck on February 16, 1856. He completed his commercial apprenticeship in Rostock and then worked in his father's textile shop in Schwerin. Rudolph soon became impatient with the business customs of the time, whereby customers generally bought items on credit, forcing merchants to set prices high as protection against nonpayment and hindering flexibility in terms of stock changes. He saw the secrets of successful retailing as low prices, cash payment, and rapid stock turnover--a revolutionary concept that caused some disagreements within the family. Finally in 1881 Rudolph's father lent him 3,000 marks to put his ideas into practice. On May 14, 1881, Rudolph, with his brother Ernst and sister Sophie, opened a shop, Rudolph Karstadt--selling dress materials and ready-to-wear clothes--in the harbor town of Wismar. Newspaper advertisements excited local interest and ensured large crowds on the opening day. Despite the low prices, however, customers were unused to the idea of immediate payment, and monthly sales in the first year were modest. Rudolph Karstadt's brother and sister withdrew from the business at this stage, leaving him as the sole owner.
Karstadt stuck to his convictions and was soon proved right--in the second year of business monthly sales rose to 20,000 marks, and in 1884 another shop was opened in Lübeck, with a range of goods extending to household items, leather goods, and toys. Further branches were opened in Neumü#ter in 1888 and in Braunschweig in 1890. The business grew rapidly: the balance sheet total in 1882 was 49,000 marks, which rose to 613,000 marks in 1890, and to 1.8 million marks in 1894. Rudolph Karstadt's conception of the modern department store was perfectly in tune with the times: the increasing economic power of the middle and working classes meant that consumer goods were demanded in ever larger quantities. In founding his business, Karstadt was also in line with a broader European trend: department stores had already been successfully established in France--notably with Bon Marché, Magasins du Louvre, Samaritaine, Printemps, and Galeries Lafayette--and in England, with Whiteleys, Harrods, and Selfridges.
A new branch was opened in Kiel in 1893, and Karstadt, who had previously moved from Lübeck to Berlin, now moved from the capital to this rapidly growing town, a focus of imperial military expansionism. During the 1890s and the first decade of the 20th century the business continued to expand at a considerable rate: new branches were opened, established branches were extended, and in 1900 Rudolph Karstadt took over 13 stores owned by his brother Ernst, who had gotten into financial difficulties. By 1906, the 25th anniversary of the company, Rudolph Karstadt owned 24 department stores in northern Germany. In 1912 a prestigious new store was opened in Hamburg, with 10,000 square meters of sales area and a turnover of nearly seven million marks in the first year, and in 1913 Rudolph Karstadt reestablished the headquarters of the company in that city.
While Karstadt was establishing his chain of stores in northern Germany, a business run by Theodor Althoff in the western part of Germany was following a very similar course. Althoff, born in 1858, had taken over a millinery and linen shop from his mother in 1885 and had soon succeeded in expanding the business considerably, following principles similar to those espoused by Karstadt--cash payment and low prices. In 1904 Althoff opened his first department store, in Dortmund, with a sales area of 5,000 square meters, and in 1910, the 25th anniversary of the business, the enterprise consisted of 11 stores in all. The year 1912 saw the establishment of Althoff's largest store yet, in Essen, with 10,000 square meters of selling space and 53 departments.
Interwar Merger of Karstadt and Althoff
World War I put an end to the years of prosperity and expansion for both Karstadt and Althoff. People hoarded their money, and goods became increasingly scarce. The similarity of the two businesses and the need to concentrate resources during this crisis brought the two department store pioneers together for the first time in 1917. In 1919 the firms agreed on a common purchasing arrangement. In 1920 Rudolph Karstadt KG was converted into an Aktiengesellschaft--joint stock company--with founding capital of 40 million marks, based in Hamburg. Theodor Althoff was chairman of the supervisory board. A complete merger of Karstadt AG and Theodor Althoff KG followed in May of the same year, and the share capital was raised to 80 million marks; at this time Karstadt had 31 stores and Althoff 13.
The decade which followed the merger was one of rapid expansion, funded by numerous capital-raising measures. The company opened new branches and extended existing ones, as well as acquiring a number of manufacturing businesses in the furniture, textiles, and grocery sectors. EPA Einheitspreis AG, a subsidiary enterprise started by Theodor Althoff's son Heinrich, was established in 1926 following the American model of five-and-dime stores, with goods sold at four prices: 10, 25, 50, and 100 pfennigs. This business was tremendously successful, with 52 branches in Germany and a turnover of about 100 million Reichsmarks (RM) in 1932. In 1927 Karstadt acquired the 19 stores owned by M.J. Emden Söhne KG, and in 1929 a new store was opened in Berlin, one of the largest and most modern in Europe at the time, with a sales area of 37,000 square meters. Another 15 stores were added by the merger with Lindemann & Co. KG in the same year. By the time of the company's 50th anniversary, in 1931, Rudolph Karstadt AG and its subsidiaries had 89 branches and about 30,000 employees--compared with 11,500 in 1924--and a turnover of around RM200 million.
Great Depression Threatens Retailer's Survival
This phase of growth--conceived and carried through, it appears, on the initiative of Hermann Schöndorff, a dominant member of the company's management board at the time--reached its climax with the construction of an impressive new headquarters in Berlin, covering 70,000 square meters. Employees in the former headquarters in Hamburg were transported to Berlin in a specially commissioned train on January 1, 1932. The plans for expansion ended in crisis, however. The national and international economic difficulties of the early 1930s, combined with debts incurred during the previous decade, brought the company into severe financial trouble. In 1931 only five of Karstadt's stores were showing any profit. Theodor Althoff died in August 1931, when the business he had helped to found was approaching collapse. In April 1933 a consortium of banks assisted in drawing up a program of reorganization in order to ensure the company's survival. All the production subsidiaries were to be divested, share capital was to be reduced from RM80 million to RM7.6 million, the branch network was to be reduced, and EPA Einheitspreis was to be sold. The newly built headquarters was sold in 1934, and the company's administration moved into smaller premises in Berlin.
The restructuring effected a recovery in financial terms. Karstadt then, however, had to contend with difficulties arising from the National Socialists' (Nazi) campaign against department stores, involving boycotts and restrictive legislation, as some department stores had Jewish owners and were seen as representing a threat to the specialty German retail tradition. Despite these obstacles the company reached an economic high point before World War II: in 1939 it had 67 branches, a total sales area approaching 260,000 square meters, and a work force of 21,000. Annual sales rose from RM190 million in 1933 to RM300 million in 1939.
Wartime Difficulties Yield to Postwar Growth
Business conditions during and immediately after World War II became increasingly primitive, determined by rationing and the scarcity of goods, by changes of staff as women replaced the men who were called for military service, and--especially in the later years--by the damage to or destruction of stores by Allied bombing. In 1944 Rudolph Karstadt died at the age of 88. The end of the war saw the expropriation of 22 stores in the Soviet occupation zones and the destruction of more than 30 of the 45 branches in the western zones.
The currency reform of 1948 marked the beginning of West Germany's economic recovery. In this year Karstadt had 6,700 employees, 55,000 square meters of sales area, and an annual turnover of DM172 million. During the years that followed, rising incomes and consumer confidence fueled the reestablishment and renewed growth of Karstadt's retail business. In 1952 Karstadt reacquired 75 percent of the former EPA Einheitspreis AG, now called Kepa Kaufhaus GmbH (Kepa); the remaining 25 percent was acquired in 1958. In 1956, the year of the company's 75th anniversary, the turnover of Rudolph Karstadt AG exceeded DM1 billion for the first time. By this stage Karstadt had 49 branches and Kepa 51, with a total sales area of 222,000 square meters and 31,000 employees. The company name was changed to Karstadt AG in 1963, and a new administrative headquarters was opened in Essen in 1969.
Diversification in 1970s
The 1970s saw another important phase of expansion for the group, accompanied, as in the 1920s, by a diversification of interests. A travel company, TransEuropa Reisen GmbH, was jointly founded by Karstadt and mail-order company Quelle Gustav Schickedanz KG in 1971. The following year the company was renamed KS-Touristik-Beteiligungs GmbH. KS-Touristik itself held 25 percent of Touristik-Union International GmbH KG. In 1976 Karstadt agreed to buy a stake in the mail-order company Neckermann Versand, which was experiencing financial difficulties. As Neckermann itself had a travel subsidiary, the Federal Monopolies Commission required Karstadt to sell its share in KS-Touristik. In 1977 Karstadt raised its share in Neckermann to a controlling 51.2 percent. Neckermann was converted to a joint-stock company in the same year.
As well as moving into the mail-order and travel businesses, Karstadt diversified its retailing interests during this decade. The group's first furniture and home decoration store was opened in Munich in 1972. By 1980 the group had nine such furniture outlets. Seven self-service department stores began operation with the foundation of Karstadt SB Warenhaus GmbH, a subsidiary of Kepa, in 1974. The first specialized sports equipment store was opened in 1976: nine of these outlets were in operation in 1980. Further specialty outlets for fashion, music, books, and leisure activities were opened between 1977 and 1980.
The second half of the decade also saw the rationalization of Karstadt's retailing businesses. In 1977 it was decided that the concept behind the Kepa outlets would not be successful in the long run, and 25 of Kepa's outlets were reintegrated into the Karstadt chain; the remaining 42 branches were sold or leased. The self-service department stores--by then numbering 18--were also brought into the main Karstadt network. Between 1977 and 1979, 17 of Neckermann's stores were turned into Karstadt outlets and 17 new Karstadt stores were established.
Pursuit of Productivity in the 1980s
By 1981, Karstadt's department store business had 155 branches and 71,000 employees, and accounted for 77 percent of turnover. Neckermann Versand AG, the mail-order subsidiary, had a work force of 6,600 and accounted for 13 percent of the group's annual sales. NUR Touristic GmbH, Neckermann's travel subsidiary, had 1,500 employees and a 10 percent share of sales. The restructuring at the end of the 1970s indicated a shift in strategy from expansion in store numbers to increasing the productivity of each store. This policy was pursued through the 1980s. Karstadt, in 1991, had 155 stores--the same number as in 1981. However, sales area during the decade increased from 1.3 million square meters to 1.4 million square meters. Work force numbers have tended to decline--from 79,500 in 1981 to 71,000 in 1990. Annual turnover was DM12.7 billion in 1981; after a decline in the first half of the 1980s, this had risen to DM16.8 billion in 1990.
Facing increasing competition from self-service and out-of-town stores, Karstadt's strategy in the 1980s was to maintain its traditional emphasis on department stores carrying a full range of goods in town centers. In the late 1980s, however, the company implemented a refurbishment and realignment program by which individual stores have been modernized and adapted to the nature of their localities. Furthermore, a distribution center was established at Unna, near Dortmund. The project was started in 1987 and was fully operational for the first time in 1990, costing DM210 million. This center replaced regional warehouses and has enabled Karstadt AG to make efficiency and cost improvements in the area of logistics, the distribution of goods between warehouses and stores. Diversification, which was at the core of Karstadt's development in the 1970s, was not part of the company's strategy during the 1980s. Although the company retained specialty outlets for sports equipment and furniture, accounting for about nine percent of annual turnover, all other ventures into specialty areas, except Runners Point, had ceased operations by 1987.
In 1981 Karstadt raised its stake in Neckermann Versand AG to more than 94 percent, and in 1984 the group acquired all remaining shares in this subsidiary. Both Neckermann Versand AG and its travel subsidiary NUR Touristic GmbH continued to take losses during the first half of the 1980s, returning profits only since 1986 and 1987 respectively. Improvements at Neckermann were due largely to its abandonment of specialty catalogs, returning to one main catalog targeting families in the medium- to lower-income groups. Staff reductions also played a part. Neckermann, which produced around three million catalogs each season, was by the end of the decade the third-largest mail-order company in Germany, behind Otto and Quelle, and had subsidiaries in the Netherlands, Belgium, France, and joint ventures in Greece and Poland. NUR Touristic, which has subsidiaries in the Netherlands and Belgium, also reduced its work force, from 1,445 in 1981 to 937 in 1989. Despite these improvements at Neckermann and NUR, the problems were not entirely eradicated: while both businesses showed increases in turnover, their profits declined in the waning years of the decade.
The 1990s and Beyond
The reunification of Germany, along with tax reforms that increased consumer spending power, brought Karstadt and its subsidiaries a significant boost in sales in the early 1990s. Department stores along the border with the former German Democratic Republic benefitted from visiting customers from the new federal states, while the mail-order business was able to penetrate into the eastern territories and take advantage of the rise in consumer demand without having to establish retail outlets. Karstadt had believed its coverage of western Germany to have reached saturation point, but the new Länder, or federal regions, presented the group with an opportunity for further expansion. In 1990 a cooperation agreement was reached with the Centrum department stores in eastern Germany; in March 1991 Karstadt acquired seven of these stores--in Dresden, Görlitz, Halle, Hoyerswerda, Leipzig-Lindenau, and Magdeburg&mdash well as leasing two former Magnet stores in Brandenburg and Wismar. Conversion of these stores to western standards required considerable investment. Neckermann and NUR also developed mail-order and tourism infrastructures in the East.
Further consolidation of Germany's retailers came in 1994, when Karstadt merged with Hertie Waren & Kaufhaus GmbH. The DM1.5 billion deal added Hertie's 300 department and specialty stores with US$4.2 billion in sales to form what Daily News Record's James Fallon called "the richest retailing group in Europe."
Karstadt showed off its "cyber-savvy" with the launch of "My-World," Europe's largest online shopping site, in October 1996. The electronic mall offered over 150,000 items and generated an average of $20,000 in sales every day. However, while the chain continued to seek new ways to present its wares to the buying public, it did not neglect the old ways. That same year, Karstadt staged a grand reopening of its Berlin outlet, Kaufhaus des Westens. Known in the vernacular as KaDeWe ("ka-day-vay"), the store had first been built in 1907 and had long been sequestered in East Germany by the Cold War-era Berlin Wall. A renovation and expansion made it the largest department store on the European continent, with 60,000 square meters of selling space.
Karstadt was among the retailers who helped to slowly erode Germany's "blue laws" in the early 1990s. Won by the nation's powerful unions, these laws prohibited work on Sundays (known as "Feiertag" or "free day") and ended the workday at 6:30 p.m. weekdays and 2 p.m. on Saturdays. As the retail environment in the nation worsened, store operators were able to convince local and, in November 1996, the national government to ease restrictions on store hours. The national reform did not allow Sunday hours but did allow the extension of the weekday to 8 p.m. and Saturday hours to 4 p.m. Karstadt took advantage of the new selling time, but like many of its competitors did not see an immediate payoff.
In fact, while Karstadt's sales rose more than 60 percent in the early 1990s, from DM16.77 billion to DM26.98 billion, its net income declined from DM227.8 million in 1990 to a low of DM41.9 million in 1994 before recovering somewhat to DM109 million in 1995.
Principal Subsidiaries:Neckermann Versand AG; NUR Touristic GmbH; Kepa Kaufhaus GmbH; Runners Point Warenhandelsgesellschaft mbH; Versandhaus Walz GmbH; Neckermann Postorders B.V. (Netherlands); Neckermann Postorders N.V. (Belgium); Neckermann Sarl (France); Neckermann Vliegreizen Nederland B.V. (Netherlands); Neckermann Reizen België N.V. (Belgium).
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