Landlords face uncertain future after Praktiker insolvency

When a big German retailer goes bust, it can often struggle on for years under various forms of administration before either recovering under new ownership and hefty debt write-downs, or being slowly put out of its misery. The case of Praktiker, Germany’s third-largest home improvement chain, may turn out to be an exception – in that it may be denied the meandering death-spiral of other retail peers.

For insiders, the management problems at the operating level at Praktiker have long been an open secret, and the company has been teetering on the brink for several years. Its main hope of salvation was a rescue plan centred around Praktiker’s subsidiary Max Bahr, itself a DIY home improvement chain but with its own (allegedly more sustainable) brand identity. Those hopes now appear dashed, after the Hamburg-based Max Bahr itself filed for insolvency as suppliers turned the screws on the company out of fear of what awaited them from the parent’s demise, and a key credit insurer pulled the plug.

The Praktiker group has 20,000 employees, with 6,800 employed at the 132-store Max Bahr chain. The Max Bahr division had long since distanced itself from Praktiker’s widely-scorned but seemingly-permanent advertising call to consumers to take advantage of its discounts (“20% off everything – except pet food!” was its rallying-cry). There is now a very real fear of up to 4,000 immediate layoffs at the group.

Praktiker has 413 stores, of which 314 are in Germany. The stores’ locations do not lend themselves easily to adaption for other uses, much as a supermarket might, with observers suggesting that only about 20% of the stores would be in ready demand for alternative uses.

Private equity hedge funds have already appeared on the scene, with one group of 4-5 investors having bought a €250m bond with a view to converting it into equity in Praktiker. Praktiker’s German rivals OBI and Hagebau are picking over parts of the chain, and the UK’s Kingfisher home improvement concern is also thought to be interested.

The Praktiker case has been analysed in depth in the German business media, with many comparing its insolvency with the final collapse of national drugstore chain Schlecker last year. Here is what we heard from a number of REFIRE’s contacts in the retail real estate industry, who deal daily with asset and property management issues across a range of retail categories:

Susanne Klaussner, managing director at Erlangen-based GRR Real Estate Management GmbH: “Praktiker is lacking a clearly thought-through concept and clear positioning vis-à-vis its competitors. That, and its lack of investment in modern store design in a hotly-contested field, have led Praktiker into insolvency. It’s no longer anywhere near enough these days to just promote discounts, and this should have been clear to Praktiker from experience with their own Max Bahr chain. As with Schlecker before them, Praktiker was blind to the changes going on around it, and its insolvency is the result of ignoring the time-honoured maxim of retail, that “Retail is Change” (“Handel ist Wandel”)

Filipe Costa, managing director at PAMERA Retail GmbH, said the insolvency came as no great surprise. “Frankly, I expected this. You can no longer just gain customers by offering them the cheapest deals. Pure price fixation is now obsolete. Praktiker’s policy of 20% on everything just wasn’t enough, but it was enough to break them. The experience of Schlecker with a similar policy, and now Praktiker, along with what we’re seeing here in Germany where full-service supermarkets are now taking business back from the discounters – all of this could be a signal that consumers still value a pleasant atmosphere and good service. The advice and service offered by competitors OBI, Bauhaus and Hornbach does seem to be winning out against the pure discount culture of Praktiker.”

Joachim Sumpf, the CEO of retail consultancy group BBE Handelsberatung GmbH and IPH Handelsimmobilien (whom we interviewed a number of months ago in these pages), also saw parallels with the Schlecker collapse. “Praktiker’s competitors have all developed much better differentiation strategies. Hornbach appeals to the hardened DIY enthusiast; OBI and TOOM take care to appeal to women with their home decorating offers; Bauhaus offers customers a drive-in area, which helps them to load their cars up more easily.”

“The right positioning and the tenant’s competitiveness are decisive in their sustained success in the market, and this needs to be analysed intensely before (as a real estate investor) signing a lease agreement with them. Experts can see the warning signs of a potentially endangered retail business pretty early on, and need to be constantly alert to pending problems.”

“Previously robust concepts are now under threat from Online versus Offline competition, Big City versus Small Town, and Downtown versus Periphery issues, which are taking less time to show up. The sort of futuristic analysis we carry out on the prospects for a particular location often proves vital in both new planning and refurbishment of existing retail assets.”

“If Praktiker goes down now, all at once a lot of landlords are going to be faced with the question of what alternative use they can put their asset to. Unfortunately for most, there won’t be too many alternatives, since local planning laws very often will only permit retail operations of the sort that would be denied a presence downtown.”