By Sara Seddon Kilbinger, Senior Reporter, REFIRE
Galeria Karstadt Kaufhof, the last major German department store group still in operation, has filed for insolvency for the second time in two years, in an increasing sign that to succeed, retail needs to become a more diverse hybrid offering.
Earlier this month, Galeria Karstadt Kaufhof announced plans to close more than 40 of its 131 remaining branches. Galeria currently employs 17,000 people and operates across 97 German cities. Speaking to the Frankfurter Allgemeine Zeitung (FAZ) newspaper, the group’s CEO Miguel Müllenbach admitted that to save the company, the number of its branches had to be ‘cut by at least a third’ and that compulsory redundancies would be inevitable. In a letter to the group’s employees, Müllenbach explained that the company needs to divest itself of branches that, given the slowdown in consumption and rising inflation and energy costs, ‘would no longer be able to operate profitably in the near future’. The drastic measures are a last-ditch attempt to stave off the group’s complete financial collapse.
The company has filed for protective administrative insolvency, Germany’s equivalent of the US Chapter 11 proceedings. Galeria filed for this kind of insolvency back in April 2020, at the beginning of the COVID-19 pandemic. As a result of this first filing, the company had more than €2 billion worth of debt wiped out and 4,000 jobs were lost. After the 2020 filing, around 40 locations were closed. Other stores were renovated though and the original restructuring plan was to completely remodel 50 to 60 of the remaining department stores, bringing them back to profitability.
While Galeria Karstadt Kaufhof has had its share of problems in recent years as it battled to find its place in Germany’s fragmented retail market, it became clear back in January that its problems were deepening when it received €220 million of government financial aid in addition to the €460 million loan it had already received from the government.
However, Galeria’s struggles predated the pandemic: in 2019, it recorded losses of €78 million. The company was acquired that year by Austrian real estate company, Signa, for an estimated €1 billion. Signa is the international investment and industrial holding company of the Tyrolean investor René Benko, one of the richest Austrians. Galeria Karstadt Kaufhof is only a small part of the Austrian's empire, which has grown rapidly over the past decade and a half.
To succeed, retail needs to become a hybrid offering
So what can we expect next? According to Dr. Wulff Aengevelt, managing partner at Aengevelt Immobilien, department stores have historically been the ‘weak point’ for inner cities at night, which means they are a perfect candidate for a revamp: ‘The development of the city center as a location for work, trade, culture and living is an important economic factor,’ he said. ‘Over the decades, focus clusters have formed, with the result that some city center areas - for example, with primarily office use - become deserted after hours. The same applies to pure shopping streets after closing time, since there are often only a few apartments in these areas and restaurants and cultural offerings are generally underrepresented. In this context, the department store concept, which has remained virtually unchanged for decades, represents one of the inner-city weak points. Nevertheless, it is precisely these properties that offer significant opportunities for a "revitalization" of the inner cities.’
However, our definition of what a classic department store should be also needs a rethink, according to Aengevelt. One way to repurpose such stores would be to develop mixed-use concepts that continue to provide for retail uses on the first floor of the department stores while the upper floors are reinvented for non-retail uses, such as offices, medical practices, fitness studios, restaurants/hotels and housing. ‘Mixed-use across sectors makes the site more invigorated throughout, more crisis-proof, and the risk of desolation is significantly reduced,’ he said.
He emphasizes the need to create flexible spaces that can ‘function over a longer period of time and allow for repeated necessary adjustments to market changes and cycles’. The basis for this are so-called reusable spaces, i.e. spaces that are not limited to a specific type of use - retail, office, gastronomy, practices, fitness spaces, which can be converted and reused flexibly – and relatively cheaply - at short notice.
Such spaces could offer profitable short-term contracts instead of long-term vacancy, in line with the interest-generating motto: What's new? ‘All in all, multiple-mixed-use concepts offer a much more flexible starting situation in which department stores can be redesigned individually at any time and at short notice - even in parts - without having to convert and renovate the entire property directly at great expense,’ he added. ‘They form an important factor for their economic development and thus also become interesting again for capital investors as sustainable investments - a classic win-win situation for society as a whole.’
Aengevelt has been observing and analyzing changing location and competitive situations for the retail sector since the 1990s, with continuous declines in sales, especially for department stores. According to a study by PwC, the gross sales of German department stores almost halved from more than €10 billion to around €5.5 billion between 2003 and 2018 alone – even before the pandemic - while sales have risen continuously in favor of online retail.
Ambitious revamps are underway
Other investors are also wising up to the fact that retail spaces need a re-jig. One such place is the Forum Mülheim in the city of Mülheim/Ruhr, which is being converted into a retail/medical centre hybrid, which will include tenants such as health insurance provider AOK and a day-care centre. Commerz Real bought the Forum in 2017 for €126 million but soon realised that the retail environment wasn’t right. The ground floor will continue to be used for shops but the basement and upper floor will be transformed into the Forum Medikum, offering rooms for doctors, physiotherapists and health service providers. In total, 14,500 sqm of 52,000 sqm of rental space will be transformed from retail to medical space during the €40 million conversion. ‘We are confident that we will be able to complete the construction work in mid-2023,’ said Mario Schüttauf, manager of the Hausinvest Fund, which owns the Forum.
Elsewhere, similar conversions are underway: in Fürth (Flair) an inner-city shopping centre is mixing it up and in Berlin the Potsdamer Platz Arkaden and Kaufpark Eiche are also becoming multi-use. The Potsdamer Platz Arkaden designed by renowed Italian architect Renzo Piano were an elegant city location with leather-upholstered benches but they never really worked as a shopping centre and Canadian investor Brookfield and service provider ECE are now changing that. Visitors have tended to overlook, whilst strolling through the unique interior, that the high, light, long hall with the glass roof was a shopping centre at its core.
Now, Brookfield, which acquired Potsdamer Platz including the arcades in 2016, has ambitious plans for the space. Instead of accessing the shops on the upper floors via escalators and bridges, the access going forward will be within the shops themselves, which will become two-storey buildings. The number of pedestrian bridges in the shopping street will be reduced from seven to one, and the number of escalators from 13 to four. Each of the six buildings along the shopping street will have its own architectural signature and some of the façades will be pulled forward. ECE is in charge of the design and layout of the new arcades, with the approval of Renzo Piano's office.
As part of the revamp, the number of shops will shrink from 135 to 90 but the shops will be larger on average. One existing tenant TK Maxx is expanding to 4,200 square metres. There will also be a 1,100 square metre NBA shop selling US basketball league products as well as a 3,500 square metre, three-storey house for apparel retailer Peek & Cloppenburg, which is scheduled to open in 2023.
