The Decline Of The Department Store

Long the crown jewel of retail in Germany and elsewhere, department stores have been losing market share for decades. On Thursday, ailing chain Karstadt is expected to present its long awaited restructuring program.



Once a symbol for Germany's prosperous middle-class consumers, the Karstadt department store chain has been fumbling with one lifeline after another for years.



After taking over its struggling rivals in the 1990s, it went through a major restructuring before going into adminstration in 2009. Since then, it has changed owners twice and now finds itself on the brink of insolvency yet again.



But the problems facing the once iconic retailer run far deeper than mere mismanagement. Department stores on the whole are forfeiting ground to other, more dynamic forms of retail.



Online shopping, brand-specific outlets, discount stores and now ubiquitous shopping centers are all luring customers away from the traditional department store.



"There's no doubt that department stores are facing competition on a lot of fronts," said Torsten Waach van Wasen, a consultant with the firm Alvarez & Marsal. "Retailers have to move to multi-channel sales, both online and offline, in order to prosper."



Decline of the department store



Karstadt's new owner, Austrian real estate investor René Benko, paid a single euro for the money-losing company last August. He bought it from billionaire investor Nicolas Berggruen, who had also acquired it for one euro in 2010 from the company's then-insolvency manager.



In a June 2013 interview with Germany's Bild tabloid, Berggruen said he had underestimated the problems at Karstadt.



"I didn't know how ill Karstadt was after twenty years of mismanagement," he said.



Mismanagement has certainly been a contributing factor to Karstadt's demise, but department stores on the whole have been declining in Germany and the rest of the world for decades.



From 14 percent of Germany's retail sales in the mid-70s to 2.7 percent in 2013, the downward trend is clear. Hertie, Horten, Wehmeyer, Bilka - department store names that accompanied generations of German shoppers are gone.



Analysts now openly speculate about Karstadt eventually joining that list of extinctions.



To be sure, retail in general is still growing, but slowly. In 2000, total sales in Germany were 428.3 billion euros ($541.7 billion), according to the German national retailers' association (HDE).



By 2013, sales had risen to 450 billion euros and HDE now expects to see 1.5 percent growth by the end of this year.



Rise of online retailers



Online sales are growing faster than any other retail sector and make up 9 percent of total sales. And analysts expect them to grow at a rate of 17 percent year-on-year - up from 12 percent in 2013.



"In the long run, the retailers that will succeed are those that successfully establish a combined online and an offline presence," said Jörg Funder, director of the Institute for International Trade and Distribution Management at the University of Worms in Germany.



"Even Amazon is now starting to set up storefronts," he said.



Discounters are increasing their market share too, offering bargain-priced wares in smaller assortments than department stores. There are also shopping malls, which instead of selling a full range of goods under a single name, offer various brands from a number of retailers.



Department stores, experts say, will have to re-invent themselves in order to survive.



One way forward could be the "store-in-store" model, according to which a department store offers floor space to a wide variety of independent retailers in exchange for a cut of their gross sales. Another option could be exclusively catering to wealthy customers.



Either way, it seems these once iconic consumer paradises have their best days behind them.