What future does "Galeria Karstadt Kaufhof" have?

The external conditions for Galeria's business have recently become difficult. The sharp rise in energy prices and the further increase in the inflation rate have put many customers in an awkward economic situation. The great uncertainty about the progress of the war in Ukraine and the development of business studies have also led to a strong reluctance to buy, especially for products that make up Galeria's product range. In the last two years, which were still largely shaped by the coronavirus pandemic, Galeria has not made any significant progress in restructuring the company.

Some of the 131 stores that are still open today only just made it off the original list two years ago. The planned realignment based on the three concepts presented - "Weltstadthaus", "Regionaler Magnet" and "Lokales Forum" - is the right strategic approach, which can take into account the different demands of customers and other situational conditions.

However, implementation at the locations requires operational initiatives and skill, coordination processes with partners - including at municipal level - and therefore time and financial resources. A protective shield procedure with restructuring under self-administration generally offers a better framework for this than further borrowing, which requires interest and repayment and would not offer any relief like a protective shield procedure.

The consequences of closing Galeria stores would be fatal for many inner-city areas, particularly in smaller and medium-sized towns, where department stores are often still the main attraction. Closures cause immediate job losses and trigger lower footfall and further loss of attractiveness in city centers, affecting other retail, food and entertainment businesses.

All in all, the negative effects of an intensifying downward spiral could quickly run into the hundreds of millions nationwide. The owners of "Galeria Karstadt Kaufhof" are aware of these effects and their strength as arguments in discussions with representatives of local authorities, local Business Studies and, last but not least, the landlords of their locations.

The key question is: Will the company be able to complete the restructuring quickly and lay the foundations for lasting success with realigned stores, tailored product ranges and coordinated online offerings? The two years since the first protective shield proceedings have certainly not played into Galeria's hands: Visitor frequency in many city centers has not yet reached pre-crisis levels and vacancies have increased. The main target group has become smaller and has become increasingly accustomed to efficient and convenient online offerings provided by much stronger competition.

The current situation is making it difficult for the company, which reported a loss of 622 million euros in the 2020/21 financial year and expects a loss in the low to mid three-digit million euro range for 2021/22, to act forcefully. In particular, creating a convincing multi-channel offering, which is important for appealing to younger customers and gaining new competitive advantages, combined with a realignment of the product ranges at the individual locations, is a challenging and costly task.

Given the reported capital requirements, there will probably only be a viable going concern forecast for a small proportion of the current locations. Identifying this "core" of locations and aligning the stores to the changed requirements is the last chance to prevent the "endgame" in which the department store industry finds itself from being blown.