Can German department stores attract luxury retail?

In a land known for its thrifty citizens, German department stores are missing out on a shift to luxury. Spending at the outlets, which date back as far as the 19th century, has fallen 3.9 percent since 2009 as the richest shoppers have sought designer gear at single-label stores, driving luxury expenditure up by 16 percent to 12.9 billion euros last year.  Kaufhof owner Metro AG (MEO) has sought unsuccessfully for more than four years to exit the chain, whose sales declined 3.7 percent in 2011.

“German department stores are not yet fully realizing the potential to exploit in the premium and luxury segments,” Mirko Warschun, head of A.T. Kearney GmbH’s consumer industries and retail practice in Munich, said in a phone interview. “Germany is not a booming luxury market like China, but it is a strong and resilient market in western Europe.”

The growth of the German luxury market last year outpaced a 9 percent increase worldwide, according to figures from trade association Meisterkreis. Department stores accounted for less than 4 percent of the total amount spent, Meisterkreis said.

The stores’ aversion to luxury is illustrated at the Kaufhof store in Frankfurt, where no piece of clothing or footwear in the front window costs more than 100 euros and the sixth-floor hairdresser offers a cut for 22 euros. At the nearby Vuitton store, items on display from the street include a 4,550-euro suitcase, a 1,340-euro dress and a jacket for 775 euros.

Labels such as Prada and Cartier, readily available at the Printemps outlet in Paris or Harrods in London, can’t be found at Kaufhof or Essen-based Karstadt, which mostly offer mid-market labels such as Esprit and Gerry Weber.

The German chains may not consider the investment needed to gain a luxury footing worthwhile because consumers don’t associate them with premium brands and their stores aren’t regarded as tourist destinations like Harrods or Printemps, said Warschun. “It requires so much investment and they have a limited budget,” he said. “Consumers don’t associate Kaufhof to a premium brand and will still rather go to a luxury-store shopping street where the shopping experience is nicer.”

Kaufhof’s products are tailored specifically to each of the retailer’s 141 locations, said a spokeswoman who asked not to be identified. Karstadt didn’t respond to requests seeking comment. Unlike department stores, luxury brands are jumping on opportunities afforded by a country which, according to researcher Euromonitor International, had the highest disposable income in western Europe last year at $2.4 trillion.

Galeria Kaufhof, Frankfurt

The number of “monolabel” luxury stores in Germany rose 28 percent from 2007 to 2011, according to Meisterkreis, the association of German luxury brands. The country is one of only a few in Europe where Italian luxury brand Ermenegildo Zegna isn’t losing local customers, the company’s eponymous chief executive officer said in an interview.

While luxury stores flourish, Dusseldorf-based Metro is paying the price of Kaufhof’s conservatism. Metro, Germany’s biggest retailer, halted negotiations in January to dispose of the chain, where sales have declined 4.4 percent over the past five years. Since it first sought to exit the business in March 2008, Metro shares have fallen 61 percent. Over the same period, the Bloomberg European Fashion Index of luxury stocks has dropped 24 percent.

“The priority for Metro is to sell Kaufhof,” said Marc Renaud, who manages about 850 million euros at Mandarine Gestion in Paris, adding that the chain is “a catastrophe.” Renaud sold his stake in Metro, which represented 3.7 percent of his portfolio, last year.

The number of German department stores declined to 247 at the end of 2011, down a third from 2006, according to Euromonitor. In France, numbers have remained stable in the period, while in the U.K. they have risen by about 20 percent.

Amid the stratification in spending, the Germans could take a lesson from their neighbors. France’s Printemps has been positioning itself as a luxury retailer to attract customers and reported a 13 percent increase in revenue last year. “Our choice has been very clear that we made several years ago, and that is to move toward a luxury positioning and offer the luxury customer the best possible shopping experience,”Printemps CEO Paolo De Cesare said in an interview.

adapted from Bloomberg BusinessWeek