The end of an era: Germany’s retail giant Arcandor is broke

In Germany, the largest retail group in the country is presently facing the end. However Arcandor AG, with its head office in Essen, is no victim of the economic crisis. Rather the company has collapsed as a result of general management errors and an excessively visionary company policy that all too often failed to operate on the basis of reality.

The Arcandor era originally began with two equally good and successful ideas: On the one hand there was Rudolph Karstadt, who pursued the plan back in 1881 to open a department store in which all things essential for daily life were located under one roof and constantly available at reasonable prices. On the other hand, a Mr Schickedanz also played a big roll in the subsequent history of Arcandor. He founded the mail-order company Quelle in 1927 and was thus the first retailer in Germany to deliver goods from a catalogue to his customers in their homes.

Both companies enjoyed success in the years that followed their establishment, and both expanded quickly. Following the end of the Second World War and during the economic boom period of the 1950’s in particular, Karstadt and Quelle developed to become synonyms of the prosperous German economy. In 1977 Karstadt expanded to become Germany’s largest retailer, with a turnover of almost eleven billion D-Mark. In 1999 Karstadt and Quelle finally announced that they were to merge to become KarstadtQuelle AG, the largest retail group in the Federal Republic of Germany with 116,000 employees and an annual turnover of 32 billion Euros.

However, the prestigious project was to be anything but a story of success. Shortly after the merger, the companies reported that they intended to economise and make around 7,000 employees redundant, although they were also set to purchase the textile chain SinnLeffers. This marked the onset of delusions of grandeur, which were to cost the group its very existence a decade later.

From 2002, KarstadtQuelle returned harsh losses. Rotations at board level followed market entries into Eastern Europe and other emergent nations, whilst the direction and strategy of the group became increasingly removed from the true demands of the market. A vast, faceless range of average fashions, lifelessly displayed on overfilled clothes rails, characterised the image of Karstadt department stores, whilst shopping centres, individual label and flagship stores for major brands became a long-term threat in town centres. The upshot: Customers turned away from Karstadt. Back in 2004 the company was already experiencing serious financial difficulties, resulting in the closure of 77 deficient stores across the country.

After a brief interim high in 2006, during which KarstadtQuelle suddenly enjoyed profits of almost 350 million Euros again, the company management opted to change the name. KarstadtQuelle became Arcandor. Company boss Thomas Middelhoff concentrated wholly on the shareholder value principle and focussed primarily on the dividend payments to shareholders. The consequences of the terms “reorganisation” and “restructuring” were felt with growing frequency. In 2008, the liabilities of Arcandor AG stood at around 1.5 billion Euros and with them came the threat that a number of expiring credit lines would not be extended. Soon, the talk at the head office in Essen was no longer of restructuring but rather of rescue. As the successor to Middelhoff, the former financial director of the telecoms company Telekom, Karl-Gerhard Eick, was tasked with bringing Arcandor back to profitability at the beginning of this year.

Eick quickly discovered that the group actually had debts of 2.6 billion Euros, of which a considerable portion was repayable in June 2009. Furthermore, Karstadt and Quelle sales rapidly declined even further. Eick desperately attempted to raise fresh funds. However, the major shareholder Sal. Oppenheim did not wish to proceed with recapitalisation and the federal government, when beseeched with requests for aid, refused to ally itself with the company. The upshot: On the 9th June 2009 Arcandor was forced to register its insolvency.

Just three days later the public attorney’s office in Essen initiated embezzlement proceedings against the former manager Thomas Middelhoff.

The insolvency proceedings have since commenced and the one-time largest retail group in Germany is now facing asset stripping. Once this is complete the workforce, which once stood at more than 100,000 employees, will be reduced to around 5,000 members of staff and even this number is highly questionable. A few profitable Karstadt stores will be taken over by the Arcandor competitor Metro, and integrated into its department store chain Galeria Kaufhof. In contrast, it is entirely unclear what will happen to the former mail-order giant Quelle. The company is initially set to be streamlined in order to make it attractive to any potential investors, although it is presently impossible to foresee whether and when there will be any chance for the remaining Arcandor subsidiary in the future. However, one thing is for certain: A great German corporate vision has transcended into one of the most spectacular crashes ever witnessed in the Federal Republic of Germany.