A challenging turnaround ahead for the owner of Lindex

Although May 13, 2015 was Wednesday instead of Friday, the day was anything but lucky for Finland: fresh Eurostat data showed the country officially having fallen into a recession. Thus Finland and Greece alone share the same gloomy economic situation in the Eurozone - nothing to be proud of for Finns who in the last few years have gained fame (or notoriety) for keeping a strict line towards less than robust South European economies.

The weak Finnish economy adds to the troubles faced by Stockmann, owner of Finland’s most prestigious chain of department stores but globally best known as the force behind Lindex. Stockmann is now facing tough decisions related to cost cuts, simplifying the retail brand portfolio and withdrawing from long standing markets, steered by a new CEO since November 2014.

From Early Internationalization to Losses

From a humble beginning more than 150 years ago as what probably would be called a variety store today, Stockmann globalized before most other Finnish retailers. When Finland was the closest Western economy to the Soviet Union, expats there could utilize the company’s offerings which were delivered to Moscow. Thus, when the Soviet Union started collapsing, store-based expansion to the east to Russia and gradually south to the three Baltic States was logical. This was done through department stores and apparel specialists under the Seppälä brand and since 2007 by acquiring Swedish Lindex. In 2010, Stockmann’s then CEO Hannu Penttilä could boast this as being a reason behind the weekly Suomen Kuvalehti having awarded it the title of the best company in Finland in the international expansion category the year before.

By 2010, the group’s sales exceeded 1.8 billion euros a year, growing to more than 2 billion euros for the next three years all while being able to show a profit. 2014 was a turning point, the revenue dropping to just above the 2010 level while the group showed a result which was around 100 million euros in the negative. This was a consequence of the weak consumer confidence in Finland where about half the revenue comes from, the crisis in Russia and ever increasing competition from Internet retailing. Penttilä retired, and the Swedish Per Thelin was appointed as someone able to call the Icarus flying towards the sun back to earth before getting scorched beyond repair.

Optimized Assortments Instead of Wide Ones

Thus Stockmann got a strategy moving away from offering “everything for everybody” and a “wide assortment” to “clear value propositions and target group” and an “optimized assortment” while aiming at 50 million euros annual cost cuts. Stockmann has already announced closures of three of its department stores in Russia and one in Finland in 2016/2017. It has also sold Seppälä, which showed an almost constantly falling profit for a decade and finally loss since 2012, to its CEO and also started refocusing Lindex, such as opening the first outlet in the UK while being withdrawn from Russia in 2016. Stockmann is also openly looking for a new owner for its non-store specialist Hobby Hall – and, according to market rumours, for its bookstores – and closing Stockmann Beauty specialist stores.

Within department stores, Thelin thinks that every square meter has to be profitable. Thus the company is concentrating on what it does best, such as selling fashion (about two thirds of the total group revenue comes from that), cosmetics and groceries and handing over selling space to specialist retailers for the rest. The first example of this is the electronics and appliances specialist Expert opening its outlet inside the flagship department store in Helsinki in May 2015.

The Physical Outlet Network Getting Sparser

Also, Stockmann’s global reach through store-based outlets is being significantly downsized. From the near almost 700 stores it ran in 2014, despite opening new Lindex outlets, Stockmann could well have just around 500 outlets worldwide this year. An increasing focus will be put on opportunities offered by the Internet. While in 2014 Lindex was present in just 16 markets through its physical stores, it already has a country-specific online store for 28 including, from the total revenue viewpoint miniscule markets, such as Luxembourg and Malta.

Likewise, the sales through Stockmann Beauty are expected to be compensated through Stockmann’s own Internet store as well as by Lindex ‘s launch of its cosmetics series in April 2015. This might be able to boost the share of cosmetics of all sales in Stockmann-owned fashion chains from the meager 5 percent it was before the selling of Seppälä.

Counteracting an Identity Crisis through Online Focus

The ongoing challenges Stockmann is facing are not unique to the company, but rather shared by many of its competitors. For example, in department stores in Finland, Kesko, one of the two retailing giants of the country, has divested its much less downmarket, yet still unprofitable Anttila chain to the German fund 4K Invest. The other giant, S Group, has started opening up Marks & Spencer sections inside its own department stores. Generally speaking, times are very challenging for all traditional outlets selling apparel in Finland, with some key store-based channels reporting clearly decreasing sales at the beginning of 2015.

Focusing on key product groups while sticking to the premium image Stockmann has and widening the Lindex network is obviously not enough for a Phoenix like rise from the current troubles – the company has to increase its online presence as well.

In the first half of 2014, Stockmann estimated sales through Stockmann.com accounted for 8 percent of all sales in those product categories which were sold online. This shows that there is still room for growth, at least online, and Stockmann is indeed opening a new distribution centre in 2016 to boost that.

According to a study conducted for the Finnish Direct Marketing Association, in 2014 Stockmann.com was still just the 12th most visited Internet retailing website in Finland. In comparison, with almost four times more unique visitors than Stockmann, Zalando with its estimated almost 100 million euro sales to Finnish customers has rapidly neared yet not reached the combined sales of Lindex and Seppälä in the home market.

With its department stores and store-based and online apparel sales, one can still count Stockmann as a local key player. Yet it should remain a vigilant, not sleeping, giant in order to come out of one more challenging period in its long history as a winner.

By Pasi Hannonen, Senior Research Analyst, Euromonitor International