If you were to start a survey of how many consumers know the “Kaufhof”, that would certainly be a large majority. On the other hand, if you ask consumers when they last bought something in a department store, they would probably mostly shrug their shoulders. This would describe the central problem of the last German department store chain: There is no viable business model. Without repeated state aid, “Galeria Karstadt Kaufhof GmbH” would no longer exist.
The chances of being in the black weren’t bad at all this year. The end of the Corona measures and probably also the nine-euro ticket ensured that the inner cities were full in spring and summer. Data from the city laser scanner operator Hystreet shows that from the beginning of the year to mid-October, for example, more than twice as many pedestrians were out and about on Königstrasse in Stuttgart as in the same period last year. In the Schildergasse in Cologne and Georgstrasse in Hanover, more visitors were registered this summer than in the pre-Corona summer of 2019.
The Federal Statistical Office confirms that high footfall generates additional sales. In the first eight months of this year – more recent data are not available – sales in “other retail trade with goods of various kinds”, i.e. in department stores, increased by 21 percent in real terms compared to the same period of the previous year. By way of comparison, total retail trade stagnated over the same period if inflation is factored out.
Galeria did not benefit from these leaps in sales. According to consistent media reports, the group again asked for state aid, the exact amount of which was unknown. Previously, the management had unilaterally terminated the collective restructuring agreement concluded with the Verdi union.
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This paper was signed after the merger of Karstadt and Kaufhof and not only secured the preservation of locations, but also salary increases for employees. As expected, the union reacted with outrage – and referred to the high profits of the shareholder, behind which an Austrian real estate investor stands.
Prof. Bert Rürup is President of the Handelsblatt Research Institute (HRI) and Chief Economist of the Handelsblatt. For many years he was a member and chairman of the German Council of Economic Experts and an adviser to several federal and foreign governments. You can find out more about the work of Professor Rürup and his team at research.handelsblatt.com.
Already at the beginning of 2021 and then again at the beginning of 2022, Galeria received state aid because of the consequences of the Corona virus. The Economic Stabilization Fund helped with two liquidity aids totaling 680 million euros. In addition, the group got rid of billions in claims from creditors with a protective shield procedure. At the time, Federal Economics Minister Robert Habeck (Greens) emphasized: “Galeria Karstadt Kaufhof, with its 131 department stores, is of enormous importance for many inner cities. It is therefore right to help in this difficult situation” – a statement that one does not have to follow due to the lack of economic success.
The core of a dynamic market economy is not only that new successful companies are created, but also that unsuccessful companies disappear from the market. Joseph Schumpeter, probably the most important German-speaking economist, coined the term “creative destruction” in 1911 for this growth-promoting structural change. The term already appears in the “Communist Manifesto” and in “Capital” by Karl Marx. This means that a new economic order is replacing an old, outdated one. Or to put it another way: Who needs a department store that stocks almost everything from pencils to underwear to Rolexes when there is Amazon.com?
Unprofitable jobs do not need subsidies
If unprofitable companies are kept alive by the state with subsidies, jobs are saved in the short term. At the same time, however, staff are prevented from being employed where they generate added value instead of producing further losses. In the Galeria executive floor, one may think about concepts to reduce the costs for the approximately 18,000 employees. At the same time, however, large parts of the service industry are desperately looking for staff.
It is possible that the Galeria employees in other, better frequented shops could do a lot more to make a city center more attractive. In any case, preventing mass layoffs is not a valid economic argument for further state aid once the labor market has been swept clean. Even if the German economy is slipping into a recession, subsidizing unprofitable jobs in a group without a future concept makes no sense.
>> Read here: Not again subsidies for the billionaire Galeria owner René Benko
Large department stores are now the figureheads for inner cities. The question, however, is what such figureheads are worth when consumers are increasingly avoiding these traditional temples of consumption. Government money can only be spent once. The cities affected should be able to present concepts for how the tax millions for Kaufhof can be used more sensibly in order to make the urban centers more attractive.
Galeria is by no means the first group that the state tried to save from impending bankruptcy – and ultimately failed. In the mid-1990s, the Bremer Vulkan shipyard went bankrupt despite large amounts of state aid.
In 1999, contaminated sites from real estate transactions brought what was once the largest German construction company, Philipp Holzmann, to the brink of ruin. The then Chancellor Gerhard Schröder (SPD) turned himself in to the rescue. In March 2002, Holzmann was nevertheless insolvent.
Damage from government aid easily adds up
At the height of the financial crisis, the federal government took a stake in Commerzbank in 2009 and subscribed to shares worth 5.1 billion euros. In order to be able to get out of the bank without losses, the share price, which currently fluctuates between seven and eight euros, would have to rise to 26 euros. After all, this bank survived the financial crisis, unlike Hypo Real Estate, whose liquidation cost taxpayers several billion euros.
>> Read here: Galeria’s high losses reinforce resistance to further government credit
The second largest German airline Air Berlin went bankrupt in August 2017 because the major shareholder Etihad turned off the money supply. With a loan of 150 million euros, the federal government maintained air traffic during the holiday season. Together with irrecoverable claims from the Federal Employment Agency and the Treasury, the damage for the state added up to around 200 million euros.
And now, after the bankruptcies of Hertie, Woolworth and Karstadt, the last department store group may be on the verge of collapse – and the state is faced with renewed bad debts.
Depending on the situation on the labor market, preventing mass redundancies is not a valid economic argument for state aid.
(Photo: dpa)
The trade association HDE warns of further setbacks for stationary retail in view of expensive energy, high inflation and gloomy consumer sentiment. Shop closures could accelerate in the coming months, especially in inner cities. The association argues that the billions in aid promised by the federal government against high energy costs should therefore also benefit retailers. This may be true for the bulk of retailers. But Galeria is not a victim of the energy price crisis.
During the corona pandemic, the reactivated economic stabilization fund had to solve the complicated task of only supporting companies with a functioning business model. The initial skepticism as to whether this selective granting of aid could succeed has largely subsided. A company like the Kaufhof/Karstadt Group, which has long lacked a viable business model, should also be judged by these standards. Economics Minister Habeck has no convincing reason to throw good money after poorly invested state money.
More: Galeria Karstadt Kaufhof: Department store group admits “existence-threatening emergency”.