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Karstadt: Looks Like A Clearance Sale


Patriotism hasn't paid off for KarstadtQuelle. While German retailers have ventured as close as Poland and as far as China in search of growth, Germany's largest department-store chain mostly stayed home. Desperate to pump up flagging sales, Essen-based Karstadt diversified into everything from golf-equipment outlets to a sports-TV channel, all in Germany. It branched out into travel and even launched Starbucks Corp. (SBUX) in Germany via a joint venture with the Seattle-based coffee purveyor.

Betting on Germany was a big blunder for Karstadt, whose department stores are a fixture in most downtowns. Revenues have swooned in tandem with German consumer confidence. Karstadt reported a $540 million loss for the first half of 2004, on the back of a 6% decline in sales, to $8.5 billion. To reverse the slide, management is making another contrarian bet: In June the company tapped former Bertelsmann CEO Thomas Middelhoff to head its supervisory board. Karstadt CEO Christoph Achenbach, promoted to the post in June, is in charge of day-to-day management, but few expect Middelhoff to be a figurehead. "He's certainly someone who will take a very active approach to the job," says Thilo Kleibauer, a retail analyst at M.M Warburg & Co. in Hamburg.

A slick media exec may seem like an odd choice to oversee a staid German retailer. Middelhoff, 51, was pushed out of Bertelsmann in 2002 following a dispute with the controlling family over plans to take the company public. Yet Middelhoff's knack for dealmaking -- he engineered the acquisition of publisher Random House -- will come in handy at Karstadt, which must unload money-losing ventures. A partner at Investcorp International Ltd., a London private-equity firm, Middelhoff should be able to trade on his international connections to help find buyers.

Karstadt's recent travails have also fueled speculation that main shareholder Madeleine Schickedanz, an heir of Quelle's founder, will try to sell the 123-year-old company. The stock is down 33% since January. Another school of thought holds that Schickedanz, who has increased her stake to 41.5% from 36.4% in recent weeks, will team up with other big shareholders such as insurer Allianz Group and buy up enough to delist the company. Then management could work on a turnaround free from public scrutiny.

TOUGH MARKET

The suffering shareholders will learn what Middelhoff and Achenbach are up to in late September, when the company unveils its turnaround plan. Middelhoff and other executives declined to be interviewed before then. The betting is that Middelhoff will reverse the diversification strategy. A prime candidate for disposal is the company's 40.5% stake in DSF, a German TV sports channel that lacks the viewers to be consistently profitable. Karstadt may sell its 50% share in Thomas Cook, which has been slammed by a downturn in travel. Achenbach also wants to renegotiate the terms of the Starbucks venture.

Will chopping deadwood save the tree? Karstadt owns the famed KaDeWe shopping palace in Berlin, but analysts question whether its smaller department stores and those outside city centers will be able to fend off assaults by more focused outlets such as fashion retailer H.M. Hennes & Mauritz or discounters such as Aldi and Lidl. "The market is more difficult here than anywhere else I've worked," says James Bacos, a director at the Munich office of Mercer Management Consulting Inc. (MMC), which advised Karstadt. "But if you have the right format," he adds, "you can win."

The right format is elusive. Targeting specific groups -- like singles in chic neighborhoods -- could freshen Karstadt's image. More firings and a longer workweek could also be in store, even with earlier layoffs hurting Karstadt's reputation for service. "It's going to be painful for everybody," says Commerzbank's (CRZBY) Jürgen Elfers. Welcome back to Germany, Herr Middelhoff.

By Jack Ewing in Frankfurt


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