The signs were already there. In January this year, Galeria Karstadt Kaufhof, one of Europe’s largest and oldest department store chains, asked for and received 220 million euros of government financial aid. That was in addition to the 460 million euro loan the business had already received from the German government, due to difficulties during the COVID-19 pandemic.
In early October this year, the chain’s management said it was terminating a previously agreed deal it had made with union representatives. Difficult times called for radical restructuring, they said.
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Managers also started to campaign for more financial help from politicians, citing a downturn in consumer sentiment, high inflation and rising energy prices.
Then, after its board meeting on Oct. 31, the company said it would file for insolvency again, for the second time in two years.
The Galeria Karstadt Kaufhof stores will file for what is known in Germany as protective administrative insolvency. This is Germany’s version of the U.S.’ Chapter 11 proceedings. The chain, which is more than a century old, had already filed for this kind of insolvency back in April 2020, at the beginning of the COVID-19 pandemic. As part of this, the company was forgiven more than 2 billion euros worth of debt.
This new insolvency means the company will again restructure. Management suggested that around a third of its remaining 131 stores will now be shuttered. The company employs more than 17,000 people and any closures will involve thousands more redundancies.
After the 2020 filing, around 40 locations were closed. Other stores were renovated though and the original restructuring plan was to completely remodel 50 to 60 of the remaining department stores, bringing them back to profitability.
The decision to file for insolvency again is a controversial one.
The Galeria Karstadt Kaufhof chain had not been doing well for years previously, making a loss of 78 million euros in 2019, even before the health crisis hit.
Management consultants told German media the states’ decision to give the struggling stores more money at the beginning of this year was a “scandal.” “Given the financial state of the business I don’t see how they will ever repay this taxpayer money,” one expert said.
The Galeria Karstadt Kaufhof chain, which has a presence in 97 German cities, was bought by Austrian real estate company, Signa, for an estimated 1 billion euros in 2019.
Signa’s portfolio is estimated to be worth around 24 billion euros and includes the U.K. department store Selfridges, German luxury retailer KaDeWe, and half of the Chrysler Building in New York. Many of the Galeria Karstadt Kaufhof stores are located on prime, central city real estate around Germany.
In October, an Austrian investigation into tax irregularities and possible corruption targeted Signa owner, Rene Benko. Austrian authorities were concerned that Benko had tried to write a luxury yacht off his taxes, saying it was important for promoting business relationships. Benko also wanted to write off the rental of a private jet. The Austrian authorities allege that Benko tried to offer the investigator in the case a lucrative job with his own company.
On Oct. 18, Signa’s Innsbruck offices were searched by police.
German commentators have suggested that the investigation into Benko make it less likely that the Galeria Karstadt Kaufhof chain will get another tranche of state money. That is even though, many municipal officials in Germany see the stores as an essential attraction and employer in their central cities.
Signa has expended rapidly and, unlike the department store chain it owns, continues to do well, attracting capital and investments from wealthy Europeans like the Peugeot family.