Blog: Leonie BarrieEnd of the line for Arcandor?

Leonie Barrie | 11 June 2009

The collapse into bankruptcy protection earlier this week of retail and travel group Arcandor AG, owner of Germany’s largest department store chain, wasn’t a surprise. The company, which operates department store chain Karstadt and mail-order business Primondo, had been trying – and failing – to restructure its business for the past four years, with little to show except heavy debts. 

The retailer, which also owns travel company Thomas Cook, saw its shares fall by more than 80% over the past year as it slumped to a full-year loss of EUR746m (US$992.4m) and sales fell 3.4% at its Karstadt unit.

Without a plan to rescue its business when times were good, it stood little chance of being able to weather the recession. And it seems the German government had had enough too, with its decision to reject pleas for state aid to help repay loans being the final straw that broke the camel’s back.

So what now? The bankruptcy does not affect every aspect of Arcandor's operations, with travel firm Thomas Cook Plc, Primondo’s specialist mail order companies and home shopping channel HSE 24 untouched by the proceedings. But by its own admission the company has just two months, until the end of August, in which it can afford to pay salaries for Arcandor’s 43,000 employees. And loans of EUR710m will shortly need to be repaid.

Under German insolvency law, a bankruptcy filing offers similar protection to the Chapter 11 rules in the US, which allow a company to continue to operate and reorganise while offering protection from its creditors.

Hong Kong-based supplier Li & Fung has admitted that it will be affected by the process, and is currently owed about US$5.4m in agency commission by Arcandor. But other suppliers including Esprit Holdings and sportswear company Adidas AG say they are "barely affected" by the insolvency – although Adidas has warned it will only deliver new orders if the goods are paid for in advance.

So the stage is now set for a break-up and sale of its assets, with rivals like Metro making no secret of their interest in merging its Galeria Kaufhof department stores with Karstadt, and German company Otto being touted as a good match for Primondo.

But whether such a sale can raise the vast sums needed to match the company's obligations to creditors remains to be seen. And if this doesn’t seal its fate, are department stores really the model that today’s investors really want to buy in to?

The Financial Times calculates that about 500 of Germany’s 643 department stores have fallen – or are about to fall – into the hands of the receiver. And it notes that the format has failed to keep pace with the specialist retailers found in shopping centres and on the internet. Indeed, so tough was the competition that even discount giant Wal-Mart three years ago gave up its plans to sell everything under one roof in Germany.

 


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