ANALYSIS-Europe department stores need makeover to survive

Published: 05 Jun 2009 01:38:32 PST

* Stores need to cut product range, use private labels

* Differentiation is key

* Euromonitor expects department store sales to fall

FRANKFURT/LONDON, June 5 - Europe's mainstream department stores will have to resist the temptation of trying to be all things to all people as discounters, online and specialist stores snatch away customers.

Department stores will need a thorough makeover to highlight their individuality and exclusivity by cutting back their product range, focusing on themes that work with local customers and launching private labels to stand out, analysts said.

Several chains across Europe have been struggling with the fallout of a global recession as consumers tighten purse strings amid growing concern about rising unemployment and falling house prices.

"To stay relevant the companies will need to ... give consumers a reason to have to visit the stores," said Jon Wright, Industry Manager Retailing at Euromonitor International.

They needed to remember the things for which consumers first loved department stores, he said, "product choice, premium brands and a consumer centric sales approach that is as much about offering advice as it is about selling goods."

Euromonitor International forecasts constant value sales for department stores to fall 3 percent in Germany and 5 percent in the UK between 2008 and 2013.

The group to gain most from tough markets are discounters.

"Frugal is the new chic and a back-to-basics sentiment has taken root," Boston Consulting Group noted in a recent consumer sentiment report.

LADIES' PARADISE

Even in bleak times, differentiation pays: renowned stores like KaDeWe in Berlin, Harrods in London and Galeries Lafayette in Paris continue to attract shoppers as lush displays, swanky buildings in exquisite locations make up for potentially higher prices.

Emile Zola in his book "The Ladies' Paradise" described department stores in late nineteen century Paris as an icon for capitalism and the rise of the modern city, and these stores to this day still live off their historic status.

But this only works for a few groups.

The majority of department stores has to find other ways to stay on consumers' shopping lists amid growing competition, for example from suppliers like Hugo Boss, Adidas or Puma, which now also have own stores.

One way is to offer exclusivity via private labels.

This has worked for Britain's second-largest departments store group Debenhams, whose affordable designer clothes range "Designers at Debenhams" has helped it back on its feet.

Local peer John Lewis and Spain's largest department store group El Corte Ingles also owe much of their success to their private label ranges.

SLIM DOWN, CONSOLIDATE

Trying to please all customers also sets department stores up against a growing number of shopping centres, which is an unequal battle.

"In contrast to department stores they (shopping centres) have the best providers for each product category," said Michael Gerling, head of Cologne-based EHI Retail Institute.

Some department stores are coping by slimming down their product range and combining private labels with other brands along a common theme, said Klaus Peter Teipel, senior consultant at BBE Retail Experts, pointing to Zurich's Jelmoli, Munich's Ludwig Beck and Swiss chain Globus.

Kaufhof, a German department store chain that is owned by retailer Metro, has been narrowing its focus over the years.

"We have turned Galeria Kaufhof from a generalist into a modern multi-specialist," said Lovro Mandac, chief executive at Metro's Kaufhof unit in an interview last month. The stores no longer sell rugs, lighting or furniture.

Kaufhof has never made a loss since its beginnings in 1879, something its local loss-making rival Karstadt, owned by stricken retailer Arcandor can only dream of.

Metro has proposed to merge Karstadt with Kaufhof, which has been up for sale since last year, to create a national champion -- an example of consolidation that could also be a way out of the current crisis for department stores.