– Thoughts on Strategy and Management

How weak is the condition of German retail?

OK, this is more about economics, but this question really touches the strategies of retailers.
For years I’ve been reading about the difficult situation for German retailers: The economy is struggling, the extensive social security system is subject of ongoing reforms, people are afraid that they won’t bee able to keep up their current living conditions in future – hence they shop less and save more.
As Oliver already wrote, we were shopping last Saturday. Well, if German retailers are in a recession at the moment, I wonder what it might look like when we are back in a boom. What I saw were densely packed shops and streets. By noon the city of Cologne was virtually crowded. It was difficult to find a table in a restaurant for lunch or a change room to try on some clothes. According to the bags people carried, they were definitely not only window-shopping.
Well, I have to admit that this was on a Saturday when people have time to shop and it was in a prime location that is frequently listed among Germanys top ten shopping streets. Anyway, I have seen similar scenes in many other towns over the last few years.
So why are the retailers in Germany so unhappy?

Of course, consumption figures had been better years before, and so had been retail sales figures. But the overall state of the economy can’t be the only explanation for the bad mood of retailers. There are some other things:

Most larger retailers feel the pressure to grow. Stock markets or their private shareholders require that and you need economies of scale in order to operate efficiently, e.g. get better buying conditions.
The problem is that the German market is already saturated and the overall market is not growing significantly. Germany is one of the countries with the highest figures for retail space per inhabitant. Despite that fact, retail space is still growing. New shopping centres are being developed or existing ones extended. All the large retail chains will take any chance to open new shops in good locations. Unfortunately, people can spend only so much, no matter how many goods are offered on how much space. Accordingly, it gets more and more difficult for retailers to increase sales per square meter, which is an important benchmark figure.

One more point: Retailers have long since realised that they can almost only grow at the expense of their competitors. This has forced them into an fierce price competition. There are bargains, sales, and discount actions all year round. Of course, retailers erode their margins with such a pricing strategy. But much to their horror, customers have learned to exploit this price competition to their advantage. German customers are said to be among the most sophisticated smart shoppers in the world. They will wait patiently and than go miles for a bargain. The effect on retail sales in dramatic.

So I think retailers should stop to blame the economy or politicians for their problems. Although the overall growth potential of the retail industry is determined by the state of the economy, there is more to it. Retailers should stop price erosion by changing their pricing and marketing strategies. Some of them, like Peek & Cloppenburg are already on that way.

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