Bitter pill for Schlecker

Germany’s biggest retail insolvency in years is highlighting changing habits among shoppers in Europe’s largest economy, showing the limits of a no-frills approach pioneered by a generation of retailers.

The crisis at Schlecker, a family-owned chain of pharmacies whose cheerless stores are found in even the smallest villages and quietest suburban streets, has thrown into doubt the future of more than 8,000 branches and about 30,000 staff. It is the biggest business failure in German shopping since Karstadt, the department store group, filed for insolvency along with parent company Arcandor in 2009.

While the insolvency comes at a time of economic austerity across much of Europe, Germany is a relatively safe haven of stable consumer spending and Schlecker’s non-German subsidiaries – in eight other European countries from Spain to Poland – are not the direct cause of its woes. Rather the group’s demise is attributed more to long-standing failings to adapt a once-successful business model.

“Schlecker’s problems are nothing to do with any economic crisis. They are internal and related to the company’s lack of competitiveness against its market rivals,” says Matthias Queck of Planet Retail, a retail research company. “The market has changed and society has changed.”

Schlecker was founded by Anton Schlecker in the 1970s, capitalising on price liberalisation in the German pharmacy market. It had some 11,000 stores at its peak in the last decade and success was based on continual expansion into low-rent villages and suburban parades where other retail groups did not venture. The stores paid little attention to service or presentation, sometimes even blocking the windows with shelves.

No-frills retailing has a successful history in Germany, where consumers often remain reassured by a basic approach that suggests low prices. In the grocery segment, “hard discount” supermarkets run by Aldi and Lidl have a high market share. But Thomas Roeb, a professor of retailing at the Bonn-Rhine-Sieg university of applied sciences, says “the Schlecker story is not really about discounting”.

“Discounters such as Aldi have a concept geared towards creating a cost advantage. Schlecker doesn’t, focusing on proximity to the customer. But there is only limited advantage in being available to shoppers every day when you are selling stuff they don’t need to buy every day,” Mr Roeb says.

Schlecker’s rivals in the German pharmacy world, principally the DM and Rossmann chains, have been able to offer more enticing shops and competitive prices, expanding at a slower rate but in better locations with bigger stores. Their turnover per square metre is reckoned to be several times higher.

Once Schlecker’s rivals accelerated their expansion, says Mr Roeb, its “very existence was threatened”. Mr Queck says: “Schlecker could not raise productivity to the levels of its rivals.”

Schlecker tried to survive by cutting stores, while latterly Mr Schlecker’s children – who as teenagers in 1987 were kidnapped in an assault on the family’s wealth that left it publicity-shy – tried to lead a repositioning of the group. Yet a €230m investment in a store overhaul has proved too little, too late.

The group, which in 2010 had sales of €6.6bn, also garnered a reputation for poor treatment of its staff. “It also did not help Schlecker that they were carpet-bombed with bad publicity. It could very well be that this has left a mark that the company found difficult to remedy,” says Mr Roeb.

Mr Schlecker ran Schlecker’s main operating arm not as a limited company but in effect as a sole trader. It remains uncertain how much of the business can be salvaged or whether the family will be able to exert much influence over the insolvency process. Meike Schlecker, the founder’s daughter, said at the group’s first press conference in more than two decades that the family wealth was largely gone. “There is nothing left,” she said.

Schlecker’s insolvency comes just before an updated German law to simplify company restructuring is due to take effect. Roland Fendel, a lawyer with Schultze and Braun, an insolvency and restructuring advisory firm, says: “It would have been better if this insolvency had been staved off until the introduction of the new law in March. That would have given more options for the restructuring.”