With a population of over 82 million, record low unemployment, rising wages and consumer spending of EUR385.5 billion, there is no doubt that Germany is an attractive market for a retailer looking to expand. With consumers willing to spend more and recent retail sales beating expectations, increasing 1.7%, Hudson’s Bay Co’s (TSX:HBC) $3.36 billion acquisition of Kaufhof, the number one department store in Germany and Belgium, comes at a good time.

The deal will effectively be financed through the sale of 40 of the acquired properties, it is accretive even before taking synergies into account, and it de-levers company. But there are risks, of course. Let’s look into the German market a little further.

Kaufhof’s presence and market position in Germany

Kaufhof operates three leading banners and is the number one German department store, with 119 locations and 31% market share. There is only one direct competitor, and Kaufhof’s market share outpaces it by 7%. The company also has 16 locations in Belgium, where it is the only department store in the market.

Kaufman’s same-store sales have been flat over the last five years, and although HBC management says that this is due to the fact that the company was operated by a mass merchandiser without expertise in department store retailing, this is an area of concern. HBC management has a plan for growth through the following measures:

1) Invest in Kaufhof’s early stage e-commerce platform. E-commerce currently represents a mere 2% of Kaufhof’s sales, and this channel has been growing at a fast pace in Germany.
2) Leverage HBC vendor relationships to introduce global brands.
3) Introduce Saks and Saks Fifth Avenue to Germany.

Shoppers in Germany are known to be frugal and demanding, and there have been some epic failures when it comes to breaking into this market. When Wal-Mart Stores, Inc. decided to expand to Germany in the late 1990s, it created much fear across the German retail industry. However, as we know, Wal-Mart’s attempted entry into Germany failed. There were plenty of reasons for this failure, but I think it boils down to the fact that Wal-Mart had American executives leading the German expansion, and they failed to adjust to the very different culture and consumer behavior. So, in 2006 the company exited. Gap Inc. also made two failed attempts to enter Germany, with the last withdrawal being made in 2004.

So, now here comes HBC with a seemingly good strategy, but the memories of other failed retail expansions into Germany looms above. And HBC is not the only retailer entering Germany. Gap recently announced that it is re-entering Germany by partnering with European e-commerce player Zalando, who sells to 14 European countries, including Germany, through its online fashion website.

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