Why Baumax and Praktiker Disappeared – Why Did They Fail?

Why baumax and Praktiker disappeared – why did they fail?

Stockholm, 9th Juni 2016

Prof. Dr.rer.pol. Dr.-Ing. Thomas Roeb M.A. HS (University of Applied Sciences) Bonn-Rhein-Sieg

4th Global DIY-Summit Prof. Dr.rer.pol. Dr.-Ing. Thomas Roeb M.A. 1 9th Juni 2016 HS Bonn-Rhein-Sieg - [email protected] Prof. Dr. Dr. Thomas ROEB M.A. clients (selected retailers) contact

• AMS Sourcing B.V. (NL) CEO • atb market (UA) Marketing Director • Anton Schlecker VP Purchasing • basic AG CEO • Delhaize Group (B) Senior VP Group Purchasing • Denner AG (CH) CEO • denree GmbH CEO • dm-drogerie markt GmbH & Co. KG Owner/CEO • EDEKA Zentrale AG & Co. KG Director Marketing • Gebr. Bratzler Fruchtgroßhandel CEO • Ihr Platz GmbH & Co. KG VP Sales and Purchasing • Jawoll GmbH Owner/CEO • Kopeika (RUS) Consultants to the Board • Kaufland Stiftung VP Purchasing • Lidl Discount Stiftung CEO • Nordwest Handel AG 3 different CEOs • Penny Discount CEO • Plus Warenhandels GmbH CEO • Praktiker AG CEO • REWE AG CEO • Tchibo AG VP Sales & Marketing • Weltladendachverband e.V. Head of Marketing

2 Prof. Dr. Dr. Thomas ROEB M.A. clients (selected suppliers):

• n.v. artic s.a. • AVO-Werke August Beisse GmbH • Axel-Springer Verlags AG • Bongrain Deutschland GmbH • GlaxoSmithKline Consumer Healthcare … • Hewlett Packard Europe • Intersnack Knabber-Gebäck GmbH & Co. KG • Josef Schmitz Grafschafter Krautfabrik GmbH • Laverana GmbH • Moksel-Gruppe • Nestlé Deutschland AG • Fleischwarenfabrik Heinrich Nölke GmbH & Co • H.&E. Reinert Westfälische Privat-Fleischerei … • SC Johnson GmbH • Westfleisch

3 Prof. Dr. Dr. Thomas ROEB M.A. clients (selected others):

• Bundesministerium für Verbraucherschutz, Ernährung und Landwirtschaft (Ministry of Consumer Protection, Food and Agriculture) • CMA Centrale Marketing-Gesellschaft der Deutschen Agrarwirtschaft mbH (Central Marketing Organization of the German Agriculture) • Die Verbraucherinitiative e.V. (Association for the protection of consumer rights) • Gesellschaft für technische Zusammenarbeit GTZ (Society for technical cooperation between Germany and developing countries)

• Lebensmittelzeitung (Germany´s leading specialist journal for food retailers and manufacturers) • SEB AG (bank)

• KPMG • Kurt Salmon Associates • McKinsey & Company • Roland Berger Strategy Consultants • wbpr Gesellschaft für Public Relations und Marketing GmbH

4 baumax and Praktiker were completely different – in their concept and their failure

• both baumax and Praktiker were no real discounters, but only Praktiker failed for this • baumax failed for its foreign expansion, if failure is the right expression • Praktiker failed because it tried in vain to compensate its cost disadvantage by using aggressive promotions

4th Global DIY-Summit Prof. Dr.rer.pol. Dr.-Ing. Thomas Roeb M.A. HS Bonn- 5 9th Juni 2016 Rhein-Sieg - [email protected] There are many ways leading to price leadership – the Aldi-way is only the exception

small lean low low high low assortment operations absolute prices sales relative costs costs

small lean low low assortment operations absolute prices costs

vertical integration low low high low absolute prices sales relative lean costs costs operations

4th Global DIY-Summit Prof. Dr.rer.pol. Dr.-Ing. Thomas Roeb M.A. 6 9th Juni 2016 HS Bonn-Rhein-Sieg - [email protected] baumax and Praktiker didn´t take any of them – indeed they weren´t real discounters at all

baumax concept

• assortment size: 60.000 SKUs (before restructuring) / 55.000 (after restructuring)

• pricing: officially EDLP, but in reality neither ED (every day) nor L (low), but in reality strong promotion-orientation and generally high price level

• „Aldi“-type (EDLP, limited assortment) concept tested in Eastern Europe (2010/2011), but stopped for unclear reasons

Praktiker concept

• very strong promotional pricing (“20% on everything except pet food”)

• non-promotional prices above average

4th Global DIY-Summit Prof. Dr.rer.pol. Dr.-Ing. Thomas Roeb M.A. 7 9th Juni 2016 HS Bonn-Rhein-Sieg - [email protected] baumax and Praktiker were completely different – in their concept and their failure

4th Global DIY-Summit Prof. Dr.rer.pol. Dr.-Ing. Thomas Roeb M.A. 8 9th Juni 2016 HS Bonn-Rhein-Sieg - [email protected] The key reason for baumax´ failure lay elsewhere: in its expansion into Eastern Europe

baumax: foreign operations 2014 and starting year

65 • foreign expansion was too fast (on average one new country per two years in the years 1992 - 2010)

• foreign expansion into the wrong countries (Eastern Europe and Turkey), the potential of which was over- and the crisis underestimated: in 2014, 6 of 8 foreign markets were hopelessly loosing money. Only the first two markets CZ and SK were profitable

• wrong focus of management, e.g. in 2012 out of 5 VPs only one for sales/purchasing, the others for finance, real estate, social issues and art (!) 24

14 15 15

7 8 7 3

Austria 1992: 1992: 1993: 1995: 2000: 2006: 2008: 2010: Czech Slovakia Hungary Slovenia Croatia Romania Bulgaria Türkei Rep.

4th Global DIY-Summit Prof. Dr.rer.pol. Dr.-Ing. Thomas Roeb M.A. 9 9th Juni 2016 HS Bonn-Rhein-Sieg - [email protected] But the core business (A, CZ, SK) was good enough for baumax to become an orderly exit – as opposed to Praktiker

difference between failure of baumax and Praktiker

baumax Praktiker

• no bankruptcy; instead restructuring and • full-scale bankruptcy even dragging down orderly M&A process leading to sale the profitable subsidiary “max bahr”

• 9.500 out of 11.000 jobs preserved • all jobs lost

• no financial losses for employees, • almost all claims of employees, suppliers, suppliers and landlords landlords and banks lost

• losses only for banks, but 70% of debt • major loss to investors reimbursed

4th Global DIY-Summit Prof. Dr.rer.pol. Dr.-Ing. Thomas Roeb M.A. 10 9th Juni 2016 HS Bonn-Rhein-Sieg - [email protected] baumax and Praktiker were completely different – in their concept and their failure

4th Global DIY-Summit Prof. Dr.rer.pol. Dr.-Ing. Thomas Roeb M.A. 11 9th Juni 2016 HS Bonn-Rhein-Sieg - [email protected] Praktiker didn´t have the cost advantage required from a discounter

cost as a % of sale

33,1% 29,3% 27,0%

14,0%

Hornbach Praktiker Supermarkt Aldi

source: annual reports, estimations Prof. Dr. Dr. Thomas Roeb M.A.

4th Global DIY-Summit Prof. Dr.rer.pol. Dr.-Ing. Thomas Roeb M.A. 12 9th Juni 2016 HS Bonn-Rhein-Sieg - [email protected] Praktiker tried to generate cost-advantages through price reductions

parameters of Praktiker 20%- promotions at the beginning

200,0%

28,8% 11,9%

price reduction sales increase share of promotion share of promotion -20,0% days in total days sales in total sales

source: estimations Prof. Dr. Dr. Thomas Roeb M.A.

4th Global DIY-Summit Prof. Dr.rer.pol. Dr.-Ing. Thomas Roeb M.A. 13 9th Juni 2016 HS Bonn-Rhein-Sieg - [email protected] The sales increase leads to a significant reduction of the share of fixed costs in overall costs

fixed costs as a function of sales

• space costs (!) • depreciation of store furniture • HQ • advertising • … 100,0%

33,0%

fixed costs, non-promotional fixed costs, promotional level level

source: annual reports, estimations Prof. Dr. Dr. Thomas Roeb M.A.

4th Global DIY-Summit Prof. Dr.rer.pol. Dr.-Ing. Thomas Roeb M.A. 14 9th Juni 2016 HS Bonn-Rhein-Sieg - [email protected] staff productivity wasn´t affected by the 20%-promotions

Entwicklung der Personalproduktivität infolge der Aktionen

20% 25,0%

average price tripling of reduced by sales leads to 20% staff -> volume productivity increases by increase of 100,0% 25% to 25% 100,0% maintain sales 80,0% 100,0% levels -> productivity reduced by 20%

staff productivity initial productivity loss due to productivity gain due to staff productivity final level lower prices higher sales level

source: calculations Prof. Dr. Dr. Thomas Roeb M.A.

4th Global DIY-Summit Prof. Dr.rer.pol. Dr.-Ing. Thomas Roeb M.A. 15 9th Juni 2016 HS Bonn-Rhein-Sieg - [email protected] In addition, the price reduction of 20% doesn´t lead to a reduction of the margin by 20%-points, but just ca. 15%-points

margin as a function of promotional pricing

„20% on everything 100% except petfood“

80% 40,5% = 40,5% of 100% 20,5% = 25,6% of 80% margin

price of purchase

59,5% 59,5%

non-promotion promotion

source: calculations Prof. Dr. Dr. Thomas Roeb M.A.

4th Global DIY-Summit Prof. Dr.rer.pol. Dr.-Ing. Thomas Roeb M.A. 16 9th Juni 2016 HS Bonn-Rhein-Sieg - [email protected] However, Praktiker didn´t succeed – unlike Aldi – to increase sales surface productivity, i.e. overall sales in existant stores

sales surface productivity

1.810 € 1.657 € 1.506 €

995 €

Hornbach Bauhaus Obi Praktiker, D Max Bahr, D source: annual reports

4th Global DIY-Summit Prof. Dr.rer.pol. Dr.-Ing. Thomas Roeb M.A. 17 9th Juni 2016 HS Bonn-Rhein-Sieg - [email protected] the sales impact of promotions decreased with the frequency of promotions

share of promotional days

39,6% share of promtion sales in total sales 56,7% 11,9%

increase of sales during promotions 28,8%

200,0%

100,0%

2006 2007

source: calculations Prof. Dr. Dr. Thomas Roeb M.A.

4th Global DIY-Summit Prof. Dr.rer.pol. Dr.-Ing. Thomas Roeb M.A. 18 9th Juni 2016 HS Bonn-Rhein-Sieg - [email protected] the compensate for this, Praktiker was forced to increase its margin, killing its discount claim

Praktiker: Margin as a function of promotional sales

Praktiker margin mix 2007 Praktiker margin mix 2007

40,5% 37,5%

26,7% 23,0%

margin, non-promotion margin, promotion margin, non-promotion margin, promotion

Quelle: Geschäftsberichte, Schätzungen Prof. Dr. Dr. Thomas Roeb M.A.

4th Global DIY-Summit Prof. Dr.rer.pol. Dr.-Ing. Thomas Roeb M.A. 19 9th Juni 2016 HS Bonn-Rhein-Sieg - [email protected] So, what does that mean for discounting in DIY: discounting must be more like IKEA, than like Aldi; efficiency gains are much harder to attain

small lean low low high low assortment operations absolute prices sales relative costs costs

in fmcg, assortment size is driven by brand variety more than by product variety -> assortment size can easily be shrunk by relying on private labels

in DIY, varity is driven by wide range of different products -> private labels can make only a limited contribution to assortment size

vertical integration low low high low absolute prices sales relative lean costs costs operations

4th Global DIY-Summit Prof. Dr.rer.pol. Dr.-Ing. Thomas Roeb M.A. 20 9th Juni 2016 HS Bonn-Rhein-Sieg - [email protected] thank you for your attention!

4th Global DIY-Summit Prof. Dr.rer.pol. Dr.-Ing. Thomas Roeb M.A. 21 9th Juni 2016 HS Bonn-Rhein-Sieg - [email protected]