Are department stores a relic of the past, or do they contain seeds for the future of retail? That is the central question in our interview series ‘A love for department stores’, where we will discuss the challenges and opportunities for the business with a selection of leading voices in retail.
From toys to food
Let’s head for Italy first, where department store La Rinascente Milano was awarded the title of ‘Best department store in the world’ by the Intercontinental Group of Department Stores (IGDS) in 2016. We had the honor to meet one of the most successful Italian entrepreneurs, Maurizio Borletti, the grandson of Senatore Borletti, who launched the brand La Rinascente in 1917. Mister Borletti was CEO of tableware company Christofle, was shareholder of La Rinascente between 2005 and 2011, invested in the French department store company ‘Le Printemps’ between 2006 and 2013 and is today one of the shareholders of ‘Highstreet’, the company that holds most of Karstadt’s real estate. This is an expert in the business, no doubt!
Mister Borletti, what was your first memory of a department store?
“Well, as you know my family started the La Rinascente department stores in 1917. The company was sold to Ifil, the holding of the Agnelli family, in 1969. The only member of the family who stayed aboard as a shareholder was my father, who was still in the board when I was a child. So my first memory is that I accompanied my father to the board and that I would look at toys while he would work. Toys were always one of the most important departments back then. As a child, a department store meant toys to me above anything else. Then later, maybe I became more interested in the fashion department. When young people come to department stores now, I suppose the first thing they appreciate is the food department. Food has replaced toys, in a way.”
La Rinascente must be your favorite department store in the world?
“Of course! It’s like asking a mother about her child!”
When did you start working yourself in the department stores?
“My first professional experience in the sector was actually as a supplier. I had bought a tableware company called Christofle, so I was negotiating at the other side of the table. Literally every department store in the world was among our customers, from Japan to Australia, South America, the United States and all of Europe. This included, of course, all the big names like Printemps, Galeries Lafayette, Bon Marché, BHV, Inno, and so forth.”
“I saw the evolutions from the other side, the vendor side, and that was interesting. I can say that during that period, I got to know most department stores in the world. And I could see there was a big evolution. Certain department stores had gone in the direction of luxury, and others had not. Some had reinvented themselves, many had not. So when I sold Christofle after ten years in 2003, and decided to return to the department store business, I was able to apply what I had learnt in the rest of the world. That helped me a lot when I went back into that business.”
“I began looking at La Rinascente in 2004 and brought together a group of investors. In 2005 we invested in the company. What I believed we should bring back to the department store, was a very strong sense of luxury. The luxury sector’s growth was very significant, but companies like La Rinascente had not evolved, they were selling cheap products with bad service. So we re-invested very significantly in the business: making the stores beautiful, bringing the service back, innovating, adding new categories, with a whole floor dedicated to food. That brought a new impulse. We were amongst the pioneers but today food is present in every luxury department store.”
In 2005, when I met your management team, La Rinascente in Milan was still a basic department store. Then you added luxury. Is luxury the key to success?
“Luxury has been the key to success for department stores in the last twenty years, I think. Why? Because department stores are expensive to manage, with high personnel and location cost, so they need products that are expensive and have reasonable margins. With commoditized products, you don’t have these margins so you have to play on efficiency. Department stores are more suited for products that people don’t buy for a basic need, but more for products that people want as a source of pleasure for themselves or to offer to someone as a gift, a present. That’s a different approach. Tourism became an important factor: more people were shopping far away from home. This trend was also helped by the dynamics in the Far East, in China, in Russia… Another thing that changed, is that competition became more international. And even more so with the digital arena.”
Physical experience
Is online the biggest threat for department stores?
“No, the biggest threat for department stores is mismanagement! I believe that when you have a threat, you have an opportunity. Online is obviously a threat because it creates competition as it reaches the same customers. It’s accessible to many people, internationally, with very lean operations. You don’t need to find 50.000 square meters in the center of a big city. A department store is a capital-intensive business, if you want to succeed.”
“Now, where is the opportunity? The opportunity for me is that in this new online world, acquiring the customer and managing the relationship with the customer is the most expensive item. In this logic, department stores have two advantages. First, they already have the relations, and also they have these locations with enormous traffic, so you have great opportunities of creating relationships at a low cost if you have a high traffic store. And when you are building a relationship, you are not building it for one brand but for many brands. On the contrary, when you’re building a relationship for Dior, or Gucci or whatever, you’re only building it to sell your own product. You don’t have that much to sell, you are limited.”
“In a department store, you are selling 300, 400 brands, in many different categories of products. You have more chances of selling and of selling more to a customer than when you are a single brand. In the beautiful world of the multi-brand operators, once you have a relation with a customer, you can sell that customer much more. So you can invest in the relationship with that customer. You can finance a personal relationship with the customer. This is the dream for a department store: having a real connection between the sales people and the customer. You have more resources to put behind this. That is a fascinating challenge.”
“But you need a number of things. Financial resources of course. You also need a different type of organization. The professional profile for a sales person has changed. The role is no longer sitting and waiting in the store for the customers to come in and serving them. Now it is much more about managing a portfolio of customers. You must know them, you must know what they buy, why they buy,… and then you can improve your sales.”
But in reality there are lots of e-commerceconcepts, like mytheresa.com. If you see how they ship the product, how the customer receives it… it’s fantastic. So you can have great personal shoppers at La Rinascente, but a lot of department stores don’t cope with it properly I think.
“That’s absolutely true. But all the studies I have seen in that area show that when it comes to pleasure, if you take away the practical side, people still like to shop physically more than they like to shop online. It doesn’t mean that they will leave their house, take the car, find a parking spot… to get to a place where they can buy physically. But if they have a reason to be in a place where they can have physical products, then they are very happy to do that. For products like fashion, accessories, skin care… the possibility to see, feel or smell the product is still very important.”
“In physical retail there will be a selection. It will be much more concentrated in places where people either want to be or have to be, physically: like airports, train stations, city centers… And if they have to be there, the effort to go into a shop is very minimal. So the physical experience comes at a very low cost. A retailer should try to be where people want to go. Italy, for example, has a lot of cities with a beautiful, old city center. Or look at the big cities like Paris or New York: people go there because they want to. If you are where people want to be, you have a big advantage as a physical retailer. That’s why department stores put so much effort in activities that are not limited to the pure selling of products: food & beverage, events, beautiful store design… Architecture is still a big attraction. People may come without the intention of buying, or without an idea of what they want to buy, but once they are there, they will…”
What was your best idea for success? How did you achieve your success?
“Obviously, things are different country by country and city by city. Hamburg isn’t Frankfurt which isn’t Munich. This is true in all countries: Milan is different from Rome or Paris from Lyon. You really have different worlds in the same country. But the principle is always the same. A successful retailer is a retailer that knows their own customers very well. You need to know what she wants. And the recipe is different in Paris than in Düsseldorf or in Tokyo. I’m a strong believer that the human relationship with the customer is key, everywhere in the world. The best way to have this relationship is in a personal relationship. So empower your sales people to be active, to have a relationship, to become an advisor, or even to become a real friend. People are much happier in a place where they know someone, where they are liked, recognized. This is true everywhere in the world. Of course, a Japanese will interact in a different way than an American. But the relationship is there.”
“One of the big mistakes I’m seeing is in creating the connection between the marketing department and the customer: this, by definition, can only be impersonal. You cannot have a personal relationship with two hundred thousand people. You can have a relationship when one sales person connects with two, three hundred individuals, and technology can help you with that. But it’s much more micro than macro. I think this is quite universal, it works everywhere. The tools that you can use, are more and more the same everywhere. You have WhatsApp in Europe and WeChat in China, but they are the same type of tools.”
You put a lot of weight on the shoulders of the staff. They are important?
“Certainly. The type of job I’m asking of the staff is actually very similar to what it was in the stores of a hundred years ago, where they knew every customer by name and knew what they had to buy for her and when they should call her. That still works today, and technology facilitates this.”
Cultural shift
Do you still visit department stores yourself? Do you still like it?
“Oh yes! I’m worried for a number of department stores because they seem to be struggling and I don’t see them change and adapt fast and strong enough. One of the issues is a very big change in culture. Getting talented people who have the skills and who are predominantly young, into organizations that are pretty old, is not so easy. It’s difficult for the people in the organizations themselves, and it’s difficult for the younger generation that comes in. It’s very disruptive. I’ve seen it in so many department stores. How can you make these people stay?”
With the Borletti Group you have shown a lot of interest in the big German market. For example, in 2010 you were in the running for the Karstadt Group. Finally German – American billionaire Nicolas Berggruen acquired the company which he sold later to the Austrian Signa Gruppe from investor René Benko. What was your view on the company?
“At the time when we were looking at Karstadt, we estimated that to create a base of about thirty stores, concentrated in the most important cities, we probably needed something close to a billion in investment on a five year basis. We needed to invest in the stores, and we needed to work on the people, the workforce. It was difficult to find enough people to work on a Saturday. You couldn’t move people from one floor to another, you couldn’t move people from a day to another… It was very hard. When we asked for a significant change in flexibility, this was quite reasonably accepted by the unions at Karstadt themselves, but was totally rejected by ver.di, the German trade union.”
“Nicholas Berggruen told them he didn’t need to reduce personnel, he did not need more flexibility, he didn’t need longer working hours, he was happy with things as they were. And the result is that Karstadt almost went bankrupt and that they had to lay off a very large number of people. So it didn’t work that way. And I believe that at that time, what we needed to do was to invest in the stores and invest in the personnel, and in the attitudes of the personnel. Flexibility is also a state of mind.”
“The other thing I know is that sales people are humans. So if they work in a dirty environment, in run-down stores, where no investments have been done, then they won’t care. And if they are in a store that has been renovated, a lot of them will react, and work better. They will be happier because the work environment is better. That’s a virtuous circle.”
Would you still be interested in entering the German market? Your name is in the press, regarding Kaufhof or Karstadt…
“I don’t read the German press, though I’m aware that my name has been cited. We’re still involved indirectly in Karstadt, because we are a shareholder in ‘Highstreet’, the investment company owning a significant number of Karstadt’s German department store premises. So we do regularly have information on the business, but we obviously have no impact on the business itself.”
“I think that the challenge today is even bigger than it was in the past. You have to close problematic stores in order to save others. You need to be selective, probably today even more than at the time. In that sense, Karstadt and Kaufhof have a very different approach. Karstadt has already reduced the number of stores significantly to focus on larger stores. Kaufhof has a lot of problems. It’s a bit like Lafayette in France: they have a lot of regional stores that they are now trying to franchise out. So I would say that the challenge is bigger for Kaufhof than for Karstadt, because they have too many small stores.”
Variable rents
Shopping in a luxury department store that offers events and innovations is a captivating and rewarding experience, we understand. However, it is a real tough situation, so Mr. Borletti, is there a real future for our beloved department stores ?
“When you look at that tv series, Mr. Selfridge, then you can see that from the beginning, department stores were fun, were about entertainment. Of course those were different times. I think today you have a lot of new possibilities to make the stores more interesting. The business will be shifting between physical and digital, but both can work together. People will find and buy products online, that is a fact. But they will also keep shopping physically and the way they shop is changing. Today, they will not even want to carry their bags home. Mobility will change, and physical retail will have to deal with that.”
“If you look forward in time, maybe we could think of variable rents, in function of the traffic you are generating. If you are a landlord, what you are supplying is access to traffic. Rent is for providing that service. That will probably become one of the parameters. Rent for traffic. A long time ago, the business was purely physical. You had the brands, you would show the products, and the people had to come to your store to buy… Today it becomes so much easier because you can have a platform send your products home. So the parameters will have to change.”
“One of the companies we now invest in, is Grandi Stazioni Retail, managing the advertising and the retail business in railway stations. Today we have about 200.000 square meters of selling space plus many advertising screens. And we have 750 million passengers per year. So it’s quite big. When you have a store in the station, your potential is huge: the number of people passing your store by far exceeds the number you will ever be able to serve. But the other thing is, you are a media. People see you. This is a bit the same in department stores. Why do brands accept in certain cases even to lose money just to be present in department stores? Because they are seen by so many people. It’s advertising.”
“So what we do now in the stations, is to apply the things we have learned in the department store business, but with new technology. All advertising channels in the stations have cameras that monitor the people who are passing. The images are not stored, that is forbidden, but we obtain statistics from them. So we know how many people have passed the screen, we know the percentage of men and women, the age, the style… There’s a lot of parameters you can work on. So you can learn if the people who are passing are interested in what they see, and even in what they are interested.”
“We are going to extend that to all the shop windows. So you can have the statistics: are your windows interesting or not? How many people pass in front of your window? How many people stop? Are they men or women? What style do they have? And what are they looking at? Also, we provide marketing tools to the stores and the brands, based on the databases of the transport company. Again, we will not have the right to have the names of the people, but we have a idea of the profiles and if they opt-in we can send them targeted messages that correspond to their profile.”
The Borletti Group today
Privately-owned investment group Borletti Group operates in three sectors which have strong synergies: retail and department stores, luxury and branded consumer goods, and real estate. For example, it has invested in famous department store companies La Rinascente (acquired in 2005, sold in 2011) and Printemps (acquired in 2006, sold in 2013).
Today it invests in Grandi Stazioni Retail, operator of the 14 largest train stations in Italy with over 100 million euros of revenues, 95,000 square meters of commercial area and 750 million yearly visitors. It is also developing ‘The Market’, an innovative Outlet Village in San Marino that aims to create ‘the next shopping experience’ with leading fashion brands.
Maurizio Borletti: “Were applying some of the things we learned in the department stores. We will have a big food area for example, and we will develop an innovative marketing approach. It’s a region where in the summer you have a lot of people, with a lot of free time. The rest of the year you have another type of customers: residents who are relatively wealthy and who are willing to travel. So in the summer it’s like fishing with big nets, in the winter it’s a more targeted approach…”
About the project
With the interview series ‘A Love for Department Stores’, retail expert Erik Van Heuven and journalist Stefan Van Rompaey (RetailDetail) set out to explore the world of department stores. Discussions with international investors and managers will identify the challenges and opportunities for this retail industry. In the digital age, department stores are not relics from the past, but the ultimate example of retail as entertainment. The interviews will appear on the RetailDetail websites in the coming months, in RetailDetail Magazine and will result in a book about the history and future of department stores in Europe.
As a former top manager at, among others, Galeria Inno and Karstadt, Erik Van Heuven knows the sector through and through. As chief editor of StoreCheck and RetailDetail, Stefan Van Rompaey has been following developments in the retail sector for decades.
by Erik Van Heuven