Will Castro Fill a Gap in Germany?

Gabi Rotter, CEO of Castro, and Stephan Hermening, an executive at the German company Heine, have been spending much time together over the past few month, planning the Israeli fashion chain's entry to the German market.

Gabi Rotter, CEO of Castro, and Stephan Hermening, an executive at the German company Heine, have been spending much time together over the past few month, planning the Israeli fashion chain's entry to the German market. In a joint interview, the two said that it took a whole year to convince Heine, a subsidiary of Otto, the largest direct marketing group in the world, that Castro can succeed outside of Israel.

A few months ago, Castro and Heine decided to form an equal partnership and set up a company called Castro Deutschland. Now Rotter and Hermening are working hard on the details of the company's first store, which is due to open in September 2004. Rotter hopes that Germany will be Castro's growth engine in the next few years. Heine has a similar view of new company, and believes that it will fill a gap in the German fashion landscape, which is currently composed mainly of department stores.

Hermening notes that one of the most important matters to be determined is the location of the stores, particularly when renting expensive commercial space in major cities in Germany. Efforts are being focused on finding suitable locations in Munich, Hamburg, Stuttgart and Frankfurt. One location in a prestigious area of Hamburg has already been found.

Heine has much experience on which to base its decisions regarding the best location for a store, as the company manages several shopping centers in Germany. Even though most of Otto's activity is in direct marketing, via catalogs and an Internet site, Heine's parent company began to branch into retailing in 1999, with a joint venture with Inditex - the parent company of the Spanish Zara fashion chain. Zara now operates over 25 stores in Germany, and asked for Inditex's approval before Heine signed the agreement with Castro.

Hermening does not view Zara as competition for Castro Deutschland, but in Israel, Zara was the main catalyst for the revolution in Castro's operations and look, including the establishment of Castro Men, after Zara began opening branches in Israel in 1997. Castro changed its collection, transferred production to the Far East, lowered prices and blazed the trail for the rest of the fashion companies in Israel that together brought significant changes to the local market.

Hermening also attributes Zara's success in Germany to the good locations that Heine and Inditex chose together. Hermening notes that some of the most successful fashion companies in the world, such as Gap, from America, have had difficulty making inroads in the German market because they have not learned how to choose the right locations.

Location, however, is not the only problem facing international brands and fashion chains in Germany. Hermening says that the German market is very competitive, with a high awareness of price and quality, and may be the most competitive market in Europe.

Hermening estimates that annual sales in the German market are 8-9 billion euros (NIS 45-51 billion). The most successful fashion retailers at present are the department stores. The Swedish H&M chain, which specializes in colorful, trendy fashions at reasonable prices, is enjoying impressive success in Germany, with branches all over the country. Boutique chains, such as Castro, are less common.

"We want to position ourselves as higher quality and more fashionable than the regular department stores," says Rotter.

The plan is to open 40-50 pairs of stores - Castro and Castro Men - each with an area of about 400 square meters (4,300 square feet) within 5 years, with a joint and equal investment of 20 million euros. This plan, however, is not "carved in stone," in Rotter's words.

"At the end of each year we will evaluate our situation," says Rotter, "and will decide how to proceed."

It has taken a while for foreign companies to learn the right mix for succeeding in the German market, not just the designs, but also the sizes that sell best in Germany, and now the smart companies are opening store after store and are doing well.

Hermening wishes this same success for Castro, noting that if sales exceed their targets, more stores will be opened than originally planned.

"We have not set a target date for an operational balance," says Hermening. "It will be hard to turn a profit at first, when we are operating only 6 stores, and even 10 will not be enough." He declined to disclose the sales target set for Castro Deutschland, but did say that in the retail fashion field, sales of 6,000-7,000 euros per square meter per year are considered a reasonable achievement.

A quick calculation reveals that if Castro Deutschland operates 40 pairs of stores, each with an area of 400 square meters, and manages to reach sales of 6,000 euros per square meter annually, total sales in Germany will be some NIS 550 million. In Israel, where Castro operates 73 stores, annual sales total about NIS 350 million.

One of the most important questions is how to introduce the Castro brand to Germany as the cost of advertising in that country is high. Hermening rejects outright a campaign on television, noting that it is totally unfeasible in the initial stages. He feels the best way to build the brand is on the street, via billboards and posters, as will as via the stores themselves, which will be designed along the same bright, clean lines as the Castro store at Herzliya's Arena Mall.

Rotter adds that the company will make extensive use of public relations materials, such as those distributed in Israel. He notes that one of the reasons the company chose Becky Griffin as the new Castro girl was that she is familiar to Europeans as a presenter on MTV.

Are Castro's advertising activities suitable for Germany? Hermening believes so. Castro's Israeliness does not pose any problem, he says. At first, when Heine's agent in Israel suggested, at Rotter's request, that the German company consider a joint venture with Castro, Hermening doubted that an Israeli fashion chain of international standard existed. The Otto Group was purchasing products in Israel, however, and right after his first visit, Hermening decided that was something to talk about. The political question - the fact that Israel is not a popular country in Europe - was never mentioned during the discussions with the Heine management on cooperation with Castro.

The crucial question was whether Castro could adapt its collection to the German market. For a year Hermening examined the design skills of the Israeli chain. Castro had been selling clothes for years to Heine's catalog warehouses, but most of these were simple items that bore no resemblance to the collections of trendy clothes sold in Castro's stores in Israel. These collections do not include heavy winter coats for snowy weather or light sweaters for a chilly summer, but Castro will design such items for the German market. Rotter notes that all the design activities will continue to operate in Israel.

Although Rotter admits Castro has a lot of work to do in Germany, he continues to draft broader plans involving expansion to other European countries.

"If Castro Deutschland is a success," says Rotter, "Heine's international connections and wide-ranging operations in Europe will be a platform for the opening of stores in other countries, too."