Castro leaving Germany, Switzerland
Israeli fashion chain closing its stores in European countries after losing tens of millions of shekels
Castro's failure joins those of Israeli fashion chains which were unsuccessful abroad. Unlike high-tech, it appears Israeli fashion has nothing new to offer consumers abroad and lacks the resources needed to compete against global fashion brands with an annual sales turnover of billions of dollars.
Israeli fashion companies which failed abroad include Matim Li, which opened and closed stores in Greece and Cyprus; Crazy Line, which left Germany after opening only two stores; and Lee Cooper, which was forced to shut down dozens of stores in Eastern Europe due to the global financial crisis.
The Castro chain in Germany was sold for only NIS 5.5 million (about $1.5 million) to a German chain of women's fashion.
Castro paid a heavy price of tens of millions of shekels for its attempt to take Europe by storm as an independent chain. In the first nine months of 2010, it lost NIS 13 million ($3.5 million) for its German activity.
In the fourth quarter of 2010 Castro will erase a NIS 25.5 million ($7.2 million) loss for its investment in Germany. In 2008, the company's losses in German totaled NIS 16 million ($4.5 million), and in 2007 – NIS 25 million ($7 million).
It started on an optimistic note. In 2004, Castro opened its first store in Europe, in Cologne. The optimism was based on Castro's success in Israel and on its partner – the biggest company in Germany selling fashion through catalogues.
The partnership turned out to be a disappointment and was dissolved, and CEO Gabi Rotter discovered that a foreign brand of a relatively small and anonymous fashion company will find it difficult to compete in a foreign country against global fashion brands – with the marketing and advertising budgets, the size of the stores and the pre-acquaintance with the audience.
In the end of 2009, Rotter was still optimistic. "I believe that within three years our activity in Germany will become profitable," he said. Recently he decided to give up.
"We realized that the European market was not going to improve financially and that we were basically running against the wind," he says today.
"A thorough examination revealed that it would take years before we would start making a profit in Europe. We generated NIS 50 million ($14 million) a year in sales in Germany, but you need much more than that to balance it out. The rent and employment costs are very high there."
What are your insights in retrospect?
"When a mega brand like H&M hits the market, real estate owners favor it too. They get cheaper rent. We are an unknown foreign brand and have to pay more.
"When we came in we didn't know it would be so difficult. Today I know that you have to be a very well-known and global brand to succeed in saturated markets. Global chains have no problem putting hands in their pockets in order to stand out."
Perhaps Castro didn't have any fashion news for Germany?
"From a fashion perspective, out situation in Germany was excellent. We have fans there, on Facebook too. If I could balance the activity within two years, we would have stayed. With the current situation, it would be irresponsible to continue our activity there in terms of our shareholders."
Is this a sad day for you?
"I can't say I'm very happy because it was Castro's future growth engine. Now we'll have to find a new engine. I am in complete peace with the move. We made a brave decision and shut down.
"We'll still do other very interesting things in international markets. One of the move's biggest achievements is that we'll stop reporting losses for the German store starting on the second quarter of the year."
Is there a fashion bubble in Israel?
"In the past two years we have been preparing for the growing competition and the infiltration of mega brands from abroad in an extraordinary manner. The market has become very crowded. It's a global market for all intents and purposes.
"But Castro has reestablished its status and strength in Israel. We have loyal customers and all it takes to compete. The good will have to be better. This market won't be easy."
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