The Decline and Fall of Konsum Austria (1996)

TITLE:    The Decline and Fall of Konsum Austria (1996)  

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    This document has been made available in electronic format
         by the International Co-operative Alliance ICA 
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                         July, 1996

          (Source: Review of International Co-operation,
          Vol.89, No.2/1996, p.62-68)
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          The Decline and Fall of Konsum Austria  
                    by Robert Schediwy*
          **************************************


In the spring of 1995 "KONSUM OESTERREICH", a large but ailing
consumer co-operative that once had counted between one fourth
and one fifth of Austrian households among its members, had to
engage in bankruptcy proceedings.

In the meantime, approximately 90 per cent of the co-operative
assets have been sold off in order to assure a 40 per cent
quota to the company's creditors.

It is as yet unclear what solution will be found for the
(formally) more than 800,000 members' shares - but
approximately 5,000, i.e. about a third of the company's
employees, have lost their job because of the catastrophe -
the rest have been taken over by other retailers who have
bought the firm's shops.

KONSUM AUSTRIA has become Austria's biggest bankruptcy case
since 1945.

In the present context we can only outline some of the reasons
for this tragical development that is, however, by no means
unique in Europe (Schediwy 1995, Kemppinnen 1995 on EKA). 

Similar events have also taken place outside Europe, e.g. in
Quebec and Argentina ("EL HOGAR OBRERO").

Long-standing Weaknesses
------------------------
Already more than 20 years ago the so-called "red giant" of
Austria's retailing, once regarded as one of the "three
pillars" of the Austrian labour movement, showed serious signs
of weakness. This consumer co-operative movement, which had
close ties with Austria's trade unions and to the country's
Social Democratic Party, had been one of the pioneers of
self-service in Austria. It was also a pioneer of the Austrian
"hypermarket revolution" starting in the late sixties.
However, the massive expansion phase between 1970 and 1974
already seriously increased the movement's debt burden: the
co-operative's own capital increased by 6 per cent in real
terms, between 1970-1973 but during the same period it's loan
capital increased by 6.5 per cent. Even if this loan financing
could still be assured by credit institutions close to or
partially owned by the movement, the "urgent necessity to
increase the co-op's own capital" could already be discerned
(Schediwy 1976). Therefore the period from 1972 to 1978 can
already be termed a period of "regional crises".

By 1976 it had become evident that the problem of Upper
Styria, the weakest regional co-operative (product of a merger
of 5 local co-ops) had become too big to be shouldered by the
neighbouring, prosperous co-operative of Graz.

The Solution
-------------
The solution of mergers on a grand scale forming the giant
"Konsum Austria" had to be envisaged, if one did not want to
run the risk of sizeable regional bankruptcies which would
have been highly detrimental to the whole movement.

There was a serious risk, however, that in a step-by-step
national merger only the weakest co-operatives would actually
join and the well-to-do firms of the movement would prefer to
stand on their own as was happening in the case of German
Co-op AG. (Rossel 1981, p. 43) 

Thus the merger of Konsum Austria in 1978 had to be carried
through with strong political and union backing. Anton Benya,
uniting the functions of president of the Austrian Federation
of Trade Unions, president of the Austrian parliament and
president of the supervisory council of KGW, Austria's largest
consumer co-operative (based in Vienna and realizing about 40
per cent of the total turnover of the movement) put all his
personal weight behind a "total merger".

Only some small mountain co-operatives  refused to enter the
super-merger. The management of other well-to-do co-operatives
(like Graz) are supposed to have contemplated staying out, but
the pressures to join were too strong. (The elected members'
representatives were usually loyal partisans of the country's
rather centralized union and social democratic leadership.
They were not so much  representatives of grassroots
membership but of "social organisations". Therefore they
tended to be isolated from the actual membership base, which
would regard itself increasingly just as "clients", while the
officials would still talk about a "movement").

A Period of Stagnation
----------------------
Had the big rescue operation of the super-merger been followed
by energetic attempts at modernizing, streamlining and
cost-cutting inside the new giant retailing co-operative it
might have been successful. However, this was not the case. At
the same time the level of competition in Austrian retailing
became fiercer - with the Hofer (i.e. Aldi) discount chain and
"Billa" (owned by the Austrian pioneer entrepreneur Wlaschek
and almost fully financed by its own capital) as most
aggressive competitors.

The period of 1978 to 1990 therefore can be regarded as a
"period of stagnation" (to use Gorbachev's term for the
Brezhnev era) or of concealed crisis. After some initial
successes deficits exploded after 1982, but were hidden behind
an increasingly complex facade of sale-and-leaseback
arrangements and behind the foundation of new firms, which
allowed, e.g., re-evaluation of existing real estate. This
period was presided and symbolized by two men: general
manager, Manfred Kadits, then already approaching retirement,
who was perfect in pointing out how "everything was under
control" and the ageing Anton Benya, who is supposed to "never
have wanted to hear about problems" according to many
witnesses. 

In this context warning voices like that of Rauter (1983, p.
174), Schediwy (1986) and Blaich (1988/95) in the context of
the project of Brazda and Schediwy (1989) were regarded not as
helpful but rather as a nuisance. The publications were either
bought up to "calm down things" (Ortner 1983, Blaich 1995 p.9)
or answered by more welcome "positive" articles (e.g. Syrowy
1988 and the answer of Patera 1988). 

One of the worst possible combinations of a principal/agent
relationship: a principal who wants to hear no "bad news"
(possibly practising the politician's "art of not knowing")
and an agent "going the easy way" towards retirement thus
depleted the once enormous riches of a movement that had owned
incredible masses of valuable real estate. 

This period of concealed crisis and "management by ignorance"
ended in 1990, when both Kadits and Benya retired from their
jobs - and the well-known, cost-cutting intentions of the new
general manager Hermann Gerharter seem to have estranged him
immediately from the strong trade union base of the firm
(Nilsson 1995/1). During the final crisis, Konsum Austria's
media put most of the blame on Hermann Gerharter up to the
point of making him a scapegoat.  But he was probably blamed for
the wrong things. On his "way to the top" he had tried to
please his future electors by a policy of over-investment (and
mis-investment) in his departments (e.g. Konsum's own brand
production) and thus contributed to the depletion of the
movement's reserves. But this is hardly mentioned today. And
while it is true that this last "captain" of the sinking ship,
Konsum Austria, probably  grossly overestimated his capabilities
to bring about a turnaround and may have not only committed
grave management errors but also more serious mistakes, the
true candidates for a personification of Konsum's decay appear
to be the two top men before Gerharter.

The Inevitable Scandal
----------------------
Already by the end of the 1980s many observers saw Konsum
Austria's situation as inexorably converging into a
mega-scandal. As a matter of fact one of the top leaders of
Austria's Social Democratic Party, an excellent technocrat,
confided to the author already in 1987 that he too saw no
other outcome for Konsum but as in the German "Neue Heimat"
-Scandal (see Nilsson 1995/2). But, he concluded, there simply
was no possibility to influence the course of events from the
outside, "because these co-operatives are practically owned by
themselves" (Nilsson 1995/2).

From 1990 the once well-hidden problems of Konsum Austria
became a matter of increasing public debate. The beginning of
July, the usual date for the presentation of Konsum Austria's
balance sheet started to be a focus of unfavourable publicity
for the ailing enterprise. Published figures for operating
deficits ran at around 130 - 150 million US $ during the last
years - a staggering figure for an enterprise with less than
20,000 employees. In this context the official policy of the
other "pillars" of the Austrian labour movement after 1990
seems to have been to withdraw all higher ranking
representatives in time before the looming disaster broke. In
this they were successful: The December 17, 1995 election
ended with a victory of the country's Social Democrats who
fought on a platform of preserving the welfare state. Attempts
by their opponents to draw them into the Konsum Scandal
failed. 

The 1993 Alliance between Konsum Austria and Migros
---------------------------------------------------
In February 1993 there was unsuspected hope in what some
observers at least privately, had already termed the "Greek
tragedy" i.e. the inexorable path of Konsum Austria towards
its catastrophe. Konsum and the Swiss Migros group concluded a
complicated agreement that looked like an unexpected last
chance for the ailing "Red Giant". Both sides had some
realistic reasons for engaging in transnational co-operation.
Migros, a private enterprise turned into a system of
co-operatives by its charismatic founder Gottlieb Duttweiler
(but not accepted as an ICA member in the 1940s) was and is
the dominant force in Swiss retailing. In view of increasing
EU integration (and a Swiss referendum of.1992 barring even
adhesion to the "European Economic Area") Migros was looking
for expansion into neighbouring EU territory (and probably
additional outlets for its own production). Western Austria,
where Migros is already well-known and respected, seemed a
natural sphere for expansion.

The interest of Konsum management to find a powerful and rich
ally on the other hand was obvious. Konsum's general manager
Hermann Gerharter, also seems to have appreciated the not too
union-friendly attitude of the Swiss group: even though he
himself was a product of a pure "labour movement career" he
turned violently anti-union during his last two years in
office. (Nilsson 1995/1).

But why did this attempt at transnational co-operation fail?
-------------------------------------------------------------
The reasons may not only be of interest as a post-mortem
elucidation of the given case, but can also be regarded as a
typical example of non-hierarchical co-operation between
unequal partners in general.

Probably the co-operation between these very different
partners was at the same time too superficial and too
fundamental. It went too far and at the same time fell short
of its potential mainly because of hesitations of both
partners to "go all the way".

Konsum Austria basically should have been eager to "sell out"
to Migros, even at a nominal price, in order to avoid the
looming scandal. But obviously  the co-operative leadership
was not willing to this. It seems Konsum's management wanted
to use Migros' skills in logistics and organization for a
rejuvenation cure, but with a minimum of concessions, ignoring
the fact that it was by far too late for such a strategy.

On the other hand, the Swiss who knew that their partner was
in bad shape (but do not seem to have been made fully aware of
the size of the looming catastrophe) certainly wanted to "put
a foot into the door of the Austrian market" but without
committing themselves fully to the restructuring of the whole,
by now rather non-transparent, Konsum empire.

The details of the Konsum-Migros agreement (into which the -
costly - purchase of a maverick private Austrian retailer,
Zumtobel, was integrated) cannot, of course be given here (see
Nilsson 1995/2). Suffice it to say that there were three main
aspects: Western Austria (west of Innsbruck) was ceded to a
Migros (St. Gallen) majority holding (75 per cent). For the
rest there was a 50/50 per cent split for a newly-founded
purchasing logistics and marketing firm. The hypermarkets in
Central and Eastern Austria were to be owned 75 per cent by
Konsum and 25 per cent by Migros (but with a possible increase
of Migros' share in the future). The small Konsum shops stayed
out of the deal. The results of 1994, the first year in which
this transnational co-operation between the rich and the poor
giant became operative, were disastrous.

The Austrian public did not react favourably to the fact that
Migros' better known brands were on offer rather than the
Konsum's own products. Therefore, sales fell dramatically and
operating deficits exploded. There also had been no signs of a
"new start" (e.g. changing the names of shops, a publicity
campaign presenting Migros etc.)

Reluctance to give up the prerogatives of traditional
"independence" on the Austrian part and all too prudent
hesitation on the Swiss part meant that the co-operation did
not have any positive impact on the Austrian retailing market.
Both parties were drawn by the nature of the arrangement into
a "free rider"-philosophy, but to the detriment of each other.
And both were to be heavily penalized for that attitude. 

The Beginning of the End
------------------------
By the end of 1994 the banks who had given Konsum a "last
chance" started to become uneasy and wanted to get hold of
Konsum's last valuable asset, its 30 per cent share in BAWAG
bank (the old, union-dominated "Workers Bank", turned into a
highly profitable enterprise by its cunning and authoritarian
general manager Walter Flottl). In this they succeeded at the
beginning of 1995, much to the dismay of Konsum's suppliers.
In the end, the decision to sell off most of Konsum's assets
to its Austrian competitors left no room for any further
Migros participation. But internal Migros criticism of the
Konsum deal had also already reached the point when the
"double or quit" option would have been answered in favour of
a "quit" at any rate. 

The example of Migros - Konsum Austria co-operation is thus
not one based on a very favourable basis from the beginning.
But this is unfortunately the case for many such ventures,
where one partner has sovereignty.

No Half Measures
----------------
One conclusion to draw would be that in such a situation no
half measures should be taken. For the expanding partner there
should be complete control and responsibility because a
"limited losses and profits"-strategy will turn into a "sure
loss" strategy if quick and dramatic action cannot be taken.

For the poor partner the message would be: better swallow your
(co-operative) pride of independence and leave the playing
field beaten but not dishonoured while there is still time.

Sources
---------

Blaich, R. (1988), Die Entwicklung der Konsumgenossenschaften
in Osterreich, Vienna.

Blaich, R. (1995), Der Rote Riese wankt, Wien (republication
of Blaich, 1988 with a new introduction).

Brazda, J./Schediwy, R. (Ed., 1989), Consumer Co-operatives in
a Changing World, Geneva 1989

Kemppinen, H. (1995), EKA: A Case of Co-operative Monagement
in a Financial Crisis, in: The World of Co-operative
Enterprise 1995, Oxford 1994

Nilsson, J, (1995/1): Konsum Osterreich: Der Weg in den
Untergang, in: Wirtschaftspolitische Blatter, 3-4/95
Nilsson, J. (1995/2): Konsum Osterreich - Sjukdom,

Raddingsforsok, Slut, Stockholm, Kooperativa Institutet, 1995
Nilsson, J./Schediwy, R. (1995): Konsum Autriche: La voie vers
la fin, in: Recma (Revue des Etudes Co-operatives Mutualistes
et Associatives), Nr.259, Paris 1996, p. 44 ff

Ortner C.(1983), Der Bestseller, "Profil", Vienna, May 16,
p.40

Patera, M. (1988), Konsum - es lebe die Genossenschaft, Der
Standard, Vienna (November 18, 1988), p. 23

Rauter, A.E. (Ed., 1976), Verbraucherpolitik und
Wirtschaftsentwicklung, Vienna

Rauter, A.E. (1983), Konzentration im Handel - am Beispiel der
genossenschaftlichen Absatzwirtschaft, Vienna

Rossel, D. (1981), Die Probleme der demokratischen
Willensbildung als genossenschaftliches Charakteristikum,
dargestellt am Beispiel des Konsum Osterreich, Vienna.

Schediwy, R. (1976), Die osterreichische
Konsumgenossenschaftsbewegung seit 1945, Eine statistische
Leistungsbilanz, in: Rauter (1976), p. 271 ff

Schediwy, R. (1986), Schweden und die Krise der
Genossenschaften, in: Zukunft, Vienna, 10/1986

Schediwy. R. (1995): Die aktuelle Situation der
Konsumgenossenschaften in Europa, in: Wirtschaftspolitische
Blatter, Vienna, 3-4/95

Syrowy, R, (1988), Uni-Studie: Bemerkenswerte Ertragsschwache
beim Konsum, in: Standard, Vienna, November 11, 1988, p. 15

----------------
*  Mr Schediwy is the author of numerous books and articles.
He is Head of the Department of Public and Co-operative
Economy at the Federal Economic Chamber in Vienna and has
taught at the University of Vienna and Webster University,
Vienna. He is also co-editor and main author of "Consumer
Co-operatives in a Changing World" (ICA, Geneva 1988).