TITLE: The Decline and Fall of Konsum Austria (1996) ---------------------------------------------------------- This document has been made available in electronic format by the International Co-operative Alliance ICA ---------------------------------------------------------- July, 1996 (Source: Review of International Co-operation, Vol.89, No.2/1996, p.62-68) ------------- 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).