Expensive German expansion: Migros subsidiary Galaxus swallows almost 200 million

For Irminger, it is clear that we are at the stage of investing abroad, as always when expanding into a new market. But we are still monitoring this at the moment: “We are currently investigating how much we want to develop with Galaxus in Germany.”

Two things should be clear. If Irminger weakens Migros overall, does not shy away from layoffs and turns away every penny, he will have to explain well to management and the workforce why Galaxus is also embarking on a costly overseas campaign. Second, Galaxus’ expansion into neighboring countries was already expensive. If it continues like this, it will become even more expensive.

How expensive was the Galaxy expansion and how expensive will it be

The numbers speak for themselves. Galaxus.de has burned 120 million euros since its launch in Germany at the end of 2018. So says Germany’s annual report for the end of 2022 (latest edition).

At that time, the company was expected to achieve a negative result of 60 to 65 million euros in fiscal 2023. This would bring the cumulative loss over the first five full financial years to a total of €180 million.

At Galaxus, we believe that “it is right and important to intensively discuss the pace of expansion and related investments.” The Migros subsidiary is fundamentally confident that it will be successful in the medium or long term: “In the German and European markets, Galaxus has managed to achieve strong earnings in recent years, achieving sales of 286 million euros in 2023. It is calculated that there was a 55.4 percent increase in the Swiss Galaxus headquarters compared to the previous year.

Our path towards greater market relevance is correct: “We are developing within the planned framework and the longer we go, the more confident we are that we will be successful in Germany.”

German e-commerce expert: “Galaxus.de had a nervous breakdown”

Actually, the sales growth on Galaxus.de is correct. Famous German e-commerce expert Jochen Krisch is also aware of this. The founder of K5 Future Retail Conference and head of industry blog Excitingcommerce is impressed by Switzerland’s popularity, especially among younger customers: “Galaxus seems to have lost its temper here.”

But Krisch also notes: “Initial investments are always extremely high, and Galaxus has created more noise than confusion by building its own logistics infrastructure.” Rather than working with outside logistics providers, the Swiss established their own logistics base in Krefeld near Düsseldorf.

Galaxus in Germany wants to score points against industry giants such as Amazon or Otto Group, not only with its low prices but also with features such as editorial contributions and community spirit on its website. According to Krisch, “it’s not an absolute success, but it’s a good differentiator.”

Another five-year investment is required

For Galaxus.de to truly keep up with Germany, the company must continue to grow and therefore accept further losses. Galaxus.de is approaching its goal of one day occupying the 5th place in Germany, but it is still a long way off. The brand has sales of 1.4 billion euros; This is more than four times the previous sales of the Migros subsidiary.

The drive to rank in the top five stems less from map enthusiasts. But rather a necessity: after all, in the huge online mass markets, there are only a handful of players who have a chance to make a profit due to economies of scale.

Krisch sees it this way: “For a strong provider like Digitec Galaxus with appropriate capital resources, it should be entirely possible to break into the top five. When it depends on the capital used and the marketing budget.” The e-commerce professional describes the time frame this way: “But it will probably take five to ten years.” Now that the first five years are over, this means that Krisch is waiting for another five years that will require high investments and probably also make losses.

“The target cannot be a quick breakeven.”

As a general rule of thumb, Krisch says: “The investment costs you want to achieve are the level of sales you want to achieve.” So what ranks fifth on the current German target list would mean an investment amount of over a billion euros. The cash burn rate will likely continue to be expected in the near future. Krisch sees it this way: “I don’t think there can be a quick breakeven target. In order for Galaxus to remain at the forefront in Germany in the long term, it needs a certain size of at least 500 million to one billion euros. Only then does it make sense to focus on the result.

Migros wants to make its decision by the end of the year

Will you invest another five years in a foreign bet whose outcome is uncertain? Or will you pull the emergency brake in advance, as the Migros Zurich cooperative did with its pan-European fitness business?

The problem is expected to become even more urgent at Migros. Mario Irminger says a decision should be made in calendar year 2024: “We assume we will have the answer to this by the end of the year.”