BAT YAM, Israel — It’s unlikely that Aharon Castro, the Greek-born founder of Israeli retail chain Castro, ever envisioned selling its trendy clothing in Germany.
But come September, Castro’s hip-hugging jeans, flirty skirts and sexy tops will be sold there through a joint venture with the German mail-order group Otto GmbH & Co.
For Castro, the deal with a substantial group like Otto is proof of Castro’s creative success, as well as more international recognition of its capabilities, said Gabi Rotter, Castro’s chief executive officer and Aharon Castro’s son-in-law.
“We’re not going to be flying the Israeli flag in the stores,” Rotter said. “But it shows that a fashion brand can come from a little place like Israel.”
The casualwear created by Castro designers in the company’s Tel Aviv headquarters bears little resemblance to the patterns sewn by Castro’s mother, Anina, who opened a salon in the family’s Tel Aviv apartment when they first immigrated to what was then Palestine in 1933 from Saloniki, Greece.
In those days, Aharon Castro likes to say, there were only two kinds of bread in the grocery store and only two kinds of fabric, in four colors. Times changed, but slowly.
By 1948, during the volatile war before the state of Israel was created, the family moved Anina’s salon to a small store they called Nina, expanding the business with a ready-to-wear line produced in the basement. The aim was to offer high-quality, stylish, ready-made clothing at a reasonable price during a time when most people didn’t have much money to spare. The rtw business flourished, helped along by the relative lack of competition in the local fashion industry.
Nina took the family name and became Castro, as the company began manufacturing and retailing its line of clothing to the local department stores, and then opened its own stores, starting in 1985. By the late Eighties, Castro’s decision to export to Europe and the U.S. backfired when an economic crisis in Europe forced the company to lower prices and Israel’s triple-rate inflation ate into its profits.
When the Castro’s youngest daughter, Etti, and her husband, Rotter, joined the business, they restructured and reorganized it, and by 1997 had developed an entirely new business strategy: outsourcing their production and redefining their brand name as a source for affordable, trendy clothing designed in Israel.
With 80 percent of their production line outside of Israel, Castro cut its manufacturing costs by using cheaper labor in China, Hong Kong, Portugal, Spain, Turkey, Poland and India. At first, the global production switch created a logistical nightmare, having to make sure that each item of a design line, from a simple sandal to a pair of jeans and tiny emblem-emblazoned T-shirt, made in five different countries would get shipped to Israel and end up in all the stores at the same time.
“It took us a while to figure out what to do,” said Rotter, who now co-manages the company with his wife. “We didn’t want to make a warehouse or an Israeli Zara,” referring to the Spanish clothing chain that now has 12 stores in Israel.
They were also up against the government’s then-recent decision to lower import tariffs, which brought in a slew of European and American retail chains, creating stiff competition for Castro’s trendy clothing.
These days, the familiar red-and-white Castro label is one of the most recognized in the country, with a total of 81 women’s and men’s stores located in most Israeli cities and malls, giant billboards of Castro models looming above most major highways and a range of clothing that symbolizes trendy, fashionable but affordable designs for the Israeli consumer. In addition, the financial results of the Tel Aviv Stock Exchange-traded company reflect the positive impact of Castro’s structural changes.
At the end of February, Castro’s fourth-quarter revenues were up 9 percent and year-end sales reached $83 million, up 5.4 percent from the previous year. Castro’s board elected to pay a $2.2 million dividend for 2003, up from $2 million last year. Castro shares, meanwhile, gained an impressive 200 percent in the last 12 months.
“They had an excellent year,” said Yuval Zaira, an analyst covering Castro for Israel Brokerage & Investments, based in Tel Aviv. “Even with the current recession, the company grew and this expansion into Germany is the right decision for them.”
With the Israeli retail fashion market nearly saturated by early 2000, Rotter had devoted much of the past three years to considering where to launch a subsidiary chain in Europe, working on logistics, strategy and marketing in order to find the best market. Otto approached Castro in 2003, offering access to Germany, Europe’s largest economy with the highest purchasing power and access to more than 100 million people in Germany and the surrounding countries. Unlike England, Spain, France and Italy, Germany also has a large number of imported brands, which was another reason why Castro set its sights on the deal.
“The expansion in Israel is completed,” said Zaira. “If Castro is going to grow, with the recession and the other brands, this was the right opportunity.”
Last November, Castro agreed to a joint venture with Heinrich Heinh GmbH, a subsidiary of the Otto group, to establish a chain of 80 stores under a jointly owned company called Castro Deutschland. Like Castro, Otto was also established as a family business and has grown into the largest catalogue group in Germany, representing a dozen retailers, including Eddie Bauer, Spiegel and Zara, as well as a significant business in retail outlets and e-commerce.
For Castro, Otto has the ability to fill Castro’s logistical gaps as an outsider in Europe. As a catalogue retailer, Otto is more than familiar with importing retail brands to Germany, while its real estate business will offer Castro Deutschland the “triple-A retail locations” necessary to create brand awareness in Germany, said Rotter.
“They have no Gap or Castro of their own,” he pointed out. “Even H&M is Scandinavian.”
Otto liked the Castro store style: Most of the shops are boutique-size stores in city centers, although the Tel Aviv flagship has a department store flavor, with an in-house DJ, hairdresser, cafe and several other brands. What will change for Castro Deutschland are the sizes and some of the styles of the Israeli Castro line. More sweaters for the longer and colder Germany winters, less of the light summer clothing that is found in the Israeli Castro stores from March through October, and a slight shift in the range of sizes.
“Our clothing fit the German models perfectly, but the weights and proportions are slightly different,” said Rotter.
The 40 women’s and 40 men’s stores will be put in place over the next five years, starting this September. Otto will own 51 percent of Castro Deutschland and Castro 49 percent, with 20 million euros invested in the joint venture over the next five years. Castro Deutschland is expected to reach the same volume as Castro’s current turnover in Israel.
“This is a first for an Israeli clothing company,” said Rotter. “People didn’t think we could do it. But this makes us feel like we’ve gotten a really good grade.”