In the run up to Christmas 2018, ESM is proud to present a recap of some of our biggest articles of the year, exclusively for Premium website subscribers. In the autumn, on the back of a busy year for Metro AG, Stephen Wynne-Jones met Olaf Koch, the group’s chief executive. This article first appeared in ESM Issue 5 2018.
It’s been three years since ESM sat down with Olaf Koch, the chief executive of Metro AG, and to say that the business has seen some changes in that time would be an understatement.
Last year, the conglomerate formerly known as Metro Group completed a historic demerger, separating its core wholesale and retail operations (which now encompass the Metro of today) from its consumer electronics division, Ceconomy.
As Koch noted at year end, 2017 was, arguably, one of the “most eventful and strategically important years in the history of Metro”.
A Singular Goal
And the changes keep on coming! In the autumn, Koch and his team announced the planned divestment of Real, the group’s hypermarket operation.
Coming just months after Koch pooh-poohed suggestions that Real was for sale, the announcement (on 13 September) that a disposal was, indeed, imminent took the market by surprise. Largely, however, analysts and shareholders have welcomed the move.
As HSBC’s Andrew Porteous wrote in a briefing note, ‘Increased focus [at Metro] is a positive. We have consistently held that Metro needed to simplify in order to create value.’
As Koch tells ESM, the sale of Real is just one of a number of strides towards optimising the Metro operating model since the 48-year-old took charge of the group in 2012.
“When I took over as CEO of Metro, we had department stores, we had a large international hypermarket presence, we had consumer electronics, and we had our core business, which is wholesale,” Koch says. “At that time, we were suffering, and when we reviewed the reasons why, it was clear that our point of differentiation wasn’t clear.
“It was foggy, it was driven by KPIs, and it was driven by a central management system that was very remote from the day-to-day shop floor discussion we needed to have with our customers. That’s when we started to dismantle the conglomerate.
“In recent years, the industry has been exposed to significant change, and while the velocity of this change is currently slower than it has been, it is constant. That means we need focus – on our business model and our strategy going forward – and a diversified conglomerate, like we used to have, doesn’t add any value.”
Koch also rejects suggestions that the sale of Real may have been accelerated by the company’s shareholders, with major investors such as Czech billionaire Daniel Kretinsky and Slovakian Patrik Tkac putting pressure on Koch and his team over the group’s performance.
“When you look at the transcripts of our quarterly results, and also some other events, you can read between the lines,” he says. “For a long time, we have been saying that we have to get back to our origins, which is the wholesale business. This is where we need to focus on.”
The Real Challenge
In recent years, Real – which boasts more than 280 stores and 34,000 employees – has been something of an albatross around the group’s neck, with its 2016 and 2017 quarterlies peppered by like-for-like sales declines.
However, following the investment in new store formats, such as Markthalle Krefeld, which opened in November 2016, the past year has seen at least some positive momentum. Real posted a 1.7% increase in like-for-like sales in the first half of the year, however, sales fell back by 1.0% in the third quarter, due to an earlier Easter.
Thus, while Metro is confident that a deal to sell the hypermarket operation could be completed in six to eight months, it is not going to cut and run, with Koch eager to emphasise the strides that Real has made, and continues to make, in its turnaround process.
“We’ve always said that there were three components that need to be absolutely rock solid, to make sure Real is a sustainable entity,” he says. “Firstly, we need to find ways to motivate customers to come to our stores more often. This is where the Markthalle concept comes in. We’re bringing it to another 19 locations on a modular basis, with much lower capex, while we are also launching full Markthalle stores in Braunschweig and Bielefeld.
“Secondly, we need to deal with the fact that a lot of categories that have traditionally been sold through hypermarkets are now being sold, to a very strong degree, online. That’s a marketplace we established in March 2017, with the acquisition of Hitmeister, and we have been able to develop it into a business with almost €400 million worth of gross merchandise value in less than two years.
“Thirdly – and this is arguably the most tricky – is the need to achieve competitive labour costs. During the summer, we managed to complete the spin-off of our Real assets into a new legal entity that is not associated with the Verdi trade union, and it has given us a more competitive labour platform. In fact, we have been able to hire more than 2,000 people since this was implemented, so we can say with authority that the new staff set-up is cost competitive.”
Making A Move
With significant progress made, Koch and his team were presented with an opportunity to complete the simplification of the Metro business – a process that started with the sale of Galeria Kaufhof to Canadian retail conglomerate Hudson’s Bay Company for $3.2 billion in 2015.
“At the end of the summer, everything came together and we said, ‘Right, now is the time to complete the dismantling of the old conglomerate,’” he says. “It was time to put the whole focus on wholesale. That was always going to be our final destination, and we are convinced that it has a fantastic opportunity for growth.
“It’s only fair for Real, as well, so it can be the primary focus under a new ownership structure. We are a wholesale group, so when you discuss the various different elements of the group, Real is well down the list.
“That’s not to say that we don’t believe in Real – of course we do – we believe it needs a new ownership structure that can give it the attention it deserves. There is a significant value creation opportunity that can be captured, but we believe it needs full dedication and capital focus.”
Waiting In The Wings
As for potential suitors? Within hours of Metro announcing the sale of Real, the rumour mill went into overdrive, with retail rivals, private-equity investors and, most notably of all, Amazon, among those named as possible future custodians of the business. After all, with its renewed focus on food as an ‘experience’, the newly redesigned Markthalle stores aren’t a million miles away from those of Whole Foods, making it a potentially perfect fit for the online giant. Koch, however, rejects these suggestions.
“I would never comment on any potential buyer at this moment in time,” he says. “Also, Markthalle has been inspired by a number of different grocers – it’s not just Whole Foods. Probably the one that inspired us the most was Wegmans, and the culture of how they run their business. We also looked at Mariano’s, H-E-B. Of course, people draw the comparison with Whole Foods, but it’s a comparison too far, if you ask me.”
On Amazon, Koch admits that he has “huge respect” for the Jeff Bezos-owned giant and its Asian rival, Alibaba, “because of their decisiveness in generating more value by learning through data and turning it into action, but I dare to say that the business we are in, which is the SME business, the ingredient for success is something that you cannot replace with technology.
“It’s about trust. It has a soul. It can be supported by tech, but not easily replaced.”
But what happens next? Will the hard work undertaken to turn Real’s fortunes around be put on ice? Between now and the sale’s completion, Koch has affirmed that Real will remain a key part of the Metro business.
“We will continue to work with the team on the agenda that has been agreed,” says Koch. “That’s why we are opening the next Markthalle in October, and we’re going to continue to apply the concept in other locations. We need to create readiness around the brand.
“It would be foolish to stop now and take away any of the momentum that we have achieved.”
Financial Stability
Given the turbulence of the past few years, Metro can be happy with how its most recent financial year has progressed to date, with the group seeing like-for-like sales at its core wholesale operation rise by 1.2% in the first nine months of the year, although reported sales were down 1.3% due to adverse currency effects.
In recent years, Metro has adopted a targeted, market-by-market approach to how it does business geographically. For example, HoReCa is the primary focus of the business in Southern Europe, while small retail traders and restaurant owners are in its sights in Eastern Europe. This strategy appears to be bearing fruit: in Q3, the group posted double-digit growth in Turkey, Ukraine and Romania, thanks to its renewed focus.
“We have two very large target audiences: HoReCa and the independent retail trade,” Koch explains. “These are the markets in which we see higher purchase frequency, better margin mix, better results. To meet the demands in each market, however, you can’t just adopt one rule per region – you need to assess each market in turn and adapt your assortment, format and marketing communications. Spain and Portugal, for example, are two very different markets.”
Prior to 2015, Metro operated a system “pretty much like every other corporate”, Koch says, with country managing directors reporting to a central management function. Today, the operation is all about autonomy, with regional CEOs having the power to “change very much: assortment, format, marketing – whatever you want, except the branding, of course. We never want to have a situation again where a manager tells us, ‘I can’t serve the customer better because the corporate structure is hindering me.’”
Lessons From Russia
However, even the most solid chains are only as strong as their weakest links, and in April, Metro was forced into an embarrassing climbdown from its full-year growth expectations after it emerged that all was not well in the group’s Russian operations. This led the group to issue a profit forecast of 0.5% for the year, instead of the anticipated 10%.
Commenting on the news, the Financial Times was curt in its estimation, summing Metro’s challenges up with the phrase ‘crash and carry’.
Since then, the Russian business has alleviated some of its problems (like-for-like sales were down 7.0% for the first nine months of the year), but there is still a long way to go, as Koch admits.
“We have a very simple management principle, which is built around proximity, control and action,” he says. “Proximity means that when we engage with one of our operating partners, they shouldn’t say, ‘I think,’ ‘I assume,’ or ‘I hope.’ We should be able to understand when a problem is taking place and how we can change it. There should never be a discussion around ‘are we in control?’
“While I don’t want to throw stones, in Russia, we came off track on that. Over the past few years, we were performing slightly better than the market in Russia, but one quarterly development raised eyebrows and warranted further investigation. We looked into it, and the feedback wasn’t good and required us to take action.”
In Russia, as well as a new management structure, Metro has pledged to focus more directly on the needs of its customers by changing the assortment and pricing policy, incorporating more volume-based pricing, rather than the wide-ranging promotion-based strategy of before.
“The B2B market in Russia is very healthy, but we took our eye off the prize,” Koch says. “We introduced too many reflex actions, increased promotions, issued confusing communications. We don’t have a problem with the market, and we don’t have a problem with our model. We just made mistakes. It’s something that we [will] correct, and it won’t take that long to correct it.
“As we have said in our Q3 results, we are already able to take away some of the scepticism about the Russia business. The wholesale business in Russia is making progress, and there’s no reason to deviate from the observation that we shared with the market in early August.”
Koch admits that he believes “strongly” that the Russian B2B market remains attractive for Metro due to the size of the potential audience.
“There’s a HoReCa market that’s worth around €15 billion, and we have around €500 million of that. The trader market has a purchasing power of €76 billion, we have around €1 billion. There’s room for us to gain market share in the coming years, but we need to correct some of the wrongdoings of the previous period.”
Digital Upgrade
Metro has also made an investment in its digital operations, with the group undertaking a major upgrade of its internal IT systems – its Ukrainian business was among the major firms hit by a cyberattack in June of last year – and the rebranding of its IT department to Metro-Nom. The aim, as Metro announced in April, was to position the group’s IT department as a ‘pace-setter’ in the tech field.
Among the schemes that Metro has launched are #TakeTheExit, a campaign launched earlier this year to attract top-level software developers and IT experts to the business, and the Metro Accelerator powered by Techstars programme, a mentoring programme for technology-first start-ups. As Koch explains, the latter is important in enabling its customers to “do business better”.
Ability To Compete
“One of the things we’ve learned from dealing with our customers is that those that aren’t competing in the digital world feel that they aren’t receiving fair treatment,” Koch says. “So, last year, we announced that we were instating a ‘digital community’ package for our HoReCa customers, whereby they could develop a website for free, with social-media integration, table reservation, and these sort of elements. Our aim was to get 50,000 in the first year to sign up to it, and we’ve already surpassed 95,000.
“So, why would we do this, at great expense to ourselves? It’s a worthwhile expense because it helps to make our customers better. Our principle is that if we can provide tools to make a business stronger, the conversation about introducing the next tool to improve that business is going to be easier.”
Built On Trust
Following the forthcoming Real sale (and Metro’s return to its primary wholesale focus), you would be forgiven for thinking that the company might take its foot off the gas somewhat – it has, after all, been the most hectic two-year period in the company’s history. Does Koch see future business opportunities on the horizon?
“Never say never,” he says. “We have been quite active on the M&A front in recent years, with the takeover of businesses like Pro à Pro, Rungis, and so on. We will continue to look at potential add-ons to our business and how we can broaden our level of services and solutions for customers. I am certain we will continue to review our operations and never exclude anything that we think might add value to our business.”
After all, even in a global marketplace, there are new territories to explore. Later this year, Metro will launch a new operation in a brand-new market: Myanmar.
“The portfolio will not remain unchanged for eternity – it will continue to evolve,” says Koch. “Of course, it will remain wholesale-focused – we are going to remain on a singular path. We’re not going to go into the fashion business, for example...”
[Photos by Urban Zintel and Hartmut Nägele.]
© 2018 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: The European Supermarket Magazine.
