June 5, 2012

Metro Group sells Makro C&C stores in the UK

Olaf Koch, CEO Metro Group (photo: Bert Bostelmann)
Olaf Koch: "We must now show results rather than just announcing them"
Viewed in isolation, there was nothing untoward about Metro Group selling its English C&C business to local wholesaler Booker last week.

After Morocco, the UK is only the second country the company has ever exited, and its business empire still spans 30-odd nations and three continents.

Looked at more closely, however, the long-expected departure from the British Isles is symptomatic of a wider malaise within Germany's largest retailer by annual revenues.

"After generating losses (in the UK) for years...it's a logical step to terminate a business which doesn't meet our medium- and long-term expectations...Metro can now concentrate on its core markets," says CEO Olaf Koch.

So far, at least, so logical, but it wasn't a pretty sight.

Massive decline in productivity

Last year, Metro's 30 "Makro" C&C outlets in the UK just managed to generate revenues of around €883m. This reflects a massive decline in productivity since the year 2000 with revenues falling from around €60m to only €29.4m per 9,000m² store. Total losses have exceeded €130m over the last five years.

Even though Metro Group will retain pension liabilities and has incurred a book loss and a €200m ebit reduction, its battered share price jumped on the news of the sale.

One suspects, however, that this was not due to Metro receiving a cash consideration of £15.9m and a 9.99 per cent stake in Booker with an option to exit after one year.

Rather, retail analysts in Frankfurt appeared relieved that, unlike predecessor Eckhard Cordes, the new CEO seems prepared to cut losses and run rather than to live in hope eternal.

A good butcher

Being a good butcher could well prove a necessary quality in a C&C empire where Lebensmittel Zeitung believes few countries make any real profit with the exception of China and Russia.

However, this is not particularly comforting when investors remember that both countries account for only around €5bn of global annual revenues totalling €31bn.

Meanwhile, in addition to Koch's recent decision to abandon advanced plans to enter Indonesia, a number of Metro's country operations are said to be on the critical list. These include Spain, Portugal, Hungary, Egypt, Pakistan, Kazakhstan and Japan.

Apart from the inevitable country risks associated with investments in Asia and Africa, Metro C&C doesn't seem to have a blueprint for success on mature markets including Germany. Revenues and earnings within the division are on the decline.

From 2008 to 2011, global annual revenues sagged from €33.1bn to €31.2bn. Around €800m of this occurred in Western Europe with German revenues falling from €5.7bn to €5.2bn.

German business model
 
The main problem with the business model in Germany, and for that matter in numerous other countries, is a loss of price aggression. Today, many small HoReCa businesses prefer to buy at Aldi or Lidl.

Attempts to counteract this by increasing customer services to include a delivered wholesale offer haven't cut the ice. Although Metro's worldwide delivered wholesale revenues have now reached €1.6bn, higher costs have lowered margins, and the store network has been cannibalised.

As rumours on the Frankfurt bourse circulate that Metro Group shares could be relegated from the DAX to the MDAX stock index, this once overproud company now lacks a compelling growth story in all of its major business divisions (C&C, hypermarkets, department stores, electronics entertainment).

Bust-up at AGM
 
Small wonder that the annual shareholders meeting at the end of May was something of a bust-up by German standards. Frustrated institutional investors lambasted management errors, past quarrels among the principal shareholders and board members, as well as the long-standing feud with Erich Kellerhals, the minority owner of electronics entertainment subsidiary Media-Saturn.

To make matters worse, there are few real retailers in Metro Group's c-suite following the infelicitous departure of Joël Saveuse. Perhaps Olaf Koch doesn't need to be a retail thoroughbred, but he will have to radically change corporate culture and fast: "We must now show results rather than (just) announcing them."

This subtle criticism of predecessor Eckhard Cordes, who failed to find a buyer for Metro's "Kaufhof" department stores and "real,-" hypermarkets after indicating that they were up for sale, might perhaps placate the vengeful gods of the stock market universe for a wee while.

Should, however, Koch fail to keep his word, he will have no choice but to fall on his CEO sword, and maybe Metro with him.
 
  
Related article in German: Lebensmittel Zeitung, no. 22, 01.06.2012, by Hans-Jürgen Schulz, Christiane Ronke & Gerd Hanke


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