Metro AG

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Metro AG

SchluterstraBe 41
40235 Diisseldorf
Germany
Telephone: +49 (211) 6886-2870
Fax: +49 (211) 6886-2000
Web site: http://www.metro.de

Public Company
Incorporated: 1996
Employees: 230,848 (2001)
Sales: EUR 52 billion (US$45.73 billion) (2002 est.)
Stock Exchanges: Diisseldorf Frankfurt Xetra
Ticker Symbol: MEOG.D (Dusseldorf), MEOG.F (Frankfurt), MEOG.DE (Xetra) NAIC: 445110 Supermarkets and Other Grocery (except Convenience) Stores; 445120 Convenience Stores; 452110 Department Stores; 551112 Offices of Other Holding Companies

One of the largest retailers in the world, Metro AG is a Düsseldorf-based holding company formed through the 1996 merger of four giant German retailing groups. It operates 2,250 stores in 25 countries, and competes with such notable conglomerates as U.S. retail king Wal-Mart, Carrefour of France, and German rival Tengelmann. The company employs almost a quarter-million people. Metro concentrates on four core businesses: cash-and-carry wholesale outlets, retail food markets, consumer electronic stores and home-improvement centers, and department stores. With strong retail and price competition in the German marketplace, the company has aggressively pursued growth in foreign markets. Between 1997 and 2001, international sales jumped from 5 percent of the group business to 45 percent. The cash-and carry business accounts for 75 percent of foreign sales and is the company’s most profitable division overall.

Beisheim Founds Metro Cash & Carry: 1964-1995

Metro’s global retail/wholesale empire began as Metro SB-Grossmarkte, a cash-and-carry business that German entrepreneur Otto Beisheim founded in 1964 in Mulheim. Popularized in the United States, cash-and-carry operations departed from traditional wholesale models by allowing commercial customers to pick and purchase goods at distribution centers, then haul them away in their own vehicles. Benefits included lower prices, larger product selection, extended business hours, and immediate possession of merchandise. Operating under the name Metro Cash & Carry, the company received financial backing in 1967 from the Franz Haniel & Cie. industrial dynasty and the Schmidt-Ruthenbeck family, also wholesalers. Beisheim and his new partners each controlled one-third of the shares in the company.

The infusion of capital enabled Beisheim and his partners to expand cash-and-carry outlets within and beyond German borders. In 1968, Metro joined with Dutch conglomerate Steenkolen Handelsvereniging NV (SHV) and established a company in the Netherlands operating as Makro Cash & Carry. Nine western European countries became home to Metro and Makro wholesale outlets by 1972. Expansion into retailing soon followed. In the early 1980s, Metro and Union Bank of Switzerland made a major acquisition, German department store chain Kaufhof AG. As Metro gained controlling interest in the company, it steered Kaufhof toward converting some stores into specialized fashion and shoe outlets, and investing in consumer electronics (Media Markt and Saturn) and computer businesses. In late 1992, the Metro added another retail conglomerate to its portfolio, buying a majority stake in the German holding company Asko Deutsche Kaufhaus. Asko’s properties included retail and wholesale grocery networks, furniture stores, and Praktiker home-improvement centers.

By 1993, privately held Metro had controlling stakes in Kaufhof, Asko, and Asko’s subsidiary Deutsche SB-Kauf—all companies listed on European stock exchanges. The holdings not only left Metro with a dominant market share in the German food-retailing sector, but elevated it to one of the largest retailing groups in the world. Indeed, Metro had an estimated 180 companies under its management, including brand-name businesses such as SB-Kauf supermarkets, Massa discount stores, computer chain Vobis, office supply group Pelikan, Adler clothing stores and AVA department stores. Along the way Metro had become Metro Holding, with its headquarters and leader, Beisheim, locating in Baar, Switzerland. Entering his seventies, reclusive billionaire Beisheim retired from active management of the company in 1994. He turned over the reins to close associate Erwin Conradi, who had joined Metro in 1970. Conradi would dominate the company management over the next five years.

Becoming Europe’s Largest Retail Group: 1995-1998

Conradi announced in October 1995 that Metro Holding planned to establish a new company—Metro AG—by merging its four largest German operations: Kaufhof, Asko, SB-Kauf, and Metro Cash & Carry. The merger was largely driven by Europe’s sluggish consumer spending and crowded retail sector. “Consumer confidence over the coming years looks likely to remain weak,” Conradi explained in a March 1996 interview with The Daily Telegraph. “Price will become even more important and for companies that means cost savings will be more vital than ever.” Consolidation allowed the new group to cut costs while boosting sales and creating a platform for global expansion. Conradi estimated sales would rise to DM 76.4 billion (US$52 billion) in 1998, more than 22 percent above the group’s 1995 total. He added that net profits would double over the period from DM 719 million to DM 1.47 billion.

In May 1996, shareholders for publicly traded Kaufhof, Asko, and SB-Kauf approved a share-swapping plan and merger backdated to the beginning of the year. With an estimated value of US$10 billion, Metro AG was headquartered in Düsseldorf / Cologne and overnight became the largest retailer in Europe and among the top five in the world. The company was listed on the German DAX stock index for the first time on July 25, 1996. Under a complex ownership arrangement, privately held Metro Holding retained a 60 percent stake in the company, a stake controlled by Beisheim and the Haniel and Schmidt-Ruthenbeck families via another holding company. First year net sales for the new company came in at DM 55 billion (US$35.4 billion) and net profit at DM 717 million (US$393 million). The company had just over 130,000 employees.

Following the consolidation, Metro embarked on a series of acquisitions and divestitures designed to strengthen core businesses and move ahead with expansion. In 1997 it added 59 Wirichs home-improvement centers to complement the Praktiker chain. It bought computer and restaurant holdings, and disposed of fashion, furniture, and some retail and wholesale grocery outlets. Foreign sales grew 50 percent as five chains—Real, Media Markt, Praktiker, Adler, and Vobis—launched operations in other European countries. Metro Cash & Carry, already in 15 countries, opened its first stores in Romania and China. But 1997 proved to a disappointing year for shareholders. Sales increased to DM 56.8 billion (US$31.7 billion), but net profit fell from DM 717 million (US$393 million) in 1996 to DM 623 million (US$309 million). Even with added expansion costs, the profit figures weighed in lower than management expected.

The buying and selling continued into 1998. Metro fortified its profitable European cash-and-carry operations by purchasing 196 Makro Cash & Carry stores from SHV Makro NV of the Netherlands for US$2.7 billion. Metro later bought out the remaining interest that the parent company Metro Holding held in SHV Makro, a move made to guarantee investors full profits from the businesses. Metro also added to its portfolio the well-known Allkauf and Kreigbaum “hypermarkets”—known as combination grocery/department stores.

Focusing on Core Businesses: 1998

Entering 1998, investors and industry analysts still lacked confidence Metro was on the right track. Many criticized the retail giant for being overly diversified, lacking a coherent strategy, and subject to mysterious ownership. Shareholders also had concerns about the company’s low profit margins.

Metro was indeed diversified. It had 13 independent operating divisions at the end of 1997. The glut of companies included wholesale food outlets, three department store chains, hypermarkets, food stores, discount stores, consumer electronics centers, home-improvement centers, three computer centers, fashion centers, shoe stores, restaurant and catering services, and real estate and support companies. The concerns over the company’s structure and strategy compelled Metro to embark on a DM 5 billion (US$2.7 billion) reorganization program in the fall of 1998. Hans-Joachim Korber replaced Klaus Wiegandt as management board chairman, and Korber pushed forward a plan to concentrate on just four core businesses.

Company Perspectives:

Metro AG is at the head of a capital market-oriented, highly competitive retail group with an international profile. The Metro group’s business and operational structures, entrepreneurial concepts, and strategies are worlds apart from the usual image of a retail company focusing on the domestic market.

At more than 2,200 locations in 24 countries the Metro company proves this competence—with concepts that meet the highest quality demands. Intelligent, sophisticated logistics systems guarantee that a large selection of high quality merchandise is always available both in the food and nonfood areas. In terms of our food offering the aspect of freshness enjoys top priority. With its quality management program the Metro AG takes up a leading position in the trading industry.

The program also called for Metro systematically to shed non-core business chains through a new subsidiary Divaco (initially Divag). Metro invested DM 350 million in Divaco and retained a 49 percent stake. A group of investors led by Deutshe Bank managed it. In December, Metro transferred to Divaco companies generating sales of DM 16 billion (US$9.6 billion) and employing 34,000 workers. The banished businesses included 813 Vobis computer stores, 143 Kaufhalle and 25 unprofitable Kaufhof department stores, fashion and shoe stores, Tip discount stores, and Kaufhalle’s real estate business. Divaco sold 165 Tip stores to Berman retailer Tenglemann for DM 375 million in late 1998. A year later, trying to raise cash for expansion, Metro disposed of additional assets by selling and leasing back its retail real estate. In a joint venture with Westdeutsche Landesbank that raised DM 5.4 billion, Metro sold the ground under 290 retail outlets in Germany, Turkey, Greece, Hungary, and Luxembourg.

Metro’s financial numbers for 1998 finished strong. The Makro acquisition drove six months sales up 62 percent, with year-end figures hitting to DM 91.7 billion (US$54.7 billion, EUR 46.8 billion). Net income jumped 19 percent to DM 735 million(EUR 579 million). The company was one of the strongest performers on the German DAX. International expansion also moved smartly ahead, with foreign business contributing 35.2 percent to total sales in 1998 and company payroll climbed above 181,000.

Merger Speculation: 1999

Investor confidence was short-lived, however. From an all-time high of DM 153 marks (EUR 78.5) in January 1999, company stock dropped 20 points on the DAX by the end of March and hovered there the rest of the year. For the year, sales dipped to DM 85.7 billion (US$44.1 billion, EUR 43.8 billion) and net income dropped to DM 713 billion (EUR 305 billion). Metro added another 73 foreign outlets, and introduced a customer loyalty program “Payback” at the Real and Kaufhof chains. It also launched its first Internet business activities with the Kaufhof and Metro Cash & Carry units.

Merger and acquisition rumors dominated Metro’s press coverage as stiff competition and stagnant growth in European retailing drove companies to look for partners to secure market share. The entrance of U.S.-based Wal-Mart onto the scene exacerbated the pressures. During 1998, Wal-Mart had acquired nearly 100 German hypermarkets with annual sales of US$3.1 billion. In early 1999 reports surfaced that the world’s largest retailer had an interest in buying all or part of Metro. A Metro official responded by saying a merger “would not be a congenial get-together.” Still, speculation persisted. Analysts identified the Netherlands’ biggest retailer Ahold, and British retail group Tesco, as possible merger or acquisition candidates for Metro. And in January 2000 reports surfaced that management for Metro and the U.K.-based retailer Kingfisher were having preliminary discussions. Metro continued to deny any interest in merging. “Of course people call us, of course we talk to them,” said Metro Supervisory Board Chairman Conradi in the January 26, 2000 Financial Times. “But we have not actively been pursing any deal and neither should we, as our competitive position is not at risk.” Industry insiders thought otherwise. Several believed some or all of the three original partners wanted to sell their shares to Wal-Mart in order to invest in non-retail interests. The partners were bound to act together under agreement in effect until 2003.

Merger rumors peaked in July 2000 when German newspaper Welt am Sonntag reported that Metro would transfer its Real chain of hypermarkets and Extra grocery chain to Wal-Mart, which wanted to continue to expand in Germany. Metro would in turn acquire around 1,000 of Wal-Mart’s Sam’s Club warehouse outlets. Metro’s original partners this time issued a formal statement denying an interest in selling the company. They also asserted that they planned to maintain their cooperation for an indefinite period and sustain their commitment to Metro. At the same time, the partners announced that Conradi would resign. Some industry observers viewed Conradi’s resignation as a dismissal for the supervisory board chairman’s failed negotiations with Wal-Mart and French retailer Carrefour, which later acquired the French group Promode and replaced Metro as Europe’s largest retailer. Others contended that Metro Executive Board Chairman Korber had threatened to leave if Conradi stayed. Korber and management board members reportedly felt Conradi blocked management decisions, which in turn delayed restructuring and expansion, specifically the acquisition of SHV Makro’s additional cash-and-carry stores in Asia and Latin America.

Key Dates:

1964:: Otto Beisheim founds Metro SB-Grossmarkte, a wholesale business that becomes Metro Cash & Carry.
1967:: Haniel and Schmidt-Ruthenbeck families become Beisheim’s partners.
1968:: Metro Cash & Carry expands to the Netherlands, opening Makro Cash & Carry stores.
1993:: The company acquires a majority interest in Asko Deutsche Kaufhaus.
1994:: Beisheim retires from active management of Metro and Erwin Conradi is appointed president of the Metro Holding Board.
1996:: Metro Holding merges Asko, Metro Cash & Carry, Kaufhof and Deutsche SB-Kauf to create Metro AG.
1998:: Metro purchases Makro Cash & Carry and Allkauf and Kreigbaum hypermarket chains; and establishes Divaco to sell non-core businesses.
1999:: Rumors circulate that Wal-Mart will purchase all or part of Metro; and Hans-Joachim Korber is named CEO.
2000:: The company’s original partners deny rumors of the Metro merger; and Supervisory Board Chairman Erwin Conradi resigns.
2001:: Cash-and-carry operations expand to Russia and Croatia; and the company purchases Primus-Online, an e-commerce business.
2002:: The company’s cash-and-carry operations expand to Vietnam.

Korber Takes Charge in 2000

By September 2000, there were several new faces on the Metro management board. To streamline the strategic decisionmaking process, Metro had reduced seats on the board from five to four. Korber retained the chairmanship along with his CEO title. In charge of balancing the family members demands with increasing Metro shareholder value, Korber reaffirmed Metro’s commitment to international expansion, especially with the cash-and-carry business in Europe and Asia. But he resisted recommendations that Metro attempt to boost its share price by divesting of poorly performing food retail and home-improvement chains and focusing on profitable cash-and-carry and electronics stores. The company’s four-part divisional makeup consisting of cash-and-carry (Metro, Makro), food retail (Real, Extra), nonfood specialty (Media Markt, Saturn, Praktiker), and department stores (Galeria Kaufhof) was “optimal,” according to Korber.

In an effort to become more visible to investors, the company began to draw up its consolidated annual financial statements according to the International Accounting Standards (IAS). To promote entrepreneurial thinking within Metro, Korber introduced the control and management tool EVA (Economic Value Added) and benchmarking. The company also instigated incentives ranging from stock options for managers to merit pay for shop employees. Metro continued its advance into e-commerce and in June 2000 Metro acquired controlling interest in Cologne-based Internet service company Primus-Online.

Pursuing Profitability: 2001-2002

Metro’s 2000 sales numbers met most analysts’ expectations for Europe’s restrained retail market. Fueled by growth in the cash-and-carry business, sales for 2000 grew to EUR 46.9 billion (DM 91.8 billion, US$44.1 billion), up over 7 percent from EUR 43.8 billion the previous year. Pre-tax profit climbed 10.7 percent to 754 euros. Sales abroad climbed to 42.2 percent of all sales. Kaufhof, the struggling department store division Metro had considered selling, registered a pre-tax profit of 7.2 percent after adopting the “Galeria” concept that appealed to upper-income, ethnically diverse urban consumers.

Metro opened another 80 retail outlets in 2001, bringing the store count up to 2,249. Cash-and-carry stores were opened for the first time in Russia and Croatia. Metro continued to push retail operations to develop high-brand recognition and store concepts. Sales figures rose 5.5 percent to EUR 49.5 billion (US$44.2 billion) for 2001, slightly lower than the 6 percent predicted number. Foreign sales rose to 44.4 percent of total sales. However, pre-tax profits dropped 10.7 percent to EUR 673 million. Based on 2001 sales, Metro ranked first in Germany, third in Europe and fifth in the world among retailers. But Korber had little interest in rankings. “We do not build an empire but rather develop our company to be profitable in the long run,” said Korber in a September interview in the German business magazine Focus Money.

At the end of the first quarter of 2002, Korber predicted Metro group sales would hurdle the 52 billion euro mark by year-end. By 2003 he expected sales figures for outlets outside Germany to exceed those within its borders. The company’s ongoing expansion resulted in its first cash-and-carry store in Vietnam in March 2002. Openings were planned in India and Japan before year end. Metro also announced it would open a chain of Real hypermarkets in Moscow and sell its stake in Divaco by the end of the year.

Under Korber, Metro moved ahead on a strategy based on internationalizing core retail operations, enhancing shareholder value, and creating brand awareness among consumers for retail outlets. Expansion efforts continued to focus on developing new stores “organically” and without incurring the costs and risks of acquisitions. Cash-and-carry operations, with 384 stores in 22 countries, remained the largest revenue producer in the group, accounting for 45 percent of the group’s sales, or EUR 22.7 billion in 2001. Metro management remained committed to setting profitability targets for each of its independent sales divisions. While public talk of mergers and acquisitions largely died in 2000, the agreement among Metro’s original owners to act in unison is set to expire in 2003, and could raise the issue again.

Principal Operating Units

Cash-and-Carry: Metro; Makro. Food Retail: Real; Extra. Nonfood Specialty: Media Markt; Saturn; Praktiker. Department Stores: Galeria Kaufhof. Other: Metro MGE Einkauf (Purchasing); Gemex Trading AG (Import Agent); Metro MGL Logistik (Merchandise Movement); Metro Distributions-Logistik (Warehouse Delivery); Metro Wertstoff-Circle Services (Waste Disposal); Metro MGI Informatick (IT Services); Metro Real Estate Management (Construction Services); Metro Werbegesellschaft (Advertising); Dinea Gastronomie (Restaurants/Catering); Primus-Online (Internet Services), Divaco (Investment).

Principal Competitors

Wal-Mart Stores, Inc.; Carrefour SA; REWE-Zentral AG; Royal Ahold NV; Tengelmann Warenhandelsgesellschaft OHG; Edeka Zentrale AG; AVA Allgemeine Handelsgesell-schaft der Verbraucher AG; Karstadt Quelle AG.