Talking shop: Auchan takes on Metro's Real eastern Europe division
Metro has, for some time, wanted to dispose of its low food margin Real hypermarkets.
The long-awaited disposal of Metro's Real grocery chain in eastern Europe was finally announced this week, putting an end to months of speculation over the future of the division.
French retail giant Auchan was the buyer, securing the operations in a deal worth EUR1.1bn (US$1.4bn), comprising Real's stores in Poland, Romania, Russia and Ukraine. Turkey, however, was not part of the deal.
The acquisition may have come as little surprise to most industry observers. Metro has, for some time, wanted to dispose of its Real hypermarkets outside Germany.
The retailer has been under pressure to raise cash after issuing a profit warning in October and being removed from the DAX stock exchange a month earlier.
The deal will allow the group to reduce its net debt by EUR1.5bn, which stood at EUR7.7bn at the end of September.
Metro insists the move will allow it to focus on the "successful further development" of its domestic Real business. Daniel Lucht, research director at Research Farm, believes Metro secured "a good price" for the disposal that will help "ease its debt burden".
"That's the rationale behind the deal for Metro really. It's basically to ease the pressure a bit, they are under a lot of pressure on a lot of fronts, so they want some cash flow," he tells just-food. "They're keeping with their [cost cutting] strategy and so they have had to make this cut ... and they've looked to sell Real for a long time. It was kind of clear Metro had to split its business up and the operations in eastern Europe are profitable and a good business to sell in order for them to ease their debt burden."
That pressure, according to Verdict Research analyst Andy Stevens, stems in part, from the difficulties facing most hypermarket operators across Europe.
"The trends across Europe are the same as they are in the UK. The hypermarket really isn't the format that is working for retailers at this point in time. There is a lot of competition from online, and convenience stores are, by their very nature, they're just far easier, far more convenient for someone to go and shop at," he tells just-food.
Auchan, however, appears to believe hypermarkets still have potential in Europe. The French retailer is, Lucht believes "a lot better at running hypermarkets than Real".
Through its acquisition, Auchan will be adding Real's 91 hypermarkets across Poland, Russia, Romania and Ukraine to its own network of 98 stores in those four countries.
"Auchan is the most successful hypermarket operator at the moment in Europe," Lucht tells just-food. "All of the other players have tried and are not doing that well but Auchan maintains the edge. Its most successful hypermarkets make around EUR300m a year in France."
Lucht says the fact Auchan already has its own network in eastern Europe comprising warehouses, logistics and distribution centres, means Real's operations will "sit in very nicely" with its own.
"For Auchan, it definitely makes sense. The reason the two companies haggled so long over the price is, a lot of these hypermarkets in Eastern Europe have turnover-based rent: a rent that is basically a percentage of the sales turnover.
"Auchan think they will probably raise the sales levels [of the stores] and they were really worried about the rental costs exploding, so they had to negotiate that for some time."
The country, however, that was not part of the negotiations was Turkey. Lucht says Auchan's lack of presence in the country would have meant the operations had "no interest to them".
"They bought where they already have a presence and where they know what they can do with the markets. They know what they get in terms of sales per store from their own operations. In a new country you have to build up the whole supply chain, you have to add the warehousing and get the product to the stores. It probably makes sense for Metro to keep hold of that."
Metro certainly appears to have faith in Real's future in Turkey. Chairman Olaf Koch said this week its Real stores in the country have "developed very nicely" in recent years and "show great growth potential".
"This is now to be consequently tapped," he said.
Metro, though, faces challenges at home. It sales in Germany dropped 2% in the third quarter to EUR5.9bn. Nonetheless, Koch told analysts at the time he was "absolutely convinced" of the "significant ... operational improvement potential in Germany".
"It's an EUR8bn turnover business, operating on a quite attractive base of ranges ... the operating improvement is very feasible. The capex for growth is something we need to assess," he said.
Stevens believes it would be "sensible" for Metro to "focus quite heavily on its core German offering".
"It's what they know and it's what they're good at," he says.
Koch, who took office at the start of the year, pledged this week to focus on Metro's cash and carry wholesale unit and its Media-Saturn electronics stores, the group's biggest and most profitable businesses.
Lucht also believes Metro will first focus on paying down debt in order to improve the group's credit rating. "They can then invest into their priorities," he says. "That would be cash and carry and Media Saturn."
Auchan, meanwhile, continues its international expansion. It has doubled its store presence in central and eastern Europe through the Metro deal.
"It's quite a significant undertaking from Auchan so it is going to be a launchpad for something fairly significant," Lucht says. "It will take time for a re-branding and bringing everything under one banner, but they have said they're looking to open stores, so expansion is on the cards. It gives them a solid base in those market so it will make it a lot easier for them to expand."
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