Metro Group wants to plant more flags in China and across Asia

Metro Group wants to plant more flags in China and across Asia

German retailer Metro Group has unveiled plans to increase its investment in international expansion and is targeting high-growth markets in Asia to help offset weakening sales in Europe. With Metro eyeing long-term gains, Katy Humphries asks if the time is ripe for a major expansion drive.

After an investment lull in 2009, Metro plans to pick up the pace of international expansion over the next 12 months.

The world's third-largest retailer indicated that it will invest EUR1.9bn (US$2.38bn) this year to increase its international presence, with store openings planned for its wholesale cash-and-carry business in Asia alongside the expansion of its consumer electronics banner, Media Markt, into China.

Metro's expansion drive is a clear indication of where the retailer expects to generate long-term growth.

Metro entered China in 1996 with the launch of its first wholesale stores. Since then it has invested in expanding its footprint and now the country is one of Metro Cash & Carry's top five international markets in terms of store numbers.

The group currently operates 40 Metro Cash & Carry wholesale stores in 34 cities and, last year, China generated sales of EUR1.1bn.

Metro intends to boost its wholesale grocery business in China by opening about at least six stores this year, including a pilot store in Shanghai.

Growth will be concentrated on Shanghai, Beijing, Guangzhou and neighbouring cities due to the high population density and logistical infrastructure offered by those regions. 

The company also plans to open a total of 16 Cash & Carry stores in Asia this year.

Metro Cash & Carry currently generates 7% of its total sales in Asia and Africa, a figure that the company will hope to grow as it expands its store numbers.

The strong growth drivers – such as rapid population growth, an emerging middle class and increasing economic clout – offered by these markets mean that Metro will likely look to tap these regions to propel the top line for may years to come.

Nevertheless, for the time being at least, Metro remains highly reliant on markets in mainland Europe, where it generates about 90% of sales.

This could pose a problem for the company over the next year, as the eurozone debt crisis threatens to dampen the consumer recovery in its largest markets.

In February, the group posted an 8.9% drop in EBIT for fiscal 2009 as German and Eastern European regions weighed on the group's performance.

This trend continued into the first quarter, with Eastern European operations posting a profit of EUR91m, down from EUR94m last year. The group's domestic business saw an EUR45m loss versus a loss of EUR25m in the first quarter of 2009.

With consumer spending coming under continued – and potentially increasing – pressure in some of its largest markets, Metro could well be forced to increase investment in price in order to woo cash strapped consumers and retain its competitive edge.

To date, Metro has managed its way through the economic downturn largely by battening down the hatches and delivering on its "Shape 2012" cost savings programme.

Shape 2012 contributed EUR208m to operating earnings in 2009 and management indicated that it expects the programme to contribute in the region of EUR500m to earnings this year.

So, with Metro possibly having to increase its investment in price at the same time it is forced to rely on cost-cutting to bolster its profit performance, is now the right time to ramp up spending on international expansion?

While expanding in new markets may give the top line a shot in the arm, profitable returns are often slower in coming.

Nevertheless, RBS analyst Justin Scarborough insists that Metro's record for generating a good return on investment in emerging markets is a strong one.

“I would suggest that Metro, with Media Markt and Saturn and its non-German cash & carry/food retail operations, actually has a pretty good track-record in terms of investment and growth. In the case of MMS and Cash & Carry, it is almost unrivalled on the global stage in terms of growth in profits and returns,” he tells just-food.

In February, Metro lifted its mid-term EBIT growth target to more than 10%, having previously targeted mid-term growth of 8%.

Management indicated that it expects a significant proportion of this increase in profits to come from its businesses globally.

Chief executive Dr Eckhard Cordes said that this was a reflection of how the company expects the world to develop in the years – and decades – to come.

So, while increased investment in the emerging markets of Asia and Africa could pose a short-term challenge to profitability, according to Metro's assessment, it is a long-term necessity.