German retailer Metro Group today (17 March) posted declining earnings for 2009. However, the company also unveiled a major shake-up of management at its wholesale unit and insisted that cost cuts and investment in emerging markets positioned it well for future growth. Katy Humphries reports.
In some ways, it has been a tough year for German retail giant Metro Group.
The company this morning posted a year-on-year decline in earnings in 2009 as currency exchange and the cautious consumer environment hit sales.
During the year, revenue decreased by 3.6% to EUR65.5bn (US$90.14bn). Adjusted for currency effects, turnover edged up by 0.2%, although sales in Metro’s home market declined by 0.6% to EUR26.5bn, the company revealed.
EBIT before special items dropped 8.9% to EUR2.02bn. The group’s Real, Media Markt and Saturn, as well as Galeria Kaufhof and Real Estate divisions, were able to increase EBIT before special items year-on-year.
However, earnings at Metro Cash & Carry fell short of the prior year level as this unit suffered the most from currency effects, the company said.
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Nevertheless, Metro’s management remained upbeat. Despite the decline in earnings witnessed this year – and warnings that the “challenging” environment and swings in currency exchange could weigh on 2010 – the group raised its mid-term profit growth outlook from 8% to 10%.
Speaking during an analyst presentation, Metro chief executive Eckhard Cordes said that he was confident in the company’s ability to improve its profit performance in the medium term.
Cordes said that the company would improve its bottom line through the company’s Shape 2012 efficiency drive.
Shape 2012 contributed EUR208m to operating earnings last year and management indicated that it expects the programme to contribute in the region of EUR500m to earnings this year. The group has targeted savings of EUR1.5bn by 2012.
As part of the drive, and in a bid to turnaround its struggling cash-and-carry business, Metro announced a major shake-up of management at the unit.
The company will integrate the management structure of its Metro AG holding company and Metro Cash & Carry businesses to increase efficiency.
While Cordes confirmed that there would be a “headcount reduction” as overlapping positions are eliminated and the structure is streamlined, he remained coy over how many jobs would go.
In an indication of how Metro sees its wholesale business developing, the unit will be separated into two operating units – one for Europe, Middle East and North Africa and one for Asia and new markets.
Frans Muller, who heads up Metro Cash & Carry, will assume responsibility for Asia and new markets, while Joël Saveuse will take on responsibility for Europe/MENA in addition to his role as head of Real hypermarkets.
In the Europe/MENA region, Metro Cash & Carry will concentrate on the turnaround in Germany, the extension of private label and the development of its delivery service. In emerging markets, the company will drive growth through expansion and store openings – while also looking to keep a lid on costs.
According to Bernstein analyst Christopher Hogbin, the move shows that Metro recognises the need to fuel expansion in growth economies and restructure more mature markets.
However, Hogbin adds that it could also suggest that the management board is dissatisfied with the pace of change in Europe, and Germany in particular.
“The demotion for Frans Muller suggests management has been disappointed with the pace of restructuring of C&C’s German business, and potentially that the concept stores profiled at its recent analyst event are insufficient to achieve target profitability,” he suggests.
“Moreover, the grouping of all European markets will raise fears that the recent performance issues in Germany are now considered more of a “mature markets” issue.”
Cordes today moved to pour cold water on such concerns, insisting simply that Saveuse is the right man for the job, having proven his ability to improve operations in mature markets with his turnaround of Real in Germany.
“Joël has brought confidence back. He has created a motivational spirit and people are looking forward now with a positive mood,” Cordes said.
While he did not confirm that the management change will increase the pace of improvements in the German wholesale business, he did emphasise his “confidence” in the new team’s ability to usher in higher profit levels.
“I would not compare the pace – is it faster or not faster – I am absolutely confident that the team will be able to turn Germany around,” he said.
Nevertheless, Cordes insisted: “We have made good progress in Germany. We have made more progress than you can see on bottom line. Many initiatives are now in place but have not had a bottom line impact yet.”
Meanwhile, Metro will look to emerging markets to drive sales growth throughout the group.
The company plans to open 95 new stores in 2010, when it will enter Egypt and expand its store network in Asia and Eastern Europe.
In particular, Cordes said that Metro viewed China as a “very important” region and one that it is investing significantly in.
“We see significant growth potential for our businesses globally. Our assessment on how the world will develop in the years – or decades – to come remains unchanged,” Cordes insisted.
So, with a strategy to reduce its cost base while also driving sales growth in emerging markets, Metro clearly believes that it has some reason to look to the future with confidence.
The market has, however, met this optimism with a degree of scepticism.
In a research note, Heino Ruland of Ruland Research, describes the increased mid-term guidance as a “red herring” designed to distract from the “disappointing profit for the year”.
Shares in the German retail giant slid 2.11% to close at EUR42.16 this evening.
Metro’s strategy is a familiar one of reducing costs and entrenching its position in established markets while also investing in expansion in developing markets.
While the company has weathered the economic storm relatively unscathed, a lacklustre set of results for 2009 coupled with the a strategy that, while solid, risks sounding samey could explain why investors seem to have found little to get excited about in Metro’s announcements today.