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June 14, 2011

Talking shop: Should Makro look to Booker for success?

Metro Group replaced four of the five board members working in its Makro UK cash-and-carry division last week, including managing director Hannes Floto. As the German retail giant works to turnaround the business, industry watchers suggest that Makro's future in the UK may lie with local rival Booker, either looking to the resurgent chain for inspiration or through a sale. Petah Marian reports.

Metro Group replaced four of the five board members working in its Makro UK cash-and-carry division last week, including managing director Hannes Floto. As the German retail giant works to turnaround the business, industry watchers suggest that Makro’s future in the UK may lie with local rival Booker, either looking to the resurgent chain for inspiration or through a sale. Petah Marian reports.

Metro Group’s UK cash-and-carry operations have struggled in recent years. Their performance has been in stark contrast to resurgent rival Booker, which has enjoyed increasing sales and profits. On Friday (10 June), Metro made some sweeping changes to the division’s managment, replacing four of its five-member executive board.

The company announced the replacement of managing director Hannes Floto, finance director Stefan Hesse, customer director Mark Copeland and operations director Patrick Legro with consultants from AlixPartners.

Metro attributed the changes to “differing views on the strategic direction of the company”. And, while, the company said that the staff departed on “amicable terms, based on mutual agreement”, it may have become frustrated with the division’s widening losses and declining sales.

According to RBS analyst Justin Scarborough, the troubled business posted a 5% decline in sales during 2010 and “does not make a profit”. Scarborough also said that employee numbers were cut by some 18% during 2010.

The most recent Companies House filing said that, for the year ended 31 December 2009, losses at Makro UK widened to GBP44.8m in 2009 against GBP28.2m in 2008. Sales fell over the year from GBP867.8m from GBP899.5m.

A Makro spokesperson today (14 June) outlined the challenges and steps that it the company is taking to turn around the business. She told just-food that the operator needs to “become faster in implementing the right measures” and that it is not satisfied with its market positioning and brand perception.

According to the spokesperson, the cash-and-carry operator also has to work “harder on our customer service and what we offer our professional customers”, as well as optimising its cost structures.

She also admitted that Makro has to improve its customer orientation and to “catch up with the competition”.

What seems to have been Makro’s loss, has been rival operator Booker’s gain.

Booker has seen sales and profits continue to rise. In mid-May, the company reported a 24% boost to full-year net profit to reach GBP59.1m. Sales rose 6.2% to reach GBP3.6bn.

It too is in the middle of a turnaround programme, albeit further down the road. And, like Makro now, things have not always been so rosy for Booker, reporting a net profit in 2009 after a number of years of losses.

Booker began a three-stage revamp in 2005, a move which JP Morgan analyst Matthew Truman suggested Makro might be wise to echo.

In 2005, Booker simplified the business model, with a greater emphasis on cash management and cost control. It tightened stock management considerably, and working capital metrics across the board were brought back in-line with the industry.

In 2006, Booker began the “drive part” of its turnaround campaign, Truman said. Booker’s customer satisfaction, he explained, was at an “all-time low”, with an apparent need to increase product choice, bring down prices and provide better customer service. This, Truman noted, is “not dissimilar feedback for Metro’s German cash and carry business”.

Through this phase of the plan, Booker has significantly developed a three-tier private-label range, reduced prices, a move that Truman said has been “more than compensated for by a bounce in volumes”.

Booker also improved its service, including a free delivery offer for customers. Truman suggests that an online offer could be the “single largest growth prong” for Metro’s business in the medium-term.

He said that with an average basket size of GBP1,000 for retailers and GBP300 for horeca customers, the basket size is big enough to gain “sufficient leverage” over the additional pick pack and delivery costs.

Through the third stage of Booker’s redevelopment process, Booker has refurbished and modernised it cash-and-carry store network, developed its online offer and expanded into India.

According to Truman, the refurbished ‘Extra’ branches reported first-year sales increases of approximately 20% and its e-commerce operations have reported a 108% CAGR per year between 2007 and 2011.

Nevertheless, while Truman suggests looking to Booker for inspiration, Scarborough is calling for Booker to take the ailing chain off Metro’s hands.

“Come on [Booker chief executive] Charlie Wilson. Be brave,” said Scarborough, suggesting that Booker could buy Makro for GBP50-100m, drive GBP20m in EBIT and achieve a “massive ROIC”.

However, on balance, he suggested that Booker might have the right idea and may be seeing enhanced growth from Makro’s decline and “taking sales and customers without having to pay a goodwill premium”.

For Metro, Scarborough suggested that selling the UK operations would be a bit like Wal-Mart Stores selling its German business to Metro, or Metro selling its French consumer electronics unit.

“If after many management changes, the profit trends are not acceptable, a sale is a far better option and in some case a sale for a very low price would at least remove a loss off of Metro’s group P&L,” said Scarborough.

The Makro spokesperson, however, said that the company is aiming to restructure Makro UK and to “get the operation back on the growth path” and that there are “currently no plans to sell the business”.

Whatever Metro’s plans are for Makro, its new management team faces a steep road ahead.

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