January 12, 2016 - fbicgroup Group Multi-Cha… · expanding(German(e?commerce(market,(where(the(group(faces(competition(from(the(likes(of(retail(giant(Amazon. (MULTI-CHANNEL INVESTMENTS

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January 12, 2016

DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2016 The Fung Group. All rights reserved.

• Metro’s fiscal year 2015 results highlight the importance of logistics investment in the group’s modernization strategy.

• Improvements in logistics are important to sustain the expansion of multi-‐channel capabilities, central for all three Metro’s retailing brands.

• Metro has also started fostering startups, having partnered with US accelerator Techstars to launch the Techstars Metro Accelerator program.

• Metro’s modernization strategy aims to equip the company with the tools to grow within the expanding German e-‐commerce market, where the group faces competition from the likes of retail giant Amazon.

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MULTI-CHANNEL INVESTMENTS On December 15, 2015, Metro Group announced its results for fiscal year 2015. In a recent FBIC flash report, Metro Group Gears Up Its Logistics to Fit Multi-‐Channel and Fresh Produce, we analyzed how the company’s plan for logistics investments announced in September 2015 sits within its broader strategy.

In this report, we expand the analysis of the group’s strategy, and of the role of logistics within it, in light of announcements made by Metro’s CEO, Olaf Koch, and CFO, Mark Frese, in the company’s annual results presentation.

TARGETS ACHIEVED DESPITE CHALLENGING ENVIRONMENTS Koch introduced the fiscal year 2015 presentation by remarking that, despite the challenging macroeconomic and geopolitical environment, Metro managed to grow its comparable sales by 1.5% year over year; its EBIT before special items (adjusted for currency effect) by 4.7%, to €1.5 billion (US$1.7 billion); and its EPS to €1.91 (US$2.14) from €1.84 (US$2.33) on September 30, 2014. The company also managed to reduce its net debt to €2.5 billion (US$2.8 billion) from €4.6 billion (US$5.8 billion) at the end of the previous fiscal year.

Frese explained that positive comps were achieved thanks to the performance of Metro Cash & Carry (Metro’s dominant retail brand, which contributes about 50% of the group’s global sales), and electrical goods chain Media-‐Saturn. The reduction in the group’s net debt was mainly due to the sale of department store chain Galeria Kaufhof to Hudson’s Bay Company for €2.8 billion (US$3.1 billion) in September 2015, Frese noted.

HOW LOGISTICS FITS WITH THE STRATEGIC AMBITIONS OF THE GROUP Koch said that the company’s planned investment in logistics consisted of building three new distribution centers and expanding an existing facility by 2018. He did not disclose any figure, but commented that the investment will be, in euro terms, in the high double-‐digit millions, and that it will unleash annual savings in the double-‐digit millions, without specifying across how many years.

Source: Metro Group

Metro managed to grow its comparable sales by 1.5% year over year; its EBIT before special items (adjusted for currency effect) by 4.7%, to €1.5 billion (US$1.7 billion); and its EPS to €1.91 (US$2.14) from €1.84 (US$2.33) on September 30, 2014.

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The logistics investment will be focused on Germany, which is the group’s core market and accounts for about 40% of its global revenues. So, it is worthwhile to look at how the group performed in Germany in fiscal year 2015:

Figure 1. Metro Group Sales in Germany, Fiscal Year 2015

Source: Metro Group

Figure 1 shows that overall group sales growth in Germany was flat in 2015, with little progress from the previous fiscal year. Although Media-‐Saturn showed comparable sales growth of 1.6%, both Metro Cash & Carry and Real recorded negative comps, dragging down Metro Group’s overall results.

FOCUS ON MULTI-‐CHANNEL MAKES LOGISTICS CRUCIAL Multi-‐channel is a key element of Metro’s strategy. The investment in logistics will be a crucial support for the strategy, as multi-‐channel operations require efficient supply chains and delivery.

For Metro Cash & Carry, expanding e-‐commerce and food-‐service delivery options is central to refreshing the business model. The chain is still heavily reliant on customers—small business owners, particularly in the hotel, restaurant and café (HoReCa) sector—visiting its brick-‐and-‐mortar stores. But HoReCa entrepreneurs now have less time to physically visit stores. In response to the evolving needs of its customers, Metro Cash & Carry aims to become the “champion for independent business” by being able to serve customers through online retailing and food-‐service delivery.

Multi-‐channel retailing is also a focus at Media-‐Saturn. The chain’s online sales grew by 20% in fiscal year 2015 at the global level, and we can assume a similar performance in Germany. Media-‐Saturn aims to further expand its e-‐commerce reach and integrate it with the optimization of its store portfolio. This entails closing underperforming stores; opening new, smaller formats such as Saturn Connect in central urban locations; and refurbishing existing stores to focus more on the “digital lifestyle” concept, which involves a high level of curation, a focus on mobile and innovative products, and the expansion of service and contract offerings. In the results presentation, management highlighted same-‐day delivery of online orders within three hours as one of Media-‐Saturn’s main operational achievements; the service is now available in 170 German cities.

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Figure 1 shows that overall group sales growth in Germany was flat in 2015, with little progress from the previous fiscal year. Although Media-‐Saturn showed comparable sales growth of 1.6%, both Metro Cash & Carry and Real recorded negative comps, dragging down Metro Group’s overall results.

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Even for hypermarket chain Real, the division of Metro Group that is struggling the most, multi-‐channel is a central part of the effort to make the brand more relevant. Over fiscal year 2015, Real’s online sales more than doubled, to €47 million (US$54 million). Frese announced plans to expand Real’s multi-‐channel proposition, including by offering in-‐store grocery click-‐and-‐collect, as part of a store modernization effort. Supply chain efficiency efforts to reduce costs were also listed as a priority for the hypermarket chain. For Real, the group’s investment in logistics will also help it meet demand for a broader selection of fresh produce, which requires more frequent supply restocking.

Source: Metro Group

The growing importance of multi-‐channel retailing at Metro shows how the role of the stores within the group’s operations will increasingly become integrated with the company’s overall e-‐commerce operations and services provision (although we note that the store operations will still be central, particularly for Metro Cash & Carry and Real). To sustain these efforts, and operate smoothly as a multi-‐channel retailer, the group must enhance its logistics capabilities.

INVESTMENT IN STARTUPS Frese showcased the most recent component of Metro’s modernization strategy, investment in startups. Together with the expansion of the multi-‐channel operations, this is a central element of Metro’s innovation strategy.

Metro partnered with US startup accelerator Techstars to launch the Techstars Metro Accelerator program in October 2015. The company defines it as the world’s first hospitality and food tech accelerator. There are currently 11 startups in the program, including companies that produce software solutions and apps for restaurant owners, caterers and hoteliers, such as www.1001menus.com, Flowtify and Wynd; travel and restaurant services providers such as Lunchio and Journy; and online retailers such as Gastrozentrale.de, a B2B online shop for kitchen technology and restaurant/catering equipment.

The fostering and investing in startups is part of the modernization strategy at Metro as it aims to come up with “the next big thing” that will differentiate the way the group caters to its customers.

Even for hypermarket chain Real, the division of Metro Group that is struggling the most, multi-‐channel is a central part of the effort to make the brand more relevant. Over fiscal year 2015, Real’s online sales more than doubled, to €47 million (US$54 million).

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“AMAZONIFICATION” OF METRO The investment in logistics, expansion of multi-‐channel and search for the next big thing through investments in startups all suggest that Metro’s modernization process entails a good degree of “Amazonification.” Much like Amazon does, the company is developing strong logistics capability and plans to reinvest profits in innovative ventures.

This is a logical move, as Amazon is an important competitor for Metro in Germany, particularly for Media-‐Saturn. Over the last three fiscal years ending December 31, 2014, Amazon grew its sales in Germany by 31%, to €8.9 billion (US$11.8 billion). The two companies compete closely in the German market, often embracing similar initiatives. For instance, in response to Media-‐Saturn offering same-‐day delivery, Amazon launched the same service for its Prime customers in 14 German cities in November 2015.

Source: Amazon-‐presse.de

Over the last three fiscal years ending December 31, 2014, Amazon grew its sales in Germany by 31%, to €8.9 billion (US$11.8 billion).

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At the same time, Metro Group is becoming more like Amazon as e-‐commerce becomes the battleground for retail growth in Germany. According to German e-‐commerce association ECO, by 2019 total B2B and B2C e-‐commerce turnover in Germany will reach €57.6 billion (US$62.5 billion). ECO estimates that B2C e-‐commerce will grow at 12% compound annual growth rate (CAGR) through 2019. But the firm expects even stronger growth for B2B e-‐commerce, predicting the segment will grow at a 15% CAGR over the same period.

Figure 2. E-‐Commerce in Germany: Market Value Forecast, 2015–2019

Source: ECO/FBIC Global Retail & Technology

With the B2B e-‐commerce market expected to grow by 75% from 2015 through 2019, it clearly makes sense for Metro Group’s B2B division, Metro Cash & Carry, to focus more on serving its customers through the online channel. Similarly, it makes sense for Media-‐Saturn and Real to continue to expand multi-‐channel options for their B2C customers, in order to take advantage of a market that is expected to grow by 12% year over year.

If Metro Group succeeds in gearing up its logistics, it will compete more effectively with Amazon in terms of speed, convenience and efficiency of e-‐commerce delivery. But Metro has a big competitive advantage over Amazon in Germany—its store network. Metro’s cost-‐effective store portfolio gives it visibility and support for its multi-‐channel operations that Amazon and other pure e-‐commerce players simply do not have.

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According to German e-‐commerce association ECO, by 2019 total B2B and B2C e-‐commerce turnover in Germany will reach €57.6 billion (US$62.5 billion).

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Deborah Weinswig, CPA Executive Director—Head of Global Retail & Technology Fung Business Intelligence Centre New York: 917.655.6790 Hong Kong: 852 6119 1779 China: 86 186 1420 3016 [email protected] Filippo Battaini [email protected] John Harmon, CFA [email protected] Aragorn Ho [email protected] John Mercer [email protected] Shoshana Pollack [email protected] Kiril Popov [email protected] Jing Wang [email protected] Steven Winnick [email protected] Eddie Wong [email protected] HONG KONG: 10th Floor, LiFung Tower 888 Cheung Sha Wan Road, Kowloon Hong Kong Tel: 852 2300 2470 NEW YORK: 1359 Broadway, 9th Floor New York, NY 10018 Tel: 646 839 7017 LONDON: 242-‐246 Marylebone Road London, NW1 6JQ United Kingdom Tel: 44 (0)20 7616 8988 FBICGROUP.COM

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January 12, 2016 - fbicgroup Group Multi-Cha… · expanding(German(e?commerce(market,(where(the(group(faces(competition(from(the(likes(of(retail(giant(Amazon. (MULTI-CHANNEL INVESTMENTS