Metro’s mission: the spirit of commerce

Changes are afoot among the retail giants of Germany. Takeovers of the smaller companies have not always had the desired results and some units are underperforming. Can consolidation or even French know-how provide a solution?
Elsevier Food International, Vol. 11, Number 1, February 2008
Klaus D. Schwarz

About 15 years ago when Wal-Mart started its international expansion, market analysts stated that it would not be a question of whether Wal-Mart would take over Metro but when. Today we know that analysts can be wrong despite seeming to have more insider knowledge than normal mortals.
Both worldwide retail giants made their own ways, often targeting the same countries or companies. Wal-Mart had to cope with some defeats, as was the case in Germany. Metro had, and still has, its problems too but the speed of conquering new countries could generously blanket unsatisfying performances – especially in Germany. If you are the first one to enter India, Pakistan or Vietnam you will be admired by the rest of the (retail) world. Metro’s former CEO Erwin Conradi had set up several rules back in the 1970s and 1980s. One of these was. “You can only be successful abroad if you have a successful market position at home”. Of course Metro was, and is, successful at home performing first as a market leader in the cash & carry business and later on with its home electronics markets Media Markt and Saturn. However, it always had some skeletons in its cupboard. In order to improve its unsatisfying results in the food retail business, the company chose to acquire more and more competitors following the principle of ‘joining several sick (companies) could perhaps lead to one healthy one’. Possible synergies and the positive effects of economies of scale were obviously overestimated. The question of why former German Wal-Marts should make a profit after being converted to Real (which did not make any profit either) still awaits an answer. Some market analysts in Germany tell us that Wal-Mart is waiting until Metro has made the hypermarkets profitable and will then return. From time to time the Metro board remembered that the hypermarket business was originally invented by their French colleagues.

French know-how as a solution?
The board had always had special links (professional and personal) with Carrefour. So in August 2007, they decided to bring former Carrefour top-manager Joel Saveuse (responsible for Carrefour-Europe) to the Düsseldorf headquarters. In France, Carrefour had lost market share to discounters and hypermarket competitors, had reduced its portfolio to fewer formats, invested in fierce price wars, and finally won back its leading position. As we know from the Netherlands, Ahold travelled along the same stony path – also with success.
It is not unusual in Germany’s retail history that two brothers start a small company and develop this into a worldwide empire. As was the case with the two Albrecht brothers and their Aldi stores, and also that of the two brothers Wilhelm Schmidt-Ruthenbeck and Ernst Schmidt with their first Cash & Carry outlet called Metro SB-Grossmarkt in 1963. A year later, Otto Beisheim became general manager of Metro. Beisheim convinced the Haniel family to join the newly founded company and invest their money in the expanding network of Cash & Carry outlets across Germany. The three parties Schmidt, Haniel and Beisheim had an equal share in the company. After a very successful expansion and acquisition of many companies (amongst others the Kaufhof department stores) the Metro Group was founded in 1996 as a holding company and its shares of Metro AG became part of the German Dax. Until 7 August 2007, the Metro shares were owned by Otto Beisheim (18.8 per cent), Franz Haniel & Cie (18.4 per cent) and the Schmidt-Ruthenbeck family (13.0 per cent). The three owner families had an agreement that their shares together should always have the majority of 50.1 per cent.

Does change of power lead to a change in philosophy?

Metro has undergone some major changes during the last few months including the appointment of Dr. Eckhard Cordes as chairman and CEO.

However, in late August 2007, Franz Haniel & Cie announced having purchased additional shares, increasing their ownership to 34.24 per cent. The Schmidt-Ruthenbeck family had increased its shares up to 15.77 per cent. The implication was that they now together owned 50.01 per cent of the shares and could therefore overrule the opinion of Otto Beisheim if decisions and changes were to be made. They immediately used this newly gained power. First of all they changed its top management. Hans-Jürgen Körber was sacked and replaced by Eckhard Cordes who had been president of the supervisory board and at the same time CEO of the main stakeholder Haniel & Cie. He was now also CEO of Metro. On 8 November 2007, Germany’s leading daily economic newspaper Frankfurter Allgemeine Zeitung ran the following headline: “Das Doppelleben des Eckhard Cordes” (the double life of Eckhard Cordes). In this case ‘double life’ refers to somebody with a second (disguised) personality. And everybody with a slight knowledge of German and international rules of listed companies wondered: how can the CEO be controlled by the supervisory board if both functions are united in one person?
Some weeks after Cordes’ appointment, the German public learned that further changes in favour of the owner families had been decided. Franz Markus Haniel joined the supervisory board. In other words, another representative of the Haniel owner family will be exercising control over himself. However, it seems as if the new Metro leaders are not so comfortable with this constellation and have announced to be appointing (they say electing) a new president of the supervisory board as soon as possible.

Selling off the family silver or safeguarding the assets?
In 1997, Hans-Jürgen Körber took over the helm of the company and led it from a national company (seven per cent of the sales came from abroad) to an international company with more than 55 per cent of its revenues from outside Germany. Products that did not form part of the core business of Metro such as furniture, home improvement products, shoes or clothes were either sold or placed with the common company Divaco, the duty of which was to find a final solution for

Metro had to find its own way of expanding in Eastern Europ and Asia

these mostly underperforming companies. Next, and after having listed Praktiker (home improvement) on the stock exchange, Metro could concentrate on four pillars: cash & carry (Metro/Makro), superstores and hypermarkets (Extra/Real), home electronics (Media/Saturn) and department stores (Kaufhof). Internationalisation was boosted in 1998 when Metro bought all European outlets of its Dutch partner Makro. This turned Metro into a pan-European company overnight. However, as the Dutch did not sell their overseas locations, Metro had to find its own way of intercontinental expansion – especially in central and eastern Europe and in Asia. The year 2006 was one of the most successful years for Metro. Net sales were up 7.5 per cent to 59.9 billion euros, which was more than forecast by the company itself. Net profit climbed to 1.06 billion euros – more than ever before. So why did they dismiss Hans-Jürgen Körber? Nobody knows exactly. Perhaps the main shareholder families thought it was time for a new generation to take over. Perhaps Hans-Jürgen Körber could not reach an agreement concerning the huge value of assets owned by Metro Group. “We should not sell the family silver because this is our warrantee for further success and sustainable growth,” he argued for continuity. “But it’s not the core business of retailers or wholesalers accumulating buildings or real estates” could be argued by those with a different point of view. So why not sell these and distribute the profits or annual interest incomes to the shareholders or at least put the money into further expansion or refurbishing of existing stores? Perhaps private equity companies or financial experts succeeded in pushing things in this direction and urged a change of mind against the more conservative position of Körber.

Consolidation seems inevitable
On the other hand there is no need to read the tea leaves to find out that patience with underperforming units has its limits. Everybody knows that German superstores and hypermarkets (Extra and Real) are making losses and that the Kaufhof department stores are showing disappointing profits. Whereas foreign adventures need time - sometimes several years - to get into black figures, the benchmark for Germany should be more rigid. So it comes as no surprise that speculations concerning Kaufhof, Extra and Real immediately after the dismissal of Körber flourished in all colours and varieties. After years of painful consolidation, there was still one German department store left besides Kaufhof. This was Karstadt (today part of the Arcandor holding). Experts recommended that the Karstadt and Kaufhof department stores should merge as this could be a reasonable solution for both. This solution has still to be realised. In the case of Real, Kaufland (Schwarz Group) is still the most powerful hypermarket company in Germany. They may be able to make the Real hypermarket profitable again. However, as this is the dominating retailer in this area it is unlikely that competition authorities would grant permission for such a merger. So let us wait and see if the new French manager Joel Saveuse can realise the turnaround. Before leaving Metro, Körber had checked the Extra network as the first likely ‘victim’ of a forthcoming restructuring operation. It didn't take long. In January it was announced that the Rewe Group will take over the 245 Extra supermarkets with effect from 1 July this year. The sale allows the Metro Group to reduce its balance-sheet net debt by around €350 million. The rating-relevant net debt will even decrease further by more than €670 million.
"The sale of Extra enables us to concentrate our food retailing operations solely on Real and thereby focus more effectively our resources on the further successful re-positioning in Germany," said CEO, Kordes.

Huge benefits from abroad and best results ever
There is more to be happy about if Metro looks at its foreign ventures. Most of these seem to contribute to the group’s profit. Today, Metro Group operates in 31 countries in 2,400 locations (778 of these with general merchandise only), served by 270,000 associates, 5,500 of which are employed at Düsseldorf headquarters. As the crew at headquarters is recruited from over 30 countries, some of whom need to have their children looked after during working times, Metro has now established its second bilingual (German-English) Kindergarten – you may call it a very sustainable way of recruiting future employees.
Looking at the results of 2007 sales were up by 10 per cent to 65 billion euros (Germany +7.4 per cent, abroad +13.5 per cent). The international sales of €38 billion were a record 57.7 per cent of total sales.  In other words, the fruits of its international investments are significantly contributing to Metro’s general performance. And this is undoubtedly still owing to Körber’s vision.
Looking back on Körber and his board colleagues’ merits we have to acknowledge considerable progress in the fields of ECR, RFID, food safety and other initiatives improving the supply chain, availability and safety of merchandise, optimisation of logistical processes thus improving profits of all parties while better serving the consumer. If Metro’s supervisory board is now looking for a person to be ‘elected’ to continue Körber’s strategy it will not be easy for him or her to find the right way. Maybe the main shareholders will insist on cutting off, closing, shrinking or selling hypermarkets, superstores or department stores. Maybe they want to draw more money out of buildings, real estate or other assets. Maybe private equity companies are eying the world’s third largest merchant of consumer goods.

Integrated part of our society
Incidentally, Metro not only buys and sells goods. It is the main sponsor of the Düsseldorf ice hockey club Metro Stars, organising exhibitions and events to explain to a broader public what wholesalers and retailers are contributing to society, how modern IT technologies can be implemented and can make life easier and more transparent for everybody taking responsibility for healthy nutrition. Together with, among others, the German soccer coach Metro tells us how to become or stay fit and healthy and in good physical and mental condition. So Metro was well on the way of becoming an integrated part of society as we know it from leading companies in Anglo-Saxon countries. This was quite new for Germany, especially since Germans are normally on the alert if somebody tells them things that are not directly related to his core business. What are they hiding? Am I being cheated? No they were not, they were following a new approach building up sustainable confidence between retailers and consumers and between wholesalers (as a cash & carry operator) and retailers. Guido Barilla spoke of this approach in a very impressive and convincing manner during the ECR conference last June in Milan. One of the latest examples is Metro’s initiative to support individual operators of small convenience stores. Therefore they integrated small sample convenience stores in their cash & carries to discuss different assortments, merchandising and marketing ideas with these merchants who do not have the knowledge, time or power to experiment with new developments. The same spirit could be felt when Frans Muller, responsible for Metro’s international expansion, presented the company’s efforts to educate and equip fishermen in India in order to be able to deliver their products to far away markets. The spirit of social responsibility is not so new at Metro. Though in former times Metro preferred that nobody should know too much about its empire, it was its founder Otto Beisheim who in 1993 already donated the sum of 50 million Deutschmarks (about 25 million euros) to the WHO business school situated at Vallendar near Koblenz, since named the ‘WHU Otto Beisheim School of Management’ (http://www.whu.edu). Meanwhile this private university has gained an excellent reputation and is very highly esteemed among students and companies – especially those who are internationally oriented. By those examples we learn a bit more about the real meaning of sustainability. Let us hope that this spirit will not be sacrificed by a future management team, private equity companies, bookkeepers or nitpickers. Up to now, one of Metro’s guidelines and missions was titled The Spirit of Commerce, which should express the company’s obligation towards corporate social responsibility.