Metro did not pass in Russia

The shares of the German company fell due to losses in the Russian market. In Metro itself, they explain all the crumbling hopes for the restoration of Russian small and medium-sized businesses.
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It was bound to end this way sooner or later. Metro Cash & Carry has always positioned itself as a store for small and medium-sized businesses. In a situation where this very small business disappears in Russia before our eyes, what can be the fate of these stores? - Correctly.

Shopping centers Metro Cash & Carry were considered a model of German investments in the Russian economy. But now the success story threatens to turn into a history of decline.

In Germany, Metro AG shares collapsed to a historic low, and it happened because of Russia. The leadership of the German trading company at the end of April shocked investors with a warning that it will not achieve the targets for the current fiscal year in terms of turnover and profit growth. At the same time, the main reason was the weak development of business in Russia. No other regional market is mentioned in this written statement, although Metro Cash & Carry shopping centers operate in 25 countries around the world.

"I, I must admit, was very surprised, because until now, Russia has been the best region for Metro in this indicator, like the rate of operating profit," Gerold Deppisch, an analyst at Landesbank Baden-Württemberg in Stuttgart, told DW. He no longer recommends investors to buy shares of Metro and is now looking forward to May 15, when the company's headquarters in Düsseldorf will publish the results of the first half of the current fiscal year.

On this day, Metro management will need to explain to both its shareholders and analysts why it until very recently counted on "a noticeable improvement in revenue in Russia in the second half of the year," and now all of a sudden, they parted with these hopes. But most importantly, they are waiting for explanations, what exactly is meant by the "new positioning of business" in Russia, which is mentioned in the April message for investors, and how much it will cost.

If the presented plan does not convince the participants of the stock market, a new wave of sale of Metro shares is threatened, which, compared to the February peak, already lost a third of the cost. Then the chair under the chairman of board Olaf Koch (Olaf Koch) can even rock. In any case, the company Pieter Boone (Pieter Boone), who grew up as the CEO of Metro Cash & Carry Russia to the head of the entire small wholesale division of Metro, the company on May 7 has already sacked.

This symbolic resignation suggests that the rapid expansion of the Metro Group on the Russian market, which served as a model for successful direct German investments in the Russian economy for a decade and a half, now threatens to turn into a history of decline.

Actually, it has already begun. How else to perceive, for example, the reports that appeared in April that Media Markt is going to sell its business in Russia? And after all, there are 65 shops of electronics and household appliances in 27 cities of the Russian Federation, opened just at the time when Media Markt was still part of the Metro Group.

The first two of them appeared in 2001 in Moscow, then they began to open in the Moscow region, St. Petersburg, Rostov-on-Don, the Urals, Siberia. Today, there are 90 of them in 51 one region, the company's website reports, and they provide about 16,000 jobs.

So Metro Group has become one of the most active and large, multibillion-dollar German investors in Russia. Therefore, it is not by chance that the head of this concern Eckhard Cordes (Eckhard Cordes) was elected in 2010 by the chairman of the board of the Eastern Committee of the German economy - a very influential organization in Germany lobbying the interests of large business in the post-Soviet space.

In the fall of 2013 it became known that Olaf Koch, who had replaced Cordes at the head of the Metro Group, intends to turn the Russian division of the concern into a public joint stock company and place some of its shares on the stock exchange, and proceeds from the IPO will be used for further expansion in Russia. This ambitious plan was the culmination of a success story. Soon things went downhill.

However, back in May 2014 Koch at the St. Petersburg International Economic Forum (SPIEF) continued to talk about a possible "expansion of our activities in Russia." He was then the only head of a large German company who came to this event, which took place two months after the annexation of the Crimea against the backdrop of a growing armed conflict in eastern Ukraine.

All this was followed by a fall in the ruble exchange rate, the Russian food embargo, the economic crisis in Russia, and further aggravation of its relations with the West. Already in early 2015, Metro Group postponed the IPO of the Russian unit for an indefinite period, and a year later Olaf Koch finally buried his plan. At that time, the concern in its quarterly reports regularly reported losses incurred in the Russian market when recalculating revenue and profit in euros.

In the small shops Metro Cash & Carry are bought small and medium businesses

However, in 2017, the Russian economy emerged from the recession, the ruble was relatively stabilized, import substitution in the area of ​​food products earned, and the new Metro AG, apparently, decided that the worst in Russia is already behind. Especially since the world football championship is ahead, with which the Russian stores of the company seem to have had high hopes until recently. And suddenly - a sobering message for investors.

"In a situation where the price sensitivity of Russian consumers has increased significantly, and rapidly expanding Russian retailers are actively attracting buyers with constant discounts and promotions, Metro stores that did not want to reduce prices as aggressively began to be perceived as too expensive," said an analyst in an interview with DW. Commerzbank in Frankfurt am Main, Jürgen Elfers.

At the beginning of this year he visited Moscow for the fourth time, where he visited retail enterprises of the capital and the region, and then published two studies on the largest Russian retailers, among which Metro AG takes 6th place. Forecast by Jürgen Elfers: "To improve the situation in a short time Metro is unlikely to succeed, the Russian market today is much more difficult than it was ten years ago."

Alexei Korenev, an analyst with the Moscow-based Finam group of companies, came to a similar conclusion with DW. "The problems of Metro Cash & Carry in Russia are primarily caused by competition with large federal networks, with disposable income declining in the population, so its buying priorities have shifted towards cheaper products, into the economy segment, and Metro is losing considerably."

However, the matter is not only in the price competition, which, for example, one of the two leaders of the Russian market, Magnit, suffers, forcing the founder of the company, Sergei Galitsky, in February this year to even sell his shares at a very unprofitable price for him.

The specificity of the business model of Metro Cash & Carry shopping centers is that they are not oriented at all to a wide range of customers (hence the need to issue a client card). They are engaged in small wholesale trade and are positioned as "professional suppliers for small and medium businesses". Their target audience throughout the world are hotels, restaurants, catering companies, offices, farmers, private practitioners, architectural bureaus, law firms, in short: a middle-class business.

Therefore, in the past decade, the opening of Metro Cash & Carry shopping centers in all the new cities of Russia very graphically showed that small and medium-sized businesses have successfully formed and developed there. But are not the problems of the Metro AG that are aggravating now the indicator of the worsening state of the Russian middle class? "Indirectly, yes," Aleksei Korenev confirmed, "Small and medium-sized businesses are now forced to economize and seek, where cheaper, simpler."

So it may well be that the German company in its time greatly overestimated the prospects of the Russian market economy, and then did not realize in time the deep political changes that had taken place in the country. Therefore now it has collided in Russia not just with increased competition and weak ruble, but with the crisis of its business model itself. But for the time being it is simply not ready to admit it - neither to its shareholders, nor, perhaps, to itself.