Metro Сash & Carry losing money in Russia

The German Metro Сash & Carry in 2018 reduced revenue by 6.1% and in two years shifted from the 2nd to the 9th place in the ranking of the largest foreign companies operating in Russia.
30.09.2019
Forbes
Origin source
This is largely due to the fact that the format of hypermarkets is going through hard times.

Golden times for the western trading giants in Russia have passed. Their huge supermarkets are losing competition to convenience stores and e-commerce. One of the flagships of the European retail, the German Metro Сash & Carry, in 2018 reduced revenue by 6.1% and shifted from the 6th to 10th place in the rating of the largest foreign companies operating in Russia (and in 2017 it was on 2 m); French Auchan is still the leader in the ranking, although its revenue fell by 8%. Why is the “store for shops” retail format from Germany losing popularity in Russia?

Victim of politics

“Everything will be like here in the West,” promised Metro Сash & Сarry Chairman Thomas Hubner in 2002, a year after the opening of the first Russian Metro Сash & Carry. The Germans started in the Russian capital merrily and noisily - with an ensemble of songs and dances and Moscow Mayor Yuri Luzhkov. In July 2019, in the Solntsevo district of Moscow, Metro Сash & Сarry routinely opened its 94th store in Russia. Sergei Sobyanin congratulated the employees of the German company on Trade Day and said that they will have to work in a complex but promising market. In recent years, Metro Сash & Carry's prospects are not very bright: from 2014 to 2018, the revenue of the Russian division decreased by € 1.5 billion, to € 2.8 billion.

In the 2000s, Russia was one of the fastest growing and most profitable markets for a German company. Trade volumes grew, the margin for certain types of goods reached 70% with an average in Europe of 5%, recalls Tatyana Glukhareva, former purchasing manager of the company. One of the reasons for the current problems of the company, analysts call, oddly enough, the methodology and thoroughness of the Germans, who do not have time to respond to rapid changes in consumer preferences. “Digitalization of a business requires changing approaches to trading, Metro’s revenue and share is reduced due to increased competition, and the business model requires fundamental adjustments,” says Jerry Kalmis, former head of Metro Сash & Carry in Russia. “I tried to make changes in the business as quickly as possible.”

Kalmis was appointed the head of the Russian Metro Сash & Carry in 2016, he was supposed to accelerate the inertial and clumsy model, but he left the post of CEO in June 2019, five months before the expiration of the contract. Kalmis does not comment on the reasons for his departure. “Firstly, I signed a non-disclosure agreement. Secondly, they didn’t completely pay me, ”he explains in an interview with Forbes. Metro Cash & Carry Russia is a very strong company, this business generates a good flow of $ 3 billion a year. I still buy products at Metro. And sometimes, not finding something in the store, I photograph the empty shelf and send it to my former colleagues with the question “Where is my product?” Kalmis says. He was replaced by the former director of the Ukrainian Metro Сash & Carry Martin Schumacher. Under him, dramatic events developed in the Donbass and in the Crimea, affecting the company's business. He refuses to talk about them in detail. “Political changes have affected many markets. In my observation, they became a challenge and had a negative impact in the short term, but allowed to rethink the approach to business in the long term, ”Schumacher is short.
In March 2014, a referendum was held in Crimea, and the peninsula became part of Russia. Germany did not recognize the accession; the chain stores in Simferopol and Sevastopol ended up in an area with a disputed political status. “Now two stores in Crimea are managed by separate Metro enterprises that are not controlled by Metro Cash & Carry Russia or Metro Cash & Carry Ukraine,” a representative of Metro Cash & Carry headquarters in Dusseldorf explained to Forbes.

In May 2014, one of the Metro Сash & Carry stores in Ukraine was on the line of fire. Then fierce battles began for the Donetsk airport between the armed forces of Ukraine and the formations of the unrecognized Donetsk people's republic. In late May, after bloody battles for the airport using helicopters from the Ukrainian side, Metro Сash & Carry closed a hypermarket located one kilometer from it, evacuated employees and removed security. Marauders removed all goods from the store in just a day. Later, the Ukrainian Metro Cash & Carry estimated the size of the stolen at € 1 million. A local store was opened in the premises of the former German hypermarket, but Metro Cash & Carry continues to consider this outlet to be its own. They are simply closed, a representative of the German company’s parent company answered the Forbes question about the status of stores in Lugansk and Donetsk.

Martin Schumacher has stabilized the business in Ukraine as a whole: Metro Cash & Carry Ukraine indicators are returning to pre-crisis indicators. The company's revenue in 2014 amounted to € 531 million, then decreased to € 425 million in 2015 and € 420 million in 2016, but began to recover in 2017 and reached € 523 million in 2018. Events in Ukraine negatively affected to Metro Сash & Carry’s business in Russia. The West imposed sanctions, Russia responded with a food embargo, under it, according to the chairman of the board of the Russian-German Chamber of Commerce (WTP) Matthias Shepp, about 7% of the assortment of Russian Metro Сash & Carry stores fell. I had to look for new suppliers in Brazil and Chile. “In addition, imported products have been partially replaced by Russian manufacturers,” says Shepp.

Wholesale for wholesale

The first Metro AG store was opened in the German city of Mülheim in 1964. He worked for wholesalers who could buy goods for cash (cash and carry principle) for resale in retail. The idea of ​​creating a new format came to the mind of hereditary merchants Wilhelm Schmidt-Rutenbeck and Erwin Schmidt and the Shell family, which owned a company for the production of electrical appliances. The initiative was supported by the German family-owned investment company Haniel. But another founder of Otto Beisheim, under whose control the network began to earn billions, is considered the main engine of development of Metro AG.

And Beisheim himself, thanks to Metro, has become one of the richest citizens of Germany. He was born in a family with a modest income, and his parents could not even pay for the boy’s education in high school, so he was forced to go to learn the working profession of a tanner. He did not have to work for a specialty for long: the Second World War began, and Beisheim went to the front. According to the Ministry of Culture of Bavaria, he served in the SS troops, but, as the ministry noted, he did not participate in war crimes. After the war, Beisheim worked in one of the electronics stores and, having fallen on a business trip to the United States, was amazed at the scale of American retail. Returning to his homeland, he joined the Metro AG team and began to develop a hypermarket chain. “At the headquarters level, we studied the history of the opening of the first store in Germany,” says Vladimir Martynov, a former manager of the Russian Metro Cash & Carry. “But everything was pragmatic in German: we looked at the American market and opened just such a format.” As it turned out, this format was lacking throughout Europe.
Four years after its founding, Metro Cash & Carry entered the international market - first to the Netherlands, two years later to Belgium. By that time, 13 hypermarkets were already operating in Germany. Two years later, the company did business in Austria, France, Italy and Spain. By the 20th anniversary, she brought the number of European stores to one hundred. In 1990, Metro Cash & Carry expanded its presence with the opening of the first hypermarket in Turkey, in 1996 in China, in 2002 in Japan and Vietnam. By the fortieth anniversary of business in the empire, Otto Beisheim managed 500 hypermarkets around the world (now there are 764).

In February 2013, a maid in the Otto Beisheim suburban mansion in Bavaria heard an unusually loud bang from the owner’s wing. In the bathroom, she found dead Beisheim. He shot himself at the age of 89, the German media called the cause of suicide the co-founder of Metro AG a serious illness, what kind of illness it was, journalists did not recognize it. His wife, whom he had been married for about 50 years, passed away in 1999. Contrary to many rumors, Beisheim was not officially bound by marriage with his common-law wife, Danish Lisa Evers. “He was my life partner and partner,” Evers said in an obituary. If their marriage was registered, a woman could become one of the richest in the world, but life decreed otherwise. As a result, Beisheim shares (about 10%) went to two charitable foundations bearing his name, located in Munich and Baar. Forbes estimated Beisheim's fortune in 2012 at $ 3.3 billion.

In 2018, the family-owned company Haniel, dissatisfied with the results of the work of Metro AG, began selling its share in the network: EP Global Commerce (EPGC), controlled by Czech billionaire Daniel Krshetinsky and his Slovak partner Patrick Tkac, bought a 7.3% stake. The German media called this deal a fatal mistake due to the fact that the buyers were foreigners, and even not from the trading sector - the new shareholders were engaged in the electric power industry. However, despite criticism, Haniel in 2018 proposed the EPGC to buy its remaining 15.2% stake. But the deal was blocked by other shareholders of Metro AG, believing that the proposal would reduce the value of the entire asset. The capitalization of Metro AG on the Frankfurt Stock Exchange in September 2019 amounted to € 5.3 billion. Metro AG revenue in the fiscal year 2017–2018 amounted to € 36.5 billion - € 700 million less than a year earlier, net profit grew only by € 3 million, up to € 348 million (two years earlier it reached almost € 520 million). In Russia, in 2014, with revenue of 240.4 billion rubles, the company earned 14.7 billion rubles of profit. Since 2016, the company's turnover decreased every year, profit fell from 13.3 billion rubles (2015) to about 5 billion rubles (from 2016 to 2018).

New formats
 
Metro was the first to offer Russian customers to purchase goods in huge hypermarkets (Auchan arrived only a year later, in 2002). The main task for the Germans in the free Russian market from the very beginning was expansion. After the first two hypermarkets in Moscow, Metro in 2003 opened two more in St. Petersburg and at about the same speed began to develop its distribution network in cities with over one million people. The most active expansion of the network was in 2010-2012, said former employee Vladimir Martynov. Then began the contraction of the business. In 2012, Metro AG put up for sale the Real chain in Central and Eastern Europe, including 17 hypermarkets in Russia, as a result, the French Auchan bought them for € 1.1 billion. In 2017, Metro AG Chairman of the Board Olaf Koch announced the withdrawal from a company selling electronics and household appliances under the brands MediaMarkt and Saturn. Koch explained this step in an interview with Russian Forbes in 2017 with the need to simplify the governance structure during the reform period. In 2018, MediaMarkt’s Russian business was sold to the M.Video-Eldorado group, controlled by the family of billionaire Mikhail Gutseriev.

“In Russia, we completed the expansion at 94 shopping centers in 51 regions from Kaliningrad to Irkutsk,” summarizes the 19-year-old investment by Martin Schumacher. - We came to the presence of a large, powerful, not the most flexible infrastructure, which was to take the path of adaptation to the realities of the market. And you need to do this very quickly. And that’s what determines my next steps. ”

According to Victoria Davitaia, head of the retail sector of the research company GfK Rus, hypermarkets are currently experiencing hard times and can no longer boast of the lowest prices, although previously this was one of their main advantages. In addition, large-format stores provoke unplanned purchases and take a lot of time, so many prefer to buy goods at retail outlets within walking distance. According to GfK, the most difficult year for large retailers was precisely 2018, when the share of hypermarkets in value terms fell by 1.6 percentage points over the year, to 16.3%. However, Metro's market share in the cost of household goods remained at a stable level - 0.9%, notes GfK.

Metro Сash & Carry already had to deviate from the basic principle - betting on wholesalers. In 2014, the company launched the Fasol project of convenience stores (more than 1,400 outlets throughout Russia). In 2019, Metro opened its first online store, and individuals can also use delivery. Geographical expansion no longer brings the desired increase in turnover and profits, consumer incomes do not grow, new ideas are needed, says Victoria Davitaia. “Metro Cash & Carry can no longer remain only a hypermarket: it should become a hybrid - a trading and service platform with an online delivery network,” says Jerry Kalmis, the former head of Metro Cash & Carry in Russia.

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