Presentation of the risk situation

METRO GROUP primarily faces the risks that are described in the following section.

Business and sector risks

As an international company, METRO GROUP is dependent on political and economic developments in the countries in which it operates. In many European countries, customers are deeply unsettled by the sovereign debt crisis and its effects, including government austerity programmes, as well as rising un­employment. This is dampening purchasing power, consumer confidence and, as a result, private consumption, which in turn makes it more difficult for us to achieve our sales growth objectives. Overall, we expect economic developments in Europe and other developed economies to bottom out in 2013 following a sharper than expected downturn in 2012. Despite a loss of momentum compared with previous years, we expect the growth markets of Asia to profit from a continued strengthening of domestic demand and the emergence of an affluent middle class. Compared with 2011, the risk-and-opportunities profile for the short- to medium-term development of the retail sector and thus for METRO GROUP has improved only slightly. We are continuing our selective expansion in the growth regions of Asia and Eastern Europe to reduce potential risks posed by the regional variation in economic developments. In the process, we are focusing on business units and countries where we can build a distinct profile and strong market position. For example, the METRO Cash & Carry sales line opened 12 new stores in China in 2012 – more than ever before within one year in one country.

Our international position requires us to address possible economic, legal and political risks. The situation in individual countries can change rapidly. Unrest, changes in political leadership, terrorist attacks or natural disasters can endanger METRO GROUP’s business in the affected country. We insure ourselves as far as possible and to the appropriate extent against business interruptions that, for example, are the result of political unrest. Professional crisis management allows for a fast response and crisis management. At the same time, the international expansion of our business provides us with the opportunity to offset economic, legal and political risks as well as fluctuations in demand in individual countries.

To limit the risks of expansion as far as possible, we plan each market entry meticulously. We identify risks and opportunities by conducting feasibility studies. We only enter new markets when risks and opportunities are deemed to be manageable. Risks can also be reduced by forging partnerships with local companies. These businesses know the legal, political and economic environment of the respective country. Even though we base our expansion decisions on the best available information, we cannot rule out the possibility that the growth momentum in individual countries will fall short of our expectations in the coming years.

Details about the assessment of economic developments can be found in chapter "Forecast report".

Risks related to the retail business

The saturated markets of Western Europe, in particular, are characterised by rapid change and intense competition. The resulting conditions can influence business developments and represent natural business risks. A fundamental business risk is consumers’ fluctuating propensity to consume.

Shifting consumer behaviour and customer expectations pose risks and opportunities – including in the face of demographic change and increasing digitalisation. Failing to adequately consider customer trends and price developments or missing trends in our assortments or with respect to new sales channels can have a negative impact on Group sales and jeopardise METRO GROUP’s growth objectives. To account for these factors, we continually optimise our merchandising concepts and adapt them to our customers’ needs and consumption patterns. For example, we are expanding our range of regionally traded products and increasingly customising our assortments to meet our customers’ increasing demands with regard to ecological, social and health considerations. All sales lines have established growth programmes aimed at boosting sales and earnings and protecting the intrinsic value of our assets. To recognise market trends and changing consumer expectations early on, we regularly analyse internal and external information. In the process, the Group’s own market research draws on qualitative market and trend analyses as well as quantitative methods such as time series analyses or forecasts of market developments derived from analyses of sales data and the results of panel market research. Time series analyses also include the observation of product segments on the market over a certain period of time. Our sales lines initially examine the practicability and acceptance of innovative concepts in test stores. Only after successful conclusion of these tests will innovations be introduced systematically and swiftly in other stores. METRO GROUP continuously allocates funds to optimise merchandising concepts and modernise stores. These measures help to secure and expand the competitive strength of all sales brands. Examples include a distinct intensification of our online activities and multichannel business, added delivery options, measures to strengthen our own brands, investments in innovative sales formats and the expansion of our sales activities. In this way, we can reach customers even better and in a more targeted manner.

Internet sales are an important opportunity and, at the same time, a significant risk to our Company’s future success. Online retail is experiencing strong growth. We expect this development to continue. As a result, it is imperative for METRO GROUP to further strengthen its Internet sales channel to ensure that it does not leave competitors any room to gain market share. We are taking successive steps to expand our sales lines’ online business. In the financial year 2012, we made important strides in our transformation from a purely stationary provider to dovetailed multichannel sales operations with the online stores of Real, Media Markt, Saturn and Galeria Kaufhof. Risks related to this strategy include the high demands placed on logistics and information technology: the success of our multichannel offering depends on our ability to offer our customers fast and reliable deliveries and to guarantee safe, convenient ordering. In addition, it is important to optimally link the stationary business with electronic retailing. With the Redcoon group, one of the leading online retailers of electronic products, we have added a pure play online retailer to our portfolio to counter competition from the sales segment focused exclusively on the Internet.

Location risks

Various factors pose a risk to the intrinsic value of METRO GROUP’s portfolio of locations. These include

  • intense competition over suitable properties,
  • the risk of poor decisions on the choice of location which can be reflected in new store openings failing to attract the expected customer response as well as
  • a deterioration in the profitability of a location, for example due to declining sales or rent increases.

Additional risks include outdated locations and the need for maintenance or repair work.

METRO GROUP counters these risks through active property management and professional strategic and operative investment controlling as well as the technical risk management of our real estate company METRO PROPERTIES. In all countries, we select our locations on the basis of an intense examination. By continually monitoring the profitability of our network of locations, we can identify adverse developments at individual stores or retail outlets early on and respond quickly. If none of the measures taken produce the desired result and a sustained improvement in the situation at the respective store or retail outlet is considered unlikely, we will divest of the store and thereby ensure the permanent optimisation of our network of locations.

Risks from portfolio changes

METRO GROUP aims to continuously optimise its portfolio. All portfolio changes and the related strategic and investment or divestment decisions focus on their contribution to the Company’s success in terms of value-based management. We can reduce risks related to the intrinsic value of our assets – both in terms of individual groups of assets and our overall portfolio – through value-based management.

During the reporting year we sold the cash & carry stores of MAKRO Cash & Carry in the UK including its entire operating assets to Booker Group plc. Also in 2012 we announced plans to sell the Eastern European business of our Real sales line. This transaction is subject to the approval of the relevant antitrust authorities and is scheduled to be closed in 2013. Following a 2-year test phase, we have decided to discontinue the activities of Media Markt in China. Risks resulting from these portfolio changes are reflected in the financial statements.

Risks related to business performance: suppliers and products

As a retail and wholesale company, METRO GROUP depends on external providers for the supply of goods and services. We choose our suppliers very carefully, particularly in the own-brand area. We place a particularly high priority on the reliability of our suppliers in terms of product reliability and compliance with safety and social standards. Defective or unsafe products, an exploitation of our environment or inhumane working conditions would cause extensive damage to the image of METRO GROUP and pose a long-range threat to the Company’s success. For this reason we continuously monitor our own-brand suppliers to check whether they adhere to METRO GROUP’s high procurement policy standards. In particular, these include the quality standards tested by the Global Food Safety Initiative (GFSI), such as the International Food Safety Standard and the GLOBALGAP certification for agricultural products. They help to ensure the safety of foods on all cultivation, production and sales levels. In addition, we conduct special training programmes to help suppliers in emerging markets to fulfil safety standards. We will broaden the training curricula to cover environmental aspects and standards for fair and humane working conditions as well.

Above all, our requirements of our suppliers are regulated in special contracts which are regularly reviewed for compliance. Violations of conditions can lead to exclusion from our supplier network or, in case of inacceptable production methods such as sandblasting of jeans, which is harmful to health, to a procurement ban on a product. In this way, we further minimise our supplier risk. Should, however, an incident related to quality occur, the process steps described in our manual on incidents and crises take effect. During this time, an appropriate management of the incident is our first priority. In addition, we examine possible improvements to our quality assurance systems.

To prevent disruptions in the supply of goods and to avoid becoming dependent on individual companies, we work with a variety of suppliers and ensure that we do not become dependent on individual companies. By taking this approach, we ensure that the desired product is practically always in stock in the desired quality and quantity and, in the process, achieve high levels of customer satisfaction.

Our success also depends heavily on the procurement prices of the products offered for sale. In many cases, our large purchasing volumes in numerous countries have a positive effect. Product prices are based on the availability of the required raw materials that may temporarily or continually become scarce. This can drive up procurement prices or lead to a certain level of volatility. For example, increased energy prices can lead to higher procurement prices for a variety of products.

But products themselves can become scarce, too. One case in point is fish, which can become scarce as a result of overfishing. For this reason, METRO GROUP launches own measures and supports initiatives fostering the sustainable use of natural resources. In the fisheries area, for example, we have developed a Group-wide procurement policy and play an active role in the Marine Stewardship Council (MSC) and Aquaculture Stewardship Council (ASC). These organisations award product seals for sustainable fishery or aquaculture aimed at the conservation of fish stocks. As early as 2011, METRO GROUP also joined the Roundtable on Sustainable Palm Oil (RSPO). The organisation, which includes companies and non-governmental organisations, works towards the sustainable cultivation of palm oil plants, a raw material used in cosmetics and sweets, in particular. Among other things, we address supply shortages resulting from population growth through central trading offices in key procurement markets.

Other examples of product risks include supply bottlenecks after natural disasters, longer delivery times and price increases. METRO GROUP’s procurement management creates the necessary structures to ensure a sufficient supply of goods at all times.

Our activities to foster a sustainable supply chain are described in chapter "Sustainability management".

Business performance risks: logistics

The responsibility of logistics is to ensure a high security of goods supplies at optimised cost structures while considering sustainability-related aspects such as energy and fuel consumption. The wide variety of goods and articles and the high merchandise turnover, however, result in organisational, IT and logistics risks. The Company’s international positioning and focus on national, regional and local product assortments increase these risks. Additional challenges arise from the expansion of our online activities and our multichannel business, delivery options and other innovative sales formats. Any disruptions in the supply chain, for example in the supply of goods, could lead to business interruptions. We reduce our dependency on individual suppliers and service providers by expanding our circle of business partners and employing the principle of efficient assignment of responsibilities.

Another logistics risk arises from the generally complex and at the same time underdeveloped supply structures that prevail in emerging markets, in particular. In many cases, these go hand in hand with particularly challenging climatic conditions that can result in food spoilage on the way from the producer to the store. METRO GROUP creates the necessary structures to ensure consistently high quality along the supply chain at all times. We use qualification programmes to prepare our sup­pliers in emerging markets for these logistics requirements.

In case of product incidents, our logistics systems must be prepared to trace the good’s itinerary and origin within a very short time. This is done with the help of modern technologies and product identification standards. We actively engage in various international organisations to foster the developments of these standards and promote the introduction of innovative technologies for improved product identification.

Information technology risks

The demands of our information technology (IT) have markedly increased as a result of new formats and sales channels, such as online retail and deliveries. Other tasks include real-time analyses of business processes and timely monitoring and management of merchandise flows. Regulations, for example on data protection or credit card processing, the associated increased public debate about misconduct as well as the increasing complexity of IT generate additional risks for our Company.

As a result, we have reinforced the organisational measures that ensure our compliance with internal and external IT regulations. We regularly check systems connected to the Internet for weak spots. We counter the increasing complexity of modern IT landscapes through tightened management regulations and a centralised corporate architecture, known as enterprise architecture management.

Important business processes such as product ordering, marketing and sales have used IT systems for many years. As a result, the continuous availability of the infrastructure is a critical factor in the development and implementation of our IT solutions. Systems that are essential business operations in the stores, above all checkouts, are largely self-contained and can continue to be used for some time even during events such as network failures or the failure of central systems. In case of partial network failures, they can automatically reroute shipments or switch to redundant routes.

Modern technologies such as server virtualisation allow us to make efficient use of hardware and ensure that key IT systems can swiftly be restored in case one or several servers break down. We operate several central computer centres, which enable us to compensate even for major failures and to limit business interruptions to a minimum. These organisational structures minimise numerous risks, including the risk of natural disasters or criminal acts.

In addition, we ensure that the data we process are correct and can only be viewed by authorised staff. The necessary user accounts and access authorisations are administered centrally according to predefined, partially automated processes – from the employees’ hiring through departmental changes to their departure. We regularly check whether Group specifications are adhered to in case of critical user rights and provide centralised reports on the results of our examinations. In particular, this applies to systems serving the planning of corporate resources (ERP, enterprise resource planning). Key processes and IT systems of our central IT company METRO SYSTEMS are independently checked and certified. They are reviewed by a department of Internal Audit that specialises in IT auditing procedures and by external inspectors who certify our pro­cesses and systems in accordance with the international stand­ard for audit reports of services companies ISAE 3402 (International Standard on Assurance Engagement).

Awareness of the importance of data protection prevails at all levels of our Group. The commitment to adhere to the data protection standards of the German Federal Data Protection Act (BDSG) is part of all employment contracts. In particular, employees of Company units that handle sensitive data under­go on-site training on data protection. Additional measures have been launched in the context of our new, Group-wide data protection guideline.

The dynamic development of information technologies also creates opportunities for our Company to optimise its own processes and offer its customers new solutions. Our first step in this area is to launch a pilot project to test the extent to which we can deploy an innovation at our Company. This approach ensures we can control feasibility and security risks as well as risks related to the integration of these innovations into our existing systems. In particular, we are currently examining the relevance of the following trends:

  • IT solutions for private customers can also be used within the Company. This development is initially reflected in the use of mobile devices.
  • We are testing the extent to which we can take delivery of computing and storage capacity from partners over the Internet within the context of cloud computing. Our company METRO SYSTEMS is also providing initial solutions of this type.
  • Customers are increasingly using multiple channels to obtain information or purchase goods, including social networks and mobile technologies. We have started to posi­tion our Company in this area, for example through our own Facebook pages and applications for smartphones.

Human resources risks

The expertise, dedication and motivation of our employees are key success factors that have a decisive impact on METRO GROUP’s competitive position. One prerequisite to achieving strategic goals are highly qualified experts and managers. It is an ongoing challenge to recruit and retain such valuable employees for the Group, in particular in the face of demographic change and intense competition for the best people. This makes in-house qualification measures indispensable. To foster the requisite skills among our employees, we optimise training and professional development programmes for employees at all levels. Training courses and targeted human resources development measures promote entrepreneurial thinking and actions; variable and performance-based pay components serve as an incentive. Direct participation in business success increases employees’ identification with METRO GROUP and enhances their awareness of risks and opportunities in all entrepreneurial decisions. With targeted training programmes, which we implement in cooperation with various partners, we manage to attract young people to a job at METRO GROUP and to optimally develop their particular strengths. This also includes integrating professionally and socially disadvantaged or disabled young people into our day-to-day work environment. The principle of diversity and equal opportunity among our employees helps us to attract the best experts and managers to our Company and retain them over the long term. Succession planning at METRO GROUP, in particular in senior management positions, is guaranteed through customised career paths and development perspectives.

Additional information on METRO GROUP’s human resources policy can be found in chapter "Employees".

Environmental risks

METRO GROUP is aware of its responsibility for our environment and has firmly embedded the principle of sustainable business in its corporate strategy. Environmentally harmful practices along the supply chain can seriously damage our image over the long term and endanger our business. This is why we implement numerous measures to ensure environmentally responsible business practices. For example, we were the first German retail and wholesale company to calculate its carbon footprint in 2008. This helps us to detect potential risks early on and introduce countermeasures. Smart metering systems provide us with detailed consumption data and thus enable us to further optimise our energy management, for example through the energetic renovation of existing locations. In view of increased expectations we project rising costs from compliance with standards. Conversely, energy saving measures can also help us to reduce our costs. Over the medium term, the effects of climate change can limit the availability of raw materials, for example in the cultivation of grains. METRO GROUP comprehensively reports about the opportunities and risks resulting from climate change within the context of its sustainability management as part of its membership in the Carbon Disclosure Project.

Additional information on environmental protection can be found in chapter "Sustainability management".

Legal risks, tax risks

Legal risks arise primarily from labour and civil law cases. In addition, risks for METRO GROUP may arise from preliminary investigations, for example in the context of possible infringements of cartel or competition law. Tax risks are mainly connected to external audits which take a differing view of certain circumstances and transactions. In addition, risks may result from interpretations of sales tax regulations. The Tax department of METRO AG has established appropriate guidelines to ensure an early detection and minimisation of tax risks. These risks are regularly and systematically examined. The resulting risk minimisation measures are coordinated by the Tax department of METRO AG and the national subsidiaries.

Control of Media-Saturn-Holding GmbH

Based on the arbitral award of 8 August 2012 and the decision of the Higher Regional Court of Munich of 9 August 2012, the Management Board feels confirmed in its opinion that the consolidation of the Media-Saturn group of companies was rightfully effected according to the relevant IFRS regulations, both in the past and in the consolidated financial statements as of 31 December 2012. In September 2012, a minority shareholder had challenged the non-admission of an appeal against the decision of the Higher Regional Court of Munich of 9 August 2012 by filing a complaint against the denial of leave to appeal before the Federal Court of Justice. If, contrary to the expectations of the Management Board, the Federal Court of Justice were to permit the appeal and, in another procedural step, decide this matter to the disadvantage of METRO AG, the Management Board’s opinion on the full consolidation of the Media-Saturn group of companies would have to be reviewed. In that case, a deconsolidation of the Media-Saturn group of companies might become necessary if the sustained power to exercise control cannot still be assumed. A deconsolidation of the Media-Saturn group of companies based on current values would lead to one-time non-cash deconsolidation income. Following the deconsolidation, the interest in the Media-Saturn group of companies would have to be recognised at equity. This change regarding the consolidation of the Media-Saturn group of companies could impact the Company’s key financials.

Additional information on legal issues is included in the notes to the consolidated financial statements in no. 45 “Other legal issues”.

Compliance risks

The activities of METRO GROUP are subject to various legal stipulations and self-imposed standards of conduct. Legal requirements in the various jurisdictions as well as the expect­ations of our customers and the public regarding corporate compliance have generally increased and become more complex. In response to these requirements, METRO GROUP has established a Group-wide compliance system which it continuously refines. The aim of this system is to systematically and sustainably prevent regulatory infringements within the Company. METRO GROUP regularly identifies behavioural corporate risks.

A particular focus is placed on preventing corruption and antitrust-law risks. Corruption risks arise both in dealings with public authorities and public officials, for example in the context of the Company’s international expansion or authorisation processes, and in business dealings with suppliers and other business partners. Antitrust-law risks may arise in the context of business dealings with METRO GROUP suppliers, for ex­ample, when it has not been assured that agreed terms and conditions comply with applicable laws and regulations. In addition, the Group-wide compliance management system covers other relevant penal risks, data protection and labour-law-related risks such as discrimination.

As part of the compliance management system, the necessary organisational structures are established in consideration of all identified and assessed compliance risks. The responsible departments consistently manage and control the risks within the existing structures.

METRO AG has introduced standards of conduct to manage the identified compliance risks, including a handbook on antitrust law that provides guidelines on supplier negotiations, among other areas. This handbook also contains templates for antitrust-law-compliant communications with suppliers. In add­ition, METRO AG has introduced Group-wide anticorruption policies outlining standards of conduct for dealings with both authorities and public officials and with business partners. The anti-corruption guidelines also stipulate that a compliance check must be carried out before entering into a business relationship with business partners in high-risk areas. These efforts are complemented by compulsory training courses, systematic and target-group-orientated communications and the consistent, disciplined handling of compliance incidents and follow-up measures. In addition, METRO GROUP employees, their business partners and customers have access to a professional reporting system which enables them to notify the Company of compliance violations and potential violations in all Group languages. Where necessary, incidents may be reported anonymously. The compliance organisation ensures that all reported cases are investigated in an appropriate fashion.

By strengthening its internal control system, the Company ensures that compliance requirements are being increasingly integrated into its operational business processes and reviewed. The internal audit department regularly reviews the effectiveness of internal controls as part of its audit schedule.

Financial risks

The financial department of METRO AG manages the financial risks of METRO GROUP. These include the risk of price changes (interest risks, currency risks, share price risks), liquidity risks, creditworthiness risks and risks arising from cash flow fluctu­ations.

Ensuring METRO GROUP’s unlimited access to the capital markets is part of the management of financial risks. In the process, debt reduction forms an integral component of our strategy. Among other things, this is achieved by continuously optimising our net working capital and focusing our investment funds on measures that add value for the Company. In this way, we gain additional flexibility to finance the transformation of our business models in response to the continuously changing needs and demands of our customers while allowing for a stabilisation and mid-term improvement of our capital market rating.

These risks and their management are described in more detail in the notes to the consolidated financial statements in no. 42 “Management of financial risks”.