Letter to the shareholders
About a year ago, I announced in my letter to you that 2012 would be a challenging financial year for your Company. At the time, it was clear that the sovereign debt crisis in Europe would increasingly hurt consumption in many countries. For this reason, we based our guidance on the assumption that the economy would continue to slow.
In the second half of the year, however, the economy slowed even further than we – and many economic research institutes – had expected. As a result, unemployment in many parts of Europe climbed to record levels. Furthermore, some governments intensified their budget-cutting efforts, taking such steps as raising value added tax rates as a way of easing their heavy debt loads. Economic conditions worsened in particular for our customers in Southern and Eastern Europe. With few exceptions, disposable income and purchasing power fell sharply throughout Europe.
Despite the array of negative events and developments, we took many important, forward-looking decisions in 2012. We recalibrated the strategy used in all sales lines and put added customer value at the centre of our thinking and actions. This resulted in a clear prioritisation of the changes that needed to be made in our assortments, services and formats. These decisions were the sole reason for our success in increasing sales for the entire year and gaining market share in many countries. The new direction we have taken involves certain costs that we have consciously decided to accept. After all, we truly believe in the long-range added value that our new direction will produce for the Company. At the same time, we have strengthened our commitment to lean structures and low costs in order to bolster our earnings power.
And we have increased our focus. Our reason for doing so is quite clear: we realise that this is the only way to achieve the effectiveness we need to carry out the transformation. Within our sales lines, we are focusing on critical projects and regions, and we have also optimised our portfolio. We have divested our money-losing wholesale business in the United Kingdom, found a buyer for Real in Eastern Europe and decided to discontinue Media Markt’s operations in China. These were difficult decisions to take. But they will help us to bolster our earnings power and increase the returns on our investments.
We have also worked intensely to foster our management culture. Obviously, this process will take several years. Nonetheless, we made significant progress in this effort during 2012.
All this demonstrates one point to you: METRO GROUP and its sales lines are undergoing far-reaching change. This transformation process is both protracted and intense. But, above all, it is necessary. After all, the needs of our customers change just as rapidly as our business conditions do. These changes pose no threat to us. Rather, we view them as a tremendous opportunity to increase the appeal and allure of our range of products and services to customers. Nothing motivates us more than positive customer feedback, increasing satisfaction and the resulting growth in sales. With these goals in mind, we took additional strategic and operational steps during the past financial year. Here are just a few of them.
At METRO Cash & Carry, our highest-earning sales line, we are working to make our professional customers even more successful. To achieve this goal, we have closely examined the local expectations and needs of individual customer groups in country after country. To attract professional customers to our stores, we have systematically optimised product ranges and prices and also worked to develop more efficient logistics. Furthermore, we have expanded our solution expertise. This effort has primarily included the tremendously successful delivery business as well as support and consulting programmes for small retailers and the strengthening of our sales force organisation. We are focusing in particular on the 8 core countries that we identified in 2012. They are the keys to our overall success. To use our resources as effectively as possible, we have also strictly prioritised our strategic initiatives. As a result, we took important steps in 2012 that were designed to bolster and expand the leading position that METRO Cash & Carry maintains in the wholesale business.
Our Real sales line added a sharper regional focus to its hypermarkets in Germany. In the process, it also continued to invest in variety and quality. It is obvious that we cannot be satisfied with recent trends. The line’s earnings power is well below our expectations. Realising this, we have intensified the transformation process. Many promising concepts and ideas have already been introduced by individual hypermarkets. We now intend to scale them and forcefully continue pursuing the new direction. As part of this effort, we have given individual market managers more freedom to add locally produced items and specialities to their assortments. Our mid-range goal is to create stable, balanced earnings power.
The Media-Saturn sales line picked up the pace of the realignment process and markedly increased its competitiveness. It noticeably improved its price position, continued to optimise its range of products and significantly boosted its marketing effectiveness. All these steps are reflected in very strong market share trends. In 2012, Media-Saturn continued to expand its multichannel sales strategy. The dovetailing of online retailing with the stationary stores of Media Markt and Saturn represents a true edge over simple mail-order retailing. Up to 50 percent of online customers take advantage of the opportunity to go to a store and pick up items they ordered online. By year’s end, this form of multichannel sales was available in 9 countries. Media-Saturn has clearly maintained its leading position in consumer electronics retailing and definitely has the potential to continue to outpace its competitors. This strength will be provided by both the competitiveness of stationary retailing and the rapid growth of the online business.
The performance of Galeria Kaufhof shows that a well-run department store concept has a future. The sales line has further refined its range of products to meet the needs of its target groups by taking such steps as improving its product mix and store layout. During the past year, we also continued to invest in our stores and increase their appeal. In 2012, we improved our online shop by increasing the range of available products and expanding its functionality. From the comfort of their own homes, customers can visit this shop at any time and select items from its comprehensive range of products. Thanks to these efforts, our market share in the textile sector grew.
METRO PROPERTIES uses its expertise to support the expansion of our sales lines around the world – from location planning to construction. The bundling of expertise within a single source will help us in future to increase our stores’ energy efficiency. This, in turn, will lower costs and protect the environment.
As part of our mission as a company, we are determined to always balance our business activities with issues that affect the environment and society as a whole. Consequently, the motto of the sustainability vision we developed in 2012 is: “METRO GROUP. We deliver quality of life.” The climate target that we reset in 2012 is an example of how we are applying this vision to our day-to-day business operations. By 2020, we intend to cut specific greenhouse gas emissions by 20 percent per square metre of selling space compared with 2011 levels. You can learn more by reading our sustainability report, which is being released for the first time as part of the annual report.
To sum up: we are doing everything possible to put METRO GROUP back on track for sustainable growth in sales and earnings. For this reason, we cannot be satisfied with our earnings performance in 2012. With an EBIT before special items of €2.0 billion, we finished below the previous year’s level which had been our target. The major reason for this outcome was the previously described worsening of business conditions in the second half of the year, a development that we were able to offset only to a limited degree. In addition, special items related to the restructuring and redirection of METRO AG had a negative impact on net profit for the period.
By contrast, our sales performance was good, and this development led to gains in market share particularly in the fourth quarter. Overall, we boosted sales by 1.2 percent. Adjusted for the divestment of our wholesale business in the United Kingdom during 2012 and the sale of Saturn in France, growth even increased by 2.3 percent. During the past year, our cash flow was much better than earnings thanks, in part, to optimised investment activities. As a result of targeted investments and divestments as well as improved management of net working capital, we were able to significantly reduce net balance sheet debt. We intend to continue this positive trend and create the conditions that will lead to a better rating. The final divestment of Real’s business in Eastern Europe (excluding Turkey), which we are seeking to complete this year, will contribute to this effort. Overall, we will measurably strengthen the balance sheet of METRO AG by taking these steps.
The entire Management Board would like to express its sincere thanks to the Company’s 282,984 employees whose hard work has helped to strengthen the competitiveness of METRO GROUP and to gain market share. In a difficult business environment, they made a tremendous contribution to the Company.
I would also like to express my thanks to you, our shareholders, for the trust you have placed in us. The price of the METRO share in 2012 may not have reflected our progress. Nonetheless, we intend to pay a dividend based on our operational earnings performance before special items, as we have done in years past. For this reason, we will propose a dividend of €1.00 per ordinary share to the Annual General Meeting on 8 May 2013.
What are we expecting in 2013? A major change: as a result of a proposal approved by the Annual General Meeting in May 2012, our financial year 2013 will only cover the months of January to September. This change will mean that the high-volume Christmas business that is so important to retailers will not be included in our results. Rather, it will become part of the first quarter of our financial year in future. Nonetheless, the year of 2013 will be an important financial year for us. I believe that the programmes we have introduced will take hold and have the desired effect, even if business conditions remain exceptionally difficult.
Despite all the challenges, creating added value for customers will increasingly become the focus of our work. We are continuing to work hard on getting your Company back onto the growth track. In the end, this effort will produce higher returns – for METRO GROUP and for you.
Chairman of the Management Board of METRO AG
Düsseldorf, 20 March 2013