Letter to the shareholders

Dear Ladies and Gentlemen, (handwriting)

the financial year 2013 that we are examining in this annual report was a special one for your company in two ways: First, it included only the months of January to September and represented a so-called short financial year as a result. Second, it was a year in which METRO GROUP and its sales lines continued their successful transformation. This process created a wide range of challenges for our company. I am very proud to say that our workforce energetically took on these challenges and overcame them magnificently. On behalf of the company’s entire Management Board, I would like to express my sincere thanks to our approximately 270,000 employees for their hard work.

During the financial year 2013, we made further progress in our efforts to reshape METRO GROUP. In one reflection of this, all of our sales lines increased their appeal to customers – by taking such steps as focused product ranges as well as by expanding and deepening their sales channels and formats. This work was characterised in particular by a significant expansion of our multichannel activities, that is, the customer-focused linking of stationary and online retailing. Each sales line further refined its strategy and systematically carried it out. Our overarching goal served as a compass for this work: creating added value for our customers. We are directing all of our activities to reaching this goal. And this strategy is paying off: we have further expanded our market share in many countries.

At the same time, we have realised that we must revitalise our culture. The focus of this work is being directed at our own philosophy of leadership. The reason for this focus is obvious: I believe that METRO GROUP will be able to unleash its total business performance power only if we can strengthen trust in the individual and encourage employees to establish even closer relationships with our customers. This is a process that cannot be completed overnight – but we are rapidly moving in the right direction. About 26,000 employees have already attended our “Leadership for Growth” workshops that are designed to introduce our new management culture: authentic, transparent and dialogue-focused.

Roughly nine months ago, I wrote in my last letter to the shareholders that the short financial year 2013 – even without the strong sales and earnings results of the Christmas quarter – would be an important one for us: a year in which our measures would take hold and produce results, even though we expected to face persistently challenging business conditions. And this is just what occurred.

Although the economies of many countries continued to weaken as many governments pressed forward with their budget-cutting efforts, we delivered on the guidance we announced at the beginning of the short financial year: we boosted sales (adjusted for portfolio changes and currency effects) by 0.9 per cent to €45.0 billion and increased EBIT before special items by 3 per cent to €728 million. In terms of both sales and earnings, we are seeing continuous trend improvements that affirm our strategic direction. Furthermore, we made tremendous strides in cash flow, improving it to €–1,768 billion. Focused investments contributed to this improvement. During the past short financial year, we focused in particular on the use of our investment funds and were able to significantly increase capital efficiency as a result. In addition to targeted investments in expansion countries, we used our funds exclusively to create customer value and to carry out necessary maintenance work. We also improved our net working capital. This gives us additional freedom to finance the repositioning of our business models. As announced, we have also concentrated on creating more efficient structures and stricter cost controls. For this reason, we have markedly lowered our net debt by €2.3 billion compared with 30 September 2012.

In general, we can say that we made very good progress during the nine-month reporting period. METRO GROUP and its sales lines have redefined themselves. In the process, the company has become more attractive to customers and added business performance strength. As a result, we are leaving the short financial year 2013 with renewed vigour – and with more power than we had just nine months ago.

The capital market has welcomed these gains. This view is reflected in our share’s pleasing performance: during the financial year 2013, the price of the METRO share jumped by more than 39.5 per cent to €29.30, outperforming the relevant benchmark indices and the shares of many competitors in the process. There is one primary reason why investors are rewarding our strategy: the focused, customer-oriented approach being applied by our sales lines. The following examples illustrate my point:

Our METRO Cash & Carry sales line has significantly increased its relevance among professional customers. It achieved these improvements by developing a systematic form of target group management and taking new approaches to reaching its customers. METRO Cash & Carry also streamlined its assortment and repositioned it – by adding products that better meet the needs of professional customers. In light of the difficulties encountered in the non-food area during the financial year 2013, METRO Cash & Carry also substantially reduced its inventories as a way of creating room for more attractive non-food products. By contrast, demand for delivery, own-brand and franchise solutions rose sharply. Furthermore, the sales line intensely worked to refine its range of products and services. Altogether, these steps enabled METRO Cash & Carry to gain new customers and strengthen its relationship with existing customers. This progress also resulted from the more intensive management we are now employing. Management and employees are taking a more diligent approach to ensuring that problems are really being addressed. An example: to increase the product range’s appeal to German customers, we asked a highly respected chef to visit METRO stores in Spain, Italy and France and to search for specialities we could use in the German market. He drew up a list of products that the German stores lacked. Since then, several hundred of these products have been added to the stores.

At Media-Saturn, we carried out the most extensive transformation process at METRO GROUP during the financial year 2013. Rapid growth was generated both in multichannel retailing and online sales. The sales line markedly expanded its product range: it now boasts an online presence in more countries than ever before and offers a significantly higher number of products online. At the same time, it has continued to sharpen its price profile. Thanks to the multichannel approach, an idea that links stationary and online retailing, Media-Saturn captured tremendous market share – even though the market posed challenges created by money-conscious, crisis-plagued consumers and a reduced number of innovative new products. As we announced in December 2012, we ended Media Markt’s business activities in China following a two-year test phase and closed its stores there during the first quarter of 2013.

At Real, we have largely completed the divestment of our Eastern European business. Real Romania, Real Russia and Real Ukraine were sold to the French retailing company Groupe Auchan. We expect the transfer of the business in Poland to take effect at the end of the year – following approval by antitrust authorities. At Real, we are now focusing on Germany. With a regional management structure, the sales line has become much more customer focused and streamlined in its home market. The key aspect of this change is the new decentralised store management philosophy. This gives local store managers increased authority to design assortments as they see fit. During the financial year 2013, we remodelled and upgraded more stores than ever before. In addition, Real continued to expand its range of own-brand products. The sales line also refined its innovative drive-in concept with local pick-up stores and completely redesigned its website.

Galeria Kaufhof assumed market leadership in Germany during the financial year 2013. In the process, it demonstrated that the systematic implementation of a focused strategy was the correct approach to take. The sales line added new brands to its assortments and reworked its range of own-brand products. This effort resulted in increased attractiveness and customer relevance. Through more efficient selling space usage and strict cost management, Galeria Kaufhof also continued to improve its profitability.

Overall, our sales lines are becoming more customer focused and are gaining market shares in the process. To be able to rapidly and efficiently carry out important programmes, we need a high level of individual responsibility in particular. At the beginning of the financial year 2013/14, we are putting all real estate properties that can be clearly assigned into the hands of the sales lines. In future, we will no longer report the Real Estate segment separately. Instead, it will be included in the other segments.

I would like to express my sincere gratitude to you, our shareholders, for the confidence you have put in us. I thank you very much for this. After the price of the company’s share fell for two consecutive years, you saw the price climb steeply during the financial year 2013. Due to the absence of the important Christmas business during the short financial year, earnings per share before special items amounted to only €0.03. For this reason, the Management Board of METRO AG will propose to the Annual General Meeting on 12 February 2014 that the complete balance sheet profit from the financial year be added to other reserves retained from earnings.

What are my expectations for the financial year 2013/14? We will forge ahead with the transformation of METRO GROUP and focus on making continued improvements to our cost structures. Both aspects are vital elements of our effort to generate profitable growth. The financial year 2013/14 will also mark a major event: on 27 October 2014, we will celebrate the 50th anniversary of METRO Cash & Carry – our largest sales line and the nucleus of METRO GROUP. We will use the anniversary as an occasion to launch the celebration at the beginning of the year and to tell our professional customers even more clearly about the benefits of the business model of METRO Cash & Carry.

At the end of this letter, I would like to take a look ahead: For the financial year 2013/14, we expect that sales will remain at the previous year’s level and that we will generate EBIT before special items that markedly surpasses the previous year’s level of €1.7 billion in spite of the difficult business conditions we continue to face in many of our countries. We also intend to further reduce our net debt as a way of strengthening our balance sheet over the long term and bolstering METRO GROUP’s future.

Best regards,

Signature Olaf Koch (handwriting)

Olaf Koch
Chairman of the Management Board of METRO AG

Düsseldorf, 12 December 2013