Value-based management

METRO GROUP’s strength is reflected, among other things, in its ability to continuously increase the company’s value through growth and operational efficiency as well as optimal capital deployment. METRO GROUP has also been using value-oriented performance metrics which draw on operational key performance indicators since 2000 to ensure the company’s sustained value creation. In this regard, METRO GROUP focuses on earnings metrics in consideration of capital costs such as EBITaC. Under the EBITaC concept, a positive value contribution is achieved when earnings before interest and taxes exceed the cost of capital needed to finance the average capital employed.

EBITaC

= EBIT1 – cost of capital
= EBIT1 – (capital employed x WACC2)

Special items generally periodised over four years
WACC = weighted average cost of capital

As management decisions must also consider tax aspects, the performance metric EVA is used alongside the discounted cash flow method, especially to assess investment projects. In addition, the company uses liquidity-based performance metrics such as the cash recovery period in its investment decisions.

The use of value-based performance metrics generally enables METRO GROUP to focus on the key drivers of the operating business that management can influence: value-creating growth, increases in operational efficiency and the optimisation of capital employed. Value-adding growth is achieved through our strategy of focusing on like-for-like sales growth in the company’s existing markets, complementing the store-based business through targeted new sales channels such as online retail and delivery services as well as accelerating the company’s expansion in select countries. In consumer electronics retailing, METRO GROUP also focuses on expansion through special formats tailored to local customer needs. In each case, our customers are at the core of our thinking and acting. In addition, we continue to implement measures to ensure operational and administrative efficiency and are forging ahead with the optimisation of capital deployment. We are achieving this latter goal by taking such steps as offering tailored solutions for individual customer target groups. In this work, customer-focused product group management based on specific needs in terms of product range, price groups, packaging and marketing plays a key role.

The cost of capital reflects the expected remuneration of investors for the capital they provide and for their investment risk. It is calculated by multiplying the average capital employed by the weighted average cost of capital (WACC).

The cost of capital is calculated on the basis of capital market models. It corresponds to the minimum return on capital demanded by capital providers. As such, it reflects the total cost of capital employed and thus consists of equity and debt capital costs. In financial year 2014/15, METRO GROUP’s cost of capital before taxes amounted to 8.5 per cent. This is calculated on the basis of an aggregation of segment-specific cost of capital.

Capital employed represents interest-carrying assets. It comprises segment assets plus cash and cash equivalents less trade payables as well as other operational liabilities and deferred income. We use an average capital employed that is calculated from quarterly financial statements in order to also consider developments in capital employed that occur during the relevant period.

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€ million

2013/141

2014/15

Delta

1

Previous year’s figures adjusted for comparability reasons

2

The effect of the special items is spread over four years

EBIT before special items

1,531

1,511

−20

EBIT after periodisation of special items2

1,190

1,125

−65

Capital employed

11,758

11,220

−539

WACC before taxes

8.5%

8.5%

 

Cost of capital

−1,004

−958

46

EBITaC

186

167

−19

In financial year 2014/15, EBIT from continuing operations after periodisation of special items from previous years (2011/12: €451 million, 2012/13: €297 million, 2013/14: €454 million) and periodised one-time expenses from 2014/15 totalling €343 million amounted to €1,125 million. In the reporting period, this figure was adjusted for special items from the sale of Galeria Kaufhof and impairment losses on goodwill. Given an average capital employed of €11,220 million, the cost of capital amounted to €958 million. Despite the economy’s below-average momentum, METRO GROUP successfully deployed its capital in financial year 2014/15 and generated economic value added of €167 million that was dampened by a negative currency effect of €94 million compared with the previous year.

As an additional metric, the metric return on capital employed (RoCE) is used for the purpose of better comparability of the individual segments. RoCE measures the return on business assets deployed during the review period. For the purpose of this segment comparison, business assets also include cash rental values to account for the different ownership structures of real estate assets. METRO GROUP bases its calculation of RoCE on EBIT before special items because it adequately reflects the units’ operational earnings strength independent of special effects.

RoCE = EBIT1 / business assets including cash rental values

1 EBIT before special items

RoCE is contrasted with the segment-specific capital cost rate before taxes as the latter represents a market-oriented minimum rate of interest on capital employed based on capital market models.

As part of its continued focus on value-adding growth, METRO GROUP will use so-called Value Creation Plans as a key tool in the future. These plans provide the management with binding long-term benchmarks regarding strategy, key value drivers and the derived financial targets at the level of individual countries.