Presentation of the risk situation

We have classified METRO GROUP’s overall risk portfolio into risk groups. In addition to general risks, the Management Board of METRO AG identified and assessed the particularly relevant risks (gross risks) to METRO GROUP during the reporting period. These are listed in the following overview along with their changes since the previous year.

We editorially condensed the particularly relevant risks and revised their titles to improve comprehensibility, consistency and controllability. This results in a new numbering of several risks. In addition, the content of the risks number 1 “challenge of the business model”, number 5 “business interruption”, number 11 “rating downgrade of METRO AG” and number 12 “geopolitical situation in Russia/Ukraine” has been modified from the previous year (see overview below). For a detailed discussion, see sections below.

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No.

(no. in prev­ious year)

Particularly relevant risks 2014/15

Risk group

Loss potential

Probability of occurrence

Change since 2013/14

1

(1, 2)

Challenge of the business model

Risks related to the retail business

≥ €500 million

likely

Risk number 2 from previous year, “loss of customers with relatively low sales volumes (C customers) at METRO Cash & Carry” has been integrated into risk number 1

2

(8)

Inadequate implementation of strategy and strategic projects (METRO Cash & Carry)

Risks related to the retail business

≥ €100 million

possible

 

3

(3)

Inadequate customer orientation (METRO Cash & Carry)

Risks related to the retail business

≥ €100 million

possible

 

4

(4)

Unprofitable use of selling space

Real estate risks

≥ €100 million

unlikely

 

5

(5)

Business interruption

Information technology risks / macroeconomic and political risks

≥ €100 million

unlikely

Extension of the risk to include non-IT topics.

6

(6)

Inadequate development and support of future managers

Human resources risks

≥ €50 million

possible

 

7

(7)

Insufficiently reliable budgets and forecasts

Financial risks

≥ €100 million

possible

 

8

(9)

Inadequate and/or ineffective internal control systems regarding investments and costs for expansion and construction as well as regarding operating processes)

Compliance risks / risks related to portfolio changes

≥ €50 million

likely

 

9

(10)

Corruption, infringements of antitrust or competition law and legislative changes

Legal and tax risks / compliance risks

≥ €100 million

unlikely

 

10

(11)

Impairment of goodwill and other assets

Financial risks

≥ €500 million

possible

 

11

(12)

Rating downgrade of METRO AG

Financial risks

≥ €100 million

unlikely

Instead of several possible downgrades as in the previous year, we only consider a single downgrade for the reporting period. Therefore, the loss potential has dropped from ≥ €500 million to ≥ €100 million and the probability of occurrence has decreased from low to unlikely.

12

(13)

Geopolitical situation in Russia/Ukraine

Macroeconomic and political risks

≥ €100 million

possible

Loss potential has increased from ≥ €50 million to ≥ €100 million.

These particularly relevant risks are classified as follows on the basis of loss potential (before risk limitation steps) as well as on the basis of probability of occurrence:

 

Classification of particularly relevant risks (graphic)

1 Risk number 2 from previous year, “loss of customers with relatively low sales volumes (C customers) at METRO Cash & Carry” has been integrated into risk number 1.

We only list risks with a low probability of occurrence (< 10 per cent) if the probability of occurrence of a particularly relevant risk from the previous year now falls into this range.

The following sections outline the individual risk groups as well as key management measures and the especially relevant risks shown in the graphic and table. In principle, all group segments are affected. For specific issues, the respective business segments are indicated.

Risks related to the business environment

Macroeconomic and political risks

As an international company, METRO GROUP is dependent on the political and economic situation in the countries in which it operates.

Global economic developments were mixed over financial year 2014/15. While the USA as well as Western and Central Europe recorded robust growth rates, economic developments remained subdued in Eastern European and Asian emerging markets. In Europe, the political agenda was dominated by the conflict in Russia and Ukraine and the potential sovereign default in Greece. The conflict led to significant economic problems in Ukraine. and continued to negatively impact the already sluggish economic performance of Russia as well. In light of these developments and our operational business, we see an unchanged probability of occurrence (possible) for the risk regarding the geopolitical situation in Russia and Ukraine (risk number 12), but have raised the loss potential from ≥ €50 million to ≥ €100 million. For financial year 2015/16 we expect to see slightly stronger global economic growth than in the reporting period.

At the same time, global economic risks have risen as a whole. Specifically, the risk of a sharper-than-expected downturn of the Chinese economy would negatively impact all other regions. Furthermore, the effort to consolidate government debt in the Eurozone is a drawn-out process that will continue to suffer setbacks. Overall, the global economy has not yet returned to a path of sustainable economic growth following the financial and sovereign debt crisis.

Compared with the previous year, the risk and opportunities profile for the short-to-medium-term development of the retail sector and thus for METRO GROUP remains unchanged. Our international presence provides us with the opportunity to offset economic, legal and political risks as well as fluctuations in demand between individual countries.

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. In this context, in particular the Russia-Ukraine conflict (see risk number 12) and the burgeoning conflict in Turkey are important to note for the reporting period. Risks emerging from this conflict for METRO GROUP pertain to the loss or destruction of property/real estate, exchange rate fluctuations, restrictions on the movement of goods and capital regulatory changes. We insure ourselves as far as possible and to the appropriate extent against the loss of tangible assets and business interruptions that, for example, are the result of political unrest. Professional crisis management allows for a fast response and handling of crises. We have responded rapidly and effectively to the crisis in Ukraine (risk number 12), implementing our crisis reaction plan for the METRO Cash & Carry stores caught up in the violence. This plan includes evacuation guidelines, training and standard operating procedures for local employees. As a result, we were able to keep our employees and customers from harm and compensate the losses incurred through business interruptions and destroyed property thanks to existing insurance policies.

Reactions to possible hazards which might also lead to a business interruption (risk number 5) are regulated in our business continuity management and a crisis management manual. With this manual we essentially aim to ensure continuity of business processes during a crisis, among other objectives. Regarding risk number 5, in addition to factors considered in the previous year, we also monitor non-IT issues such as possible business interruptions due to natural disasters, pandemics or terror attacks. However, the loss potential and the probability of occurrence remain unchanged. For more information, see the section “information technology risks”.

For more information about our assessment of the development of the economic environment, see the report on events after the closing date and outlook.

Environmental risks

METRO GROUP is aware of its responsibility for the 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.

Specific environmental risks are discussed in the sections “supplier and product risks” and “real estate risks”.

For more information about environmental protection, see the chapter “principles of the group – sustainability management”.

Sector risks

Risks related to the retail/wholesale business

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

Changes in consumer behaviour and customer expectations pose risks, among others, in the face of demographic change, rising competition and increasing digitalisation. Failing to adequately consider customer trends and price developments or missing trends in our assortments and with respect to appropriate sales formats and new sales channels can have a negative impact on group sales and jeopardise our growth objectives (risk number 1 “challenge of the business model”; risk number 2 from previous year, “loss of customers with relatively low sales volumes [C customers] at METRO Cash & Carry” has been integrated into this). To counter these risks, we are expanding our sales channels based on a multichannel strategy tailored to our different sales lines. In the process, we are strengthening our online activities and expanding our delivery service. In addition, we are developing new stores for METRO Cash & Carry on the basis of a franchise concept while intensifying our competitor analyses. Through the application of an array of different strategies, we are working to further improve our purchasing and sales processes and to create added value for our customers.

In addition, we pursue transformation programmes aimed at boosting long-term sales and earnings and protecting the intrinsic value of our assets. In this context, risks emerge from the insufficient implementation and execution of strategic projects, particularly in the sales line METRO Cash & Carry (risk number 2, unchanged from previous year). To limit these risks, we comprehensively monitor project progress in the national subsidiaries and conduct training programmes that are designed to facilitate project implementation.

To recognise market trends and changing consumer expectations at an early stage, 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 on 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.

In principle, METRO Cash & Carry faces the potential risk of inadequate customer orientation (risk number 3, unchanged from previous year). To address this risk and to provide targeted product ranges, we have taken steps to create an improved, customer-oriented assortment design. In one reflection of this, we are expanding our range of regionally traded products in all sales lines and increasingly gearing our assortments to meet our customers’ increasing demands with regard to environmental, social and health considerations.

Real estate risks

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

  • the unprofitable use of selling space; this includes the risk emerging from unused selling space for which no further useful purpose can be found (risk number 4, unchanged since last year),
  • intense competition over suitable locations,
  • incorrect decisions in the selection of business locations,
  • a deterioration in the profitability of a location, for example due to social-demographic changes in the catchment area,
  • the structural condition of the property,
  • loss of rental income due to insolvency of third-party tenants, and
  • natural disasters such as earthquakes, flooding and storms.

We counter these risks through strategic and operational real estate management and far-sighted investment planning. Our active real estate management is primarily designed to increase the value of our entire real estate portfolio and is based on continuous market monitoring, transparent profitability audits and strategic decisions. In all countries, we select our locations on the basis of an intense examination. Since we continually monitor the profitability of our network of locations, we can identify adverse developments at individual stores or retail outlets early on and respond quickly. Should the measures we have taken not produce any successful results and should we think that a long-range improvement of the situation at the particular store or outlet is unlikely to occur, we will close the location, ensuring the continuous optimisation of the store network in the process. To prevent maintenance and repair backlogs in locations, a far-sighted maintenance plan has been put into place. We counteract this risk by continuously monitoring rent payments and conducting new negotiations at an early stage. In addition, we push ahead the search for new tenants with good credit histories and the development of new usage concepts for our real estate. We seek protection against the potential effects of natural disasters by introducing structural measures and by taking out insurance.

In our real estate operations, we also intend to assume our responsibility for the environment and address possible risks. In this manner, we reduce the ecological footprint of our business locations. Since 2011, we have been continuously lowering our specific greenhouse gas emissions. To achieve this goal, we are investing in such things as technical energy-saving solutions and in programmes designed to change the behaviour patterns of every employee. With the help of these measures, we can also reduce our energy costs or at least cap them in the face of rising prices.

Risks related to business performance

Supplier and product risks

As a retail company, METRO GROUP depends on external producers and providers for the supply of goods and services. We choose our suppliers very carefully, especially in the own-brand area. We place a particularly high priority on the reliability of our own-brand suppliers in terms of product quality and compliance with safety and social standards as well as suppliers’ own efforts with regard to compliance. Defective or unsafe products, an exploitation of the environment or inhumane working conditions as well as failure to adhere to our compliance standards could cause major damage to the image of METRO GROUP and pose a lasting threat to the company’s success. For this reason, we continuously monitor our own-brand suppliers to determine whether they adhere to METRO GROUP’s high procurement and compliance 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. Without an adequate GFSI certificate, a supplier of own-brand products is subject to a special inspection (Metro Assessment Solution) conducted by an accredited certification body.

We are not the only ones who have these concerns. Our customers place priority on quality and safety and are becoming increasingly interested in the environmental and social sustainability of the products sold in our stores and of the processes used to make these products. In light of this, METRO GROUP approved a group-wide, cross-product purchasing policy for sustainable supply chain and procurement management as early as 2013.

One of our focal points is promoting humane working conditions at our suppliers. We implement numerous measures. For example, our own-brand suppliers are required to protect fundamental human rights and to guarantee fair working conditions. As proof of this, our supplier contracts demand an audit based on the BSCI (Business Social Compliance Initiative) standard or an equivalent standard. This requirement applies to all own-brand suppliers of non-food articles who manufacture end products in risk countries as defined by the BSCI. With targeted training programmes, we help suppliers to create fair and humane working conditions. In addition, under the international fire safety agreement for increased building safety in the Bangladesh textile industry (Bangladesh Accord on Fire and Building Safety) we are working to increase safety in the factories of all our suppliers who produce in Bangladesh.

METRO GROUP’s decision to join the Roundtable on Sustainable Palm Oil (RSPO) in 2011 is an example of our efforts to minimise our ecological footprint. As part of the membership, we have committed to only using certified sustainable palm oil in our own-brand products beginning in 2020.

Our requirements of suppliers are contractually regulated. We regularly check to determine whether the requirements are being met. Violations of conditions can lead to exclusion from our supplier network or, in case of unacceptable production methods, 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. Our top priority is to correctly manage the incident in the customers’ best interest. In addition, we examine possible improvements to our quality assurance systems.

To prevent disruptions in the supply of products or product groups and to avoid becoming dependent on individual companies, we work with a variety of suppliers. By taking this approach, we ensure that the desired product is generally 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 purchase 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 purchase prices or lead to a certain level of volatility. We address procurement risks by continuously optimising the purchasing process. Such steps include joint procurement and the negotiation of terms with our suppliers. Prompt implementation of these improvements is a key success factor.

Over the medium term, such global challenges as climate change, the overfishing of the world’s seas and access to clean water could restrict the availability of raw materials, for example, through reductions in stocks of certain types of fish. For this reason, METRO GROUP has been supporting standards for more sustainable fishing and fish farming for years and has been working with relevant suppliers.

METRO GROUP comprehensively reports about the risks and opportunities resulting from climate change as part of its annual participation in a survey conducted by the independent non-governmental organisation CDP (formerly: the Carbon Disclosure Project). The CDP assessment shows whether companies are effectively addressing the effect of climate change on their business processes and whether they provide transparent information on these efforts.

Other examples of product risks include supply bottlenecks after natural disasters, longer delivery times and price increases. METRO GROUP’s purchasing and supply chain management create the structures that are needed to ensure the availability of goods at all times.

For more information about our work to create a sustainable supply chain, see the chapter principles of the group – sustainability management.

Supply chain risks

The task of the supply chain function is to ensure maximum product availability at optimised cost structures while considering aspects related to sustainability, such as energy and fuel consumption.

The growing variety of items in the product range and high merchandise turnover, however, result in organisational, IT, logistics and inventory risks. The growing internationalisation of our suppliers and the focus on regional and local product assortments increase these risks. The lack of active inventory management conducted on the basis of adequate planning parameters can result in significantly higher warehousing costs, above-average write-downs on products and, in exceptional cases, in the destruction of goods. Disruptions in the value chain, including in the transport of goods from the supplier to our stores or customers (during delivery), can intensify this effect. We counteract this by optimising inventory and product group management.

Inadequate regular communications regarding future product volume as a result of such things as non-existent or incorrect projections can result in insufficient product availability and inefficiencies in logistics. We respond to this risk by systematically reassigning and bundling responsibilities for customer order processing, procurement planning and master data administration in the Supply Chain Planning department.

Incomplete or poorly managed product and customer master data can lead to serious delays and disruptions in the inclusion and removal of products as well as the product supply to our customers. For this reason, we have intensified our efforts to ensure the completeness and accuracy of master data by taking such steps as regularly monitoring relevant performance indicators.

Additional challenges arise from the expansion of our online activities, our multichannel business, delivery options and the increased complexity that results from these activities as well as other innovative sales formats. We address the resulting risks by intensifying cooperation among the affected departments. We also expect to produce synergies with joint supply chain solutions.

We prevent unnecessary complexity in the portfolio of our external logistics service providers and thus excessively high total costs by harmonising business partners. In the process, we also work to prevent dependencies on individual service providers from emerging.

Another logistics risk arises from the generally complex and at the same time underdeveloped supply structures that prevail in particular in emerging and developing markets. 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 in the supply chain at all times. We conduct qualification programmes to prepare our suppliers and logistics providers in emerging markets for these logistics requirements. In this way, we also make a lasting contribution to local food supplies and counter the problem of food waste.

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

Financial risks

The risk of price changes (interest rate risks, currency risks, share price risks), liquidity risks, credit risks in dealings with counterparties in the context of financial transactions and risks arising from cash flow fluctuations may have a significant negative impact on our financial result. For this reason, the financial risks of METRO GROUP are centrally managed. To the extent permissible by law and where economically feasible we use financial instruments to hedge price risks as far as possible. Risks from translation remain unhedged, since we are pursuing a long-term investment strategy. Credit risks are being monitored through a certified risk monitoring system which allows us to initiate risk-minimising measures at an early stage.

Ensuring METRO GROUP’s unlimited access to the capital markets is integral to the management of financial risks. A rating downgrade – referring to a downgrade to “BB” assigned by the rating agency Standard & Poor’s – would have a negative impact on our liquidity and group financing (risk number 11). Instead of several possible downgrades as in the previous year, we only consider a single downgrade for the reporting period. As a result, the loss potential has decreased from ≥ €500 million to ≥ €100 million and the probability of occurrence has decreased from low to unlikely. We have further reduced debt and rating-relevant metrics have improved slightly. To counter this risk, our strategy focuses on debt reduction. Among other things, this is achieved by continuously optimising our net working capital and focusing our investment funds on measures that add value to the company.

Another identified risk concerns unexpected deviations from our budget or outlook (risk number 7, unchanged from previous year). This could mean we would not hit our target figures and would have to revalue our assets, including our goodwill. In turn, this would have a negative impact on our asset and earnings position (risk number 10, unchanged from previous year). For this reason, we attach high priority to measures designed to limit these risks. In one reflection of this, we are implementing systematic strategic earnings improvement measures for the sales lines of METRO GROUP, focusing in particular on countries that are subject to impairment risk.

In addition, the steps we take to counter these risks include careful monitoring of risks and opportunities as well as the effective internal controls for the budget and forecast process. The Internal Audit department regularly reviews the effectiveness of the internal control system as part of its audit schedule. During financial year 2014/15, we further intensified the planning and the related internal coordination process. Closer integration of strategic planning and the budgeting process as well as a stronger involvement of the supervisory bodies in the strategy and budgeting process contributed to this. In addition, the introduction of the New Operating Model at METRO Cash & Carry and the related introduction of the Value Creation Plans for each country have proactively reinforced implementation of METRO GROUP’s strategy. The deviation of our financial year from calendar year results in additional early planning security because our very profitable Christmas business takes place at the beginning of the financial year, instead of at the end of it. Finally, the outlook offers insights into the group’s expectations for business development during the coming financial year.

For more information about financial risks and their management, see the notes to the consolidated financial statements in no. 44 – management of financial risks.

Other risks

Risks related to portfolio changes

METRO GROUP aims to continuously optimise its portfolio. All portfolio changes and the related strategic and investment or divestment decisions are guided by 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 in terms of our overall portfolio – through value-based management.

In June 2015, an agreement was signed to sell the operating business of Galeria Kaufhof group in Germany and Belgium including related properties to Hudson’s Bay Company. The transaction was closed on 30 September 2015, lowering METRO GROUP’s net debt and further strengthening our financial position.

As part of the company’s focus on the core and growth markets, the wholesale business of MAKRO Cash & Carry in Greece was sold to the local retail company I. & S. Sklavenitis Trade S.A. in financial year 2014/15. Furthermore, the Management Board of METRO AG decided to close down operations of METRO Cash & Carry in Denmark as a result of inadequate market opportunities. The originally planned sale of two of the five stores to a local competitor did not receive approval of the relevant local authorities. Therefore, all five stores were closed at the end of 2014.

In financial year 2013/14, METRO AG announced the disposal of METRO Cash & Carry’s business in Vietnam and, to this effect, signed an agreement with the Thai retail group Berli Jucker Public Company Ltd. (BJC). After the general meeting of BJC had rejected the transaction, BJC’s majority shareholder TCC Holding Co., Ltd. (TCC) replaced BJC as party to the transaction at unchanged economic conditions, according to agreements from 18 February 2015 and 22 July 2015. The disposal of METRO Cash & Carry’s business in Vietnam is expected to be concluded in financial year 2015/16 and is still subject to the usual approvals by the local authorities.

In August 2015, METRO GROUP acquired the Classic Fine Foods group (CFF), Asia’s leading provider in the food service distribution market. This move bolsters the sales line METRO Cash & Carry in the strategically important delivery service business and enables entry into the premium food delivery service market in the fast-growing megacities in Asia and the Middle East.

To strengthen Media-Saturn’s customer-oriented positioning, the sales line acquired a majority share (90 per cent) in customer and repair service provider RTS in financial year 2014/15. The move significantly expands services in planning, installation, inspection, maintenance and repair of products. This acquisition was closed in October 2015.

Additionally, METRO GROUP has expanded its activities in the start-up sector. In December 2014, it acquired a 15 per cent share in the multichannel start-up Emmas Enkel. In the reporting period, METRO GROUP also entered into a strategic partnership with the US online job network Culinary Agents (share of 18.33 per cent).

These transactions will increase the flexibility of METRO GROUP and facilitate investments in the future growth. Risks resulting from these portfolio changes are reflected in the financial statements to the extent that this is required in the balance sheet.

To limit the risks of expansion as much as possible, we plan each investment and each market entry based on a structured process and proven methods. We identify risks and opportunities by using feasibility studies that consider legal, political and economic conditions. We only enter new markets when risks and opportunities are deemed to be appropriate. Even though we always base our expansion decisions on the best information available, we cannot rule out the possibility that the growth momentum in individual countries will fall short of our expectations in the coming years. Delays in store openings represent another risk, for example due to lengthy authorisation procedures or unclear responsibilities of local authorities in emerging markets. Occurrence of these risks would result in lower-than-forecast sales and earnings.

In financial year 2014/15, METRO GROUP took a number of different steps designed to further optimise internal processes related to expansion decisions and their successful implementation and, thus, to counteract the corresponding risks (risk number 8, unchanged from previous year). Committees from the sales lines are involved in the decision-making process regarding the efficient use of investment funds for expansion. The coordination processes are being continuously improved. Furthermore, previously taken investment decisions are carefully monitored.

Information technology risks

The demands of our information technology (IT) have markedly increased as a result of new formats and sales channels and their increasing importance to the group’s business, such as online retail and deliveries. Regulations such as those regarding data protection in credit card processing, the use of customer-specific information in big data solutions that are associated with an increased public debate about misuse as well as the growing 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 vulnerabilities. We counter the high complexity of modern IT landscapes through clear management regulations.

Important business processes such as purchasing/product ordering, marketing and sales have used IT systems for many years. New systems for online retailing must be continuously available, as these systems are a prerequisite for unlimited access outside normal store hours. 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 for business operations in the stores, especially 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 remote server management and cloud computing allow us to use our hardware efficiently. In addition, in the event of one or several server failures, centralised IT systems can be quickly restored. We operate several central computer centres, which even enable us to compensate for major business interruptions or limit these to a minimum. We have introduced a contingency plan to restore computer centres in Germany following longer-term outages (for example, as a result of fires, natural disasters or criminal actions) (risk number 5 “business interruption”, unchanged from previous year). For risk number 5, in the reporting period, we additionally consider non-IT topics. For more information, see the section “risks related to the business environment”. However, the loss potential and the probability of occurrence remain unchanged. For more information, see the section “risks related to the business environment”.

Information is a key resource for all companies of METRO GROUP. This means that it must enjoy the same protection as all other assets. For this reason, METRO AG developed a documented IT security management system (ISMS), which was launched at the start of 2013. The aim of this framework is to ensure the confidentiality (access only for authorised users) and integrity (accuracy and completeness) of this information. Among other things, the management principles for IT security describe our operational and organisational structures. We have implemented IT security controls in accordance with the industry standard ISO 27000. In this way, we ensure that the data we process are correct and complete and can only be viewed by authorised staff. The necessary user accounts and access authorisations are administered centrally according to predefined, partially automated processes. We regularly review whether group specifications are followed in terms of critical user rights and report centrally on the results of our examinations. Affected employees are made aware of IT security issues, prepared for these and kept up to date through regular, standardised training courses in accordance with ISO 27000. In addition, the key processes and IT systems of our central IT company METRO SYSTEMS, and since 2015 also those of Media-Saturn IT Services (MSITS), are reviewed by internal audit and by external inspectors who examine them in accordance with the international standard for audit reports of service organisations ISAE 3402 (International Standard on Assurance Engagements). We address the risk of data and identity theft, particularly for people with access to confidential information, with information campaigns on the secure use of IT in everyday work.

Awareness of the importance of data protection was further raised 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 have access to and handle sensitive data undergo on-site training on data protection. Employees with privileged access rights (for example, administrators) must sign an additional formal obligation.

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 opportunities. One prerequisite for 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. Intra-company programmes for the continued qualification of employees and the strengthening of corporate culture are also indispensable. To ensure that our employees have the requisite expertise and leadership skills, we optimise training and professional development programmes at all levels. Training courses and effective human resources development measures promote entrepreneurial thinking and actions; variable pay components based on the attainment of corporate and individual objectives serve as an incentive. Direct participation in business success increases employees’ identification with METRO GROUP and enhances their awareness of opportunities and risks in all entrepreneurial decisions.

One thing is certain: METRO GROUP can only grow if we support our employees. This is reflected in annual performance reviews in which past achievements are assessed and future development measures are agreed upon with individual employees. With targeted training programmes, which we implement in cooperation with various partners, we manage to attract young people to METRO GROUP and to optimally develop their particular strengths. In Germany, in particular, METRO GROUP companies therefore place great value on their own training programmes for employees. With a share of 7.6 per cent in the reporting period (excluding the discontinued operation Galeria Kaufhof), we are one of Germany’s largest providers of occupational training.

Succession planning at METRO GROUP, in particular for senior management positions, is guaranteed through customised career and development plans. All these measures serve to counter the key risks of insufficient development and promotion of future managers (risk number 6, unchanged from previous year).

Health promotion concepts, occupational safety measures and locally coordinated programmes such as back therapy training, fitness classes, company sports activities, dietary tips, stress prevention training courses, ergonomic advice, computer glasses and employee counselling programmes provide for a safe, hazard-free work environment. We counter risks of non-compliance with applicable labour regulations by introducing clear guidelines and compliance rules in conjunction with a respectful approach to our employees. This effort is supported by guidelines on fair working conditions and social partnership. Our guidelines on occupational safety and health management aim to create a work environment characterised by respect, fairness and partnership.

For more information about METRO GROUP’s human resources policy, see the chapter principles of the group – employees.

Legal and tax risks

Legal risks arise primarily from labour and civil law cases as well as from changes in trade laws. In addition, risks for METRO GROUP may arise from preliminary proceedings, for example, possible infringements of antitrust or competition law (risk number 9, unchanged from previous year). Antitrust law risks may arise in the context of business dealings with METRO GROUP suppliers in such areas as the resale price of retail goods. Appropriate risk provisions were created for pending antitrust law proceedings where liability is sufficiently substantiated.

Tax risks mainly emanate from external audits which take a differing view of certain circumstances and transactions. In addition, risks may result from interpretations of sales tax regulations. The Corporate Group Tax department of METRO AG has established appropriate guidelines to ensure early detection and minimisation of tax risks. These risks are regularly and systematically examined. The resulting risk minimisation measures are coordinated by the Corporate Group Tax department of METRO AG and the national subsidiaries.

Control of Media-Saturn-Holding GmbH

Based on existing court decisions relating to governance issues, the Management Board feels validated in its opinion that the consolidation of the Media-Saturn-Holding GmbH was correctly effected according to the relevant IFRS (International Financial Reporting Standards) regulations, both in the past and in the consolidated financial statements as of 30 September 2015.

Encouraged by recent court decisions, the Management Board does not expect that future court rulings – as a result of other legal challenges filed by the minority shareholder or by members of the advisory board on behalf of the minority shareholder – will contradict these verdicts in relevant issues regarding the governance of the Media-Saturn group of companies.

If – contrary to the expectations of the Management Board – a court were to reach such a different assessment, the Management Board would review its opinion on the full consolidation of the Media-Saturn group of companies; 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.

For more information about legal issues, see the notes to the consolidated financial statements in no. 47 – 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 continued to increase and become more complex. In response to these requirements, METRO GROUP has established a group-wide compliance system that 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.

Our compliance management is primarily focused on preventing corruption and antitrust law risks. On the one hand, corruption risks arise in dealings with public authorities and public officials, for example, in the context of the company’s international expansion or authorisation processes. On the other hand, they can arise in business dealings with suppliers and other business partners (risk number 9, unchanged from previous year). In addition, the group-wide compliance management system covers other relevant criminal and regulatory 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 group-wide 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 anti-corruption 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.

Compliance guidelines are updated continuously and adjusted on the basis of risk. These efforts are complemented by compulsory training courses, systematic and target group-oriented communication measures and the consistent, disciplined handling of compliance incidents and relevant follow-up measures. In addition, METRO GROUP employees, their business partners and customers have access to a professional reporting system that enables them to notify the company of compliance violations and potential violations in all group languages. If necessary, incidents may be reported anonymously. The compliance organisation ensures that all reported cases are investigated in an appropriate fashion.

The internal control system is one of the key elements of a well-designed corporate governance. By strengthening its internal control system, the company ensures that compliance and governance requirements are being increasingly linked with its operational business and financial processes.

At the end of each financial year, the internal control system is reviewed with regard to appropriateness and effectiveness through self-assessment and reviews by Group Internal Audit.

In sensitive process areas, particularly expansion, construction, purchasing and store processes, we will continue to apply the improvements we initiated in the previous financial year (risk number 8, unchanged from previous year). For this reason, we conduct risk analyses as well as modify or expand our operational control structures. In addition, we increasingly assess the effectiveness of standard controls for specific processes.