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. Since 2000, METRO GROUP has also been using value-oriented performance metrics which draw on operational key performance indicators 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 tax aspects influence decision-making, assessments of investment projects are based on the discounted cash flow method as well as the key figure EVA. In addition, liquidity-oriented key figures such as the amortisation period for investment decisions are used.

The use of 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 earnings strength 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 this context, METRO GROUP also strengthened its position through targeted acquisitions in the delivery business over the past financial year. In addition, customer value was increased through the expansion of digital solutions. In consumer electronics retail, 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 our customer target groups Horeca, traders and SCO. In this context, 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 2015/16, METRO GROUP’s cost of capital before taxes amounted to 8.0 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

2014/151

2015/16

Delta

1

Previous year adjusted for comparability reasons

2

The effect of the special items is spread over four years

EBIT before special items

1,511

1,560

49

EBIT after periodisation of special items2

1,125

1,163

38

Capital employed

10,763

10,992

229

WACC before taxes

8.0%

8.0%

 

Cost of capital

−856

−874

−18

EBITaC

269

289

20

EBIT 2015/16 from continuing operations after periodisation of special items from previous years (2012/13: €297 million, 2013/14: €454 million, 2014/15: €343 million) and periodised one-time expenses from 2015/16 totalling €493 million amounted to €1,163 million in financial year 2015/16. The figure for the reporting period was adjusted for special items from the sale of METRO Cash & Carry Vietnam and subsequent income from the sale of Galeria Kaufhof in the previous year. Given an average capital employed of €10,992 million, the cost of capital amounted to €874 million. To provide for better comparability, impairment losses on goodwill effected over the course of financial year 2014/15 were considered in all quarters in the calculation of capital employed of the comparable period. In a challenging economic environment, METRO GROUP successfully deployed its capital in financial year 2015/16 and generated economic value added of €289 million.

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. Like capital employed, EBIT is also adjusted for the financing component of rents.

RoCE = EBIT1 / capital employed

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.

The group continues to position itself for value-adding growth. In this context, so-called Value Creation Plans were implemented as a key instrument in financial year 2015/16. 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 and also serve as a reference point in the context of the remuneration system.