(Bloomberg)—After two years of stagnating profit and a thwarted initial public offering of its Russian unit, Metro AG CEO Olaf Koch says life is about to get better for Germany’s biggest retailer.
Soon to start his fifth year at the helm, Koch is eager to reap the benefits of actions that have included the sale of its iconic department-store chain, startup investments and an e-commerce push. He’s also on the lookout for acquisitions.
“The fun part starts now,” the 45-year-old former Daimler AG executive said in an interview in Bloomberg’s Frankfurt office. “The last two years have been anything but funny. We’re now in strong and healthy shape after years of adjustment.”
Investors will get a window into the CEO’s progress on Tuesday when Metro reports Christmas season sales. After international sanctions foiled its plan to list its Russian Cash & Carry unit on the stock market last year, recent news has been better. The company has signaled a robust holiday season, and a surprise dividend increase Nov. 25 helped fuel a 6.3% gain in its shares this year.
After years of under-investment, Metro is playing catch-up in a market transformed by the advances of online retailing. Koch is using 1.75 billion euros ($1.9 billion) cash from the sale of the Galeria Kaufhof chain to cut debt, invest in e-commerce and make Metro’s 2,000 stores more attractive. Metro is the parent company of electronics chain Media-Saturn Group, No. 23 in the Internet Retailer 2015 Europe 500 Guide. Media-Saturn Group had an Internet Retailer-estimated 1.1 billion euros in 2014 web sales, according to Top500Guide.com.
Startup investments
Takeovers also form part of Koch’s plan. Early next year, Metro plans to announce a companywide initiative to scout investment in startups to help it get closer to the restaurants, hoteliers and independent grocers who patronize its stores, Koch said.
“In the old way of retail, we controlled the chain in terms of data and information,” Koch said. “Today that’s totally turned around,” with consumers able to research products and compare prices from their smartphone, he said.
“This is a business that failed to modernize for a very long time,” said Richard Clarke, an analyst at Sanford C. Bernstein, which has an outperform rating on the shares. “It makes sense that they’re trying to get ahead of the competition and modernize as fast as they can.”
Koch still has some convincing to do. Investment researcher Redburn said in a report this month that Metro’s turnaround strategy doesn’t contain new ideas. “We do not think this time around will be any different to previous attempts to improve the group’s performance due to structurally weak positions and a poor track record of execution,” Redburn said.
Cracked iPhones
Koch’s bet is that wholesaler Cash & Carry—the source of about half of Metro’s 59 billion euros in annual sales—can win clients by providing Internet-enabled benefits such as trolleys preloaded with their favorite dry and canned goods when they arrive at the store.
Metro is also courting startups, taking stakes in companies including Lunchio, which lets customers pre-order and pay at restaurants, and Roomatic, a smartphone app for room-service delivery to small hotels. On Jan. 28, 11 startups in a Metro accelerator program run with Colorado-based Techstars will present business plans in Berlin.
Having entered the German online electronics market a decade after Amazon.com Inc., No. 1 in the Internet Retailer 2015 Top 500 and Europe 500 guides, Media Markt and Saturn stores are working with a handful of startups to offer services like repairing cracked iPhone screens or configuring Sonos wireless music systems. “This is one of the biggest opportunities Metro has,” said Koch. “I cannot tell you today how big it will be and how successful. And we will make mistakes.”
With Germany’s retail market remaining under pressure, Koch has his work cut out. Retail sales in the country will grow just 2.7% annually through 2019, researcher Planet Retail estimates. Metro’s sales may rise at most 2% in each of the next two years, according to analysts surveyed by Bloomberg.
Fighting Amazon and smaller online competitors will be a key battleground for the CEO. At Media Markt and Saturn, he has been willing to sacrifice margin through online sales and lower pricing to make sure customers stay with Metro’s web stores.
Koch is optimistic that his strategy will pay off. “With a couple of proven, solid quarters it could really change the equity story,” he said.