Letter to the shareholders

Financial year 2016/17 was among the most eventful and strategically important years in the history of METRO. With the initial public offering (IPO) of shares in the new METRO AG, we created the foundation to deliver even more focus, innovation and growth. In a dynamic market environment where habits, needs and demands are changing at an increasingly rapid pace, agility and speed are emerging as the most important factors for success. The new group structure will provide us with considerable advantages in this regard.

At the end of March 2016, the Management Board of the former METRO GROUP informed the shareholders that the merits of demerging the group and spinning off the wholesale and retail business should be investigated. This announcement was followed by an intensive preparation time and the organisational separation by 30 September 2016. At the Annual General Meeting held in February 2017, an overwhelming majority of 99.95% of shareholders voted in favour of the demerger. In July 2017, we were finally on target with our project: the demerger was recorded in the commercial register on 12 July 2017 and shares in the new METRO AG have been trading on the Stock Exchanges in Frankfurt and Luxembourg since 13 July 2017.

Many of you have already been issued with shares in the new company as a result of the demerger. Other shareholders purchased their holdings in our company after the initial public offering. We warmly welcome all of you as shareholders in our company!

After less than 2 months on the stock exchange, METRO already met the criteria for inclusion in the second most important German stock index. Shares in the new METRO AG were included in the MDAX on 18 September 2017. This helps us position ourselves on the capital market and appeal to a wider circle of investors, such as index funds that track the stock market index. In addition to the development of our share price, attractive dividends are an important aspect for many of our shareholders. At the first ordinary Annual General Meeting of the new METRO AG to be held in Düsseldorf on 16 February 2018, to which I cordially invite you, the Management Board and the Supervisory Board will propose payment of a dividend of €0.70 per share on the basis of our dividend policy. I would be delighted to welcome you at the meeting.

Even though the new METRO AG is still a young company, we will be able to report on the development of our company over a complete financial year and also offer a comparison with the previous year. The previous year’s financial figures as of 30 September 2016 correspond to those reported in the combined financial statements of the former METRO Wholesale & Food Specialist Group.

We have had an eventful financial year. In our transformation process towards becoming a more customer-focused company, we have taken an important step to focus all our efforts on generating additional value for our customers.

With our METRO Wholesale and Real segments, we are a leading specialist in the wholesale and food retail trade. The METRO Wholesale segment includes our METRO Cash & Carry sales line with stores in 25 countries, but also the entire delivery business, which is making a significant contribution to growth. Real is focusing on the German market with its hypermarkets and will roll out the successfully trialled Food Lover concept, which combines emotional and rational customer needs, in additional stores, either to the full extent or via selected modules. Our digitisation initiatives allow us to promote the development of digital solutions for our hospitality and retail customers. Our goal is to elevate the food and hospitality sector to a whole new level. We understand that assisting our customers in becoming more successful will also deliver rewards for our company.

We will also not rest in our efforts to continuously optimise our business. From today’s perspective, we do not expect any further major restructuring measures. The practice of adjusting our earnings for special items will not be used beyond the reporting year 2016/17. We will make changes to our reporting in the future; for that reason, all necessary measures from financial year 2017/18 onwards will be included in the reported earnings.

Directing our focus on the wholesale and food retail sector has greatly extended our company’s flexibility and agility. This allows us to further sharpen our customer focus, accelerate growth, increase the implementation speed and ultimately improve our operational earning power.

METRO Wholesale

The core customers for our METRO Cash & Carry sales line are small and medium-sized companies. We have divided them into 3 customer groups: HoReCa, Trader and Service Companies and Offices. These customer groups vary regionally. In Eastern Europe, for example, food stalls and small traders – especially in countries such as Romania, Poland and Russia – still account for 40% of total food retail sales, compared to less than 10% in Germany. These regional differences are also reflected in our business: while small independent retailers are our main target group in Eastern Europe, we are concentrating our efforts in Southern and Western Europe on the many hotels and restaurants.

Clear trends are evident for the store-based business of METRO wholesale outlets. Assortments are increasingly geared to local needs, inspiration and knowledge transfer are becoming more important and the development of solutions for our customers, such as pre-packed goods or post-purchase delivery, is gaining in relevance. Our focus is on food products, but also on those non-food categories that allow us to provide meaningful support to our customers. The share of food in our total sales revenues will continue to rise as it has done over the past years, with our private label products playing a very important role. Our private label products are designed to provide our customers with unique added value at attractive prices. They also complement the business models of our customers in terms of their composition, processing or packaging.

Our delivery business is a great success story. We now deliver our products to customers far beyond the 25 countries in which we currently operate wholesale stores. The targeted acquisition of food service distribution specialists (FSD) – most recently Pro à Pro in February 2017 – has enabled us to extend this service to currently 35 countries worldwide. Of the approximately €30 billion worldwide sales revenues in the METRO Wholesale segment, the delivery business already accounts for more than €4.6 billion. Double-digit growth rates have been achieved by responding to the specific needs of our customers with great accuracy. We have also extended our range of products in line with the growing number of delivery customers. While purchases were initially delivered from our stores, we now also operate 87 hubs dedicated to our delivery business.

We have also expanded our franchise network to currently 5,087 partners. Our trader franchise programme supports retailers in Eastern Europe in planning and designing their stores as well as in implementation. The advice we give goes far beyond the composition of the assortment. We also assist our partners in all kinds of business-related issues and offer solutions for their daily business operations. We intend to employ our franchise solution to significantly increase our number of customers from the Trader segment, especially in Russia.

Our customers are passionate entrepreneurs. This is unmistakably expressed in their dedication and in the diversity and quality of their daily business activities. It is, however, a fact that most small and medium-sized businesses are still working without much technological support. This situation offers significant potential for our customers to improve their results considerably. Progressing digitisation has created cost-effective yet powerful solutions that can help independent entrepreneurs increase their sales and reduce their costs and administrative burden. Our HoReCa Digital business unit focuses exclusively on identifying which solutions we can use to make the greatest positive contribution to the success of our customers. Besides the many start-ups we have supported through METRO Accelerator powered by Techstars, we work with numerous other companies offering digital solutions to small and medium-sized businesses in the hospitality and food retail industries. In pilot projects in Berlin, Paris, Milan, Barcelona and Vienna, we have provided approximately 500 customers with digital solutions which support them in running their business. The results were positive and reaffirm our strategy to significantly expand our exposure to HoReCa Digital. Digital solutions will add to our customers’ success and, at the same time, further increase the relevance of METRO for small and medium-sized enterprises. In addition, we offer innovators in digital fields a unique platform to reach a significant number of customers efficiently in a short time. We want to help both established companies and start-ups to reach the very fragmented markets of independent hospitality operators and retailers. We aim to make a noticeable contribution to significantly accelerating digitisation in our industry sector.

Our customers are part of a great community of independent entrepreneurs. We support this community in many different ways across numerous countries. Since 2016, we have also organised the Own Business Day. On this day, we celebrate the diversity, creativity and passion of independent entrepreneurs around the world. We organise various events that highlight our appreciation and respect for the outstanding performance of these entrepreneurs. We also provide them with a platform to make their businesses even more popular and attractive with unique offerings. 20,000 entrepreneurs participated in the first Own Business Day, with more than 100,000 in the following year. The use of digital tools plays a major role in this growth. The Own Business Day is made accessible worldwide via an app specifically developed for this purpose.

Real

Turning to our Real sales line, we are proud to have made great progress in refining our market profile. Real is already the nation’s retailer with the widest range of products. It offers outstanding quality. To further increase customer appeal, we need to reinforce the actual benefits by enhancing them with emotional aspects. A unique concept aiming in this direction is the new Markthalle Krefeld, which was implemented in November 2016. Customers who are excited about variety in particular are looking for inspiration and advice. This is exactly what we aim to provide with the new store concept: it combines an extensive food assortment and outstanding freshness with elements of themed food experiences, making the hypermarket an ideal place for connoisseurs. The concept has been well received by the customers. The customer foot-print has increased sustainably by 30%. Based on the experience we have gained, the expansion of the concept to other stores is already planned with our next location in Brunswick. We will also roll out individual modules of this concept across a larger number of stores. Our objective is to further increase the appeal for our customers as quickly and effectively as possible.

The online business of Real has also taken a big step forward. The Hitmeister shopping portal, which we acquired in 2016, was successfully integrated into the real.de website in February 2017. Consumers can now choose from a very large product range. The growth rates are enormous and we are excited about the encouraging results. Online sales grew by more than 50%. Real now also offers online shopping for food products. The orders are packed ready to go and can be picked up from one of the 9 Real stores currently offering this service. Alternatively home delivery, including fresh food, is available in many areas. Our plan is to set up a nationwide delivery service after conducting a trial in Düsseldorf.

METRO understands its role as a member of society who contributes to the creation of additional value. We have a moral obligation to balance our economic interests with both social demands and the requirements of our customers, employees, investors and business partners. That is why sustainability is an integral part of our actions and firmly anchored in our company and our sales lines. Coinciding with the publication of this report, we have released a Corporate Responsibility Progress Report. The sustainability management of the new METRO AG is already receiving accolades: the rating agency Oekom Research has accepted us into the wholesale industry sector and made us the industry leader with a prime rating. We were named industry leader in the Indices Dow Jones Sustainability World and Europe for the third time in financial year 2016/17.

Financial year 2016/17 was a successful one across the entire METRO organisation. METRO increased like-for-like sales revenues by 0.5% in financial year 2016/17. At €37.1 billion, reported sales revenues were 1.6% higher than in the previous year. EBIT before special items amounted to €1,106 million.

How will financial year 2017/18 develop? Our sales lines have almost completed their transformation process. Future expenses for the remaining measures will no longer be reported as special items. For you, that means that starting in financial year 2017/18, we will only report a single earnings figure.

Analogous to our medium-term goals, we anticipate positive growth of our total revenue again in financial year 2017/18, assuming stable exchange rates and no portfolio adjustments. We aim for our growth rate to at least match the 1.1% growth achieved in financial year 2016/17. We expect the EBITDA excluding earnings contributions from real estate transactions to increase by at least 10% on the previous year’s result (€1,436 million). Our goals include new stores as well as the continued expansion of the delivery business and the roll-out of our market hall concept in existing Real stores.

It is important to me to mention our more than 150,000 employees, for whom the transformation period and demerger were quite challenging. I would like to express, also on behalf of my colleagues, our deep gratitude to them for going the extra mile with us. We are well aware of the fact that our employees are the key to our success. This is why we regularly conduct surveys to measure staff engagement, which provides information about how well our employees identify with their company. The positive result attained in the past financial year reaffirms the path we have chosen, but also indicates areas with room for improvement, which we will work on.

Thank you for your interest, your loyalty and the continued trust you place in us. METRO AG has great plans for the future. My colleagues on the Management Board and I look forward to paving the way for the future together with our colleagues, our customers, our partners and you, our shareholders.

Yours faithfully,

Olaf Koch
Chairman of the Management Board of METRO AG