Description of the opportunity and risk situation

METRO has numerous opportunities for a sustainable positive development of its business. On the other hand, there are risks that could impact us in reaching our goals. We have allocated the METRO opportunity and risk portfolio to various subject groups. The Management Board of METRO AG identified and assessed the following risks which are considered to be particularly relevant for METRO. They are listed in the following overview:

Risk no. 1 ‘Risks from Covid-19’ was newly included, as it represented a major risk for METRO in the reporting period due to the loss potential and the probability of occurrence.

The risk ‘Planning reliability’ from the previous year is reported this year together with the newly included risk no. 8 ‘Financial risks’. This year, risk no. 9 ‘Risks from completed transactions’ also includes the risks associated with the disposal of the hypermarket business, which were listed in risk no. 9 in the previous year.

Opportunities and risks related to the business environment

Opportunities in connection with Covid-19

Despite the significant impact of the Covid-19 pandemic on our HoReCa customers and the resulting decline in sales, there is a significant opportunity for METRO to emerge stronger. This is because METRO is distinguished from its competitors by a diversified business model and strong capital resources. Especially smaller competitors that are solely based on delivery sales are strongly affected by the Covid-19 pandemic due to the high HoReCa share of sales and limited financial possibilities. METRO has the opportunity to actively consolidate the market and gain market share. The pandemic has also changed consumer behaviour and boosted the convenience trend, which has a positive impact on our Traders customer group and Traders franchise business. METRO has also intensified strategic B2B partnerships with online food retailers such as SberMarket (B2B2C) in Russia or Zakaz in Hungary and Ukraine during this period and thus has the opportunity to benefit from future growth of these companies. Digitalisation has been accelerated by the Covid-19 pandemic and the importance of digital solutions for HoReCa and Traders customers has increased accordingly. As part of its Wholesale 360 strategic approach, METRO offers its customers sustainable solutions with superior economic added value through Hospitality Digital and METRO MARKETS. The goal is to strengthen customer loyalty in the long term, to further expand customer relationships and thereby increase the share of wallet. Moreover, a faster recovery of our customers’ economic situation through successful government intervention would also have a positive impact on METRO.

Risks from Covid-19 (#1, new)

The global spread of Covid-19 and the associated lockdown measures had a significant impact on the operational business of METRO in the second half of the reporting period. While at the beginning of the Covid-19 pandemic the decline in HoReCa sales was still compensated by SCO sales, the government-ordered closure of HoReCa operations and the economic downturn led to METRO recording significant sales losses in March, April and May compared to the same period of the previous year. Since the restrictions were eased over the summer 2020, sales have recovered significantly, but due to the increase in infection figures since October and the renewed restrictions, a negative sales development has become more likely again. On the supplier side and in the supply chains, there may still be a shortage of inventories, irregular deliveries or even deteriorating purchasing conditions. We also hold real estate in our portfolio and lease some of it to third-party tenants. Political measures and a deterioration in the financial situation of tenants may lead to rent losses and, in addition to the scenarios listed under risk no. 6 ‘Real estate risks’, to a deterioration in the financial situation of tenants. In order to counter the risks arising from a potential further spread of Covid-19 in a timely and comprehensive manner, we are systematically monitoring political measures and assessing the current pandemic situation. To this end, we have set up a crisis team at group level, which is responsible for the ongoing exchange of all relevant information and timely reporting. Furthermore, a large number of centralised and decentralised measures were initiated to support the operational business, such as campaigns to reopen the hospitality industry in several countries, advice and assistance for implementation of hygiene concepts, the provision of digital solutions, for example for guest registration in the hospitality industry, and selective opening of stores to end consumers. Furthermore, the hygiene standards of METRO’s internal processes in the stores and at the point of delivery have also been subjected to a critical review from a Covid-19 perspective. Thus we are protecting our customers and employees, securing the liquidity of the group by reducing costs and supporting our customers’ businesses.

Opportunities from the development of business and political conditions

An improvement in the economic and political environment worldwide or in countries where METRO is present, as well as improvements in free trade, could have a positive impact on sales, costs and earnings. METRO operates in a large number of markets where we could potentially benefit from these developments. Opportunities could arise from a sustained positive geopolitical and macroeconomic development, for example, in the form of a recovery of foreign exchange rates.

Macroeconomic and political risks (#2)

As a company with global operations, METRO depends on the political and economic situations in the countries in which the group operates. The fundamental business environment can change rapidly. Changes in political leadership, civil unrest, terrorist attacks or economic imbalances can jeopardise METRO’s business. At the country level, the political and/or economic situations in Russia, Ukraine and Turkey are particularly noteworthy for the reporting period. The potential risks include the loss of property and real estate assets, changes in the exchange rate, product restrictions, capital controls, regulatory restrictions and unexpected weakening of demand. The global economy is increasingly marked by tense trade relations between the USA, Europe and China, as can be clearly seen in the expansion of the imposed punitive tariffs, as well as the approved withdrawal of the United Kingdom from the European Union (Brexit). We consider both issues risks. A continuous monitoring of the economic and political developments and a review of our strategic objectives allow us nonetheless to respond to these challenges in a timely and appropriate fashion. Our international presence comes with the advantage of being able to reduce the economic, legal and political risks as well as fluctuations in demand through diversification.

Interruption of business activities (#3)

Our business operations could, for example, be compromised and/or interrupted by a failure of IT systems, natural disasters or pandemics. Important business processes such as purchasing/product ordering, marketing and sales rely on IT systems. Systems for online retailing must be continuously available, as these systems are a prerequisite for unlimited access outside normal store opening times. 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 data or switch to redundant routes.

Centralised IT systems can be quickly restored to operational readiness if one or more servers fail. We operate several central IT centres, which enables us to compensate for major business interruptions or reduce their duration to the absolute minimum. We also have a disaster recovery plan to restore IT centres in Germany after extended outages (for example outages caused by fire, natural disasters or criminal actions).

We are also fully prepared for the risk of an interruption of our business activities by employing a comprehensive business continuity management system. A professional crisis management allows for a rapid crisis response and thereby ensures the protection of our employees and customers. This includes evacuation plans, training measures and specific instructions. We insure ourselves against the loss of tangible assets and any impending loss of sales or profits resultant from business interruptions wherever it is possible and reasonable.

Environmental opportunities and risks

Opportunities from sustainable business practices

Our company is more exposed than ever to economic, environmental, social and cultural challenges. Similarly, we experience that sustainability is the key to transforming these challenges into opportunities. METRO operates an active sustainability management system in order to enshrine sustainability systematically and organisationally in its core business. Our stakeholders evaluate the measures implemented by us, for example, through ratings.

Sustainability risks (#4)

The consumption of energy and other natural resources affects our operating costs and may have a negative impact on the environment, for example through the emission of climate-damaging greenhouse gases. National regulations aimed at reducing the climate impact of accumulated energy and fuel consumption could lead to higher energy price levels (for example for electricity, gas, fuel) and thus to higher overall energy costs for METRO. In particular, the levies under the German Combined Heat and Power Act (KWKG) and the German Renewable Energy Sources Act (EEG) are increasing year after year. These additional price components alone have caused our energy costs to rise compared to the previous year. We continue to assess the risk of further increases in energy prices as a result of a possible CO₂ price increase as probable. The climate target previously defined by METRO, which was expanded by the supply chain in 2019, will help to minimise this risk.

Sector-specific opportunities and risks

Retail business

Opportunities from innovations and digitalisation

METRO is focused on identifying and addressing current and future challenges of its customers at an early stage in a constantly changing environment. In this case, innovations and digitalisation are areas with excellent potential for realising increases in value. We are convinced that the consistent implementation of innovative ideas relating to the progressing digitalisation will increasingly shape the future of the wholesale and retail industry. This may give rise to new business models, which in turn may present a variety of opportunities.

In order to exploit the opportunities derived from digitalisation and to realise synergies, we are bundling our corresponding initiatives with the business units Hospitality Digital and METRO-NOM. The focus on the core customer groups HoReCa and Traders is a key component of our digitalisation strategy, which we use to provide our customers with digital solutions such as the DISH (Digital Innovations and Solutions for Hospitality) platform. With Hospitality Digital, we see significant opportunities to benefit from faster digitalisation in the HoReCa and Traders sectors as well as in other business areas. The Covid-19 pandemic is motivating our customers to accelerate their digitalisation efforts. With our METRO-NOM business unit, we continue to digitalise our core business. METRO-NOM develops, optimises and supports all digital solutions used by our customers. METRO-NOM is also developing internal digital solutions, for example, to improve the efficiency of our logistics processes. These digital solutions provide opportunities for METRO to set itself apart from the competition.

Opportunities from customer focus

Customer focus and customer satisfaction are central elements of our strategy. In order to continuously measure and consistently improve customer satisfaction, we have implemented the Net Promoter Score across the board in 24 countries in which METRO is represented with wholesale stores. Besides the purely quantitative measurement of the current satisfaction values, suggestions from customers can be systematically recorded and evaluated. This will allow further potential for improving the shopping experience and supply as well as general consumer trends to be identified. In line with our omnichannel strategy, we are expanding our delivery sales and strengthening our online activities. With Wholesale 360, our goal is to become the partner of choice for our customers by offering METRO solutions that cover all aspects of their business. We are also intensifying our competitive analyses. Our various strategic projects aim at further improving our purchasing and sales processes and at creating additional value for our customers. The goal is to ensure the ongoing value of assets, thereby mastering the challenges faced by our business model. As a wholesale specialist, we want to further increase our customer focus, accelerate our growth, simplify our structures and increase the implementation speed. We are thus striving to increase our overall operating performance.

Challenged business model (#5)

Particularly, the retail and wholesale trade in the markets in which we operate is characterised by rapid changes and fierce competition. A significant risk is consumers’ fluctuating propensity to consume. Changes in consumer behaviour and customer expectations pose additional risks, among others, in the face of demographic change, rising competition and increasing digitalisation. If we fail to adequately address our customers’ needs and price developments or if we miss trends with regard to our assortments or appropriate sales formats and new sales channels, this could potentially impede the development of our sales and income and also jeopardise our objectives in terms of growth and profitability.

We counteract these risks in various ways. On the one hand, we develop country-specific value creation plans, which are geared to local conditions and customer needs and are supported and monitored in their implementation by our operating partners and international working groups (federations). On the other hand, with our Wholesale 360 strategy we are actively working on expanding our business model from transactional sales of goods to a holistic partnership that addresses all the needs of professional customers. Examples include the platform business of METRO MARKETS, the numerous initiatives for the digitalisation of our customers bundled on dish.co and the financial services under GastroFinanz.

Real estate

Opportunities from increase in value

We see potential for value increases in possible development projects for our existing real estate assets and other properties as well as in improved facility management.

Real estate risks (#6)

Loss of rental income caused by insolvencies of third-party tenants and vacancies due to unused selling space entail the risk of a deficient rental cover or an impairment of usufructuary rights. Delayed repair and maintenance work could lead to infringements and real estate impairments as well as reputational damage.

We counter these risks with our strategic and operational real estate management. To this end, we regularly evaluate properties in terms of value and income and perform projected investment planning. The safety and health of customers, suppliers and employees could be endangered by deficiencies in the properties. We take decisive action to prevent potential accidents and damage to health, thus ensuring a safe and healthy environment. In addition, we conduct risk assessments and specify clear sets of rules and procedures. We support implementation through frequent training, internal controls such as regularly scheduled safety and occupational safety inspections as well as external controls such as stability inspections.

Opportunities and risks related to business performance

Suppliers and products

Opportunities from responsible trading

Not only for us, but also for more and more customers, the environmental and social sustainability of the products we offer and their production process play an increasingly important role, in addition to quality and safety. We aim to ensure socially acceptable working conditions within our sourcing channels. For this purpose, METRO adopted a group-wide purchasing policy for a sustainable supply chain and procurement management that applies to all products.

Opportunities from higher own-brand penetration

Own brands are a central part of METRO’s strategy to increase the success of our customers. By offering own brands, we can provide high quality at relatively low prices, thus simultaneously increasing our customers’ profitability as well as our own. Potential economic constraints and increased price pressure on our customers, for example as a result of the Covid-19 pandemic, could increase demand for own brands and thus have a positive effect on METRO’s profitability.

Quality risks (#7)

As a wholesale company, METRO depends on external producers and service providers. Defective or unsafe products, exploitation of the natural environment, inhumane working conditions or infringements against our compliance standards could potentially cause major damage to the reputation of METRO and pose a lasting threat to the company’s success. We therefore continuously audit our suppliers to assess their adherence to METRO’s stringent procurement and compliance standards. These include the food safety and quality standards recognised by the Global Food Safety Initiative (GFSI), such as the International Food Safety Standard and the GLOBALGAP certification for agricultural products. They contribute to the safety of foods on all cultivation, production and sales levels. In order to be able to operate as a METRO own-brand supplier on a preliminary basis without a recognised and valid audit certificate, the supplier must pass a special test (METRO Assessment Solution) conducted by an accredited certification body. Violations of conditions can lead to exclusion from our supplier network or, in the case of unacceptable production methods, to a product being blacklisted. If suppliers do not provide a corresponding certificate, it jeopardises the due diligence of METRO towards the customer. Potentially non-safe products on the market which are unsuitable for human consumption or use or even harmful to health represent a very high reputation risk and comprise the threat of lasting damage to customer relationships. Should a quality incident occur despite these measures, the process steps for resolving interruptions and incidents described in our manual will set out the procedure to react to the incident in the interest of our customers. We also continuously identify potential improvements to our quality assurance systems and implement them.

Financial opportunities and risks

Financial risks (#8, new)

Financial risks were newly included in the opportunity and risk profile this year. This includes the risk ‘planning reliability’, which was previously listed separately. Unexpected deviations from the budget or the outlook could potentially result in METRO missing its budget targets and making wrong business decisions. This could lead to unexpected negative financial consequences. We therefore place high priority on measures designed to mitigate these risks. In order to minimise risks, we are consistently implementing strategic measures aimed at improving our financial result. We support the operational units in their proactive implementation of the strategy by providing them with value creation plans. We also mitigate risks by conducting effective internal controls, close interlocking of strategic planning and the budgeting process as well as strong involvement of the supervisory bodies. The fact that our financial year differs from the calendar year allows us a high degree of planning certainty at an early stage, with the profitable Christmas quarter being the first quarter of our financial year. Furthermore, potential insolvencies of commercial banks and customers represent a financial risk. In order to minimise the risk of bad debts, we monitor the ratings and credit spreads of counterparties on a daily basis in addition to the receivables portfolio. At the same time, we reduce the default risk to a minimum by distributing cash pooling among several parties (diversification) and by using standard scoring and limit authorisation tools.

Other opportunities and risks

Opportunities from portfolio simplification and efficiency improvements

The country portfolio is regularly reviewed with regard to the feasibility of a local market leadership and the attractiveness of the respective markets. Through the disposal of Real in Germany and the majority shareholding in METRO China, METRO has successfully completed its transformation into a focused wholesale company. Further portfolio adjustments cannot be ruled out in the future. We have successfully completed numerous transactions in recent years and can benefit from this experience. In the future, however, METRO will focus on investments to strengthen its wholesale business and secure further market shares. The focus on wholesale could lead to improved workflows along the value chain faster than expected and could have a positive effect on our business development through an increase in operating efficiency. In addition to focusing on the wholesale business, partnerships such as the one between METRO and Wumei in China can lead to additional innovations. Collaborations can help us reduce operational cost or give our customers access to innovative food products. For example, we participate in various food start-ups through NX-Food.

Opportunities from company acquisitions

Great potential for increases in value may arise from selected acquisitions, particularly in business segments of strategic importance. Following the completed transactions of METRO China and Real, METRO’s liquidity situation is excellent and provides room for company acquisitions. We see opportunities in further expansion of our core business, for example through acquisitions in the delivery business, as well as in reinforcing our B2B e-commerce activities. The existing minority interests held by METRO offer the opportunity for additional increases in value if, for example, start-up companies were to develop faster and better than expected. We also want to solidify and expand the leading position our company has already attained in numerous markets. We expect that the consolidation of the wholesale stores in many of our portfolio countries will be intensified by the Covid-19 pandemic. Our goal here is to gain market share and, where appropriate, to take over individual locations of competitors and thus actively advance market consolidation.

Risks from completed transactions (#9)

This year, the risks from completed transactions for company acquisitions and disposals also include the risk associated with the disposal of the hypermarket business, which was listed separately in the previous year, and the risks in connection with the disposal of METRO China and other subsequent liability risks from completed sales of companies from previous years. Consequently, we now assess the overall risk as more probable than in the previous year and have arrived at an evaluation of the probability of occurrence as ‘possible’ rather than ‘unlikely’ as in the previous year. In connection with the disposal of the hypermarket business, the risks mainly consist of residual costs that will continue to be incurred after the sale and may not be sufficiently offset by proceeds from continuing operations to cover these costs, and potential results from the final determination of the purchase price or the utilisation of guarantees. Examples of residual costs are the loss of purchasing synergies and the temporary underutilisation of METRO LOGISTICS, which will only be realised in the medium term due to transitional agreements. During this transitional period, the development of third-party business is planned in order to utilise the capacity of METRO LOGISTICS.

The demerger of the former METRO GROUP was concluded on 13 July 2017 with the initial listing of METRO AG shares on the stock exchange. The former METRO GROUP has split into a wholesale specialist (the new METRO AG) and a company focused on consumer electronics and services (CECONOMY AG, formerly METRO AG). The demerger may be subject to additional legal risks, adding to the tax risks inherent in the implementation; in detail, these risks are:

• Continuing liability for all liabilities of CECONOMY AG occurring on the effective date of the demerger/spin-off for a period of 5 years
• Liability risks stemming from legal claims by shareholders of the former METRO AG in relation to the demerger, for which METRO AG has agreed to absorb the costs under the demerger agreement

We are continuously monitoring the financial position of CECONOMY AG. We are preparing for any potential complaints by way of legal defence strategies.

Information technology

Opportunities from master data

A reliable basis with regard to data quality leads to an improved understanding of customer needs and thus offers great potential for opportunities. Among other things, digital solutions from Hospitality Digital (online reservation tool, internet presence) generate master data that contribute to this data basis. In order to seize these opportunities, METRO is developing end-to-end master data solutions for customer master data and has also purchased a professional product information system, which will be introduced in all countries in the next few years. These solutions will ensure data reliability and support all distribution channels in the future.

Legal and tax risks

Trade regulations (#10)

The European Union and national governments are increasingly adopting or amending regulations to regulate trade that could affect our business. The EU directive on unfair trading practices was adopted in April 2019 and must be adopted into national law by April 2021. Further restrictions of local law are expected in EU countries in this context. Among other things, the European Parliament is discussing the proposal to ban procurement cooperations. In the Corporate Public Policy department, we collect, discuss and analyse important social, regulatory and political issues in order to represent our interests at the political level through responsible lobbying. We take increasing legal requirements into account by regularly revising regulations.

More stringent regulation pertaining to deferred compensation (#11)

Besides purchase price agreements, we enter into agreements on so-called subsequent remuneration with the suppliers. They include purchasing conditions, for example in the form of product-specific deferred rebates, cost reimbursements or payments for services such as specific customer data analyses.

For the last few years, we have observed that agreements on subsequent compensation between buyers and suppliers have been subjected to increased regulatory restrictions. This is mainly the case in Eastern Europe, but also in other countries in which METRO operates. Russia, in particular, is affected by a decline in subsequent compensations. Some restrictions mean that certain conditions are completely prohibited. At the same time, antitrust law is used to regulate conditions to the detriment of retailers and wholesalers , as it is presumed that they have market power.

We continuously and systematically monitor the risks arising from increasing regulation regarding subsequent compensation. We address these regulation trends in a preventative approach by adapting our contractual relationships with suppliers in the relevant jurisdictions and/or in relation to certain product categories to the respective developments. This allows us to ensure that any subsequent benefit arrangement complies with the applicable laws at all times. We also take care to appropriately provide for the respective limitation periods under civil law. As part of an ongoing monitoring programme, we analyse historical condition structures and update the current remuneration agreements based on these findings where it is deemed necessary. Without active management, there would be a risk that added value in the form of subsequent compensation in selected product groups and/or individual countries could no longer or only partially be collected as a result of changes to the regulatory framework. This could have a corresponding negative impact on the total comprehensive income of our company.

Tax risks (#12)

Tax risks can primarily arise in relation to the assessment of financial matters by the tax authorities (including transfer price issues). Additional risks may result from differing interpretations of sales tax (VAT) regulations. In order to identify and minimise tax risks at an early stage, METRO AG has issued a group tax guideline, which is continuously monitored by the Corporate Group Tax department to ensure that it is up to date and properly implemented. These risks are regularly and systematically examined and assessed. Increasing tax requirements are taken into account in the regular revision of regulations. Moreover, an internal control system for the sales tax process was established and already implemented for German companies; the roll-out process to other national subsidiaries was initiated in financial year 2019/20.