Description of the opportunity and risk situation

Each consolidated risk analysis is based on a 4x4 matrix with regard to loss potential and probability of occurrence. Based on the loss potential and the probability of occurrence, a risk classification (low, medium, high) is derived for each consolidated risk:

Risk matrix

The stable portfolio of consolidated risks contains a total of 16 risks for financial year 2022/23. All risks are listed in the following overview:

The changes in risks compared to Annual Report 2021/22 are presented in the net consideration.

As can be seen in the table, 1 of the 16 consolidated risks as of the reporting date was classified as high, 6 risks as medium and 9 risks as low. In the following, we go into detail about the opportunities and risks. We focus on those risks that are classified as high and medium, as well as on the changes during the reporting period.

Environment

Opportunities from a global and diversified business model

METRO’s diversified country portfolio, which excludes excessive individual dependencies on specific countries, offers a competitive edge in the current economic situation compared to other, locally positioned market participants. The global positioning also allows METRO to react flexibly to changes in global supply chains, for example through the use of regional trading offices.

Likewise, the diversified multichannel business model is optimally positioned in the competitive context to meet customer demand. The increased cost-consciousness of customers is contrasted by the own-brand and price strategy for the store-based business.

Strategic risks (#1)

Strategic risks include risks related to the group’s business model, competitiveness and digitalisation. Missing significant trends in new sales formats and channels, as well as in our assortment and own-brand strategy, can represent additional risks.

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 countries where we could potentially benefit from these developments. Opportunities could arise from a sustained positive geopolitical and macroeconomic development.

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. Changes in political leadership or economic imbalances can jeopardise METRO’s business. The war in Ukraine continues to affect the safety of employees and customers as well as the integrity of the business and supply chains. METRO’s ongoing presence in Russia results in political and reputational risks. With regard to the business in Russia, risks arise from sanctions, counter-sanctions and government intervention in business operations to the point of potential expropriation as a result of the development of the war.

Current political measures to mitigate inflation and energy costs can have an impact on the operations of METRO through price caps for basic food items or margin caps.

Regulations of national VAT systems are also under discussion with the aim of stabilising budgets. A possible consequence would be an increase of tax rates, including for the hospitality industry with tangible price increases and a potential decline in demand, which would directly impact METRO.

The proposal currently under discussion for a regulation of the European Parliament and the Council on combatting payment delays in commercial transactions would, in its current version, negatively affect our liquidity by capping payment terms at 30 days, thereby leading to increased interest expenses and a shift from supplier debt to financial debt. We are engaging in dialogue with political decision makers at the national and EU levels, in particular through associations, to raise awareness of the described impact of regulation.

Continuous monitoring of the economic and political developments and a review of our strategic objectives allow us to respond to these challenges in a timely and appropriate fashion.

• For more information about our assessment of the development of the economic environment, see chapter 3 outlook.

Interruption of business activities (#3)

Our business may be affected or interrupted by natural disasters or failure of our IT systems. Potential cyberattacks receive particular attention in this regard. Depending on the severity of the attack, important business processes such as purchasing, sales and communication between different METRO entities could be impaired. IT systems for online retailing must be continuously available, as these systems are a prerequisite for unlimited access outside normal store opening times.

Due to the severity of the cyberattack in autumn 2022 and the insights from the recovery measures, this risk has increased from ‘moderate’ (>€50–100 million) to ‘major’ (>€100–300 million) in terms of the loss potential. Following the cyberattack, further measures were implemented to safeguard against cyberattacks in general, which is why the probability of occurrence has been reduced from ‘probable’ (>50%) to ‘possible’ (>25–50%). For all IT security measures, the overriding goal is to ensure operational reliability at all times, or to restore it as quickly as possible.

Professional crisis management, for example by means of business continuity management, allows for a rapid crisis response and thereby ensures the protection of our employees and customers. This includes communication and 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.

Security and safety risks (#4)

Security risks include criminal activities, terror and unrest, as well as the issue of operational safety or danger to life and limb due to lacking or inadequate safety measures. The impact of the war in Ukraine is discussed under risk #2 ‘Macroeconomic and political risks’.

Corporate responsibility

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 in its core business. Our greatest leverages lie in reducing our CO₂ emissions and food waste, which we are advancing by, among other things, expanding energy-saving infrastructure and logistics, by adapting the assortment and packaging and by taking operational measures to prevent food waste. By ensuring environmental and social standards through the use of responsible supply chain management, we strengthen the resilience of our supply chains and, at the same time, promote local structures. Our sustainability efforts are assessed as part of ratings to create transparency for investors and other interested parties.

Environmental and social risks (#5)

Regulatory and social regulations regarding compliance with human rights and environmental due diligence are becoming more stringent.

Achieving environmental and climate objectives remains a challenge due to continued uncertainty in the supply of raw materials and the resulting potential interruptions in supply chains. It could also be demanding for our suppliers to meet their commitments, such as emission reduction targets. At the same time, our operational business generates greenhouse gas emissions that can have a negative impact on the environment.

New statutory obligations, such as those from the Act on Corporate Due Diligence Obligations in Supply Chains (LkSG), result in risks from the violation of national and, prospectively, European supply chain regulations due to possible non-compliance with social and environmental aspects in the supply chain or in our own business operations. In addition to fines and damage to reputation, falling short of social and environmental targets and obligations can also lead to limited access to financing instruments. The new due diligence obligations can also make an impact on the range of suppliers, if this is indicated as a measure to mitigate risks in the supply chain. This results in potential risks to the stability of our supply chains.

Further risks result from increasing regulations on traceability and transparency in the supply chain; again, non-compliance with these regulations may lead to potential fines or a ban on the sale of the goods in question. METRO has taken comprehensive measures to counteract the risks. For example, METRO established an appropriate social standards programme and traceability concept, introduced energy efficiency and awareness-raising measures to reduce emissions and increased the corporate budget for country initiatives to implement new environmentally friendly technologies.

• For more information about our social responsibility and environmental protection activities, see chapter 1 principles of the group – 1.3 combined non-financial statement of METRO AG.

Wholesale business

Opportunities from digitalisation and innovation

METRO is focused on identifying and addressing future challenges of its customers at an early stage in a volatile environment. Innovations and digitalisation are areas with excellent potential for realising increases in value. We are convinced that progressing digitalisation will increasingly shape the future of the retail and wholesale industry as well as business processes. This may give rise to new business models, which in turn may present a variety of opportunities.

As part of our sCore strategy, we have defined a clear digitalisation ambition in the form of a 40% digital sales share. In this context, our focus is on digitalisation initiatives that are geared towards our core customer groups HoReCa and Traders. We partner with the company DISH Digital Solutions to provide our customers with digital solutions, such as the DISH (Digital Innovations and Solutions Hospitality) platform. With DISH Digital Solutions, we see significant opportunities to benefit from faster digitalisation in the HoReCa and Traders sectors as well as in other business areas. With our METRO DIGITAL business unit, we continue to digitalise our core business. METRO DIGITAL develops, optimises and supports all digital solutions used by our customers and us, such as our apps METRO Companion or M-Shop. These digital solutions provide opportunities for METRO to set itself apart from the competition.

Opportunities from customer focus

METRO has a clear focus on wholesale and B2B customers. By measuring customer satisfaction, for example by means of the established Net Promoter Score and the systematic collection and evaluation of customer suggestions, we are able to identify potential areas to improve the shopping experience and delivery as well as general trends. We are continuing to develop our multichannel approach within the framework of our sCore strategy. To this end, we are expanding the delivery business and bolstering our e-commerce activities with the METRO MARKETS online marketplace. Our goal is to be the partner of choice for our customers by offering METRO solutions that cover all aspects of their business. 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.

Store operations and FSD risks (#6)

The markets in which we operate are characterised by rapid changes and fierce competition. Lack of collection, analysis and use of customer data, uncompetitive pricing or an insufficient level of service may cause us to fail to meet customer needs and thus jeopardise our growth and profitability targets.

Inadequate market and FSD processes can lead to inefficiencies which have a particularly negative impact on inventory levels, profit margins and customer satisfaction. To counter these risks, we develop country-specific strategy plans derived from the group sCore strategy that are aligned with the respective local circumstances and customer requirements.

We strive to have a holistic partnership with our customers to address the needs of professional customers. This includes the expansion of our delivery business, the continuous transformation of our stores into multichannel fulfilment centres, further development of our franchise concept in selected markets, the METRO MARKETS online marketplace and digitalisation initiatives for our customers on DISH, as well as financial services of METRO Financial Services.

Real estate

Opportunities from increase in value

As of 30 September 2023, the store network comprised 625 stores, 529 of which were out-of-store (OOS) locations and 76 were depots. Around half of the locations are owned. We see long-term potential for value increases in possible development projects for our existing real estate assets as well as in improved facility management.

Real estate risks (#7)

The tense economic situation and rising interest rates make real estate transactions more difficult and can also lead to risks in real estate development. This affects the expansion of our stores to multichannel fulfilment centres and depots for the delivery business in particular. Moreover, delayed repair and maintenance work could lead to legal infringements and real estate impairments as well as reputational damage. We mitigate these risks with strategic and operational real estate management. To this end, we regularly perform evaluations of properties in terms of value and income and projected investment planning. The safety and health of customers, suppliers and employees can 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.

Due to the stabilisation of energy prices, the probability of occurrence for this risk has decreased from ‘probable’ (>50%) to ‘possible’ (>25–50%). Even though the energy markets have currently stabilised at a high price level, it cannot be excluded that there will be energy price rises again in the future. Extensive energy efficiency measures were implemented in order to decrease consumption and the associated costs. New photovoltaic installations are being commissioned in addition.

More stringent legislation regarding environmental standards such as the German Buildings Energy Act (GEG) could lead to higher costs in various areas of construction and energy management, for example through the early exchange of cooling systems.

Suppliers and products

Opportunities from sustainable procurement

Alongside quality and safety, the environmental and social sustainability of the products and their production processes are, for us and more and more customers, increasingly significant selection criteria. We aim to ensure resource-friendly production as well as socially acceptable working conditions within our procurement channels. METRO pursues a group-wide purchasing policy that applies to all products and includes additional requirements for critical raw materials to ensure sustainable and responsible supply chain and procurement management.

• For more information about our social responsibility and environmental protection activities, see chapter 1 principles of the group – 1.3 combined non-financial statement of METRO AG.

Opportunities from higher own-brand penetration

Own brands are a central element in METRO’s strategy to increase the success of our customers. With our own brands, we can provide high quality at lower 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 inflation, could increase demand for own brands and thus have a positive effect on METRO’s profitability.

Procurement risks (#8)

Production downtimes, disruptions of the supply chains and international price fluctuations for raw materials and energy as a result of geopolitical instability can cause the lack of availability of goods, interruptions of supply chains and unexpected price fluctuations with a destabilising effect on our business and that of our partners.

In order to mitigate these risks, METRO is launching projects to support the purchasing activities of the national subsidiaries via bundling, thereby strengthening partnerships with suppliers and ensuring the availability of goods and their competitiveness. This is facilitated by the optimisation of our assortment and development of our own brands. Thanks to our global coverage, we are in a position to find suitable alternative supply sources for key products. When we renegotiate expiring contracts, we try to compel suppliers to be sufficiently prepared so that supply continuity can be ensured in the event of force majeure. We pay special attention to all specific price components to prepare for negotiations in an effort to obtain better purchasing prices.

Quality risks (#9)

Quality risks include risks related to the quality of the offered products, transport and storage, if they lead to an impairment of the quality of goods or food safety.

Supply chain

Supply chain risks (#10)

Supply chain risks include issues related to logistics, transport and storage, such as rising transport costs or the insufficient management of logistics service providers.

Financials

Financial risks (#11)

Without timely countermeasures, unexpected external influences on our business activities or other changes in the business environment could potentially result in us missing our target figures. In addition, delayed recognition of such changes could lead to us making wrong business decisions. We mitigate these risks by interlocking strategic planning and the budgeting process closely, carrying out very close monitoring of budget compliance, defining effective internal controls and intensively involving 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.

The current global efforts to combat inflation leads to, among other things, rising key interest rates and therefore increases the risk of escalating interest expenses for financing instruments. This risk is to be assessed as limited due to the already-reduced gross debt. In order to be able to react promptly to changes, we continuously monitor our own financing positions as well as the money and capital markets.

Furthermore, potential defaults by commercial partners and customers represent a financial risk. In order to minimise the credit risk of receivables from our customers, we decide on the amount of the granted payment terms based on comprehensive internal scoring – and external information, if available.

We reduce the credit risk for external investments with banks by setting limits based on ratings and credit spreads.

By continuously monitoring the entire receivables portfolio, we ensure a risk-adequate adjustment of our customers’ payment terms and the investment limits with banks at all times.

Furthermore, METRO is subject to price risks, liquidity risks, credit risks, cash flow risks.

• For more information about financial risks and their management, please see the notes to the consolidated financial statements in no. 39 – management of financial risks.

Transactions

Opportunities from increased efficiency and portfolio simplification

Our 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. Collaborations (even if they are purely contractual) can help us reduce operational cost or give our customers access to innovative products.

The country portfolio is regularly reviewed with regard to the feasibility of a local market leadership and the attractiveness of the respective markets. In this context, METRO disposed of its business in India in financial year 2022/23.

Opportunities from market consolidation and acquisitions

In the future, METRO will also focus on investments to strengthen its wholesale business. We want use this to solidify and expand our leading position in numerous markets. We expect that the consolidation of the wholesale stores in many of our portfolio countries will continue. For example, METRO acquired the delivery business JHB in Scandinavia in the last financial year. The existing minority interests held by METRO offer the opportunity for additional increases in value if, for example, start-up companies were to develop better than expected.

Transaction risks (#12)

The transaction risks include all risks arising from the acquisition and disposal of companies (or company shares). These include legal and tax risks, guarantees, non-recurring and residual costs, or even reactions of the market to the transaction. Subsequent liability risks may arise for CECONOMY AG in conjunction with the demerger of the METRO GROUP in 2017.

Due to the lower transaction volume and the elimination of guarantee claims and tax receivables from several past transactions, the risk has decreased from ‘major’ (>€100–300 million) to ‘minor’ (≤€50 million) in terms of the loss potential, and from ‘possible’ (>25–50%) to ‘low’ (≥10–25%) in terms of probability of occurrence. The risk has now been classified as low due to the changes.

Information technology

IT Data risks (#13)

Data risks include risks related to data protection and data security as well as risks related to the accuracy, completeness and availability of data necessary to ensure successful use of the group’s own data. Data theft or manipulation by unauthorised parties as part of cyberattacks can also lead to violations of data protection laws and thus to fines and reputational risks.

Human resources

Human resources risks (#14)

Human resources risks include risks related to the organisational structure of human resources, recruitment and retention of staff, appropriate remuneration and the exit process. Beyond that, risks related to corporate culture are also considered.

Tax, legal and compliance

Tax risks (#15)

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. Due to an altered risk composition, the probability of occurrence has increased from ‘low’ (≥10–25%) to ‘possible’ (>25–50%).

Legal and compliance risks (#16)

Legal and compliance risks include risks related to antitrust law, corruption, fraud, money laundering and unfair trade practices, as well as general legal risks.