How retail giant Metro is trying to save its Russia deal | Economy | DW

The German retail group Metro AG has been able to win a prominent advertising face in Russia: the TV presenter Xenia Sobtschak. In a clip on her YouTube channel, she humorously suggests to Russian consumers that access to the Metro stores is now open to all shoppers and that a specially issued customer card will no longer be required.

The new regulation has been in effect since mid-March. “Our aim is to destroy the stereotype that Metro stores are inaccessible,” explains Metro Russia’s new boss, Johannes Tholey, in a press release on its website. This change of course is surprising because it looks like a rejection of the company’s global business model and is evidence of a serious crisis in the Russian subsidiary. This was founded in 2000 and continues to run its business – despite the Russian war of aggression against Ukraine and international criticism.

“All segments are growing except Russia”

In the Düsseldorf headquarters, the crisis of the subsidiary is not denied either. In February, the press release for the 1st quarter of the 2022/2023 financial year reported “increasing sales in all segments except Russia”: “The Russian war in Ukraine and the associated reluctance to buy are having a negative effect”.

And there is no improvement in sight for the time being. Management’s full-year forecast says that “sales in Russia will decline year-on-year” and that EBITDA (earnings before interest, taxes, depreciation and amortization) there “will decline sharply.”

So Metro clearly has a problem with its Russian customers. The group serves a very special group of customers in all 22 countries in which it has markets. He positions himself as an “international specialist in food wholesale”, so his business model is not aimed at the average consumer, but at professional buyers, primarily from the hotel, restaurant, catering (HoReCa) sector as well as small grocers and kiosks.

This B2B business model of the group founded in 1963 can only work where there is a well-developed service sector with a large number of medium-sized and above all small companies, but where there is also a middle class with purchasing power that regularly uses these services.

The Metro business model needs strong medium-sized companies

Therefore, the entry of the German company into the Russian market more than two decades ago and the subsequent rapid expansion there was also clear evidence of the rapidly growing prosperity in Russia at the time. Every new Metro Cash & Carry wholesale store in another Russian city showed that the market economy had reached a certain degree of maturity here, too.

This is how Metro AG became one of the largest foreign investors in Russia and today operates 93 stores in 51 regions there (there are not many more on the German home market, namely 102). And they are all now, with the help of Xenia Sobchak, trying to attract a broad group of buyers, because the focus on flourishing small businesses obviously no longer works in a Russia that is at war and is increasingly feeling the effects of its ruinous economic consequences.

However, the Düsseldorf headquarters see things differently. The Russian subsidiary, Metro AG’s press office told DW, operates within the framework of the group’s global strategy “and therefore focuses on supporting and serving business customers – mainly restaurants and independent retailers”. The Metro business, the written statement goes on to say, “is multi-channel. The company’s professional customers buy wholesale through various channels: not only in the store, but also via apps, online or via personal customer managers”.

Metro Russia recently launched mobile applications for B2B customers to place orders, the press service said. She explains the opening of the Russian markets to a broad group of customers as follows: “The decision to eliminate card access to the markets is aimed at streamlining and digitizing processes with the common goal of being able to concentrate on the essentials, namely the further expansion of support for small businesses.”

So the group still seems to be convinced that its business model can continue to work in Russia, even though a war economy is becoming more and more established there. The fact that Metro AG’s problems on the Russian market did not begin just a year ago, after Russia’s major attack on Ukraine, but at least nine years ago, after the annexation of Crimea, is apparently ignored or suppressed.

The troubles started after the annexation of Crimea

The sharp devaluation of the ruble in 2014 was a heavy blow to all foreign investors at the time. The German food wholesaler, which had many imported goods on offer, was aggravated by the Russian ban on imports of food from the EU. The embargo imposed at the time was Moscow’s response to Western sanctions and is still in effect today. Another initial problem for Metro was the competition from increasingly strong Russian supermarket chains.

The discrepancy between the German business model and the rapidly changing Russian reality became apparent no later than spring 2018 when the share price plummeted, mainly because of Russia. The management of the group at the time acknowledged mistakes, but did not see them in the fact that the warning signs after the annexation of Crimea were not recognized and that the focus was on further expansion and not at least on restraint on the Russian market.

Instead, it was felt that the HoReCa business model had to be further strengthened. In other words, the business model that you are now, five years later, actually saying goodbye to by opening the huge cash & carry markets to everyone and moving B2B business to the digital world.

No withdrawal from Russia because of the war

On the other hand, Metro AG is obviously still not thinking of withdrawing from Russia, despite the damage to its image due to the continuation of the Russian business. The German company recently found itself in a list of “sponsors of the war” in the Ukraine.

The group management also had to listen to criticism at the general meeting of shareholders in February. The CEO Steffen Greubel defended the “not easy” decision to remain in Russia with the words: “It was the right decision. Not only, but also in the interest of preserving the value of this company for its shareholders”.

However, over 45 percent of the shares are owned by EP Global Commerce, which is controlled by Czech billionaire Daniel Kretinsky, who appears to have a clear interest in investing in Russia. Especially since Metro AG generated 2.9 billion euros there in the last financial year, a remarkable ten percent of its global turnover and, despite a decline of a quarter, 60 million euros in profit before taxes. This year, however, profits will fall sharply, as forecast. Given the ruble’s weakness since February, even a loss is becoming increasingly likely.

In the first quarter of the new financial year, Metro AG already had to record an “estimated loss of sales in the low three-digit million euro range and an estimated negative effect on pre-tax profit in the mid to high double-digit million euro range” due to a massive cyber attack. In October 2022, it mainly affected activities in Germany and Russia.

Furthermore, DW wanted to know from Metro AG whether there is now more knowledge about what this cyber attack was – a purely criminal attempt at blackmail or rather a politically motivated revenge action in view of the Ukraine war? There was no response from the Metro press office to this question.

Food donation for the Ukrainian army

Instead, the website of the company was referred to with the extra page #WeStandWithUkraine – We are ONE METRO. It documents CEO Steffen Greubel’s condemnation of the Russian war of aggression as well as numerous aid programs for Ukraine and for Ukrainian refugees. Metro subsidiaries in various countries participate in these programs.

In Ukraine, where the German group has 3,400 employees and keeps 23 of 26 stores open despite the war, 525 tons of food were donated to the Ukrainian armed forces by the end of 2022, for example. So for the army that defends its country against the troops invading from Russia, in whose ranks mobilized employees of the Russian Metro subsidiary are now serving.