Metro C&c Case Study

Metro Group is organized into 4 business units:

1. Real/Extra – everyday retail hipermarket and supermarket
2. Kaufhof – up-market department store chain
3. Media Market/ Saturn – Europe’s leading electronics retail chain
4. Metro Cash & Carry

The last unit is a world’s leading C&C wholesalers catering solely to commercial customers (as for 2006) with 100 000 employees operating in 544 stores under the Metro and Makro brand names (430 stores in 2003). Sales of €28 billion account for 50.4% of Metro Group’s consolidated sales (2005), up from 46.5% in 2003.

Successful performance in German, country of origin, started by opening the first store in 1964 and was followed by expanding stock and emphasizing assortment rather than just price. In addition, commercial equipment and other goods needed for maintaining small businesses were added (1960s) along with fresh meat and fish (1970s). This changes were more efficient thanks to implementing computer-aided merchandise management systems and upgrading customer service and allowed to expand beyond food retail in 1980s. New customer groups were identified and commercial customers were supplied across a wide range of niches. Despite this might seem to be idyllic, at this time Metro was faced with protests from German retailers. They argued that Metro presented a form of unfair competition to them. German court system consistently ruled that Metro C&C is a legitimate form of wholesale trade and occasional purchase by business customers of Metro C&C merchandise for personal consumption wouldn’t make it a  retail business (unless such usage made up over 10% of Metro C&C sales). As it was investigated to be 2.4%, Metro was no more disturbed by retailers. However still it had to face competition such as: Wal-Mart, Tesco and Carrefour. But Metro was about to present the most daring expansion strategy of all.

In 1971 Metro made its first step outside Germany and 20 years later as an experienced player it made its first step outside Europe – entering China (1996), Russia (2001) and India (2003). Metro was entering foreign markets often as the 1st foreign wholesaler using its advantage of being a first-mover. Once the company finds itself off a beaten track there are no established rules to follow, however there is also no international competition. Admittedly, potential customers are accustomed to local providers, but at the same time also enthralled by the variety of unknown offshore products. Metro was satisfying both needs: 90% of stock was sourced locally, adjusted to local market, but there were also so-called core range: products available globally, such as French fries. This created a win-win situation: creating value for Metro and for the country where it operated by generating business for local manufacturers and therefore bridging the gap between urban demand and rural supply (in part thanks to investment in cold-storage facilities that improved both the longevity of products and reduced waste). Company developed 3 formats of stores (opened 16 hours a day) and adjusted the assortment to their sizes. New customers were identified within the catchment area (1 hour drive) and surveyed for potential needs. They were not bothered with any additional advertising but direct mailing. Metro is not only daring in entering new markets but also when it comes to expanding on these markets: in 2005 Metro C&C opened 43 new wholesale stores, which is a record-breaking number for the company. Brave decisions are to be made by well-rounded international management ready to respond to any emergency on-site. As person running a store is responsible for staff of 300 they are well trained to work on any position when needed. Besides doing the hands-on job, members of board can pride themselves on their negotiation skills as they are successful in fostering local relationships, which are not always easy. Worth mentioning is an example of Russia, where local governments were supporting Metro as a mean to creating a transparent distribution channel which would allow them to collect taxes. (India  China…). Another competitive advantage over the existing local competition is quality. Russian large open-air wholesale markets offered lowest prices, however quality of products was not guaranteed, not to mention that hygiene problems were typical. Situation was alike in 

Those countries turned to be great challenges also in the institutional context. When Metro was entering Chinese market, country was not a member of WTO (for 5 more years), which means that trade was not quite liberal and foreign-owned businesses were not welcome to engage in retail and wholesale activities. Instead Metro was required by central government policy to take a local joint-venture partner and form a 60/40 JV with Jinjiang Group. Cooperation with the culturally experienced partner was rewarding and resulted in political backing. On the other hand faced with local bureaucracy Metro had to deal with long term negotiations to prove ability to bring benefits to the local area. Process was prolonged as central government accounts only for 30% of national government spending, the rest is decentralized, so there are multiple stages to gain permission for trading when company aims at operating in many urban markets. Another institutional difference is a matter of perception – in China offshore products were considered to be luxurious and value proposition was unclear for customers - Metro needed to invest in educating them, for example providing explanation to why wholesalers are not open for end users. As large cities are densely populated and there occurs shortage of land, Metro was confronted with huge cost of sales area, so stores were opened in basements of large urban buildings. Not only land was being severely competed on, the same accounted to workers and management – job hopping was common. All those factors made break-even occur later than in Europe. When it comes to Metro’s history in Russia, the company could feel a lot more welcome as it was invited by Moscow’s mayor BLA BLA. This helped in omitting  bureaucracy as government saw an opportunity to build a distribution chain with Metro. Before there was no infrastructure for deliveries to cover vast distances between stores. Supply chain was therefore inefficient. Standarization of local subcontractors. Corruption – but Metro takes no part in that? Disregarding the size of Russia, there were no spare land in Moscow. However this problem was dealt with differently than in China: company was leasing store areas from government. When it comes to institutional context in India situation was equally complex but at the same time very rewarding: consultancy A.T. Kearney ranked India as the most desirable world market. Wholesale market was highly fragmented and international companies accounted for as little as 1% of Indian grocery retail sales in 2004. Having no international competition meant that internal competition was all that had to be dealt with. This time no local partner was assigned to create a joint venture with. Metro was barred from purchasing fresh fruits and vegetables directly from farmers (in a country where vegetarians account for over 70% of the population, this made it difficult to supply the small restauranteurs who would benefit considerably from Metro’s value proposition). Despite being prohibited by regulations from selling agricultural commodities (a major product category for India’s commercial customers) and despite protests of local groups (which questioned C&C value for the country) stores increased sales. The political situation was promising but with very complex structure.

...