Metro Booted From DAX as ‘Concrete Shoes’ Drag Down Stock

Metro AG (MEO), Germany’s biggest retailer, has spent much of the past four years trying to hive off department stores, supermarkets and other assets. With little to show for the effort other than a sinking stock price, the nation’s benchmark index today hived off Metro instead.

Metro’s shares have dropped 11 percent this year, meaning a company that was once the world’s third-largest retailer is no longer among the top 30 companies in Germany’s DAX Index (DAX) by market value and exchange turnover.

Ejection from the DAX will make it even tougher for new Chief Executive Officer Olaf Koch to boost the stock price as investors who track indices sell off. The 42-year-old German has pledged to focus investment in the Cash & Carry wholesale unit that sells directly to businesses -- the only one of Metro’s five main divisions to grow last year -- and its Media-Saturn electronics retailing business while cutting off investment in assets it can’t sell.

Many analysts say the strategy will do little to help the stock recover.

“Reshaping Metro is going to be very difficult,” said Trung-Tin Nguyen, a hedge fund manager at Trimax Capital AG in Zurich, who bought and sold 2 million euros ($2.6 million) of the company’s shares in July. “It’s not a compelling long-term investment.”

Metro’s market value has shrunk by almost two-thirds since reaching an eight-year high of 21.8 billion euros in September 2007, when it was the world’s 14th-most valuable food or general retailer in dollar terms. Its current market capitalization of 8.2 billion euros doesn’t earn it a spot in the top 40, data compiled by Bloomberg show. The shares dropped 1.2 percent to 25 euros in Frankfurt today.

Cordes Disposals

From a peak of 68 billion euros in 2008, Metro’s revenue has fallen 1.8 percent. In 2009, U.K. grocer Tesco Plc (TSCO) surpassed Metro in terms of sales to take the No. 3 spot among global food and general retailers. If current growth trends continue, Kroger Co. (KR) and Costco Wholesale Corp. may soon overtake Metro in revenue, dropping the German company to No. 6 globally.

Under previous CEO Eckhard Cordes, the company sold its Extra supermarkets and the Adler fashion chain. Last year Cordes came close to selling Metro’s Kauhof department stores and said he was considering a sale or partnership for Real, another chain of supermarkets. Now Koch, who halted the Kaufhof sale in January because of fragile markets, is largely giving up on those units.

Online Future

The CEO plans to ramp up the fledgling online offering of the consumer-electronics unit, which accounts for more than 30 percent of sales. After 20 years of being Metro’s growth driver, Media-Saturn, with stores under the Media Markt and Saturn brands, has been a big contributor to the company’s woes. Among the biggest missteps: It was a decade late to the Internet.

Saturn started selling electronic goods online in Germany in October 2011, after launching Web sales in the Netherlands and Austria the year before. Media Markt followed just this January. Neither move did much to goose results as revenue at Media-Saturn fell 0.9 percent in 2011, led by a 6.2 percent decline in western European sales.

Many shareholders wonder why Metro is still investing in physical stores when “the future is online,” said Fabio Fazzari, an analyst at Equity Sim in Milan. “This is the real point that is hitting the share price.”

It’s a similar struggle at the Real chain. The unit, which accounts for 17 percent of sales, saw revenue last year fall 2.3 percent to 11.2 billion euros. While selling Real’s operations abroad may be possible, Metro will have a harder time ridding itself of the domestic stores, which have been losing market share to discounters such as Aldi and Lidl, said Boris Planer, an analyst at Planet Retail in Frankfurt.

‘Concrete Shoes’

“Real supermarkets are a pair of concrete shoes,” Planer said. “There is a certain chance of success in selling Real’s eastern European business, but the biggest chunk of Real is the German business and who is going to take it over?”

Metro is in advanced talks with two companies, including French retailer Auchan, to sell Real’s non-German operations, two people familiar with the negotiations said last month.

The retailer may be even keener to sell Kaufhof, a business that has been on the block since 2008. In January, Metro halted separate negotiations with Austrian real-estate company Signa Holding GmbH and Berggruen Holdings, the owner of the competing Karstadt chain.

“It’s going to be extremely difficult to find a suitable bidder for the whole of Kaufhof,” said Raphael Moreau, a London-based analyst at Euromonitor International. “The format is not very interesting” and is limited to Germany and Belgium.

Wholesale Gains

Metro says selling Kaufhof remains part of the strategy, though it may be difficult to find a buyer. German department stores, which enjoy a grand tradition dating back to the 19th century, have seen sales fall as shoppers turn to single-label stores. The number of German department stores has declined by a third since 2006, dropping to 247 at the end of 2011, according to Euromonitor. Kaufhof sales fell 3.7 percent last year.

Cash & Carry, Metro’s wholesale unit, has been the lone bright spot, gaining customers by developing its range of own- brand products, introducing a delivery service, and expanding in eastern Europe and Asia.

Cash & Carry, which accounts for almost half of the company’s sales, operates in 29 countries, with China, Poland and Russia among those that Koch said he will focus on. Making Cash & Carry the core business and “reining in its expansion is the right thing to do,” said Sebastian Frericks, an analyst at Bankhaus Metzler in Frankfurt.

No Way Back?

Exiting the DAX means Metro will miss out on a 13 billion- euro market. That’s the amount invested in exchange-traded funds that replicate the index, according to Achim Matzke, head of global index and technical research at Commerzbank AG in Frankfurt. The performance of MDAX, an index of midcap companies that Metro joins today after leaving the DAX, is mirrored by one exchange-traded fund, worth 850 million euros, Matzke said.

“The chances of coming back into the DAX are very limited,” Matzke said. “They all want to change the strategy to be better, but it’s not easy. In 24 years, only two stocks came back.”

To contact the reporter on this story: Julie Cruz in Frankfurt at jcruz6@bloomberg.net

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net

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