Go East, Retailer

Metro's warehouse-style stores are a huge hit

It's a 100-km drive from the village of Jaszarokszallas in Hungary to Metro's huge cash-and-carry outlet on the outskirts of Budapest. But for Pal Kerekes, a 28-year-old butcher, it's worth the trip. "It's cheaper," says Kerekes as he loads a van with packages of meat he plans to re-sell at his shop back home. "I save a few forints on every kilo."

That's the kind of testimonial that Frans W. H. Muller, Metro's chief operating officer for Eastern Europe, wants to hear. Dusseldorf-based Metro ventured into the region in 1994, when others were still leery of corruption, shoddy infrastructure, and workers who viewed customers as an annoyance. Today, Metro is a major retail brand in the east. "We definitely enjoy a first-mover advantage," says Muller. Stores in Eastern Europe account for 11% of Metro's $50 billion a year in sales. The company won't release figures, but says it is profitable in the region.

With Western Europe's retail market flat, Eastern Europe offers Metro a badly needed avenue for growth. Its operations there will definitely get a boost when the expansion of the EU eliminates the last trade barriers between east and west. And the risk from currency fluctuations will evaporate when new members adopt the euro starting in 2006.

Metro had an edge going in. Its cash-and-carry format, which contributed more than half of the company's profit last year of $449 million, proved ideal for emerging markets. The warehouse-style stores are restricted to small businesses such as restaurants and hotels, a burgeoning market in Eastern Europe. Though shoppers must prove they run a business to obtain a Metro ID card, cardholders also buy personal items and bring their friends along to shop. Most items are sold only in bulk--crates of milk, as well as big items like TVs. Metro sources most products locally, both to cut costs and to cater to local tastes. A hot seller in Poland right now, for example, is a vegetarian spread made by local processor Polgrunt.

Metro also keeps down costs with no-frills product displays and by building stores on cheap land, typically on city outskirts. All that effort keeps prices 10% to 15% below those of a typical department store or supermarket. "Prices are much lower than in other stores," says Piotr Konopko, 24, whose mother runs a bar in Warsaw. He recently paid about $100 for a bicycle at a Makro store, the name Metro uses in Poland and the Czech Republic. He figures that's $20 less than he would have spent elsewhere.

Metro's biggest competitive advantage may be its size. "Metro can negotiate with producers and suppliers, and get very favorable conditions," says Zoltan Sulok, research manager for the Economic Research Institute in Budapest. But getting fresh meat and produce to stores is also a challenge in countries like Romania, where roads are primitive. And Metro's managers must still contend with a thriving black market, along with red tape and petty corruption.

Competition is beginning to heat up, too. Metro's Real hypermarkets, large-scale food and clothing stores which are open to all shoppers, must do battle with outlets run by France's Carrefour and Britain's Tesco. The country is now home to 141 foreign-owned hypermarkets and 400 supermarkets, up from just 50 foreign-run outlets in 1995, according to Polish Market Review Ltd., a local consulting firm. Muller's early days in the Eastern European wilderness are an increasingly dim memory.

By Jack Ewing in Dusseldorf, with bureau reports

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