Online Extra: Germany's Mighty Metro

Thanks to growth abroad, the retailer's earnings are climbing despite the sluggish home economy and brutal competition

By Jack Ewing

With record unemployment, sluggish growth, and plummeting consumer confidence, Germany is a tough place to be a retailer these days. So it seems pretty counterintuitive that many analysts are recommending the shares of Dusseldorf-based Metro, Germany's biggest retail group. Yet a closer look shows that Metro, No. 55 on BusinessWeek's new list of top-performing European companies, based on the Standard & Poor's Europe 350, has held its own -- even boosted profits -- amid the macroeconomic gloom.

"Metro has managed to improve margins despite the overall consumer climate," says Volker Bosse, who follows Metro for Munich bank HVB Group and rates the shares outperform. "They've managed to take advantage of all the important trends in retailing."


  One trend that Metro has followed is expanding beyond the borders of Germany, with its slow-poke growth. Like other the nation's companies, such as carmaker BMW or media company Bertelsmann, Metro has concentrated more on international markets in recent years. That has allowed it to more than offset Germans' stagnant purchasing power.

Metro now registers almost half its 54 billion euros ($60 billion) in annual sales outside Germany, particularly in emerging markets such as Poland or Romania where incomes are rising and relatively little competition exists. Metro has done especially well abroad with its cash-and-carry stores, big warehouse-style outlets that sell food and other goods in quantity to restaurants, mom-and-pop stores, and other small businesses. Later this year it will open its first cash-and-carry store in Ukraine and two in India.

However, there's more to Metro's success. In Germany, it has turned the reduced spending power of consumers into an advantage. Its Saturn and Media Markt consumer electronics stores, which advertise that "Cheap is cool," boosted operating profits by 9.5% in the first quarter -- typically the year's weakest quarter -- to 29.3 million euros ($34 million) on sales of 2.351 billion euros ($2.7 billion).


  The giant retailer achieved this even though Germany remains the core market for its consumer-electronics business. Overall, Metro narrowed its first-quarter 2003 loss to 43.7 million euros ($50 million), from 56.2 million euros ($65 million) a year earlier. (In German retailing, anything close to breakeven in the first quarter is considered a triumph.) First-quarter sales rose 2.7%, to 12.13 billion euros ($14 billion).

Metro surely faces some challenges in the days ahead. It's unclear when the German economy will begin to recover. And Metro's Praktiker do-it-yourself stores are perennial money losers, though performance has improved, thanks to intensified advertising. Metro's Wal-Mart-style Real hypermarkets and Extra food stores have had trouble competing with aggressive, no-frills discounters.

HVB's Bosse thinks Metro can boost profitability by expanding its range of store brands. Private labels, such as Metro's Watson appliance brand, offer consumers some of the security of a brand name while giving Metro a decent profit margin.


  However, despite its accomplishments in a dreary economic climate, not all analysts are so sanguine. Investment bank UBS recently downgraded Metro from buy to neutral, arguing that weak consumer spending in Germany still poses a risk. But investors seem to disagree.

Metro shares, which trade on the Frankfurt Stock Exchange under the ticker MEOG.F, have risen 30% since Apr. 30, when the retailer released first-quarter results. The stock traded at about 29 euros ($33) recently, and some room for gains remain, says HVB's Bosse, who thinks the shares will go to 32 euros ($36.50). Even German consumer spending could get a lift soon. The government is debating speeding up planned tax cuts to boost confidence.

If so, Germany might not be such a bad place for retailers after all, and Metro is poised to benefit from any consumer-led rebound.

Ewing writes for BusinessWeek in the Frankfurt bureau

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