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FEB. 25, 2007
 Cover Story
 BT Special
 Back of the Book

Trading with ASEAN
In the recent Indo-ASEAN summit, ASEAN was, for the first time, on the defensive. India has agreed to bring down its negative list of imports to 490 items in the free trade agreement with the 10 ASEAN nations. But India’s step towards free trade was not matched by the ASEAN nations, as more than 1,000 items still figure in the negative list of the ASEAN. In 2005-06, India’s total trade with ASEAN was at $22 billion (Rs 99,000 crore), against just $7 billion (Rs 31,500 crore) in 2000-01.

Exchange Deal
Indian markets are on a roll. Global stock exchanges and financial institutions’ interest in the Indian stock exchanges goes to show the long-term growth potential of India Inc. The year has started on a positive note. The NYSE and three global financial institutions have each picked up a 5 per cent stake in the NSE. The deal will open exciting vistas in global co-operation for the NSE, and at the same time could improve the fortune of smaller exchanges in the country.
More Net Specials
Business Today,  February 11, 2007
Hans-Joachim Körber/Chairman & CEO/Metro AG
"Local Adaptation Is The Key In Retail Business"
"There's no alternative but to open up retail for the benefit of the consumer"
Alittle over 10 years ago, Metro AG wasn't the Euro 60 billion (Rs 3,42,300 crore) retail giant that it is today, but three different companies-Asko Deutsche Kaufhaus, Kaufhof Holding and Deutsche SB-Kauf. But when the three companies merged in 1996, they spawned not just Metro but a top 20 listed company in Germany. Within months, the new entity was moving into international markets, starting with East European countries and thereafter Asia. There has been no looking back since then for the German retailer. International revenues as a percentage of total revenues have gone up from 7 per cent in 1997 to 56 per cent. Since 2001, it has been the responsibility of Hans-Joachim Körber, Chairman (of the Board of Management) & CEO, to keep Metro's flag flying high not just in Germany but also outside of it. The retailer, which derives most of its revenues from the cash-n-carry, or wholesale, business, arrived in India in October 2003, but hasn't been able to ramp up; it has two outlets in Bangalore and one in Hyderabad that opened in November last year. Recently in India, Körber, 60, met with BT's R. Sridharan to talk about Metro's India experience and future plans. Excerpts:

What's your reaction to the Bharti-Wal-Mart deal?

"Real estate price is an issue. If you compare real estate price and GDP, it is out of sync"
What it shows is the attractiveness of the Indian market. We are already in this market. Everybody has realised that India is a country with a lot of potential-if you see the size of the population, the dimension of the retail sector, or if you see the demographics of India, it's a very young population. So, I think (the other retailers) will also look for ways to enter India, because you know that the retail sector in India is a closed sector.

Metro is only into cash-n-carry in India, but back home in Europe you have other formats (see Metro: Battling Stagnation in Germany). With competition coming in, do you have plans of bringing in the other formats?

No, we are focussed only on our cash-n-carry business. We are trying to expand our business now, after having opened two stores in Bangalore, and adapting it to the Indian consumer needs. (The third store opened in Hyderabad on November 29, 2006.)

In China, I believe, you have more than 30 cash-n-carry...

Thirty-three stores to be precise, and that's growing.

What sort of problems have you faced in ramping up in India? Two or three stores is really nothing to talk about when you are a m60-billion retailer.

That's true. First of all, to come to India you need a licence from the government. So we got this licence and then we had a long discussion about the interpretation of the licence, whether it means self-service wholesale in the Indian context. Then, we decided to open the first store in Bangalore. We also were promised that the APMC code (Agricultural Produce Marketing Committee Act) would be changed, but then there was a change in the (state) government and we are still waiting-two-and-a-half years on-for changes in the APMC code. (Editor's note: Eight states, including Karnataka, are yet to amend their APMC Act.) So that means we can't sell food and vegetables, rice and lentils which comprise the core category of our business. But so far we are satisfied with the development and now in Hyderabad, you can see what cash-n-carry can really do for the small businesses-restaurants, caterers and hotels.


While cash-n-carry is metro's biggest and best-known business, it operates several other formats in Germany and outside of it. Real is its hypermarket chain that was created by the merger of several regional hypermarkets, and sells everything from fresh produce to electronics to clothing. Extra is a chain of neighbourhood supermarket stores with m10 billion (Rs 57,000 crore) in annual revenues-as much as Real's revenues in 2005. Media Market and Saturn are two of its consumer electronics retail chains, with revenues of m13.3 billion (Rs 75,810 crore). Galeria Kaufhof is the department stores chain with focus on fashion and lifestyle-related products. In 2006, Metro acquired 85 stores from Wal-Mart, when the retail giant decided to wind up its German foray and write off $1 billion (Rs 4,500 crore) in losses. The big challenge for Metro is, however, to stimulate growth. The German retail market is both cut-throat and flat; in 2006, Metro Group's sales grew less than half a per cent, excluding acquisition of Wal-Mart stores. However, the group is growing rapidly outside of Germany; international sales, for instance, grew 12.4 per cent last year over 2005. That's why India, where organised retail is beginning to take off, is important to Metro.

Why didn't Metro come in via the franchisee route, which would have allowed you to bring your other formats?

First of all, as a group, we don't have any franchise concept. This is a different business. Most of our international business is cash-n-carry, and we see an acceptance in all the countries we are in because in the transition phase of an economy, this sort of a concept-cash-n-carry-helps the small businesses a lot. Why change a winning concept just because the legal framework of a country is temporarily not conducive to it? Long term we believe that India will also change the legislations because, at the end of the day, it benefits the consumer.

The group's growth has been pretty modest-4.25 per cent in 2005...

... it will be 6 per cent this year (2006) at least.

"We believe India will also change the legislations"
...And three-fourths of your business comes from cash-n-carry and electronics retail. It must be frustrating coming to a market where there's so much potential for organised retail and yet to find that there are many restrictions.

If you go back in time, it starts with the fall of the Iron Curtain. What nobody really knows today is that there was no modern retail at all in Eastern Europe. So, we moved into Eastern Europe and later into China...and, okay, we find our way. Of course, the government has to balance (the various interests) as far as retailing is concerned, but we are not in retail. It has to consider what does it mean to the existing infrastructure and what does it mean for the consumers. So when we start analysing India, it is clear that the potential is there. It is clear that the government will change legislations, it will take a while. But at the end, if you see how India is developing, if you see how the middle class is coming up, if you see how the farmers are squeezed today, and how important the agriculture sector is to India, there's no alternative but to move ahead to the benefit of the consumer and also to the benefit of the agriculture sector especially the farmers.

When you came into the country the real estate prices were relatively low, but now they have gone through the roof. Has Metro already locked into leases outside of Bangalore?

Real estate price is an issue. If you compare real estate price and GDP, it is out of sync. We have to find ways (of coping with high real estate prices) together with developers because in combination you can afford the high real estate prices. We have the experience to deal with such situations.

But obviously that puts greater pressure on your business model? Higher rentals will mean you need higher throughput per square foot.

It's relative. As long as everyone pays high (rentals), it's ok. We have a very productive model. We have high turn rates for our stock. We already operate in countries that have high rentals; Moscow, for example, has high real estate rentals. We are used to it.

Perhaps, but when you enter a new market you have to take market share away from some existing players, who are operating on historical costs.

That's true, but you can be competitive. We offer low prices and hygiene, we offer quality and availability. So we offer a lot of additional values that make our business attractive. It's not only the price. We are doing business in 28 countries, and I can tell you the concept works. We are very dedicated to our target group. We have extensive data on our customers and that allows us to offer assortments that are best suited to their customers. We have great expertise in supply chain management.

I was going to come that. How difficult has been managing supply chain in India?

It is very fragmented, it is uni-dimensional and inefficient. Therefore, supply chain management is a big part of our business. In general terms, what you see on the shelves is not our competence; it's how we put the product on the shelves which is our competence.

Looking at Metro's P&L, it does seem that cash-n-carry is much more profitable than consumer retail. Real (Metro's consumer electronics retail chain) is losing money, right?

Actually, that's a problem specific to Germany and home-made. Normally, we run (business models) that have high return on capital. That's what we are focussing on. But there's no big difference as far as the return on capital employed is concerned between, say, a hypermarket and a cash-n-carry or electronics retail.

Wal-Mart pulled out of Germany in 2006, and Metro bought the stores. What do you think went wrong with Wal-Mart's German experience?

I would turn the question the other way round and ask what they do right. In general terms, internationalisation in retailing has a lot to do with adapting to the local needs. And this is the strength of our company, as we are doing business in 28 countries. We learn how to adapt our concepts to local needs.

Are you saying that Wal-Mart did not read the German consumers right or manage its workforce properly?

I never comment on competitors.

Why do you think these 85 stores (what Wal-Mart sold to Metro) will do better under Metro?

We have critical mass. Wal-Mart was a $2-billion (Rs 9,000 crore) business in Germany, we have $28 billion (Rs 1,26,000 crore). So we can use our infrastructure, it, logistics, buying. We use our brand. We have 260 stores in Germany. Our culture, our knowledge about the German consumer. And finally, it is our store network-there is no overlapping. That's why we got the approval of the anti-trust authorities.

Metro and Wal-Mart make interesting contrast. Metro was stitched together (from three different retail companies) only 10 years ago, but most of your revenues come from international operations. Whereas the US continues to be Wal-Mart's most successful market, not so much international.

If I were to give a speech on internationalisation of retail, I would put in the middle culture. If you see the Europeans, we have learnt to deal with different cultures. Because Europe has a variety of cultures; if you travel one-and-a-half hours by plane, you are in Romania, you are in Czech Republic, you are in Poland, you are in France, the Netherlands. So different cultures. This is the strength of Europeans. The American approach is 'one size fits all'. This is from my point of view the biggest difference. And by the way, just to remind ourselves, 80 per cent of the Americans don't have a passport. So, cultural adaptation or local adaptation is the key in our industry. When I took over, Metro had 5 per cent foreign share (in terms of revenues). Today, if you see our culture, it's an international culture. Our country manager in China is a French; our country manager in Russia is an Italian. We have a very mixed management team and an international culture. This is really important. When you build a big business in India or China, they don't want to be part of a German business, they want to be part of an international company.

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