Click to read the original article for details. Behind the frequent rumors of Metro China being "sold" lies Metro's less-than-ideal survival situation. Metro has once again been reported to be "withdrawing" from China. Recently, according to foreign media, Metro, the German supermarket giant, has started a tender process to sell its business in China, with the deal reportedly valued at $1.5-2 billion. According to Metro Group's fiscal year 2018 performance report, Metro China's revenue was 2.65 billion euros, approximately $3.03 billion. According to insiders, at least eight bidders are preparing for a second round of bidding for a majority stake in Metro China's business. The list of competitors includes Vanke, Yonghui, Tencent, RT-Mart, Suning, and Alibaba. In response, a reporter from Business School sought confirmation from Metro China, which stated that the process of finding a partner is still ongoing. During this process, Metro has been in contact with several potential partners and has initiated dialogues and communications. On this basis, Metro is currently narrowing down the selection of potential partners to prepare for further negotiations. "Once we confirm partners genuinely interested in cooperation, we will sign a confidentiality agreement and start negotiations on the scope and method of cooperation." Furthermore, regarding specific details raised by the reporter, the company said, "We will not comment on the names of partners, speculation, or specific timelines, and we cannot disclose more information at this time." After 23 years in China, Metro was once a large warehouse supermarket with unique advantages, opening 12 stores in a single year at its peak performance. But "good times don't last," as revenue growth has been narrowing, and Metro's finances have also been "shrinking." According to PitchBook data, Metro's revenue has been on the decline since 2010, with net revenue down 1.6% year-on-year in 2018. Now, facing competition from multiple companies, it is clearly attractive for Metro to monetize its existing assets. But after selling these growth assets, what will be left? How much value does Metro China still have? Will it retain its brand after acquisition? Why have European retail giants failed strategically in China? Constant Rumors In fact, this is not the first time Metro China has been rumored to be "acquired." In 2018, there were reports that Metro China was seeking to sell its business, and Fosun International was in talks to acquire Metro shares. In September 2018, foreign media reported that Metro, the well-known German wholesale and retail supermarket, was evaluating its China business, including selling shares and finding partners. In October 2018, Metro was again reported to be in talks with banks to find a partner for its China business. On November 2, 2018, it was reported that Metro was in talks with Tencent about cooperation. On February 14, 2019, Reuters reported that Alibaba was in new rounds of negotiations with Metro, possibly acquiring a stake in its China business. At the end of 2018, when Business School interviewed Metro China about whether the China business would be sold, Cao Yong, General Manager of Metro China's brand, told Business School: "Completely false." Cao Yong said: "We will not sell Metro China's business, and new stores are being prepared as planned." "The reason Metro attracts interest from many Chinese companies is that China's e-commerce market and big data applications are becoming more mature, and cooperation with Metro can bring synergies. At the same time, Metro's overseas supply chain is quite attractive and can introduce high-quality imported products to the Chinese market," noted Wang Xiaofeng, an independent retail observer and founder of New Retail Channel. On May 27, it was reported that the bidders for Metro China include a consortium of private equity firm Boyu Capital and real estate developer Vanke, a consortium of Hopu Investment and fresh food mobile e-commerce platform Meicai, and a consortium of Hillhouse Capital and Yonghui Superstores. Insiders said other bidders include Suning Holdings, supermarket operator Wumart Group, and private equity firm Primavera Capital. Reuters reported in March that Metro had launched a tender to sell its China business, with a valuation between $1.5 billion and $2 billion. In 1996, Metro from Germany opened its first store in Shanghai, entering the Chinese market with the aura of being the "second largest in Europe and third largest globally in retail and wholesale supermarket group," introducing the "cash and carry" warehouse model. Metro currently employs about 11,000 people in China. According to Metro's official website, in the fiscal year ending September 2018, its sales in China were 2.7 billion euros (about $3 billion). Insiders say Metro currently has 95 stores and real estate assets in major cities like Beijing and Shanghai. Among these, real estate accounts for most of the value of Metro's China business. Like in Germany, Metro has adhered to a strategy of buying rather than renting properties since entering China. Wang Xiaofeng said that besides 96 stores in China, Metro also owns real estate assets in major cities like Beijing and Shanghai. Over the past decade, commercial real estate rents in China have been rising, with shop rents increasing by 5% to 8% annually. Some data show that for many hypermarkets with expiring leases, the renewal rent can be up to 8 times the original rent. Strategic Failure Why has Metro repeatedly failed in China? "Actually, it's not just Metro; foreign retail giants have all faced varying degrees of 'acclimatization' problems in China," noted Zhuang Shuai, founder of Retail E-commerce Think Tank and Bailian Consulting. Over the past decade, they have faced mainly external competition, with four major reasons: 1. The maturity of category killers like Gome, Suning, Easyhome, and Red Star Macalline; 2. The growth of new and old e-commerce platforms like JD.com, Alibaba, and Pinduoduo; 3. Rising land prices due to China's urbanization; 4. The rise of comprehensive and innovative business formats. According to data from the Prospective Industry Research Institute, it is expected that by 2018, China will have over 6,000 shopping malls. A relevant person in charge of Metro China told Business School that Metro has over 760 stores globally, covering 35 countries. As of now, it has opened 96 stores in 59 cities in China. Although compared with Walmart and Carrefour, which entered China at the same time, Metro has only opened 96 stores in over 20 years, less than a quarter of the former two, and its brand awareness among consumers is lower. However, in the B2B segment, Metro China rarely encounters competitors. This alone makes it hard for Alibaba, which has been accelerating its B2B business in recent years, to let go, repeatedly extending an olive branch to seek cooperation. "Metro's advantage lies in its large number of B-end users with relatively high stickiness, coupled with its membership policy, which allows Metro to better understand customers' purchasing habits and product data offline," Wang Xiaofeng said. In addition, Metro's fresh food supply chain advantages are also particularly evident. "Although B-end stickiness is high, with adjustments in corporate policies and reductions in some company benefits, Metro is clearly showing some weakness," Zhuang Shuai pointed out. Metro has done very little media relations maintenance in China, little promotion, and weak government relations. These have directly led to the difficulties in Metro's China business. "Because of its positioning, it missed opportunities in China," management expert Bi Bo told Business School. It targets businesses, not individuals, isolating itself from the mass consumer market. Metro is a cash-and-carry supermarket for professional customers (where professional customers select goods in a warehouse-style store, pay in cash, and take goods away). Compared with traditional delivery wholesalers, it has advantages of immediate access to goods and longer business hours. It is positioned for "limited" customers, only serving business operators and group consumers in industrial and commercial fields such as units, corporate legal persons, or small retailers. Metro China focuses on high-end paid membership, which is difficult to promote among C-end customers, leading to its main customer base being B-end customers (i.e., small and medium-sized enterprises), and B-end business is hard to bring explosive revenue growth. In addition, Metro has adopted a relatively conservative market expansion strategy, with a very limited number of stores, making it difficult to gain brand awareness in the Chinese market. Clearly, limited by its membership system, Metro has begun to adjust its sales strategy. According to a relevant person in charge of Metro China, Metro's business model can serve both B2B and B2C. In the future, Metro China will actively explore rapid growth in three major business areas: O2O omni-channel retail, food service distribution, and corporate benefits and gifts. The person said: First, O2O omni-channel retail, mainly serving C-end customers. Second, FSD food service distribution, providing professional services to restaurants, hotels, small and medium-sized chain restaurants, and canteens. Third, the corporate benefits and gifts business, providing one-stop solutions for professional customers. These three businesses are highly complementary and can be developed synergistically in the same Metro store. Yun Yangzi, a retail industry expert and founder of New Retail Internal Reference, said that given Metro's long-standing divestment strategy, it is more important to find a good buyer for its China operations at the right time. Acclimatization Problems Behind the frequent rumors of Metro China being "sold" lies Metro's less-than-ideal survival situation. According to Metro's 2018 annual financial report released in 2019, in the entire fiscal year 2018, Metro Group's revenue was as high as 36.53 billion euros, with the Chinese market accounting for only 7.3%. In fact, this European veteran retail and wholesale supermarket, ranked third among the world's top 100 retailers, has seen its revenue decline since 2010. In 2008, Metro's revenue reached a historical best of 65.529 billion euros, then slowly declined to 59.216 billion euros in 2015, but in 2016, its revenue dropped by 63% to 21.87 billion euros. This is the main reason Metro has been constantly seeking to improve performance through restructuring. According to Bloomberg, Metro is even willing to sell up to 80% of its China business to Chinese partners, and the key to a successful deal is whether the prices offered by multiple potential buyers satisfy it. In addition to 96 stores, the sale also includes several real estate properties in Beijing, Shanghai, and other places. "Currently, China's hypermarkets are in a period of intense transformation, and ultimately there are three outcomes," Yun Yangzi explained: first, self-transformation; second, selling out; and third, seeking cooperation. Yun Yangzi emphasized that although Metro has been insisting it will not sell its China business and will increase its development efforts in China to become a better food supplier, when a batch of foreign retailers that entered China at the same time have withdrawn or sought to sell themselves, Metro has also been at a loss, wanting to find new development opportunities, such as entering the convenience store business and opening "合麦家" convenience stores in Shanghai, but it has not ended well; wanting to achieve localization in the Chinese market and break through online with Alibaba's help, but the online business has not brought much growth space, and Metro China has once fallen into a dilemma. To expand its business in China, in 2014, Metro made a new judgment about the Chinese market, believing that China's retail industry would pay more attention to small formats, so it began to test the convenience store "合麦家." A convenience store brand created by Metro specifically for the Chinese market, it was listed as a key development, also starting from Shanghai, and quickly opened franchising. However, only four 合麦家 stores were opened, and by 2017, due to limited store sales and rising rents, all four stores were closed. From the proposal of the convenience store plan to the closure of all stores, it took less than three years. "Currently, the retail industry has entered the era of new retail development. Traditional physical retailers must transform in terms of e-commerce and physical business format upgrades. Large stores have high costs and are difficult to locate, while small and compact stores are more flexible in location, which is more conducive to the development of retailers," Zhuang Shuai pointed out. "Whether Metro will be fully acquired or seek cooperation is still undecided," Zhuang Shuai noted. Currently, traditional supermarkets are each "embracing" internet giants, forming three strong combinations: Walmart and JD.com, RT-Mart and Alibaba, and Suning and Carrefour China. The future landscape may continue to change. Now, Metro has been in China for more than 20 years, but facing the downturn in the physical economy and the increasing "acclimatization problems" of foreign companies in China, whether to exit China or accelerate transformation is a significant challenge. Source: Business School (ID: BMR2004)