Lishi Introduction: Wumart's billion-yuan acquisition of 80% of Metro China has made Metro, a supermarket largely unknown to the Chinese public, a hot topic. As a supermarket that conducts wholesale business through retail methods, Metro has been the best-performing foreign retail giant in China. But Metro, a good company, ultimately chose to sell itself in the Chinese market.

Over a decade ago, the author used to pass by a supermarket with prominent signage and grand architecture every day after work, and once wanted to go in and see what it was like, but was told by a friend that to enter this store, one needed a letter of introduction from one's work unit, and had to bring a business license and work ID, and apply for a membership card. These restrictive conditions made this supermarket a rather peculiar existence in the author's mind.

If it weren't for Wumart's billion-yuan acquisition of 80% of this supermarket's China operations on October 11, it would probably still be unknown to most Chinese people, despite having annual sales of over 20 billion yuan in China. This supermarket is Metro, once the world's third-largest, Europe's second-largest, and Germany's largest retail and wholesale group.

It is reported that Wumart spent about 1.52 billion euros (approximately 11.9 billion yuan) to acquire Metro China. After the transaction, Wumart Group will hold 80% of the shares in the joint venture, with Metro retaining 20%.

Regarding this transaction, Zhang Wenzhong, founder of Wumart Group and chairman of Dmall, said that Metro is a very good company, and the sale is not due to poor management but a strategic adjustment. Therefore, the seller was also carefully selecting buyers, and Wumart was fortunate to win in the end.

What kind of company is Metro? What makes Metro a "good" company? Why did a good company end up selling itself?

-01- A Supermarket That Operates Wholesale Business with Retail Methods

In the 1960s, after World War II, a trip to the United States changed the life of Otto Beisheim, a German in his 30s. In the U.S., he saw a new wholesale business model: the "cash and carry" model, where restaurants, hotels, and retail stores could pick up goods themselves at large supermarkets and pay immediately.

This model may seem ordinary, but it is actually a highly efficient business model. Its advantage lies in combining supermarket and warehouse into one, conducting wholesale business in a retail manner, thus eliminating the need for separate warehouses and distribution centers for wholesale enterprises, avoiding the pressure of advancing funds for large customers, ensuring low-cost and high-efficiency operation, and offering a wide variety of products to meet the one-stop shopping needs of professional users.

Just as the emergence of department stores was a revolution against small grocery stores, and supermarkets were a revolution against department stores, the cash-and-carry supermarket was no less a revolution against traditional wholesale markets.

Beisheim was attracted by this business model, and after careful market research and analysis, he introduced this unique business concept to Germany. In 1964, a supermarket with an area of 14,000 square meters, equivalent to two football fields, was established in Essen, Germany. This was also the first supermarket in Metro's history.

Different market positioning determines different target customers. Unlike many supermarkets that do both retail and wholesale, Metro strictly limited its target customers from the beginning, mainly serving B2B markets such as hotels, restaurants, small retailers, and institutional buyers, and not open to ordinary consumers.

Metro had a firm understanding of this. In their view, if the company did not restrict customers and allowed everyone in, operating costs would increase and management difficulty would rise.

For example, a case of Coca-Cola, if displayed bottle by bottle, would need to be placed 24 times, but if placed as a case, it only needs to be done once, and it can be directly placed on the shelf from the receiving area using machinery. Metro chooses customers who buy by the case, not by the bottle. This reduces operational costs and also means reduced labor costs.

Secondly, once the target group is locked in, their needs can be fully studied—what products they like, what they don't like—and then optimize the product assortment.

Oliver Heil, former general manager of Metro China, once said, "Other retail supermarkets may need 400,000 products to meet their customers' needs; Metro only needs 150,000. Metro only focuses on target customers, knows what they need, and can effectively control the number of categories. Otherwise, the company would need more investment, more suppliers, more negotiations... that's cost. Technically limiting the customer base can improve operational efficiency."

The emergence of Metro was a milestone in German commercial history. Its huge shopping space, dazzling array of products, and highly competitive prices quickly made it the preferred purchasing market for professional customers. However, this also attracted many competitors.

-02- Business Strategies That Led the Industry

The 1960s was an era of rapid economic development in West Germany. Metro's success quickly attracted many imitators, and similar stores appeared in major West German cities such as Munich, Hamburg, and Düsseldorf. Facing competition, Metro launched a new marketing strategy: direct mail advertising.

Registered members of Metro receive a "Metro Mail" every two weeks, a colorful poster that details the latest prices, new products, and promotional information for the half-month period.

This strategy is now a common marketing tool for supermarkets, but in the 1960s, it was an extremely advanced marketing method that could both optimize the user experience and stimulate consumer desire. Metro achieved significant market results through this strategy.

Compared to other supermarkets, Metro had another advantage: its customers were all registered members. The types and quantities of products each person purchased were recorded. Based on this data, Metro established an important sales department: the "Customer Advisory Group." The advisory group would classify users into three levels based on their scale and purchase volume, and provide targeted consulting services to help them "get the most complete stock with the least money."

For major customers, the advisory group would proactively communicate, provide purchasing advice, and help users reduce procurement costs. In this way, Metro not only had a large number of stable customers but also promptly grasped customer needs, thereby improving the initiative and flexibility of product management.

Supply chain management is crucial to the operational efficiency and market competitiveness of retail enterprises, but it is also the most cumbersome and difficult to precisely control, especially for supermarkets like Metro that offer a large number of fresh products. From the late 1970s to the early 1980s, Metro's senior management introduced the concept of information management to Metro to dynamically manage the supply chain.

By introducing information technology into the management of sales and inventory data, Metro's management could clearly monitor the status of product purchases, sales, and inventory at any time, and promptly control the business process to avoid losses.

In addition to recording the purchase, sale, and inventory status of products, Metro's information system could also track each customer's shopping frequency and purchase structure. Aggregated data could reflect market demand trends, enabling Metro to adjust product structure and business strategies in a timely manner.

In Metro, the information system covers every link from product selection, ordering, reordering, sales, to cashiering and receiving. For example, once the inventory of a product falls below the safety stock, the computer can send a supply notice to the supplier.

Another example is that during procurement, the computer will propose purchase forecasts based on customer demand information. Managers make final decisions based on this data, considering season, promotions, activities, and work experience. Metro's information system solved the supply chain management problem that is usually the hardest for retail enterprises to control.

Metro's development also benefited from its standardized rules. These rules cover every aspect of Metro's operations. A clear example is that Metro stores worldwide have exactly the same appearance, internal layout, and operational rules as the headquarters.

Standardized operations saved Metro a large amount of materials, personnel, and operating costs, allowing Metro to replicate globally at low cost and high efficiency.

Through a series of market strategies that led the industry, Metro grew rapidly in competition. By the 1990s, Metro had become the world's third-largest retail and wholesale group, second only to Walmart and Carrefour.

-03- Metro in China

In 1995, Metro formed a joint venture with Jinjiang International (Group) with a 90% stake, establishing Jinjiang Metro Cash & Carry in Shanghai. This was also the first joint venture approved by the Chinese government to establish chain stores in multiple major cities in China. In 1996, Metro China's first store opened in Putuo District, Shanghai.

In an era when China's main retail formats were still small shops, grocery stores, wholesale markets, and department stores, Metro's emergence undoubtedly had great market advantages. For example, Metro offered more than 20,000 product categories, meeting users' one-stop shopping needs; product quality was excellent, and most suppliers on Metro's list were well-known domestic enterprises and joint ventures. Metro also had many directly sourced foreign products, and fresh food came from units recognized by national institutions...

Metro quickly achieved success in the Chinese market. In the following years, Metro opened branches in Shanghai, Wuxi, Ningbo, Nanjing, Fuzhou, Dongguan, and other places. By 2003, Metro had 18 stores in China and planned to reach 40 within 3-5 years.

2008 was a milestone year for Metro China. That year, Metro's sales in the Chinese market reached 12.646 billion yuan. Although this figure ranked only 26th among China's top 100 chain enterprises, Metro's single-store sales were as high as 330 million yuan, only 3 million yuan lower than RT-Mart among foreign chain retail enterprises, surpassing the two giants Walmart and Carrefour, and far exceeding other domestic chain retail enterprises. More importantly, in 2008, Metro achieved profitability in the Chinese market for the first time, and has never suffered losses since.

It took more than a decade to achieve profitability in China, not because Metro's profitability was poor, but because Metro always owned its properties. Due to the large area and scale of its supermarkets, Metro's site selection was difficult, so since its establishment, Metro usually bought land and built stores in urban-rural fringes with convenient transportation.

Although this led to huge investments and slower store expansion, today, with China's urbanization, these stores concentrated in first- and second-tier cities have become rare and valuable resources. This is one of the factors that makes Metro China more "valuable."

Food safety has always been one of the focal issues in Chinese society and has long been a shortcoming of Chinese retail enterprises. But Metro's arrival set a benchmark for the industry. Through strong supply chain control, it made thousands of fresh food products traceable.

For example, consumers can scan the traceability code on beef packaging to know the breed of the cow, growth process, processing process, origin, and even vehicle information and transport temperature.

The reason this was possible is that Metro has hundreds of audit standards for suppliers, covering the entire process from planting, breeding to harvesting. In addition, Metro's subsidiary, MC Quality, also provides comprehensive professional training and consulting to partner enterprises and farmers in production, technology, packaging, logistics, and market operations.

These measures greatly improved food safety standards in the Chinese market, and Metro became one of the most trusted food suppliers in China. For example, Metro was a major food supplier for the Beijing Olympics and the Shanghai World Expo.

In recent years, with changes in the Chinese market, many foreign retail giants have retreated from China, but Metro has performed well. In fiscal year 2017-2018, Metro China's sales grew by 2.7% to 20 billion yuan, with an EBIT margin exceeding 5%. In fiscal year 2018-2019, Metro China's sales are expected to grow by 5.4%. Despite good performance, Metro still chose to sell itself.

-04- The Road to Selling

In the past two years, news about the sale of Metro China has appeared in the media from time to time. First, there were reports that Fosun International was in talks with Metro, and later it was rumored that Tencent, Alibaba, RT-Mart, Suning, and even real estate giant Vanke were bidding for Metro. By July this year, the list of buyers for Metro was narrowed down to Yonghui and Wumart. On October 11, Metro finally fell to Wumart.

The reason Metro chose to sell its stake in the Chinese company is first due to the macro environment. The rise of e-commerce and the shrinking of traditional physical retail enterprises have become irreversible trends globally. Consumers are increasingly accustomed to buying what they want anytime, anywhere through e-commerce websites, without time and space constraints, while their dependence on hypermarkets is weakening. From 2008 to 2018, Metro Group's global revenue fell from its historical peak of 65.529 billion euros to 37.082 billion euros in 2018.

Although the Chinese market is still profitable, it accounts for only about 7% of Metro's global revenue, and is not an indispensable market. With the rapid development of China's e-commerce, traditional hypermarkets are facing survival crises. Some believe that Metro's choice to cash out at this time is not a bad time.

Apart from the background of the times, for Metro headquarters, leaving the Chinese market may be more due to the "political incorrectness" of the Chinese market. In Metro, there is a "politically correct" thing: anyone who does not recognize Metro as a B2B company is "politically incorrect."

But the reality of the Chinese market is that a large portion of Metro's sales come from B2C business. Many individual consumers also use their company's membership cards to shop at Metro. B2B business is Metro's core business, and Metro has always promoted B2B, but in China, the B2C market is growing larger. It is reported that by 2017, Metro China's B2C business had approached 70%.

An open secret is that many intermediaries combine many small C businesses into a small B or medium B business to get better discounts. These orders have contracts and invoices, look like B2B business, but are actually B2C business.

Metro Group headquarters' consistent approach is that "as long as a country's orthodox B2B business cannot proceed smoothly, that market is not a country for strategic investment, and should exist as financial investment or other means, with a clear timetable." Obviously, the Chinese market belongs to the latter.

Metro China is also conflicted about the special situation in the Chinese market. It has been wavering between B2B and B2C, relaxing entry conditions for general consumers for a while, then tightening them again. They have also taken some market measures targeting B2B and B2C, such as launching electronic payment, financial credit terms, and home delivery services in line with the times, and even experimenting with convenience stores and O2O e-commerce, but overall they have not achieved much.

With the personnel changes in Metro China's senior management, Metro ultimately returned to the old path of focusing on the B2B market, which means Metro missed the demographic dividend of consumption under the rapid development of China's internet.

Metro did not intend to give up the Chinese market easily. In January this year, its China president, Claude Sarrailh, told the media that it would not withdraw from China but would seek ideal partners, and gave three criteria:

First, it should allow Metro to get closer to customers, increase digital traffic and customer visits; second, it should help Metro rapidly improve in digitalization, achieving innovation in order fulfillment and delivery models; third, it should help Metro obtain more marketable products and improve the supply chain. This shows that Metro is also well aware that in the new era, what Metro lacks most in China is digital capability.

According to the agreement signed between Metro and Wumart, Wumart Group will use Dmall's operating system to enhance Metro's digital capabilities. Digital transformation is also the focus of the integration of the two companies in the future.

Regarding this acquisition of Metro, Wumart founder Zhang Wenzhong believes it is a historic opportunity. He summarized three points: First, Wumart should learn from European companies' strict quality control standards; second, the scale of Chinese retail enterprises needs to expand; third, in the digital age, the recombination of retail enterprises is of great significance.

Metro has 13 million registered members, fixed assets of nearly 100 stores, high-standard food control systems, and global supply chain procurement capabilities. For Wumart, which has frequently raised the banner of acquisition in the retail market in recent years, Metro seems like a good target.

But at a time when consumers' demand for traditional hypermarkets is weakening, Wumart's takeover of Metro may become a hot potato. Some industry insiders pointed out that the internet giants that previously laid out retail markets are now hard to call successful, and Wumart's move also faces extremely high risks.

"There are no successful enterprises, only enterprises of the times." Enterprises that conform to the development of the times can achieve long-term development in their era, but if they cannot keep up with the pace of the times and adjust their course in time, they are likely to be abandoned by the times. The future of Metro after the acquisition remains to be answered by time.

Source: Lishi Business Review (ID: libusiness)

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