Metro seeks Russia revamp through bulk discount shift

German retailer Metro said on Tuesday it hopes to stabilise its shrinking Russian business in the coming months after overhauling management and introducing bulk discounts to attract more independent traders and restaurant owners.

Metro’s shares tumbled last month when it lowered its earnings and sales outlook, citing a poor performance at its Russian operations and the impact of the failure to reach a new wage agreement for employees at its Real hypermarkets.

On Tuesday, Metro reiterated the adjusted outlook it gave for the group’s fiscal year that runs to Sept. 31, but gave a more negative forecast for Russia, with sales “considerably below” the prior year and a “strong decrease” in earnings.

Shares in Metro were down 3.3 percent at 0921 GMT, the second-biggest faller on the German mid-cap index.

“Given ongoing uncertainties, and a particularly challenged third quarter, a discount valuation is likely to persist,” said Jefferies analyst James Grzinic, who rates the stock a “hold”.

Chief Executive Olaf Koch said he was optimistic that a new management team and pricing policy in Russia could turn the business around, predicting more pain in the third quarter of the fiscal year, but a recovery in the fourth.

“We are convinced that with a refocused strategy, we will stabilise the country towards the end of the year,” Koch said.

Metro wants its 91 Russian stores to target more independent traders, hotels and restaurants rather than competing for ordinary shoppers with the likes of X5 and Magnit, which are engaged in a fierce price war.

To that end, it is introducing a new “buy more, pay less” concept for about a third of the goods it sells, a strategy that helped revive sales in Romania and Ukraine, but that analysts said looks set to weigh on profitability.

The Russia business was long a major contributor to profits and Metro had planned to separately list the unit until the Ukraine crisis and sanctions on Moscow dampened the economy.

Metro wants independent traders, hotels and restaurants to account for more than 60 percent of sales in the medium term, up from about 50 percent now, with Koch noting that the total market is worth about 90 billion euros ($107.30 billion).

Quarterly sales for Russia fell 21 percent, while the unit’s earnings before interest, taxation, depreciation and amortisation (EBITDA) halved to 35 million euros.

Earlier this month, Metro removed chief operating officer Pieter Boone, who was responsible for Russia. Koch set out other management changes in Russia, and said that Rafael Gasset, the new regional manager, has previously turned around the business in Poland and Romania.

Koch said Russian stores trialling the new prices are already showing a 3-7 percent rise in sales, predicting that it will take four to five months to ramp up the new approach.

Metro has also been hit by a wage dispute at its Real hypermarkets, although structural changes mean it should now be able to pay new hires less from the summer onwards, eventually leading to savings.