Metro AG CEO, Olaf Koch, says his business is about relationships, not software.
While the operating systems of most of the world’s businesses have been transformed by digital, the hospitality industry has remained largely analog. Tracking of sales, automation of wholesale food ordering, and data collection and analysis are far from being standard practice – most of the businesses rely on the instinct of chefs and managers.
German wholesale and food specialist group Metro sees the digitization of this time-honored process as a major transformational opportunity for itself and its customers. So much so, that one of the world’s largest wholesale and retail companies recently split its operations in two, separating its consumer electronics division from its food wholesale business. Seen as a radical move by some, Olaf Koch, Metro’s CEO, regards this as a natural progression. “A conglomerate is always seen as lacking focus,” he says. “We now have a clear, pure agenda on both sides of the organization, which will be good for investors who don’t want to invest in a blend of businesses.”
Metro sees huge growth potential in its wholesale and food specialist operation. The operator of over 750 cash and carry stores and the hypermarket Real aims to offer its customers in the hotel, restaurant and catering sector digital solutions to ease their operations as well as the ability to harness data and use it to determine and control the many variables that shape their business.
Koch has an enviable track record, having been a member of the Metro board since 2009 and previously held senior roles at DaimlerChrysler and Mercedes-Benz as well as private equity group Permira and Hugo Boss.
Here Koch explains why he believes employee engagement and localization are critical to Metro’s success.
In our wholesale business, we aim to help SMEs – independent restaurateurs, café owners and small grocers – be more successful. In the 25 countries we are in with our store operations, we have given local teams the authority to tailor the business to suit their audience. The hospitality industry in Europe is, on the SME side, almost analog. We’re talking about 1.8 million entrepreneurs in Europe who generate annual sales of approximately €420bn (US$497bn) sell-out value. The operating system of most of these businesses is a piece of paper and a pencil. Replenishment is driven by gut feeling, not data. By making data accessible, we can be an enormous help. More accurate replenishment will lead to less shrinkage, save money and help the environment. With data, you know instantly if it was a good day, which part of your restaurant did well and which didn’t.
We are in a transparent market. In a split second, one can find out the price point of a product, its pros and cons, and the quality of service. Yet if we build relevance, and show commitment to customers, that is also apparent in a split second. These insights have changed our priority from operations to customer dedication. We have to consciously acknowledge that the customer decides success and failure in our business – and anticipate and meet their needs and wishes. They are voting every day in favor of our offering – or not – so we aim to continuously offer better value for customers. We are doing this much better than we did five years ago, but we know there is still room for improvement.
If we’re clear about who we are serving, we can adjust the offer and the format accordingly and initiate a cycle of interaction with customers about where we can do better and supply incremental value. For us, customer centricity is directly correlated to employee engagement. We are not producers. We don’t run a chemical company. We are not in the software business. We are in the relationship business. So our priority has been and still is to raise employee engagement. We are now at 76 percent – the industry average is around 64 percent. Strong employee engagement has an even stronger impact on customer satisfaction. You can see this reflected in the Net Promoter Scores. At the best stores, the store manager, department managers and associates work very closely together.
Out-of-home consumption is growing almost everywhere in the world – that reflects the fact that lifestyles, working hours and the image of food is changing. Food is perceived differently and is much more appreciated than it used to be. So while the out-of-home consumption food service will keep growing, we are focusing on that – the business with hotels, restaurants and caterers (Horeca) in Europe, Asia and in the megacities around the world where we are present. That’s all very encouraging.
The one doubt some people have is about the small convenience stores mainly in Eastern Europe and whether they will be marginalized by modern retail. In our view, they will be exposed to more competition, but the proximity of – and service offered by – neighborhood stores will still be an advantage. If we combine our existing offer with value added services including franchise models and digital tools as well, we can.
It has intensified our determination to distribute more authority locally. The typical Metro format was driven by standard operating procedures (SOPs), and we had SOPs for almost everything. In 2012, we allowed countries to adjust the product range. In 2015, we said to local managing directors: “Here are the keys, you are now the CEO. You are free to adjust the product range, marketing mix, whatever. You cannot touch compliance, financial reporting, bookkeeping, food safety, quality or the brand. Otherwise, you’re free. You are now fully empowered, but this comes with responsibility.”
Furthermore, we changed our boardroom culture into an operating partner model. This means that we have moved from a traditional governance to an active ownership model which ensures much higher proximity and decisiveness. Every company has a dedicated operating partner with whom they develop a value creation plan. This has helped us operate in some tough markets and further differentiate us from potential competition through a very focused positioning. Teams are quick to make the necessary decisions and they’re not waiting for head office approval. We have only been doing this for around two years, but we’ve made massive progress in that time. If I, as an employee, can identify with my organization – because it’s localized and run by people who have the passion to serve the local community – it should make me even more motivated.
Earlier this year, we as a management board team concluded internal roadshows with people here on our campus in Dusseldorf, where we went through the whole strategy, in an interactive way, bringing people more into the discussion about why are we doing what we’re doing, and what’s coming next. One of the outcomes of these sessions for us was: we must do much more of this as an executive team, to have open conversations, giving insight into what we’re thinking and why because we know that employee engagement is driven by purpose. You don’t get this through annual conference speeches, town hall meetings and nice documents. We need to intensify the interaction between executives and associates, no matter what level of hierarchy you’re in. One of the first steps taken as new Metro was that we moved the entire head office into open space, thereby fostering interaction beyond department structures and hierarchy levels.
The way we are positioned, in making sure that we are driven by a solution, means that if we do it well, we are hard to replace. Technology will massively change our business model, but I don’t see the disruptor on the wholesale side that can easily jump in there. We are disrupting ourselves in the way we think about value creation yesterday, today and tomorrow. Furthermore, wholesale strongly is a relationship business, and personal relationships can hardly be replaced by technology. We steer our business on loyalty related KPIs such as the number of recurring customers and their revenue share. We focus on the Net Promoter Score as KPI to measure customer satisfaction in order to make sure that we maintain that USP, which also is a barrier for market entry.
It is being able to digitize a significant percentage of the market. This is where we focus our time and people investments on. Let’s imagine that out of the 1.8 million Horeca enterprises in Europe, we digitize 20 percent. That’s 360,000 businesses. All of them will benefit from digital tools, from consultancy and support as well as from a platform for knowledge sharing and community building. For the first time our customers will possess a relevant data set. With that data set they can achieve more. We will be able to provide analytics, smart forecasts and advise on how to optimize their business. We could automate the supply chain between our customers and their suppliers. As one of them is Metro, we are already prepared for that. If you fast forward, AI could play a role in continuously making our customers’ businesses more attractive.
That we on the one hand continue to foster entrepreneurship through more authority on a local level and on the other hand take more advantage of the scale of our group. We need to permanently improve our capability to provide solutions to our customers through unique assortment, value added services or digital solutions. We also need to strengthen our effort to work with data. We have an incredible data set, which we can use to optimize our business and become more relevant for our customers. Providing similar services to customers is the next logical step.
Digital will be a game-changing opportunity. For us it has the potential to build much more relevance and value for our customers, cement our links with the community, and help us establish ourselves as a very meaningful partner for SMEs.