Report on the Financial Situation of Migros Group
Operating Result

The change in the gross margin results from shifts in the individual companies’ shares of sales. The segment Industry & Wholesaling has a higher gross margin as a result of internal production. The segments Cooperative Retailing, Commerce and Travel have smaller gross margins because they do not have their own production facilities, but their operating costs are correspondingly lower. Passing on the efficiency increases and benefits from supplier management, commodity purchasing and exchange rate developments resulted in a falling gross margin. Annual changes in the sales mix result in further smaller shifts of margin.

Efficiency programmes, the auditing and standardisation of processes, new structures and processes – i.e. sustainable cost management – have a positive influence on the gross margin and the operating results of the commercial and industrial business. In addition to efficiency programmes, however, supplier management, the commodity prices and exchange rates had
a significant effect on the gross margin and operating results. Any increases in efficiency and improvements in the purchasing for goods are passed on to the customers in the form of reduced sales prices.

The optimisation of the value-added chain and of the structures is an ongoing process. In the financial year ended, in the strategic Cooperative Retail business area, various optimisation measures were initiated, continued or completed:

As the last major retailer in Europe to do so, Migros introduced shelf price labelling. The delegates approved the application for implementation at their assembly on 28 March 2009. After the development and test phase, all stores were fitted with price labels by autumn 2010. As of 1.1.2011, the first products without price labelling were delivered. Significant costs can be saved in procurement and management with shelf price labelling. For instance, separate price labelling of brand products for Migros no longer applies. Overall, the complexity in managing the ranges is reduced. Migros passed on these benefits directly to its customers with its price reductions as of the end of 2010.

A number of Cooperatives are working steadily on systematic programmes that will lead to a further increase in the efficiency of service delivery to the customer. The Vaud Cooperative, for instance, has been working on the CAP 345 project Together into the Future for two years. The Cooperative's supermarkets revised their key processes with the aim of winning market share in a competitive environment, which is strongly oriented to prices. Other targets included securing product margins and increasing staff productivity, while simultaneously improving services for customers. The Cooperative not only revised key processes, but also invested large amounts in the improvement of its stores, thereby hugely increasing the attractiveness of its stores to customers. The project targets were achieved in full. The competition position was improved. Salary increases were absorbed and staff costs reduced significantly compared to previous years through higher staff productivity.

In the Store Data Flow project, the interfaces between the points of sale (POS) at the outlets and the central Migros stock management systems (Food/Near Food and Non Food, Freshness systems, systems belonging to of Migros partners) were overhauled and successfully replaced. The new technology allows marketing requirements to be implemented faster and more cost efficiently in the future, while simultaneously cutting operating costs significantly by reducing the complexity. Sales information, which is updated every hour, is another benefit of the new Store Data Flow.

The activities of the centrally managed assortments Food, Non Food and Specialist Markets are bundled and grouped in the two national distribution centres. This bundling also laid the foundations for a comprehensive mechanisation of internal processes. Fully automated orderpicking systems were implemented in the areas of Food and Deep Frozen assortments in the 2010 financial year, with the aim of improving efficiency and eliminating heavy work. Commissioning is planned in both sub-projects for 2011. Neuendorf Migros Distribution Centre won the 2010 enterprise award for its exemplary overall performance in the region of Solothurn. Cooperative Migros Aare realised fully automated order picking systems for both Fruit and Vegetables at its operations centre last year. The service to the stores will be immensely improved thanks to these steps.

Delivery quantities in line with requirements result in lower logistics costs. In the Lean Supply Chain project, goods trading processes of logistics were optimised and the logistics chain adjusted to the specific requirements. In the area of specialist markets, range areas were concentrated and warehouses closed. The increased switching of transport to rail has been predominantly implemented.

The Supplier Collaboration House multiple project is to be completed shortly. In 2010 various sub-projects were rolled out successfully. The Supplier Net is a modern, user-friendly internet platform for suppliers, through which they gain direct access to Migros information and applications. This increases the transparency of the business processes and facilitates collaboration with Migros in a major way. Product Information Management is a central system to manage all information on a Migros product (description, dimensions, prices, contents, images, etc.). PIM allows Migros to make comprehensive information available not only internally but, in particular, also to customers (goods labels in the store, promotion adverts, flyers, catalogues, internet websites, etc.). The supplier/contract management system manages centrally the relevant information on supplier relations (master data, contact persons, contracts and agreements). This new system can also be used by business partners as a source of information in the future. By mid-2011, these systems will be optimised/expanded and enhanced by a label portal (internet order platform for labels and sales aids) and a supplier scorecard (key figure system for measuring and controlling the procurement processes).

The companies of the other strategic business areas are also working continuously on the improvement of processes: Globus, a company of the strategic business area of Commerce, managed to reduce costs compared to sales, despite opening new areas and thereby incurring additional fixed costs. Against the background of planned market openings and liberalisations, as well as the increase in international competitiveness, the strategic business area of Industry & Wholesaling launched a comprehensive programme called Fit for Europe. This programme analyses the individual companies systematically, and identifies and implements measures for productivity increases. Hotelplan consistently continued the cost reduction programme initiated in 2009 and again posted relatively lower costs on the previous year. At Migros Bank, the new T platform launched at the beginning of November 2009 resulted in considerable savings in 2010.

In addition to the process optimisation measures, supplier management, the commodity prices and exchange rate developments have a significant influence on the operating result of Migros Group:

Partial savings were achieved in the year under review through better supplier management. The increased use of invitations to tender, international auctions, the inclusion of procurement cooperation and bundling of the procurement volume also led to reductions in purchase prices.

The relaxation on commodity markets that started in mid-2009 continued until mid-2010. Commodity prices stood predominantly below the record highs of previous years and made commodity purchasing cheaper. In the second half of 2010, however, most commodity prices began to rise again, meaning that the price level of some commodities at the end of the year exceeded that of the beginning of the year. The savings in commodity purchasing of the first half of the year were partly offset in the second half of the year.

The massive rally of the Swiss franc, in particular against the euro and US dollar, resulted in cost savings in retail goods purchasing and in commodity purchasing of Migros-Industrie. The Exchange rate developments dampened commodity price developments in the second half of 2010. These savings are pitched against losses in exports of Migros-Industrie as well as conversion losses of sales achieved abroad (Migros France, Migros Deutschland) due to the stronger Swiss franc. Furthermore, the falling euro rates in regions close to the border resulted in an increase in shopping tourism and to falls in sales in the stores of these regions.

As a result, operating expenses rose less strongly than income. Personnel expenses, which in addition to wages and salaries also include employer’s pension fund contributions and other social security benefits, account for 19.7 per cent (previous year 19.9%) of costs shown in the income statement and, together with expenditure on goods and materials, are by far the largest cost factor. Personnel expenses increased by only CHF 3.0 million, despite of salary increases of 0.5 per cent to 1.0 per cent, higher than the industry average. This was due to careful and improved planning and the optimised use of available staff. Investment activities with total investments in the current financial year of CHF 1.5 billion (previous year CHF 1.4 billion) remain at a very high level. Depreciation is gradually coming into line with the investment volume that has risen over the years. Most of these investments are made by the Cooperatives and Commercial companies for new, expanded and modernised sales outlets, and by Migros Industry for the modernisation and expansion of capacity at production facilities.

Operating result of the Financial Services sector

The Financial Services sector generated income from financial services business totalling CHF 960.2 million with costs of CHF 372.2 million. Net income from financial services business improved from CHF 561.5 million to CHF 588.0 million, thanks to the marked recovery in the financial markets.

Net income from interest margin business remains an important component in the Financial Services sector, accounting for approximately 86 per cent of the net income in this sector during 2010. Due to a good refinancing structure, the interest margin showed only a slight change. As a result, net income from interest margin saw a rise of 3.6 per cent over the previous year.

Income from the commission business suffered from customers’ cautious approach to investment business, with the previous year's result increasing by only 1.6 per cent.

The success from financial investments and foreign currency and money transmission business improved from CHF 39.4 million to CHF 42.5 million.

Due to the continuous expansion of the customer advisory capacities and the branch network, staffing levels increased by 83 to 1'373 employees from the previous year. Staff expenditure, on the other hand, increased by 0.6 per cent to CHF 170.5 million francs.

Migros Bank commissioned a new IT platform in November 2009. This allowed achieving significant savings in IT expenditure. Depreciation and other operating expenses were therefore reduced from CHF 178.6 million to CHF 147.9 million.