Report on the Financial Situation of Migros Group
Operating Result
The operating result (EBIT before pension plan effect) of Migros Group for 2011 was CHF 979.0 million, 16.8% or CHF 197.2 million lower than the previous year’s result of CHF 1'176.2 million. It has therefore already returned to the positive level recorded in 2007. The sharp reduction in EBIT can be attributed to the Retail and Industry sector. All of the companies in this sector once again implemented substantial cuts to sales prices and are suffering as a result of the increasing level of shopping tourism in regions close to the border, brought about by exchange rate factors. Lower sales prices were only partially offset by lower purchase prices and increases in productivity. The operating result (EBIT before pension plan effect) of the Financial Services sector improved by 5.5% to CHF 292.1 million, thanks to further savings in operating expenses compared with the previous year. The cost/income ratio that expresses the relationship between business expenditure and income improved thanks to these cost savings to 46.2% (previous year 46.9%).
Operating result of the Retail and Industry sector
| CHF million | Total operating profit before effect from pension plans | Change from previous year in % | |
| 2011 | 2010 | ||
| Cooperative Retailing | 427.9 | 511.8 | - 16.4 |
| Commerce | 63.4 | 112.3 | - 43.5 |
| Industry & Wholesaling | 185.7 | 232.9 | - 20.3 |
| Travel | - 19.4 | - 12.3 | 57.7 |
| Others | 29.9 | 60.7 | - 50.7 |
| Eliminations (within retail and industry sector) | – | - 6.7 | – |
| Total retail and industry sector | 687.5 | 898.7 | - 23.5 |
Efficiency programmes, the auditing and standardisation of processes, new structures and procedures – i.e. sustainable cost management – have a positive influence on the gross margin and the operating result of the commercial and industrial business. In addition to efficiency programmes, however, procurement management, commodity prices and exchange rates had a significant effect on the gross margin and operating result. Any increases in efficiency and improvements in the purchasing for goods are passed on to the customers largely 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 just ended, various optimisation measures were initiated, continued or completed in the strategic business unit Cooperative Retailing.
For instance, Migros Aare, the cost leader among the cooperatives, is handling the challenges in three directions: growth, efficiency and management.
Growth: Firstly, the Cooperative is achieving growth in its existing sales area through location-specific assortments and measures to optimise space management. Secondly, the Cooperative is investing in the refurbishment of its branch network with the aim of upgrading the technical equipment and improving customer focus (remodelling, layout offensive). The Cooperative is occupying blank areas (new buildings, new locations or expanding space at existing locations) and developing growth markets in the core business (VOI, cha chà).
Efficiency: Over the past few years, Migros Aare has already worked intensively and successfully on improving cost-efficiency through a range of projects: Optimisation of Branch Processes 2005/06, Lean Logistics 2008, Improving Advertising Efficiency 2009 etc. In 2011, attention focused on partially automated agricultural order-picking, functional, cost-optimised construction and excellence in buying Fresh Produce. Starting points for boosting excellence in buying Fresh Produce were «buying the right produce», «buying from the right producer», «buying at the right price» and «working together efficiently». Store management will be optimised further in 2012. Four sectors will be tackled: (1) targets for the deployment of staff, (2) improvements in selective store processes, (3) revision of targets, (4) standardisation of store and shelf management and the logical continuation of store processes.
Management: The «Excellent Implementation» programme was carried out in 2011. Excellent Implementation is a carefully planned, structured process for achieving set targets in a 100% topdown fashion via management in the entire company. In the process, values are specified by the strategy. The focus is concentrated on the sustainable performance of all employees who contribute to the company's success as part of a performance culture. The four-field model «Immunity against Change» provides the basis for setting targets and for analysing which targets have been achieved and which have been missed.
Migros Vaud has been working on the CAP 345 project «Together into the Future» for a good three years. During the first two years of the project, the Cooperative's supermarkets revised their key processes successfully so as to be able to hold their own in an environment, which is geared strongly to prices. In 2011, a crucial, additional project phase was initiated, namely the analysis of structural costs. The various organisational units will be gradually analysed by external experts. The Migros Vaud Club School was the pilot project for this analysis in 2011. The specific target of the analysis was adherence to Culture Percentage expenditure. The result is a new matrix organisation, a streamlining of the course portfolio and optimisation of current classrooms and locations. The timetables of the Club schools in Vevey and Yverdon were revised in this connection. The reception of the most important Club School centre in the canton, «Lausanne Flon» was redeveloped to present a professional, dynamic and strong image for customers. A few figures compared with 2010 highlight the success of this reorganisation: the margin (profit contribution) has risen by 10.2% across all areas, teaching hours have been increased by 1.6% and customer frequency by 0.4%.
Self-scanning and self-checkout in nine pilot stores: Migros is introducing the «Subito» selfservice system to make shopping easier and quicker for its customers. Using self-scanning (for larger shopping trips) and self-checkout (for smaller shopping trips), each customer can scan products, pack them immediately and pay simply without having to rely on any members of staff. While shopping, self-scanning customers can monitor the individual products they have purchased, campaigns, the total amount spent and their new Cumulus points. Since 6 September 2011, «Subito» has been piloted in nine branches of the Cooperatives Migros Aare, Migros Eastern Switzerland, Migros Zurich and Migros Lucerne. It is already being used by approximately 14% of customers on average, with peaks of up to 25%. Decisions on how to take the project forward are expected in the first half of 2012.
The activities of the centrally managed assortments Food, Non Food, Near Food, Specialist Markets and Deep Frozen are bundled and grouped at the two national distribution centres. This bundling laid the foundations for a comprehensive automation of internal processes. During the 2011 financial year, fully automated order-picking systems in the Food and Deep Frozen ranges were commissioned, both aimed at improving efficiency and eliminating heavy physical work. In the area of Food, all stores are already supplied through the new system, while the number of stores in the area of Deep Frozen is gradually increasing. In the current year, sectors of the Non Food and Near Food assortments will be picked semi-automatically and additional sectors will be tested with pilot systems.
To improve the IT business alignment, Migros IT has implemented the strategic initiative M-Competence Centre. With this initiative, Migros has repositioned its IT services and geared them more closely to customers' requirements. Increasingly felt across the organisation, demands on the core business, particularly the Cooperative Retailing segment but also support processes, are now covered by single-source IT services. The competences needed to achieve this are now bundled centrally in one organisation and placed under a joint management team.
All IT services of relevance to the core business are now covered in M-Retail, while those of relevance to points of sale are covered by M-POS, to Finance and Controlling as well as Human Resources IT services by M-FICOHR, while the IT support for Culture & Education as well as Leisure & Sport offers is covered by M-Campus.
In addition to increasing effectiveness through the consistent focus on customer and company requirements, efficiency improvements are also achieved in the competence centres through standardisation and the exploitation of synergies, which will ultimately have a positive impact on the time-to-market of new solutions but also on operating costs.
The companies of the other strategic business units are also working continuously on the improvement of processes: The strategic business unit Industry & Wholesaling has achieved considerable efficiency improvements in the 2011 financial year through the «Fit for Europe» programme. The programme in the industrial companies is the response to increasing competitive pressure from foreign providers in Switzerland and intense competition abroad. It will run for three years and is starting in the individual industrial companies with a general analysis by an external consultant over a period of four to six weeks. In this project phase, the entire value-added chain from sales, development, procurement, production to logistics will be critically analysed. The analysis will be underpinned by external benchmarks.
Following the general analysis, potential for improvement will be validated in the detailed analysis together with local management and transferred into binding objectives. The local project teams will subsequently implement the individual measures consistently under the close supervision of management. Where possible, changes will be transferred at the end of the project in a continual process of improvement (CPI). The systematic approach focusing on implementation will ensure that significant potential and improvements are realised in the areas of decomplexity, operations and supply chain. Thanks to the «Fit for Europe», programme, M-Industry has already supported the Migros Group with substantial discounts.
For migrolino, a company of the strategic business unit Commerce, the entire logistics for migrolino shops were bundled in the Suhr national distribution centre in 2011. Not only Migros, ranges but all articles available in migrolino (with the exception of deep frozen products) are now centrally stored, picked and distributed to stores. The service to the shops will be greatly improved thanks to these steps.
In addition to the process optimisation measures, procurement management, commodity prices and exchange rate developments have a significant impact on the operating result of Migros Group:
Procurement management continued to prove instrumental in reducing purchasing costs in 2011, and has steadily evolved over recent years. With the establishment of the «Strategic Procurement/Supply Chain Support» segment, various instruments and methods have been developed and implemented since 2008. The instruments comprise a range of different levers designed to optimise operational purchasing, e.g. direct procurement at source, the European buying alliance AMS and procurement via structured online tendering and auctions. Two buying offices in Asia (Hong Kong and Shanghai) act as an extension to the purchasing departments in Zurich for the purpose of direct cooperation with manufacturers. Furthermore, these two local offices also ensure that the high requirements demanded by Migros in terms of humane conditions of production (code of conduct). are met. The buying alliance AMS allows for joint procurement measures with a number of other European retailers. With regards to procurement volumes for certain products, the alliance enables Migros to act together with the group of biggest retailers. The alliance is also a way of establishing valuable contacts with potential new suppliers. This, together with other levers, is used as part of clearly defined supplier relationship principles: are the goods in question generic in nature and easy to specify or are they value-added products offering a long-term competitive edge?
The rise in commodity prices which began in mid-2010 continued into the first quarter of 2011. Thereafter, commodity prices stabilised at a high level until the end of the year. The principal areas of relevance for Migros Group are crude oil (Migrol) and food (coffee, cocoa, cereals, rice, nuts, etc.). These goods are purchased on a decentralised basis in the relevant organisational units. The corresponding risks in terms of changing prices and supply are monitored by purchasing on an ongoing basis and are optimised by means of continuous and systematic procurement management.
Buying goods in foreign currencies also means that Migros Group is exposed to exchange rate developments. In its role as the in-house bank for the Group as a whole, in 2011, FMC Treasury hedged transaction risks of EUR 1.0 billion net and USD 1.0 billion. These hedging operations are performed on a systematic and continuous basis. The rally of the Swiss franc resulted in corresponding cost savings in goods purchasing in 2011. Thanks to having applied these hedging operations in a consistent manner, these savings are gradually translated into lower prices. These savings are pitched against losses in exports of Migros-Industry as well as conversion losses of sales achieved abroad 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.
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 procurement management, commodity purchasing and exchange rate developments to customers resulted in a falling gross margin. Annual changes in the sales mix result in further smaller shifts of margin.
With falling income levels, operating expenses rose for the most part following the company acquisitions. Measured against sales, personnel expenses, which in addition to wages and salaries also include employer’s pension fund contributions and other social security benefits, account for 20.4% (previous year 19.7%) 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 CHF 100.2 million, due not only to the company acquisitions but also to salary increases of between 1.25% and 1.75%, which are 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 1.3 billion (previous year CHF 1.5 billion) remain at a very high level. Depreciation has gradually come into line with investment income, which 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 965.3 million with costs of CHF 369.9 million. Net income from financial services business improved from CHF 588.0 million to CHF 595.4 million, thanks to cost savings.
Net income from interest margin business remains the most important component in the Financial Services sector, accounting for approximately 84% of the net income in this sector during 2011. The sustained low level of interest rates means that the interest margin was reduced slightly. Net interest income therefore saw a fall of 5.0% on 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 1.9%.
Income from other financial investments and foreign currency and money transmission business improved from CHF 42.5 million to CHF 66.4 million, thanks to brisk foreign currency business.
Due to the continuous expansion of the customer advisory capacities and the branch network, staffing levels increased by 22 to 1'395 employees from the previous year. Personnel expenses, on the other hand, increased by 1.2% to CHF 172.6 million.
Migros Bank commissioned a new IT platform in November 2009. In 2011, this once again allowed significant savings to be made in IT expenditure. Depreciation and other operating expenses were therefore reduced from CHF 147.9 million to CHF 136.8 million.