Report on the Financial Situation of Migros Group
Operating Result

CHF million	Total operating profit before effect from pension plans		Change from previous year in %
	2012	2011
Cooperative Retailing	565.5	427.9	32.2
Commerce	13.9	63.4	–78.1
Industry & Wholesaling	125.8	185.7	–32.3
Travel	–25.9	–19.4	–33.5
Others	69.6	29.9	132.8
Eliminations (within Retail and Industry sector)	–3.6	–	–
Total Retail and Industry sector	745.3	687.5	8.4

 

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 «Simply Better» project is designed to simplify the organisational setup with a customer centred transformation of standards, business models, management, processes and structures, and to generate substantial value added. Work began in autumn 2012 with seven projects (analysis phase in the first half of 2013; implementation in stages from the second half of the year onwards). The focus here is on excellent structures and processes in the operations centre as well as in the branches. In addition, the branches are designed to fulfil customer requirements and provide an ambience of well-being, without increasing operating costs.

At management level, the «Excellent Implementation» project was continued. The focus is concentrated on the sustainable performance of all employees who contribute to the company's success as part of a performance culture.

At Migros Vaud a crucial phase of the CAP 345 project «Together into the Future» was completed in 2012. The supermarkets successfully modified their key processes relating to the validation of new types of organisation and implemented them in their day-to-day operations.

Self-scanning and self-checkout: Following a successful pilot phase, the Retail Committee (RC) approved the Swiss-wide rollout of the subito self-service system in early May 2012. As at the end of January 2013, «subito» is already available in 29 branches. By the end of this year, customers will be able to use «subito» in selected branches of all Cooperatives. The Cooperatives' current timetable envisages the introduction of «subito» to some 120 stores by autumn 2014. The high level of acceptance that «subito» is enjoying among all customer groups has been pleasing.

The system to automate food order-picking at Migros Verteilzentrum Suhr AG, which began operations in the previous year, brought its full benefit to bear in 2012, enabling output and efficiency to be increased considerably. For the first time, a large proportion of seasonal Christmas and Easter products were also processed using the new system. In addition, Migros Verteilzentrum Suhr AG increased its warehousing capacity by 16'800 new pallet bays in the reporting year, thereby eliminating the need for interim storage and making the flow of goods more efficient. Since 2012, Migros Verteilzentrum Suhr AG has been a new strategic logistics partner of migrolino AG. The migrolino shops, numbering more than 170, are supplied with all the main fresh produce, food, non-food, brand products, alcohol and tobacco ranges from the distribution centre. This has allowed goods processes to be combined and aligned with the further expansion of migrolino AG's convenience business.

Migros-Verteilbetrieb Neuendorf AG began the construction of a system to partially automate the order-picking of non-food ranges in 2012. This year, further automation projects to boost efficiency will be launched as part of a long-term strategy.

After successfully integrating the national IT services such as SAP Fresh, POS systems, finances, human resources and Club Schools/leisure into the Migros IT services and generating the corresponding synergies, Migros turned its attention to the next step in the centralisation process: IT infrastructure services are now also to be centralised. As well as cost savings, the measure is intended to simplify the national provision of services significantly. The key elements of this project are as follows:

A nationwide MigrosNet for the smooth exchange of data within the Cooperative Retailing segment. Migros' main data networks are to be combined into a single network which will extend well beyond Cooperative boundaries to the end consumer (branches, places of work).

The «M-Workplace 2014» is being developed in a project in which the Cooperatives and industrial companies are heavily involved. This standard workplace of tomorrow comprises all of the equipment needed in an office both now and in the future (computers, telephones, mobility, printing, network). The M-Workplace will be launched in the participating Migros companies from 2014 onwards in a rollout that is still to be planned.The Migros computer centres are to be consolidated in a national Migros data centre network operating out of two sites. Having a single data centre management setup, led by Migros' IT services, will enable the physical service components to be ideally deployed and efficiently operated. In this project as well, the solutions will be found in collaboration with the affected locations and then implemented gradually.

The companies from the other strategic business units are also working to improve their processes on an ongoing basis: M-Industry further increased its operating capacity during the 2012 financial year. Thanks to a range of efficiency-boosting and optimisation programmes (most notably «Fit for Europe»), considerable savings were made in 2012 as well. This enabled M-Industry to support Migros Group with substantial price reductions and boost Migros' market position through its innovative strength. The successful launch of the «Café Royal» coffee capsules secured additional market share, while new ranges of muesli, yoghurts and milk drinks were introduced for Migros' own «Farmer» and «Bifidus» brands. M-Industry is thereby playing a key role in Migros' differentiation strategy.

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 was able to continue the savings made over the past few years, albeit to a somewhat lesser extent. The effects of the exchange rate floor for the Swiss franc against the euro somewhat counteracted the improvement in purchase prices from August 2012 onwards. Our membership of the European buying alliance AMS, online tendering and auctions, and direct procurement at source remain the main levers for optimising costs in procurement management. Our two procurement offices in Hong Kong and Shanghai will be supplemented by an additional office in Gurgaon (India) over the course of 2013. The two main duties of these procurement offices are to work efficiently with Asian producers and to ensure that we uphold our corporate social responsibility in our procurement activities in the Far East in terms of humane working conditions. Another, increasingly important lever is the optimisation of the supply chain, from the dispatch of goods by the supplier to their delivery at the branch. New concepts on this issue were developed in 2012 and are now being implemented in practice.

Overall, commodity prices remained high in 2012. Only a few prices that are relevant for us eased somewhat over the course of the year (coffee, cotton and, to a lesser extent, crude oil). As part of our sustainability strategy, employing a range of measures to ensure the availability of certified raw materials is becoming increasingly important. Having our own industrial companies in
close proximity to the commodity markets (compared to a simple trading company) provides a favourable basis for this.

During the reporting year, exchange rate developments had a minor impact on the Retail and Industry sector.

Despite the rise in the cost of goods and services sold by CHF 69.0 million to CHF 14.4 billion, gross profit increased by CHF 114.4 million to CHF 9'705.7 million thanks to rigorous procurement management and a raft of process optimisation measures. The gross profit margin grew by 0.2% to 40.3%.

Savings of CHF 6.5 million in comparison with the previous year were achieved in human resources. In addition to normal investing activities, the increase of CHF 52.5 million in depreciation and amortisation to CHF 1.2 billion was also due to impairments.

The rise of CHF 10.6 million in other operating expenses to CHF 2.9 billion reflects the increased rental costs due to expansion as well as energy saving measures and lower IT costs in the wake of centralisation at the Federation of Migros Cooperatives.

Overall, the operating result for the Retail and Industry sector improved by CHF 57.8 million to CHF 745.3 million.The operating result of the Cooperative Retailing sector increased by CHF 137.6 million to CHF 565.5 million due to the aforementioned efficiency improvements along the value-added chain and the contribution to investments in pricing made by the Industry & Wholesaling sector. The fall in Commerce of CHF 49.5 million to CHF 13.9 million can be put down to the repositioning of Interio, the in-store business of Ex Libris and additional expenditure on logistics and warehousing at the Gries Deco Group.

In the Travel segment, the result was affected by the strong fall in sales, restructuring costs and impairments at Hotelplan Italia as well as the bankruptcy of the airline Hello. Thanks to stringent cost management and a healthy business trend at Hotelplan Suisse, the result deteriorated by only CHF 6.5 million.

In the previous year, the Others segment was adversely affected by non-recurring costs arising from the sale of Limmatdruck AG. In addition, gains on sales made by Liegenschaften-Betrieb AG contributed to an improvement in the result in the amount of CHF 39.7 million in 2012.