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Mercator Group Activities TABLE OF CONTENTS INTRODUCTION ................................................................................................................ 1 REPORT BY THE PRESIDENT OF THE MANAGEMENT BOARD .......................................... 3 SUPERVISORY BOARD REPORT ...................................................................................... 5 2013 HIGHLIGHTS BY MARKETS ..................................................................................... 8 OPERATION AND PERFORMANCE HIGHLIGHTS .............................................................. 9 MERCATOR GROUP PROFILE AND ORGANIZATION ...................................................... 10 MERCATOR GROUP ACTIVITIES ................................................................................... 13 MAJOR EVENTS ........................................................................................................... 15 CORPORATE GOVERNANCE STATEMENT ..................................................................... 17 MERCATOR GROUP BUSINESS STRATEGY .................................................................... 24 BUSINESS REPORT........................................................................................................... 27 SALES AND MARKETING .............................................................................................. 29 REAL ESTATE MANAGEMENT AND RETAIL NETWORK DEVELOPMENT .......................... 40 EFFECT OF ECONOMIC CONDITIONS AND COMPETITION ON MERCATOR GROUP OPERATIONS IN 2013 .................................................................................................. 43 2013 PERFORMANCE ANALYSIS ................................................................................... 47 RISK MANAGEMENT .................................................................................................... 57 FINANCIAL MANAGEMENT .......................................................................................... 67 MERCATOR SHARE AND INVESTOR RELATIONS............................................................ 69 SUSTAINABILITY REPORT ................................................................................................ 73 INTRODUCTION BY THE PRESIDENT OF THE MANAGEMENT BOARD ............................ 75 RESPONSIBILITY TO CUSTOMERS ................................................................................. 77 RESPONSIBILITY TO EMPLOYEES .................................................................................. 79 RESPONSIBILITY TO NATURAL ENVIRONMENT ............................................................ 83 RESPONSIBILITY TO SOCIAL ENVIRONMENT ................................................................ 85 RESPONSIBILITY TO SUPPLIERS .................................................................................... 89 RESPONSIBILITY TO QUALITY ....................................................................................... 90 FINANCIAL REPORT ......................................................................................................... 95 Management Responsibility Statement ........................................................................... 97 MERCATOR GROUP FINANCIAL REPORT ...................................................................... 99 Consolidated balance sheet ............................................................................................ 101 Consolidated income statement ..................................................................................... 102 Consolidated statement of comprehensive income ....................................................... 103 Consolidated statement of changes in equity ................................................................ 104 Consolidated statement of cash flows ............................................................................ 106 Notes to consolidated financial statements ................................................................... 108 Independent Auditor's Report ........................................................................................ 169 FINANCIAL REPORT OF THE COMPANY POSLOVNI SISTEM MERCATOR, D.D. .............. 171 Balance sheet .................................................................................................................. 173 Income statement ........................................................................................................... 174 Statement of comprehensive income ............................................................................ 175 Statement of changes in equity ...................................................................................... 176 Proposal on the allocation of distributable profit .......................................................... 178 Statement of cash flows.................................................................................................. 179 CONTACTS AT MERCATOR GROUP ................................................................................. 181 INTRODUCTION 2 REPORT BY THE PRESIDENT OF THE MANAGEMENT BOARD The clock ticks away faster when there is a lot to about new tasks and challenges every day. And be done. Thus, 2013 flew by quickly for us. Three yet, we can be content as we look back on what processes were in progress simultaneously at has been done. In 2013, Mercator withdrew from Mercator, which are of key importance for the the markets of Albania and Bulgaria and company's further development: sales process, commenced the reorganization of the Group. We operations restructuring process, and corporate have merged the companies Modiana, Intersport, debt restructuring process. These processes are and Tehnika (technical consumer goods) to highly complex as they are; moreover, they have Mercator's respective international subsidiaries; in been taking place in an extremely challenging Slovenia, we have merged the company environment that has included changes in M - Tehnika, d.d. We have improved our efficiency shopping behaviour, poor pricing perception by cutting our costs and divesting. On the other among the consumers, and further aggravation of hand, we focused more on our core activity for the economic conditions in all markets of Mercator's customers and stabilized our market share after operations. several years of decline. We have established a more efficient system of global supply and supplier The fundamental goal of Mercator Group in 2013 relations, and improved category management. was to stabilize company operations and Revision of the Pika card customer loyalty system performance and to provide financial stability by was also a major and successful project which has further cost optimization, focus on core activity, resulted in 250 thousand of new or reactivated and business restructuring. This involves numerous card holders in the first two months alone. In activities in key areas of operations, and it requires Slovenia, we introduced a new concept of an urban joint effort by all employees. Successful store called Mercator Neighbour (Mercator Sosed). reorganization of company operations and In Croatia, we divested our underperforming units, performance improvement measures have led to adjusted the store formats and offer, and reaped decrease in our loss and financial debt from one the business synergies between Slovenia and quarter to the next, as well as exceed plan for cost Croatia as the latter joined the European Union. savings. Decline of profitability has stopped and Despite the decisive measures, Croatian market our overall debt has been decreased despite the remains among our greatest challenges. harsh conditions. The framework agreement on Competition is also stringent in the Serbian market. long-term financial liability restructuring, signed by However, owing to sound business decisions by Mercator Group with the coordination team of our regional management, we have managed to creditors, is also highly important. The agreement retain our market share there. In the markets of has laid down solid foundations for long-term debt Montenegro and Bosnia and Herzegovina, our reprogramming which will allow Mercator to operations were stable. improve liquidity and stabilize and optimize its performance to the benefit of all stakeholders. This We believe Mercator's operations are stable will lead to long-term financial stability and allow despite the negative market situation and a us to truly focus in the future on our regular decline in revenue, as we have succeeded in operations and, most importantly, on our retaining our market position in all markets of customers. our operations. The year 2013 was defined by processes that Cost rationalization measures led to considerable bear long-term impact on Mercator's decrease of operating costs as we exceeded the operations: sales process, operations plan for cost savings by over 50 percent. With the restructuring process, corporate debt right measures in cost management and restructuring process. marketing, we generated operating profit of EUR 36 million in 2013. The strategy we have laid down is therefore sound and solid. It has yielded initial success. Yet there is Mercator Group revenue in 2013 amounted to still a lot of work to be done. Retail business brings nearly EUR 2.8 billion, which is 3.7 percent less 3 than in 2012. Lower revenue is mostly a result of In the period ahead, we have to further improve poorer sales of apparel and technical consumer our operating profitability and efficiency of all our goods, and a drop in revenue in Slovenia
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