Mercator Group Annual Report for 2016
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TABLE OF CONTENTS INTRODUCTION ................................................................................................................ 2 REPORT BY THE PRESIDENT OF MANAGEMENT BOARD .................................................... 3 SUPERVISORY BOARD REPORT ........................................................................................... 5 2016 HIGLIGHTS BY MARKETS .............................................................................................. 7 PERFORMANCE HIGHLIGHTS FOR THE PERIOD 2013-2016 ................................................ 8 MERCATOR GROUP PROFILE AND ORGANIZATION ............................................................ 9 MERCATOR GROUP ACTIVITIES ......................................................................................... 13 KEY EVENTS ......................................................................................................................... 15 CORPORATE GOVERNANCE STATEMENT ......................................................................... 20 MERCATOR GROUP BUSINESS STRATEGY ....................................................................... 28 BUSINESS REPORT........................................................................................................... 29 EFFECT OF ECONOMIC CONDITIONS AND COMPETITION ON MERCATOR GROUP OPERATIONS IN 2016 ........................................................................................................... 30 SALES AND MARKETING ..................................................................................................... 34 REAL ESTATE MANAGEMENT ............................................................................................ 45 PERFORMANCE ANALYSIS IN 2016 ..................................................................................... 49 OPERATIONS AND PERFORMANCE PLANS FOR 2017 ....................................................... 58 RISK MANAGEMENT ............................................................................................................ 59 FINANCIAL MANAGEMENT .................................................................................................. 72 MERCATOR SHARE AND INVESTOR RELATIONS ............................................................... 74 SUSTAINABILITY REPORT ................................................................................................ 77 RESPONSIBILITY TO EMPLOYEES ...................................................................................... 79 RESPONSIBILITY TO CUSTOMERS ..................................................................................... 91 RESPONSIBILITY TO NATURAL ENVIRONMENT ................................................................. 93 RESPONSIBILITY TO SOCIAL ENVIRONMENT .................................................................. 102 RESPONSIBILITY TO SUPPLIERS ...................................................................................... 106 RESPONSIBILITY TO QUALITY .......................................................................................... 108 FINANCIAL REPORT ........................................................................................................ 112 Management Responsibility Statement ..................................................................................................... 113 FINANCIAL REPORT OF THE MERCATOR GROUP ........................................................... 114 Consolidated balance sheet ....................................................................................................................... 115 Consolidated income statement ................................................................................................................ 116 Consolidated statement of other comprehensive income ......................................................................... 117 Consolidated statement of changes in equity ............................................................................................ 118 Consolidated cash flow statement ............................................................................................................. 120 Notes to consolidated financial statements ............................................................................................... 121 Independent auditor's report ..................................................................................................................... 184 FINANCIAL REPORT OF THE COMPANY POSLOVNI SISTEM MERCATOR, D.D............... 188 Balance sheet ............................................................................................................................................. 189 Income statement ...................................................................................................................................... 190 Consolidated statement of other comprehensive income ......................................................................... 191 Consolidated statement of changes in equity ............................................................................................ 192 Consolidated statement of changes in equity (continued) ........................................................................ 193 Proposal on the allocation of accumulated loss ......................................................................................... 194 Consolidated cash flow statement ............................................................................................................. 195 Independent autior's report ....................................................................................................................... 196 CONTRACTS AT MERCATOR GROUP ............................................................................... 200 Introduction Business report Sustainability report Financial report Contacts at Mercator Group INTRODUCTION Annual report 2016, Mercator, d.d. 2 Introduction Business report Sustainability report Financial report Contacts at Mercator Group REPORT BY THE PRESIDENT OF MANAGEMENT BOARD 2016 – A year of strategic transformation Mercator's operations and performance in 2016 were determined especially by the strategic decision that stabilization of operations, improvement in competition of offer, and especially the establishment of foundations for long-term success and efficiency requires considerably higher investment into competitiveness of Mercator's offer. Relative to the years before, Mercator had to step up its efforts to improve its competitiveness. Only competitive offer, based in particular on sourcing within respective markets of the Group's operations, is the only foundation for long-term development and pursuit of individual stakeholders' goals. This applies in particular to the key market – Slovenia, which is one of the most competitive markets in the region and beyond. Major investments into competitiveness, however, also resulted in lower profitability. Nevertheless, growth of market share, especially in the Slovenian market, proves that Mercator is on the right track. With its competitiveness boosting measures, Mercator succeeded in stopping the stagnation of its market share which has been growing steadily since the end of the first quarter. In 2016, Mercator Group revenue amounted to EUR 2,493.8 million, which is 4.5% less than in 2015. The figures are not directly comparable as Mercator was executing its strategy of focusing on its core activity. In 2016, the measures in this regard were intensified, which included divestment of Modiana and Intersport operations. This, in turn, affected operations in markets outside Slovenia. Revenue development differed across markets. Slovenia and Serbia remain the most important markets for the Mercator Group. In Slovenia, revenue dropped by 4.0% in 2016. The cause for lower revenue includes divestments completed in 2015 (divestment of the Santana and Loka brands, divestment of Grosuplje Bakery at the end of the third quarter, divestment of tourist services M Holidays at the end of the year), divestment of Modiana at the end of the third quarter of 2016, divestment of the company Intersport ISI d.o.o. in December 2016, and divestment of other non-core operations or non-operating assets. Lower revenue is also a result of temporary closure of stores for refurbishments. Revenue was also lower in Serbia (by 6.5%), which is partly a result of divestment of Modiana and Intersport in 2016, and closing down of some stores based on a decision of the country's regulator. We also saw lower revenue in the markets of Croatia (by 9.3%) and Bosnia and Herzegovina (by 3.7%) where the companies, after successfully completed sales processes of Modiana and Intersport in 2016, only conduct real estate operations. In the market of Montenegro where we opened new neighbourhood stores in 2016, revenue in 2016 was higher than in 2015 by 6.8%. Annual Report and performance was also affected considerably by the events and developments regarding the owner. As a result of a law adopted by the Republic of Croatia, and especially due to compliance with the International Accounting Standards, the Group had to recognize additional impairments for receivables from the companies within the owner's system. This had a material negative effect on the Group's key performance indicators. Another fact should be pointed out in particular: the Annual Report pursuant to the International Accounting Standards also records the effect of discontinued operations of the Modiana and Intersport