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 – , 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 In