Combined Management Report

REWE-ZENTRALFINANZ EG, COLOGNE, AND REWE - ZENTRAL-AKTIENGESELLSCHAFT, COLOGNE COMBINED MANAGEMENT REPORT FOR THE 2016 FINANCIAL YEAR Page 1 of 177 CONTENTS GROUP STRUCTURE 3 ECONOMIC ENVIRONMENT 6 1. Macroeconomic Development 6 2. Development by Sector 7 PERFORMANCE 10 1. Comparison of the forecast reported in the previous year with actual business development 10 2. Results of Operations 11 3. Financial Position and Net Assets 14 4. Performance Indicators 17 RISK AND OPPORTUNITIES REPORT 22 REPORT ON EXPECTED DEVELOPMENTS 31 1. Future Macro-Economic Development 31 2. Expected Revenue and EBITA Development 32 Page 2 of 177 Group Structure The REWE Group is an international trade and tourism group. It consists of two independent corporate groups with the parents, REWE-ZENTRALFINANZ eG, Cologne, (RZF) and REWE - Zentral-Aktiengesellschaft, Cologne, (RZAG). The combined financial statements of these two corporate groups as at 31 December 2016 have been combined on a voluntary basis into a single set of financial statements ("Combined Financial Statements"). The information provided below refers to these Combined Financial Statements. The accounting policies used are explained in the notes to the Combined Financial Statements. As at 31 December 2016, the Combined Financial Statements included the parent companies as well as a total of 385 subsidiaries (previous year: 369). The REWE Group operates in various business segments, some of which are divided into different strategic business units. BUSINESS SEGMENTS As of: December 2016 The new central Retail Germany organisation, which combines the former National Full-Range Stores and Natio- nal Discount Stores business segments, was launched in July 2016. In this connection, the domestic real estate companies were reallocated from the Other business segment to Retail Germany. The production and sale of baking items under the Glocken Bäckerei brand and the production of meat and sausage products under the Wilhelm Brandenburg brand will also be reallocated from the Other business segment to Retail Germany in 2017. The final restructuring measures of the management structure will be implemented from 1 January 2017 onwards, meaning that the reporting structure is still based on the old business segment structure. Page 3 of 177 The National Full-Range Stores business segment operates 1,728 supermarkets and consumer stores in Ger- many under the REWE, REWE CITY, REWE CENTER, REWE to go and TEMMA brands. There are also 2,073 REWE partner stores and nahkauf stores supplied by the wholesale business. The National Full-Range Stores business segment is also active in the online business with REWE online. Furthermore, the wholesale business also supplies REWE partner retailers and third parties. The International Full-Range Stores business segment maintains supermarkets and consumer stores at a total of 2,507 locations. In Austria, the stores are operated under the BILLA, MERKUR and ADEG brands. In addition, the wholesale business supplies 400 ADEG partner stores. The International Full-Range Stores are also represented with the BILLA supermarkets in Bulgaria, Russia, Slovakia, the Czech Republic and Ukraine. In addition, drug stores are also operated in Croatia and Austria under the BIPA brand. The National Discount Stores business segment operates 2,148 discount stores in Germany under the PENNY brand. The International Discount Stores business segment trades under the PENNY MARKT, PENNY MARKET and XXL MEGA DISCOUNT brands in a total of 1,418 locations in Italy, Austria, Romania, the Czech Republic and Hungary. The National Specialist Stores business segment operates 287 DIY stores in Germany under the toom Bau- markt and B1 Discount Baumarkt brands. In addition, 44 partner stores and franchisees are also supplied. toom is among the leading providers in the German DIY sector. The National Specialist Stores business segment also operates an online business with Gartenliebe.de. The Travel and Tourism business segment comprises a number of tour operators, travel sales channels (travel agency chains, franchise sales channels and online portals) as well as destination agencies and hotels under the DER Touristik umbrella brand. Travel and Tourism operates in the source markets of Germany, Austria, Switzer- land, Eastern Europe, as well as Scandinavia, Finland, the United Kingdom and the Benelux countries since the addition of the Kuoni units in 2015. Travel and Tourism mainly trades under the brands ADAC REISEN, Apollo, DER.COM, DER Reisebüro, DERPART, DERTOUR, EXIM Tours, helvetic tours, ITS, Jahn Reisen, KUONI, Meier's Weltreisen and TRAVELIX. The Travel and Tourism business segment has a total of 748 physical sales locations. Central services provided by the parent companies and various subsidiaries for group companies and third parties are combined under the Other business segment. These services are essentially procurement functions (merchandise wholesale business and warehousing), central settlement, del credere-assumptions, IT services, energy trading (EHA), online retail trade (ZooRoyal and Weinfreunde), e-commerce services (REWE-Digital) as well as coordination of Group-wide advertising activities. This segment also includes the production sites of bakery products (Glocken Bäckerei) and meat and sausage products (Wilhelm Brandenburg). The German real estate companies, which were part of the Other business segment until 2015, are allocated to the respective operating business segments from the financial year onwards. Page 4 of 177 LOCATIONS AS AT 31 DEC. 2016 National International National International National Travel and Country Full-Range Full-Range Discount Discount Specialist Total Tourism* Stores Stores Stores Stores Stores Germany 1,728 – 2,148 – 553 287 4,716 Austria – 1,811 – 294 – – 2,105 Czech Republic – 212 – 364 41 – 617 Italy – – – 350 – – 350 Romania – – – 203 – – 203 Nordic countries** – – – – 6 – 6 Hungary – – – 207 8 – 215 Russia – 110 – – – – 110 Slovakia – 138 – – 13 – 151 Switzerland – – – – 78 – 78 United Kingdom – – – – 47 – 47 Bulgaria – 110 – – – – 110 Croatia – 90 – – – – 90 Ukraine – 36 – – – – 36 Poland – – – – 2 – 2 Total 1,728 2,507 2,148 1,418 748 287 8,836 * Travel and Tourism strategic business units – Central Europe/Northern Europe/Eastern Europe/destination. ** Denmark, Finland, Norway and Sweden. All other business segments are also strategic business units. Continuing operations only. Page 5 of 177 Economic Environment 1. MACROECONOMIC DEVELOPMENT The economy in Germany developed in line with expectations in 2016, with year-on-year GDP growth of 1.7 per cent (previous year: 1.5 per cent). As in the previous year, consumer spending was the largest growth driver, which benefited from a stable wage trend and the low inflation rate. Inflation was at 0.4 per cent in 2016 (previous year: 0.1 per cent). At 4.3 per cent, unemployment was at a very low level (previous year: 4.6 per cent). Higher government spending to provide for supply, accommodate and integrate refugees also provided positive momentum. Despite the favourable financing conditions, domestic investment by the private sector was only very modest. At 1.4 per cent, GDP growth in Austria was 0.2 percentage points below the forecast but still significantly higher than in the previous year (0.9 per cent). Nevertheless, the Austrian economy improved noticeably. Consumer purchasing power was positively impacted by the tax reform that entered into force as at 1 January 2016 and the low inflation of 0.9 per cent (previous year: 0.8 per cent). The economic recovery in industry also contributed to economic growth. As in the previous year, the Italian economy recorded slight GDP growth of 0.9 per cent in 2016 (previous year: 0.7 per cent). The positive trend was mainly due to the quantitative easing of the European Central Bank by buying bonds, a lessening of bracket creep through income tax reductions, low oil prices and a weak euro. Structural problems and ongoing risks in the banking sector depressed growth. Most of the economies in the Central and Eastern European countries in which the REWE Group is represented developed positively in 2016. Bulgaria, Croatia, Romania, Slovakia, the Czech Republic, Ukraine and Hungary experienced an upturn, with Bulgaria, Croatia and Romania exceeding forecasts. This was mainly driven by consumer spending and higher exports. Consumer spending benefited from increasing real income which, in turn, was aided by declines in both unemployment and inflation. Russia was still in a recession due to the continuing political crisis. The sanctions by Western nations resulting from the Russian-Ukrainian conflict as well as structural weaknesses associated with a low price of oil were the primary factors for the declining GDP. However, the economic parameters appear to be slowly stabilising. GDP declined by 0.6 per cent year on year, less than forecast, the rouble recovered significantly against the euro and inflation (7.2 per cent) more than halved compared with the previous year (15.5 per cent). In Scandinavia, Sweden exceeded forecasts with strong economic growth of 3.6 per cent (previous year: 4.2 per cent). Denmark and Norway posted slight economic growth but fell short of forecasts. Economic growth in Switzerland was slightly slower than expected with GDP growth of 1.0 per cent (previous year: 0.8 per cent). GDP growth was still higher than in the previous year as the negative effects of the removal of the euro peg subside. Economic development in the United Kingdom

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