Annual report 2012 Poslovni sistem Mercator, d.d. Annual report 2012 Poslovni sistem Mercator, d.d. Annual report 2012 I Introduction TABLE OF CONTENTS INTRODUCTION ................................................................................................................ 1 REPORT BY THE PRESIDENT OF THE MANAGEMENT BOARD .......................................... 3 SUPERVISORY BOARD REPORT ...................................................................................... 5 OVERVIEW OF YEAR 2012 BY MARKETS ......................................................................... 8 PERFORMANCE HIGHLIGHTS ......................................................................................... 9 MERCATOR GROUP PROFILE AND ORGANIZATION ...................................................... 10 MERCATOR GROUP ACTIVITIES ................................................................................... 13 MAJOR EVENTS IN 2012 .............................................................................................. 14 CORPORATE GOVERNANCE STATEMENT ..................................................................... 16 MERCATOR GROUP NEW BUSINESS STRATEGY ............................................................ 24 BUSINESS REPORT........................................................................................................... 29 SALES AND MARKETING .............................................................................................. 31 REAL ESTATE MANAGEMENT AND RETAIL NETWORK DEVELOPMENT .......................... 40 EFFECT OF ECONOMIC CONDITIONS AND COMPETITION ON MERCATOR GROUP OPERATIONS IN 2012 .................................................................................................. 44 PERFORMANCE ANALYSIS ........................................................................................... 47 RISK MANAGEMENT .................................................................................................... 55 FINANCIAL MANAGEMENT .......................................................................................... 63 MERCATOR SHARE AND INVESTOR RELATIONS............................................................ 65 SUSTAINABILITY REPORT ................................................................................................ 69 RESPONSIBILITY TO CUSTOMERS ................................................................................. 71 RESPONSIBILITY TO EMPLOYEES .................................................................................. 72 RESPONSIBILITY TO NATURAL ENVIRONMENT ............................................................ 73 RESPONSIBILITY TO SOCIAL ENVIRONMENT ................................................................ 74 RESPONSIBILITY TO SUPPLIERS .................................................................................... 74 RESPONSIBILITY TO QUALITY ....................................................................................... 75 FINANCIAL REPORT ......................................................................................................... 77 FINANCIAL REPORT OF THE MERCATOR GROUP .......................................................... 79 Consolidated balance sheet .............................................................................................. 81 Consolidated income statement ....................................................................................... 82 Consolidated statement of comprehensive income ......................................................... 83 Consolidated statement of changes in equity .................................................................. 84 Consolidated statement of cash flows .............................................................................. 86 Poslovni sistem Mercator, d.d. Annual report 2012 I Introduction Notes to consolidated financial statements ..................................................................... 88 Independent Auditor's Report ........................................................................................ 155 FINANCIAL REPORT OF THE COMPANY POSLOVNI SISTEM MERCATOR, D.D. .............. 157 Balance sheet .................................................................................................................. 159 Income statement ........................................................................................................... 160 Statement of comprehensive income ............................................................................ 161 Statement of changes in equity ...................................................................................... 162 Proposal on the allocation of distributable profit .......................................................... 164 Statement of cash flows.................................................................................................. 165 CONTACTS IN MERCATOR GROUP .................................................................................. 167 Poslovni sistem Mercator, d.d. Annual report 2012 I Introduction INTRODUCTION 1 Poslovni sistem Mercator, d.d. Annual report 2012 I Introduction 2 Poslovni sistem Mercator, d.d. Annual report 2012 I Introduction REPORT BY THE PRESIDENT OF THE MANAGEMENT BOARD A change in strategy and focus on the core to boost productivity by three percent per year activity until 2016 and to maximize the returns for our shareholders. Stopping the negative trends in Mercator's performance was the top priority for the new We commenced the restructuring of our retail Management Board and all employees in 2012. network in order to adjust it to new operating Declining market share, poorer cost efficiency and conditions. underperforming investments from the past, combined with the escalating effects of the Growth expectations in markets that Mercator economic crisis, negative currency translation entered relatively late are feeble. Thus, we have differences, and dwindling purchasing power, adopted a strategic decision to withdraw from drove the operating results into the red. Our Albania and Bulgaria, and to concentrate on the approach to this challenge was realistic, but also five key markets in terms of geographical focus, optimistic. After taking office, the Management and on the fast-moving consumer goods program Board developed a new strategy based on four key in terms of business segment focus. FMCG, which pillars: optimization, focus, profitability, and is our core activity, accounts for 92 percent of our growth. sales and it has the best potential for future operations. We started to reap the synergies in the Mercator is currently in the restructuring stage markets of Slovenia and Croatia where the retail which is necessary because of a lack of focus in the area and offer are being adjusted to the local strategy in the past. In our core activity, our microenvironment. We will restructure and revive performance is sound and positive; we saw good our subsidiaries Modiana and Mercator Tehnika results in our key markets. Although the result for where we already implemented a new strategy 2012 is negative, Mercator Group is financially based on optimization of sales network and solid. It has firm foundations and above all the stronger focus on economically sustainable, i.e. potential to successfully pursue its vision of profitable programs. becoming the most successful and the most efficient retailer in the region. We wish to do It is especially important that the positive effects of whatever it takes for a satisfied customer to immediate measures have been seen in the recognize us as the best retailer that offers market. In Slovenia, we succeeded in stopping the everything a discount store can offer, and much trend of declining market shares, which is a great more. success. Similar measures are being implemented in Croatia and Bosnia and Herzegovina; in Serbia Countering the negative trends we are the only major retailer seeing considerable increase in market share; in Montenegro we are the market leaders. In order to be truly efficient in attaining the short- term goals laid down, we immediately launched Offer our customers what they need especially the measures to cut costs, deleverage, and reorganize our business logistics processes. – every step of the way We soon saw the initial palpable results as we reduced our debt by over EUR 90 million and net In retail, bigger is better. At the moment, Mercator working capital for EUR 135 million, introduced a is proudly managing over 1.5 million of square more austere investment policy, improved the cost meters of retail area. However, customers efficiency in all areas of our business operations, increasingly prefer smaller neighbourhood stores. and stopped the trends of declining market shares. Therefore, activities for growth must, as a rule, be These were only the first steps in the process of carried out in smaller store formats and in the reviving Mercator. In the long run, we are looking markets where such growth is attainable – where 3 Poslovni sistem Mercator, d.d. Annual report 2012 I Introduction Mercator is synonymous with high quality, service, memorable experience. This, too, was in fact an and wide choice. innovative communication approach and another step towards changes and fresh ideas that can Mercator enjoys the advantage of having an bring about a breakthrough and change. extensive store network, especially regarding smaller neighbourhood stores where people shop We are facing challenges both past and present; daily. However,