REWE-ZENTRALFINANZ EG, COLOGNE, AND REWE - ZENTRAL-AKTIENGESELLSCHAFT, COLOGNE COMBINED MANAGEMENT REPORT FOR THE FINANCIAL YEAR 2017 Page 1 of 195 CONTENTS GROUP STRUCTURE 3 ECONOMIC ENVIRONMENT 6 1. Macroeconomic Development 6 2. Development by Sector 8 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 15 4. Performance Indicators 19 RISK AND OPPORTUNITIES REPORT 23 REPORT ON EXPECTED DEVELOPMENTS 33 1. Future Macro-Economic Development 33 2. Expected Revenue and EBITA Development 35 Page 2 of 195 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 2017 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 2017, the Combined Financial Statements included the parent companies as well as a total of 396 subsidiaries (previous year: 385). The REWE Group operates in various business segments, which are divided into divisions and segments. BUSINESS SEGMENTS Last updated: December 2017 The new management structure was fully implemented as at 1 January 2017. The National Full-Range Stores and National Discount Stores business segments were combined under the newly created Retail Germany business segment, and the International Full-Range Stores and International Discount business segments were combined under the newly created Retail International business segment. The Retail Germany business segment includes the REWE, Penny Germany and Retail Germany Central Companies divisions. As part of the restructuring, the domestic real estate companies, as well as 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, which had previously been part of the Other business segment, were reallocated to Retail Germany. Page 3 of 195 In the REWE division, 1,904 supermarkets and consumer stores are operated under the REWE CITY, REWE CENTER and REWE to go brands. There are also 2,153 REWE partner stores, nahkauf stores and third parties supplied by the wholesale business. Retail Germany also has an online presence with REWE.de. The Penny Germany division operates 2,174 discount stores under the PENNY brand. The Retail International business segment covers the Austrian Full-Range Stores, CEE Full-Range Stores and Penny International divisions. The Austrian and CEE Full-Range Stores divisions operate supermarkets and consumer stores at a total of 2,542 locations. In Austria, the stores are operated under the BILLA, MERKUR and ADEG brands. In addition, the wholesale business supplies 385 ADEG partner stores. The Retail International 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. In the Penny International division, the PENNY MARKT and PENNY MARKET brands are operated at a total of 1,466 locations in Italy, Austria, Romania, the Czech Republic and Hungary. Travel and Tourism is organised into the Central Europe, Northern Europe, Eastern Europe and Destination Areas/Hotels divisions. It 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, Switzerland, Eastern Europe, as well as Scandinavia, Finland, the United Kingdom and the Benelux countries through the Kuoni units. Travel and Tourism mainly trades under the brands ADAC REISEN, Apollo, Club Calimera, DER.COM, DER Reisebüro, DERPART, DERTOUR, EXIM Tours, helvetic tours, ITS, Jahn Reisen, KUONI and Meier's Weltreisen. The Travel and Tourism business segment has a total of 750 physical sales locations. The National Specialist Stores business segment operates 293 DIY stores in Germany under the toom Baumarkt and B1 Discount Baumarkt brands. As part of the wholesale business, 40 partner stores and franchisees are also supplied. 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, delcredere-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. Page 4 of 195 LOCATIONS AS AT 31 DECEMBER 2017 National Retail Retail Travel and Country Specialist Total Germany International Tourism Stores Germany 4,078 -- 555 293 4,926 Austria -- 2,109 -- -- 2,109 Czech Republic -- 593 40 -- 633 Italy -- 364 -- -- 364 Nordic countries* -- -- 6 -- 6 Hungary -- 212 8 -- 220 Russia -- 122 -- -- 122 Romania -- 221 -- -- 221 Slovakia -- 145 13 -- 158 Bulgaria -- 118 -- -- 118 Switzerland -- -- 77 -- 77 United Kingdom -- -- 49 -- 49 Ukraine -- 26 -- -- 26 Croatia -- 98 -- -- 98 Poland -- -- 2 -- 2 Total 4,078 4,008 750 293 9,129 * Denmark, Finland, Norway and Sweden. Continuing operations only. Page 5 of 195 Economic Environment 1. MACROECONOMIC DEVELOPMENT The economy in Germany once again experienced stronger year-on-year growth in 2017: GDP increased by 2.5 per cent (previous year: 1.9 per cent). The economic upturn was even more broadly based than in 2016: In addition to private consumption, which benefited from real income growth, increasing private and public investment, which was fuelled by low interest rates and an uptick in foreign demand, also bolstered the positive development in 2017. In 2017, inflation rose to 1.6 per cent (previous year: 0.4 per cent) as a result of, among other factors, rising energy prices. This positive economic development was also reflected on the labour market: Unemployment was at a very low level at 3.6 per cent (previous year: 4.2 per cent). GDP in Austria grew by 2.3 per cent in 2017 and was thus significantly higher than the 1.2 per cent forecast and was up year on year (1.5 per cent). This was due in particular to strong domestic demand, which was bolstered by both private consumption and a high level of investment, as well as increasing foreign demand. Private consumption was lifted primarily by the improvement on the labour market: unemployment fell to 5.4 per cent (previous year: 6.1 per cent). Inflation rose to 2.0 per cent (previous year: 1.0 per cent). The economy in Italy grew in 2017 by 1.6 per cent (previous year: 0.9 per cent). This growth was due in particular to increasing domestic demand as well as rising foreign demand. Unemployment fell slightly to 11.2 per cent (previous year: 11.7 per cent), due among other factors to an increasing number of workers with fixed-term employment contracts. The inflation rate rose to 1.4 per cent (previous year: -0.1 per cent). The economies in the Central and Eastern European countries in which the REWE Group is represented developed positively in 2017. Bulgaria, Croatia, Romania, Russia, Slovakia, the Czech Republic, Ukraine and Hungary experienced an upturn, with Bulgaria, Romania, Russia, the Czech Republic and Hungary exceeding forecasts and prior-year growth rates. GDP growth in Slovakia was at the same level as in the previous year and in line with forecasts. Economic growth in Croatia and Ukraine was less pronounced than in the previous year, although Croatia managed to beat its forecast despite the collapse of the country's largest private company. The upturn in all countries was supported mainly by private consumption, which benefited from rising wages due to the positive employment figures, and rising exports. The availability of EU funds to finance and implement economic measures (e.g., increase in minimum wages and tax cuts) also strengthened domestic demand. Rising real incomes benefited private consumption. Unemployment rates fell sharply in all countries except Russia and Ukraine. The high inflation rates of the previous years in Russia and Ukraine continued to fall. In all other countries, the inflation rates rose year on year. In Scandinavia, each of the three countries beat the economic forecasts, with Sweden falling slightly below the prior-year figure to post a strong 3.1 per cent economic growth. Denmark and Norway generated higher year-on-year economic growth. Inflation in Sweden and Denmark rose year on year, while price rises in Norway were less pronounced than in the previous year, at 2.1 per cent. Unemployment fell in each of the three countries. Economic growth in Switzerland was slightly slower than in the previous year and fell short of expectations with GDP growth of 1.0 per cent. Unemployment fell to 3.0 per cent (previous year: 3.3 per cent) and was thus Page 6 of 195 significantly below the forecast of 4.3 per cent. Inflation rose to a moderate 0.5 per cent, which was primarily the result of the devaluation of the Swiss franc. In the United Kingdom, economic growth in 2017 was 1.7 per cent, down year on year (previous year: 1.9 per cent). This was caused mainly by the uncertainty surrounding the consequences of exiting the EU ("Brexit"). The unemployment rate fell to 4.4 per cent (previous year: 4.9 per cent). Inflation rose significantly to 2.6 per cent (previous year: 0.7 per cent), primarily as a result of the devaluation of the pound prior to and following the Brexit referendum.