Chatting over tea and Baklava pastry in an unadorned small office on the first floor of a Metro Cash & Carry store in Lahore, Managing Director Marek Minkiewicz recalls how he discovered the original recipe of the middle-eastern delight, which later became a regular on Metro Café’s menu.
However, that’s, perhaps, the smallest of changes he has made to the business since he joined as its chief one-and-a-half years ago. Marek has taken the international self-service wholesaler from barely breaking even two years ago to double-digit growth in its profits this year. And he has barely begun – the new chief of MCC has far bigger plans: he now wants to disrupt the market by launching a country-wide network of small convenience stores under a franchise model and even better enter full throttle into the burgeoning e-commerce industry along the lines of Alibaba from China.
But bringing MCC to this level within a span of one year wasn’t smooth sailing – the man fired almost the entire top management, half of the mid-tier managers and fought many other challenges in his attempt to restructure a business, which remained almost stagnant for five years before his arrival with no new store openings.
Not just wholesale
The international leader in self-service wholesale has so far had a very eventful journey in Pakistan, to say the least. For starters, the wholesale giant isn’t exactly a wholesaler here. Well, atleast not any more. What started off strictly on a B2B model, catering exclusively to institutional customers like hotels, restaurants, corporates and kariana stores (small grocery shops) and that too to buy only in bulk packings, was soon forced to revise its strategy due to lackluster market response. A year-and-a-half after its launch, MCC started operating as a wholesaler as well as a retailer from where small household consumers could now also shop under a hybrid B2B-B2C model. However, it turned out that this wasn’t enough to bring profitability to the company.
MCC’s stores were essentially built and designed as no frills warehouses and were nothing like the interiors of fancy hypermarkets. The entry of Hyperstar part of Carrefour S.A -one of the world’s largest hypermarket chains- didn’t help the cause either and judging by the general hustle and bustle at Hyperstar stores, it was evident that household consumers preferred to shop at custom built hypermarkets while institutional customers generally leaned towards Metro stores. Marek however dispels the impression “Hyperstar generally bases its location in Malls; Dolmen, Fortress, Millennium etc. So more people are seen inside the store but most of them are just visitors to the Malls and not actual customers.” He adds that sometimes the rent of a shop in a mall is much higher than having your own space.
“So it might appear on the surface that they are doing better, and they have to do better as well, to make up for the higher costs and overheads.” Due to high costs, high revenues do not leave them with higher profits, he explains. Joking about the fact that Malls have parking lots where customers have to pay Marek says “Malls charge for parking and it is not good in the long-run. So I’ll say come to Metro, we have free parking.”
Merger
METRO Group wasn’t the first wholesale giant to enter the Pakistani market. Infact Makro Habib Pakistan Limited – a joint venture between the Dutch based SVH Holdings, and the House of Habib, one of the biggest business establishments of the country – had already opened two Makro stores in Pakistan when MCC opened its first in 2007 . This was another first. Contrary to rest of the world where Metro had an informal international agreement with Makro not to operate in the same country, Pakistan became the first country where both players competed head on. Suppliers like the big FMCG companies exploited the situation and successfully resisted the separate demands for deep discounts that were crucial to the wholesalers’ success.
Resultantly none of the two players were making money. Hence, in 2012, the two one time competitors decided to merge their operations under a single brand name, Metro. On paper the merger was a stroke of genius supposed to bring all sorts of expected benefits including cost synergies, combined resources and increased market power, but what it also brought with it were some very unexpected and serious challenges. “It was like combining two different cultures, and all the problems imaginable with this sort of an amalgamation arose.” says Marek. From software to corporate culture, every ideology had to be unified to get harmony in operations. And because Makro Habib was the junior partner in the joint venture, its staff felt that it wasn’t actually a merger but in fact an acquisition.
Even though Marek was not part of either the Metro group or Makro Habib at the time of the merger in 2012, his prior experience as the first MD of Makro Habib in Pakistan, had allowed him to better understand the bearings of such events. In 2009 when SVH Holdings owner of Makro stores decided to sell its 70% majority stake to its local partner House of Habib and exit Pakistan, Marek had reportedly experienced similar circumstances. “You see Marek was a representative of SVH Holdings and as soon they decided to exit, he was asked to take a back seat. People on key positions were replaced with loyals from other House of Habib companies.” reveals a former employee of Makro Habib.
According to her, owners of House of Habib are good businessmen; successfully running Indus Motors, Shabbir tiles and Habib Metropolitan Bank amongst other diverse interests but the people they sent from group companies did not understand the demands of cash and carry business. Also these people were coming from a conservative culture which was very different from that of Makro.
Despite his personal experience at Makro and the challenges Metro-Makro merger brought, Marek still believes that the decision to merge made sense “Makro was mostly Karachi based, Faisalabad was only Metro’s playfield and Lahore was evenly divided. So the amalgamation was a good combination of the portfolios of both entities.” The details of the agreement that happened between the two entities are now ancient history, but the part that lingered on was the division of responsibilities between the two partners. Habib Group took over the responsibilities of real estate management, and Metro concerned itself with the operations management of the united business.
Talking about the challenges posed by the merger, Marek says, “Post 2012 period can be a perfect case study for the students of business. It was a time filled with chances and circumstances that could go very right or not-so-good. The two entities had the common factor of cash and carry, but had two very different cultures.” He adds that they had to merge lots of things and also had to combine two head offices into one. There were some necessary changes in the workforce as well since “one head office did not need as many employees as two,” he says.
The overall make-up of the post-merger Metro head office was 70 to 80 per cent old Metro combined with 20 to 30 per cent old Makro. Out of the eight board members seven belonged to Metro. The changes at the lower management levels and other branches remained minimal. “Post merger period brought some fluctuations in the revenues of different stores in the early days. Revenues from the original Makro stores were particularly hurt but now they have been stabilized.”
However, stores had to undergo several changes to achieve that. Only recently the interiors of the original Makro-Habib stores were refurbished and some changes in the operational processes such as addition of conveyer belts were introduced. Marek said, “The customers here in Pakistan are very much accustomed to one particular way of the placement and functioning of things. When it was changed, they were confused. They didn’t like it and took a while adjusting to it.”
Marek believes that integration of various business processes and departments was the biggest challenge for the newly merged business so much so that Marek adds, “That was also the reason why we didn’t open any new stores for a long time.”
However Metro was not the only one stalling opening new stores. Marek gives example of one of his competitors, Hyperstar, which also did not open any new store till very recently since opening of its Dolmen mall store in karachi in 2012.
Original plans and expectations
When Makro and Metro entered Pakistan in 2007, there were hopes and fears (depending on where one fitted in the supply chain) that the two wholesale giants would disrupt the traditional trade models. Both had announced big plans. Ali Habib, Chairman of Makro Habib announced in Nov 2006 “By the end of 2007, Makro will have a total of 7 stores in service.Makro’s immediate plan is to have 12 centers by the year 2009 for which real estate is being earmarked and negotiations are underway. In total it has an ambitious program to establish 30 such stores in all major economic centers of the country.”
Metro was not to be left behind and within only 18 months of its launch MCC expanded to five wholesale centers. Yet ,considering that at present the total combined store count stands at only 9 , a case can be made that Metro and Makro failed to revolutionize or disrupt the Pakistani wholesale or retail market as was widely expected. Marek disagrees, “The acceleration of business goes at different speeds in different countries. So Pakistan was slower as compared to some countries and faster as compared to others.” He said that there are several factors responsible for this. For instance in India, every state has different laws and that is difficult to keep up with.
So in this respect Pakistan is the better choice for doing business. He said that Japan was another country which was difficult to operate in. He added, “The point I am trying to make is that, in Pakistan we are the market leaders, we have the first mover advantage and we have a huge opportunity, not only in traditional cash and carry, but perhaps also in some other formats, like convenience stores etc. where we can play a role in terms of knowledge transfer as well.” Elaborating his point on the changes brought in by Metro Marek says, “Multinational stores like ours have made a lot of change and have forced local stores to also develop and adopt international best practices. In turn customer experience has completely changed. Before 2006 what was there?
There was one Imtiaz Super Market on Shahrah-e-Faisal. There was one Al-Fatah that burned down three times mysteriously in the middle of the night, the whole parking and the basement where you had to squeeze everything. Then you had Pace where Imran Khan took some friends and opened the store. There was one HKB. Then what happened after 2006?
Metro and similar chains have now given the confidence and motivation to local chains and they have realized that they can do better and they have to do better.” He feels that local businesses have now realized that if they don’t adapt with the changing times, they will become extinct. Before these multinational giants hit the market, the safety standards and environment of locals supermarkets remained inadequate. For instance in Imtiaz you had electronic cables running through the ceiling. CSD remained in the same stagnated condition for ages.
Ready to Disrupt
Going forward Marek seems to have some pretty aggressive plans that have the potential to disrupt the Pakistani market and finally bring the impact that was expected from it about a decade ago. Some of these projects in Marek’s words are “babies that are already conceived and on their way.”
Convenience Stores
Metro has already established its franchise model for small convenience stores in Pakistan. Marek shared that a pilot store for their franchise model ODIDO has already been inaugurated near Moon Market, Lahore under the name ‘Freshly’. “This is a model for convenience stores and all the operational decisions are made by the franchisee but the stores buy from Metro.” The model is based on 2000 stores in Poland, 500 in Romania, 40 in Moscow, and also some in China, where they have already become operational.. Metro will help these smaller stores with logistics, store layout and advise on product mix . Marek said that these new stores will be functional from early next year,beginning February or March, and will be slightly bigger than the first one. He says that if Poland can do 2000, then Pakistan can definitely have more. “The plan is to open 800 to 1000 such stores in Pakistan initially.”
These stores do not offer competition to Metro’s wholesale concept stores.They are instead closer to the idea of convenience stores when customers need only a few items and want to shop local. i.e. “The full range of products would still be in Metro, but products like fresh meat and slush, juices etc. would be available so the Metro customers don’t have to travel all the way for one or two products.” The prices in these franchise convenience stores will match Metro and they would be better looking than the other general stores as well, the MD said. Metro hasn’t finalized the actual model for this franchise plan and are open to issuing varied operational licenses to cater to different locations.. For instance a Freshly store in Pakpattan would be different from the one in Sahiwal, depending on the factors of the location.
E-commerce
Marek finally unveiled his trump card. Metro is in the process to enter the world of e-commerce. He said that half of the total 200 million Pakistani population is less than 25 years old. They have never had a fixed phone, they have never had a desktop and they have never written a letter. But they all have smart phones. “The ease with which they go to Food Panda or order Khaadi’s new collection is incredible. My sons make fun of me when I am typing with one finger. Now they are under 25 and a lot of them don’t have too much to spend. But these 25 become 30, then they become 35, then they become 40, and they will still go like this and their children will still laugh because they will be even faster with technology.”
He said that e-commerce is gaining momentum in the country but almost 95 per cent of it is non-food until now. It focuses mainly on clothing, electronics, some FMCGs. He said that some students have now initiated startups for online selling of food. “But I say that it depends on how deep dad’s pockets are? How long they can sustain and tell their dad that in some years we will have some investors and we will do an IPO and pay you five times back? But even if this happens, it is still local.” The reason that Metro has not already started it is that even though Metro has non-food products that it can sell online, Marek wants to start it with a complete brand name. “We don’t want to put selective items online because if I brand Metro, then what would people think? They would expect everything.”
When asked if Metro would seek association with other entities, he said that Metro would not likely rely on TCS or Daraz etc. “TCS is a logistics provider and they have an advantage there but they don’t know retail. Daraz is good in softwares but how good do they know about supply chain? So yes we are all looking into it and it will be very very interesting and very very exciting.” When asked how much time it would take, he said that horizons are like babies. “Sometimes they have already been conceived and are already on the way.”
He said, “The retail environment in Pakistan is very very exciting, the group is committed and we know what our expertise are. We want to develop our breadth, we know our USPs and we know what people are coming here for. And if we can translate it in other forms of retail and see it fit, we will do it.”
The interesting part is that unlike other e-commerce channels, Metro would not need to wait for the suppliers. Its stores will also serve as the warehouse for the online store, the inventory would already be there. Marek mentioned one of his inspirations for this plan – The Alibaba supermarket in Shanghai. In these stores, there is a rail on the ceiling and there is a picking station for online orders. The workforce runs around, picks up bags and scans the products to fill the orders. Outside the store, people wait on motorbikes to pick up these bags and deliver it to the customers. Marek said, “These guys give a 30 minute guarantee for delivery. You can also buy in the supermarket but there is only one way to pay. You cannot pay by cash or by credit card. You can only pay through phone, Ali-pay. That means that Ali-pay knows exactly who is buying, where they live and what they are buying. They don’t need loyalty system. If you live within one kilometer of the store, you will start getting things. Alibaba says if they open 17 of them in Shanghai, anybody in Shanghai can order and will get that in 30 minutes at any time of the day.
While Alibaba still has to open th these stores, Metro already possesses them. Marek says he is serious about this new venture. “I think it’s great. I loved it.” Metro hasn’t done this in any other country yet. “We don’t have rails but we have big warehouses.
New stores
According to Marek all the Metro stores are doing well now and the business is now preparing ground for opening new stores. “I am looking at different cities; Hyderabad, Multan, Gujranwala. Three stores in Karachi for a population of 20 million (2 crores) is simply nothing. So we are looking at opening new stores. He seems convinced that the number of retail chains in the country are not enough to pose a real competitive threat . “In a city like Karachi, three Metros, one Hyperstar, four or five Imtiaz Super Markets, some Chase Ups, are not competition. No way. Our only competition is with ourselves. I say that you can start complaining when there are fifty Hyperstars in Karachi and twenty Makros. Then you say that there is competition.”
He adds one more factor favoring Metro in being able to push out any potential future competition. It is the international image of security and law and order of the country which is not very welcoming for more international chains to bring their operations into Pakistan. “Walmart or Tesco or other big operators from America or France would not come to Pakistan. On the other hand, even if they do decide to go to countries in this region, China and India would top the list. So for us it is a good thing.”
As things stand
Marek claims that Metro is the leader in the market in terms of volume. Drawing comparison with another wholesale retailer Imtiaz Super Market who also claims to be the leader in the industry he says, “I am not sure. We would still be close.”
Talking about the Pakistani market’s contribution to the overall Metro revenues Marek says that the stores in Pakistan are making more than breakeven returns. “We have 700 stores worldwide and only nine in Pakistan, so we are not a big contributor but we are definitely not the smallest anymore either. Our sales are more than the Japanese stores.” Marek also highlights the positive contribution of the giant supermarket chain’s to Pakistan’s economy stating, “We are Pakistan’s largest tax collector because all our products’ prices have sales taxes included.” sales volumes of Metro has been affected because of this since some of their competitors don’t charge the taxes but Metro does, so sometimes its prices are higher. “Some of my local competitors have trucks that are supposed to go to Afghanistan from Karachi and halfway, half of the goods fall off.” he says sarcastically.
However, Marek admits to some positive changes in the last ten years. “Ayesha Mumtaz of the Food authority is using the right methods to differentiate between what is hygienic and what is not. We are sometimes more expensive than some dhaaba wala or the vendor on road selling meat but there is reason for that”
The other thing he mentions is the Restaurant Invoice Monitoring System, (RIMS) launched by Punjab Revenue Authority. The scheme encourages people to submit GST invoices and win prizes in return. “How can it be that a restaurant is making revenue of 20 lacs per week and they only have an invoice of 5000 Rupees?” he asks rhetorically.
In 2015, Metro made Rs 3,800 crore in revenue and this year it is expecting the annual turnover to grow by 10 to 15 per cent. Marek says that before
2015 the firm was operating at slightly over breakeven level but had now started performing well. “In my five year plan, I want to be 200 per cent bigger.” Detailing on the specific measures taken to turn Metro’s performance around, he commented, “If you had visited this store before, or ask people who work here, they will tell you that things have improved. We are now closer to our customers. We started listening more to our HORECA (hotel, restaurants and cafés) customers, our traders and our end customers.”
Metro has also revamped the café. (Pointing to the Baklava plate) Marek says,“We have delicious baklava. We have also introduced different grades of rice. A while ago we saw that karianas were not buying any rice and pulses from us. So one of the pitches was made as new arrivals and that allowed us to successfully sell rice and pulses to karianas.”
“We also did some things on the cost side. We are cash and carry and we are low cost. When I came here, all the directors were driving around in BMWs and Mercedes. I am driving in a small Honda. I think that if you are a cash and carry you need to keep costs under control. I fly economy within Pakistan and my employees take selfies with me when they are sitting with me. So these are the ways you need to control costs, not by turning off the lights or turning off the air-conditioning, because that affects customers.”
Talking about the recent changes in the management he says, “In the books, there are three of us at the top most level. Other than that, the executive level is the highest in the management at this point.” The offer management group is one of the most important departments for Metro because it is responsible for the customers’ side .It is being headed by a consultant, let alone a manager or a director. Speaking about this matter Marek says, “That consultant has a lot of experience. When I was the pioneer of Makro in Pakistan, he was the pioneer of Metro. He was the first MD of Metro and is now running its offer management group. I don’t want to go into detail, but the man is 73 years old so we can’t have him on a high management designation. But his experience counts.”
Marek also clarifies that the layoff of the high management was not done to reduce costs. “We sized down the head office to make it more adequate to the store sizes. We are putting more emphasis on being a low cost company and making the right cost choices. We have smaller cars but our stores now have proper lighting and other store related expenses.” He added that the head offices of such stores always look better because senior officers shop there. “But all nine stores are supposed to look as good as the head office. I visit all stores in Lahore every weekend if I am not travelling.” He informed that all the personnel in the management, be it be finance or HR or any other department, had adopted a store and had to maintain an active stance in the running affairs of that store.“They don’t report to me about it as such, but they stay posted and informed of what happens in store.”
Comparing the contribution of different measures in the turnaround of Metro he said that it was a result of a mix of both cost and revenue sides. “Very roughly, I would say that the improved sales volumes, higher margins and low costs contributed around 30 per cent each in these results. The lower shrinkage that is controlled wastage also helped in improving the returns.”
All the plans that Marek talks about are exciting and look good on paper. But they are ideas. Implementation is where the magic happens. Large organisations like Metro, regardless of how no-frills they gear themselves out to be, are going to be sluggish in comparison to new, nimble ones like, say Daraaz. If Marek’s Metro can be both big and fast, we’re certainly looking at exciting times ahead.
