14 June 2024

“We are a strong community”

Interview with CFO Telerik Schischmanow
Reading time: 9 min.

Mr Schischmanow, commerce faced a number of challenges in business year 2023 – how would you sum things up?

Telerik Schischmanow: We spent a lot of time and energy focusing on the political and geopolitical situation, particularly the ongoing war in Ukraine and the atrocities committed by Hamas in Israel, as well as the ensuing conflict in the Middle East. All of this affects the supply of goods and commodities, supply chains and ultimately consumer sentiment, too.

Just like in 2022, inflation remained high in the past business year – particularly for food, with no significant let-up until the end of last year. When it comes to food, the issue is now more one of deflation for most of the countries we operate in. In other words we’re jumping from hyperinflation to deflation, with no respite from the underlying uncertainties. At the same time, costs are on the rise. The price increases caused by factors like the power and gas crisis are now reflected in commodity prices, product costs and not least personnel expenses. We’re facing a situation in which both the deflationary trends and the cost situation are taking full effect. We have to react accordingly to this discrepancy: lower food prices coupled with higher wage and material costs. We have to adapt, above all in negotiations with suppliers, some of whom have benefited from the high inflation in the past few years.

Telerik Schischmanow
Telerik Schischmanow
Member of the Management Board – Chief Financial Officer

Affordable prices for all of our customers was a top concern in the past business year. We continued to invest in prices in 2023. How long do you think this will remain necessary?

Telerik Schischmanow: We’re going to have to play it by ear and see how revenues, deflationary tendencies and the cost base develop. It’s obvious we need to keep investing to position ourselves for the future, but we need to take a careful look at what costs we want and need to carry on incurring going forward. You can’t spend the same money twice. In these conditions we will have to reshuffle our priorities and manage our funds more closely.

Despite the challenges, the REWE Group performed well as a business in 2023.

Telerik Schischmanow: Yes, the past year was the Group’s best ever, despite the crises. What’s very encouraging is that we remained on a stable footing in these difficult times – further proof of how strong our cooperative is. But we still haven’t reached the point where we can generate the funds we need to invest in order to make us fit for the future. To date, we’ve had to take on 200 to 400 million euros in new debt every year, and interest rates are changing. Two years ago we could count on an interest rate of under one per cent. By contrast, we issued our sustainability-linked bond at 4.9 per cent in 2023. That’s a big difference.

What exactly does that mean for our investments in the next few years?

Telerik Schischmanow: We mustn’t rest on our laurels. We have to remain on the alert. The revenue trend in the past two years was heavily influenced by inflation and the slump in travel and tourism activity during the pandemic, as well as the significant rebound afterwards.

Borrowing more is not necessarily a bad thing for a group that is growing – particularly since we’re investing a lot in real estate. We are one of Europe’s largest project developers and buyers of existing properties. There’s hardly any other company that can match us in terms of real estate investments. We focus on our prime locations, logistics infrastructure, warehouses, store refurbishments and digitalisation.

What’s the strategic sense behind these investments? Why are they important?

Telerik Schischmanow: In many respects, owning properties helps increase our independence. We’re not tied to rent indexation, as is the case for standard leases, where rents are rising in line with inflation. The Group is currently running up costs in the hundreds of millions on that account. These costs no longer apply if we own the properties. There’s also competition to secure good locations, and you can lose leased sites to competitors. Owning our own properties puts paid to that problem too. Last but not least is sustainability: we have free rein when it comes to installing photovoltaic systems or e-charging infrastructure. We have control over both the costs as well as development of the locations. There will always be a need for both leased and owner-occupied properties, however. The key is to maintain the balance.

You already mentioned the first sustainability-linked bond, which we issued for 900 million euros in the past year. What was that all about?

Telerik Schischmanow: We’re a rapidly growing Group and are already a major player at the European level. To cater for this growth, we need to raise more funds for the future. The aim is to drive forward both our online business and our efforts at digitalisation and automation, so that we can work more efficiently and cost-effectively.

That’s why we opted for the broad investor base offered by the professional bond market. These investors are positioned internationally and invest huge sums. They also have different needs when it comes to transparency and disclosing data and the targets we’re pursuing. Sustainability components are one main aspect continually growing in importance. I assume that many major investors in the next few years will be prevented from investing in target groups that do not commit to sustainability targets. With that in mind, we chose to become Germany’s first retailer to issue a bond linked to sustainability targets.

What was the feedback from the financial industry?

Telerik Schischmanow: We hadn’t expected anywhere near the level of demand. The bond was subscribed by roughly 150 investors, with significant oversubscription. It seems as a newcomer to this market we managed to win over a great many investors. Sustainability has long been a top priority for our organisation, and linking the bond to our sustainability targets creates another incentive to meet them. If we don’t, it works like a penalty on the coupon we have to pay.

Are we going to place other similar financial products?

Telerik Schischmanow: Our very successful first foray into this market will make it easier for us to leverage this form of financing again. That was also a key question from the investors, who would welcome us continuing to do so.

Another thing that was important to the investors is that we are a cooperative. We work for ourselves and not for external shareholders whose main focus is on dividends and the share price. A large share of our net profit for the year remains within the organisation and is available for investments. That’s a privilege, and it helps us a lot. We don’t have to think from quarter to quarter; we can take a long-term approach. And we can also rescue a part of the business that is facing crisis, like we did with Travel and Tourism during the pandemic. The security that this bond, our cooperative, also means for our employees is something really special.

Our long-term energy procurement strategy paid off in 2022, and the costs stemming from higher energy prices remained within reason. What is the situation now?

Telerik Schischmanow: In general, the energy sector remains a challenge for commerce and industry, which includes us. I assume that energy costs will remain high and trend upwards, particularly in Germany given the current political situation. We are well positioned to meet all of these challenges thanks to EHA, our energy subsidiary in Hamburg, as well as the power purchase agreement for wind energy, which will secure renewable energy in the long term, and projects such as installing photovoltaic systems on the roofs of our buildings.

In terms of finance and investments, what are the greatest challenges for the REWE Group in the next three years?

Telerik Schischmanow: We’ll be celebrating our centenary in three years and I expect we’ll be more successful than ever. We’re in a solid position and well placed to invest for the future.

However, I don’t think we’ll have seen an end to the crises and hence it’s important for us as an organisation, and as people, to be ready to change and adapt. To remain an organisation that continues to learn, that is flexible and not trapped by outdated processes and ways of working. We have to face up to these challenges – from geopolitical conflicts through supply chain issues down to migration, with all its consequences and labour shortages.

Here’s the good news: placed as we are as a Group with varying business models in a range of countries, we might not be generating soaring profits but by the same token nor will we ever go bankrupt. The REWE Group is secure in a balanced system: people will always want to eat and drink, and with our full product range, discount and convenience businesses, and our omni-channel strategy, we are more than solidly placed to react to different customer needs and market situations. People go to the DIY store when they want to renovate the house or do up the garden, and in more or less safe times there will always be a desire to travel. And we are in a position to support business areas that are not capable of peak performance, as we demonstrated during the pandemic. Those are things that bring stability to the Group and make us a strong community.