GROUP MANAGEMENT REPORT

Non-Financial Performance Indicators

Employees at the HORNBACH Group
At the reporting date on February 28, 2009, there were 13,169 individuals (2007/2008: 12,710) in active fixed employment at HORNBACH HOLDING AG or at one of its subsidiaries. The Group thus created a total of 459 new jobs (plus 3.6 %). This increase was chiefly due to the four new store openings in the past financial year. As an annual average and converted into full-time equivalents, the overall HORNBACH HOLDING AG Group had 11,542 employees (2007/2008: 11,078).

The Group had a total of 8,282 employees in Germany (2007/2008: 8,413). This reduction is due above all to a base effect – personnel capacities in Germany had been deliberately expanded, drawing especially on temporary employment contracts, due to the boom in demand in spring 2007. These contracts then expired on schedule in the course of the 2008/2009 financial year. Outside Germany, the workforce grew from 4,297 to 4,887. An average of 788 young people (2007/2008: 772) were provided with training positions in one of 13 different vocations during the year under report. The largest share of these were the 403 trainees aiming to qualify as retail sales personnel (2007/2008: 411).

Training focuses on quality
Training employees at our stores and in our administrative departments plays a key role in our concept. In this, we aim on the one hand to provide top quality advice for complex construction and DIY projects, while on the other hand also organizing work processes as efficiently as possible. To this end, numerous training and development measures were organized in the past financial year. In the context of promoting the next generation of managers, 341 men and women took part in the period under report in training measures preparing them to become section managers, assistant store managers or store managers. One of the priorities here was the increased focusing of all measures on the strategic alignment of HORNBACH-Baumarkt-AG.

Specialist training was attended by more than 4,100 employees in the past financial year. This involved our sales teams being trained by certified trainers in various areas of our product range with the assistance of customized programs. Customer-based sales promotion focused on specialist competence, the latest trends and product novelties. Not only that, for especially complex project topics we have begun to have our sales specialists trained in programs certified by the Chamber of Industry and Commerce (IHK).

Number of employees
(annual average converted into full-time equivalents)

Our Training / Multimedia department ensures that all HORNBACH employees are familiar at all times with the latest expertise in terms of working processes and IT systems. During the year under report, almost 1,950 one or two-day training sessions were held with more than 15,000 participants. In the past financial year, these focused on the training rollout accompanying the launch of the new merchandise system. With a combination of seminars and e-learning modules (blended learning), employees at all HORNBACH stores thus acquired the skills required for their specific tasks. New IT training rooms were set up specifically for this purpose in all regions across Europe. Not only that, we also made use of our two training trucks. These are trailer trucks enabling a fully equipped mobile high-tech training room with space for ten participants to be available directly on location.

To be able to implement its blended learning concept even more efficiently, in the context of this rollout HORNBACH also introduced a group-wide Learning Management System (LMS). All HORNBACH training programs now run on this platform.

In second position once again in terms of volume were the training activities for HORNBACH’s Project Shows. These involve special sales and advice campaigns on topics such as “attic conversion”, “world of orchids”, “children’s dream rooms” or “building a wood terrace”. For each Project Show, we developed a special training session enabling several hundred specialist sales staff to be specifically prepared for the advisory situations likely to arise.

Homogenous store network
HORNBACH has longstanding experience built up over several decades in operating large-scale DIY stores with garden centers. This is also reflected in the average store size, which rose last year to almost 11,200 m² (2007/2008: 11,100 m²). This figure has not been matched by any other leading DIY player in Europe. At the same time, our store network is highly homogenous, with 83 % of sales areas as of the reporting date at stores which are larger than 10,000 m². This facilitates the rapid rollout of universal and/or innovative concepts to old and new sales areas alike (best practice approach).

What’s more, the combination of homogeneity and large surfaces generates substantial logistical benefits, thus providing us with an advantage over our competitors.

During the year under report, we enlarged our network with four new stores, thus adding around 60,000 m² of new sales areas. Three of the new locations are stores with combined drive-in builders’ merchant facilities. The drive-in concept is intended to enable customers to load cumbersome and heavy goods, such as construction materials, conveniently and directly into their vehicles, to combine this with purchases in the DIY store, and to pay for all these goods at a single checkout. HORNBACH has thus underlined its traditional competence in the retail of construction materials. Thanks to the stocking of the quantities also required for large projects, numerous service measures, attractive opening hours and easy accessibility, this is increasingly attracting professional customers as well.

Moreover, we are also working continuously on gradually bringing the design of older stores in line with the latest standards, and on enhancing operating processes to enable customers’ wishes to be met even more closely. These measures include signs, shelving measures, adjustments to the layout of the stores, through to store extensions and the further enhancement of the product range.

Customers appreciate HORNBACH’s concept
The guiding principle underlying the ongoing enhancement of the HORNBACH concept is the focus on the needs of our project customers. The key criteria for our customers include the easy accessibility of the stores, the stocking of large quantities of articles, the attractive presentation of the merchandise, the highest levels of competence in the composition of the product ranges and in the provision of specialist advice, and not least a reliable pricing strategy. Customers attach great importance to reliability and quality, especially in difficult economic times.

A whole series of consumer surveys and sector studies proved once again in the past year that HORNBACH is the preferred DIY store and garden center particularly for those customers intending to implement extensive home improvement and construction projects in their houses, apartments and gardens. Our competent project focus and clear quality profile have enabled us to differentiate ourselves successfully from the competition.

HORNBACH thus occupied one of the top positions in the favor of German DIY customers once again in the “Kundenmonitor Deutschland 2008” consumer survey. Around 6,000 DIY customers were surveyed within this, the most important consumer survey in the German retail sector, which has been compiled on annual basis since 1992. As in the previous year, we came a close second, with only a minimal difference in points to the company awarded first position. We also feel vindicated by our superb performance in important individual criteria. HORNBACH thus defended its top position for the fourth consecutive year as the best DIY store in terms of product selection and variety and product quality, as well as in the comparison of the product range with those offered by competitors. Particularly important to us is that the Kundenmonitor survey has documented that HORNBACH offers the best value for money to DIY enthusiasts, garden lovers and construction clients.

In the “Retailer of the Year” study carried out in Germany for the first time, HORNBACH was singled out by customers as Germany’s most popular DIY store chain. This study was compiled by the Dutch research institute Q&A Research & Consultancy. Participants in the study were requested via the internet to name their “favorite store chain” for 16 different sectors. As the reason for their choice, consumers could state competent specialist advice, value for money, customer friendliness or other criteria. Around 33,000 consumers took part in the study.

Top marks abroad as well
Outside Germany, HORNBACH also achieved top scores in a series of customer satisfaction surveys. The “Retailer of the Year” survey referred to above was carried out in the Netherlands for the sixth time. In this, HORNBACH was voted “Best DIY store in the Netherlands” for the fourth year in succession. In Switzerland, we matched the previous year’s success in the Kundenmonitor 2008 consumer survey performed by analogy with its German counterpart, securing top position in terms of overall satisfaction. A similar picture was seen in Scandinavia, where HORNBACH reached top position in the DIY store section of the “Swedish Quality Index”. With 3,500 consumers interviewed, this quality index is one of the most important consumer surveys in Sweden. Participants in the survey were required to pass judgment on criteria such as product and service quality, price and image.

The recurrent theme running through all of the studies mentioned is the great appreciation shown by customers for individual performance areas, such as the breadth and depth of our product range or pricing policies. In the Netherlands, for example, HORNBACH was ranked first in the “product range” and “product variety” categories. Not only that, our company was also named as the sector’s “innovation leader”. However, the best product range is of little use if the price is not right. According to the findings, customers have accepted our permanent low price strategy. Home improvement customers singled out HORNBACH as the DIY store offering the best value for money both in the Swiss Kundenmonitor survey and in the Retailer of the Year survey in the Netherlands.

When making purchases, DIY store customers are also according ever greater priority to services, especially when the products are to be installed by a specialist. Our tradesman service has contributed significantly to customers’ positive assessment of HORNBACH. This enables customers at our stores to commission the laying of flooring or fitting of garage, interior, and house doors, windows, awnings, and woodburning stoves etc. Customers deal with a central contact partner, thus benefiting from a standardized order process with a clearly structured price list. In the 2008/2009 financial year, we extended the range of services on offer with two further major modules. Customers in Germany can now also commission the installation of solar energy equipment and the fitting of stainless steel chimney pipes either as part of a chimney shaft renovation or when incorporating stoves into outer walls. Both new services offer useful alternative solutions for house renovations or refurbishments. Thanks to the ongoing enhancement of the services on offer and of the relevant handling processes, our tradesman service achieved double-digit sales growth in the year under report. Around 30 % of the Group’s tradesman service sales are generated in other European countries, where the catalog of services is to be gradually introduced and extended.

Cases where customers are not satisfied with their shopping experience at HORNBACH are handled by our complaints management system. This provides us with important indications as to the strengths and weaknesses of operations at our stores and thus acts as a management instrument for optimizing customer satisfaction levels. Each problem is solved in cooperation with the HORNBACH stores in a maximum of one to two days. In the case of product complaints, the procurement department and the supplier are also informed. Complaints are evaluated on a monthly basis. A total of 691 cases were handled in 2008 (2007/2008: 693).

Permanent low price policy
Competition in the European DIY sector is not only carried out via differing retail concepts. It is also accompanied by price competition, which was fought out with unrelenting intensity in the past year as well, especially in saturated markets such as Germany and Austria. In this competitive climate, we were uncompromising in our adherence to our credible permanent low price strategy, by means of which we differentiate ourselves from the discount campaigns undertaken by competitors. We see this as providing the best foundation for achieving sustainable, above-average growth and high earnings power in the long term. Our aim is to retain customers at HORNBACH on a permanent basis by offering the highest possible degree of transparency, reliability and honesty in our pricing policies. The price guarantee accompanying the permanently low prices is intended to provide our customers with the certainty that they can focus all of their energies at all times on solving their projects.

Logistics cuts costs and CO2 emissions
One key success factor in the operation of DIY megastores with garden centers across Europe is our sophisticated merchandise management system in conjunction with our homogenous store network. By developing its own group logistics system, HORNBACH has over the years built up a competitive advantage in terms of procuring transport services. Its logistics system combines direct supplies to stores, indirect deliveries via central warehouses and cross docking.

In the past year as well, our logistics infrastructure actively supported our expansion within Europe, also laying a foundation for further growth. Many suppliers, for example, have opted for this distribution channel for Eastern Europe. Not all manufacturers are able to assemble cost-effective complete deliveries, particularly for Romania. Connecting these suppliers to HORNBACH’s logistics structures enabled transport costs to be optimized. We created additional cost-cutting potential following the successful launch of the new warehouse management system at our three logistics centers in Essingen, Lehrte and Vilshofen in the two previous years. In the 2008/2009 financial year, we further enhanced the productivity of our logistics processes.

With its logistics centers, HORNBACH is also making a sustainable contribution towards protecting the environment (catchword: green logistics). The aim is to reduce CO2 emissions along the merchandise value chain. Pooling supplier deliveries enables thousands of truck journeys to be avoided. Not only that, with the assistance of tour plans optimized on a daily basis, we reduce the volume of empty runs to and from our locations, thus avoiding unnecessary miles on the road. Group logistics also only makes use of trucks with modern low-emission engines. Moreover, inland waterways and the railroads are used for transportation, for example to transport imported goods from Hamburg and Rotterdam to the logistics centers.

IT focuses on merchandise management
The focal point of the Group’s IT activities in the 2008/2009 financial year was the internationalization of the integrated merchandise management system. Alongside the German stores, stores in Austria, Switzerland, Luxembourg, the Netherlands and the Czech Republic are now also working with the new system. A total of 59 HORNBACH locations in Germany and abroad were converted in the past year. To date, the new merchandise management system has been rolled out to 99 stores. Slovakia, Sweden and Romania are set to follow in the current financial year.

IT is also making a contribution to sustainability. The investments made in the computer center infrastructure in the past year have, as expected, impacted positively on the company‘s energy balance. This is underlined by the good Power Usage Effectiveness (PUE) value compared with benchmark figures. The optimization of the air conditioning system at the computer center using free cooling had an especially positive impact on electricity consumption in the winter of 2008/2009, thus helping to reduce CO2 emissions.

HORNBACH deploys an electronic network (WAN) for data transfers with international locations. Following conceptual development, more than 50 locations were already converted to a new, higher-performance technological platform in the 2008/2009 financial year. As well as significantly reducing costs, this will also enable better use to be made of the available bandwidths in future. A foundation has been laid for the further flexible expansion of the network. This is expected to lead to a further enhancement in availability, especially in HORNBACH’s eastern operating regions. The rollout across Europe should be completed in the current financial year. Slovakia introduced the euro as of January 1, 2009. The resultant conversion of all IT systems ran smoothly.

HORNBACH – “the hands-on DIY store pioneer”
HORNBACH’s campaigns celebrated do-it-yourself once again in the past financial year, focusing on topics such as “selffulfillment”, “a matter of trust” and “imagination”. In the spring, we encouraged people to live out their individuality and creativity with our “Do it the way you want! But get it done!” campaign, thus whetting consumers’ appetite for large-scale projects in their apartments, houses and gardens. In the summer, the focus was on competent advice, a factor which, according to a forsa study, plays a decisive role in consumers’ choice of DIY store. The slogan “If you can trust them with your project, you can trust them with anything” underlined HORNBACH’s position as a DIY store for projects, as well as its commitment to provide the best advice. In the autumn, we called on consumers to put their own dreams and ideas into action, and not to set any limits to their creative powers.

One highlight of our communications in the past financial year was the unique extension to the campaign “If you can imagine it, you can also build it.” Alongside traditional media, this campaign was also implemented with an art exhibition in Berlin – “Das Haus der Vorstellung” (house of the imagination). Renowned German and international artists staged the widest conceivable variety of interpretations of the concept underpinning this campaign. The aim was to allow visitors to experience room installations with all of their senses, and thus to stimulate their imaginations as to what they might make of their own four walls.

Alongside TV commercials, we draw on all other kinds of media, such as radio, print, posters and the internet, as a platform for HORNBACH‘s campaigns. Further key components of our communications are the advertising booklets and “HORNBACH Aktuell” booklets. As well as presenting the breadth and depth of our product range, these also provide project guidance, information about our services, and tips as to our monthly Project Shows. Our advertising campaigns and individual measures yet again won numerous national and international prizes in the 2008/2009 financial year, ranging from the Eurobest Award to the “Megaphone” of the German Advertising Yearbook for the best integrated campaign.

HORNBACH continues to enjoy the highest level of advertising acceptance in the sector. Broad-based market research into the HORNBACH brand has also confirmed the company’s unique position as “The hands-on DIY store pioneer”, one which differentiates it from competitors. By communicating both rationally and emotionally with DIY enthusiasts on their own terms for many years now, HORNBACH has established itself among consumers as an unmistakable DIY store player with unique selling points. Our aim is to press further ahead with establishing the HORNBACH brand in our European network of locations, taking due account of individual regional needs in the process.

Corporate responsibility
The HORNBACH Group is committed to responsible, sociallyoriented corporate behavior over and above its actual business activities.

Environmental protection
Reducing energy consumption in order to cut CO2 emissions has become a prime topic, especially in the area of building and renovation. HORNBACH – the DIY store for projects – has been a competent partner in this area for years now, and can offer a suitable product range and qualified advice. During the year under report, project shows and advertising brochures once again provided our customers with extensive information about the potential savings resulting, for example, from all-round insulation, roof insulation, replacement doors and windows, using rainwater and energy-saving lamps.

One particular focus remained that of informing customers about the fight against illegal felling - “No tropical wood from forest depletion” - advising customers to buy timber products bearing the Forest Stewardship Council (FSC) quality seal. Back in 1996, HORNBACH already provided the WWF and Greenpeace with a voluntary undertaking not to import any uncertified tropical timber – thus pioneering this issue in the DIY store sector. We set up our own quality management and environmental department in 2001. One focus of its activities involves working to protect rainforests and promote sustainable forestry which also meets social and work safety standards.

In 2007, HORNBACH became the first international DIY chain to be awarded the FSC Chain of Custody certificate GFA-COC-002007. All HORNBACH stores now offer ecologically-minded trade companies which are themselves certified and environmentally-aware DIY enthusiasts a total of around 1,400 timber products bearing the FSC seal, the most extensive range on offer anywhere in the DIY sector. Not only that, the company is also involved in international projects aiming to protect species and to maintain their natural habitats and forest stocks.

A further focus of the company’s quality management involves implementing EU environmental legislation (catchwords: RoHs, WEEE, REACH). The aim is to identify hazardous heavy metals and chemicals in products, to avoid them where possible and to dispose of potentially recyclable resources intelligently. HORNBACH benefits here from its close international links with suppliers and specialist DIY associations.

Given the increasing scarcity of resources, a commitment to the environment in today’s world would be unthinkable without recycling. To minimize the number of journeys required, HORNBACH stores use compressors for high-volume waste, such as paper and plastics. A comprehensive waste concept promotes the separation, and thus recycling, of other waste.

The company also proactively accounts for environmental protection factors when building and operating its stores. The introduction of new central building control systems allows the technical equipment to be managed more efficiently. Consistent retrieval of the heating energy in ventilation systems reduces heating energy consumption. Electricity is saved by using intelligent controls and switches, as well as by basically only using optimized lighting. What’s more, the installation of natural light strips and roof-light domes enables natural light to be drawn on. The lamp departments are equipped with light optimization systems enabling the energy consumed by these departments to be cut by around half. All in all, by combining the technologies referred to above, stores save up to 30 % of their total current electricity consumption.

Employees
In its behavior towards its employees, HORNBACH accords absolute priority to ensuring equality of opportunity and rejecting any kind of discrimination. Ethnic origin, gender, age, physical restrictions and religious affiliation play no role in the assessment of applicants. The only qualities which count are specialist competence and team spirit. By signing the “Diversity Charter” in 2008, the company underlined its commitment to a working environment which is free of prejudice.

HORNBACH has responded to the challenges presented by future pension provision by introducing a company pension model. This consists of four modules including both collectively agreed retirement provision contributions and the option of converting voluntary bonus payments and collectively agreed remuneration claims, such as vacation allowances. Building on the existing offer of part-time early retirement, a further retirement provision model has also been introduced. Via “working time accounts”, this enables employees to structure their retirement age individually, i.e. to retire early.

The company’s success is closely linked to the competence and motivation of its employees. Their willingness to roll up their sleeves and thus to improve the Group’s earnings is honored by HORNBACH’s bonus model. A further module enabling employees to participate in the company’s success is the possibility of acquiring employee shares.

One particular sign of the company’s social responsibility towards its employees was the establishment of the HORNBACH Foundation “People in Need” in 2002. The Foundation has since offered assistance in cases of fatality, accidents, and severe illness. The employees in turn demonstrated their solidarity with the Foundation with their “Employees help Employees” campaign. The company subsequently doubled the donations made by the employees.

Society
The work performed by the HORNBACH Foundation is based on two pillars. The Foundation is thus also a contact point for people outside the company who are in situations of dire need. All in all, the Foundation supported 85 people, both within the company and from outside, with a total of around € 120,000 in the year under report.

The company’s commitment towards society, which extends beyond the work of the Foundation, has a preference in terms of its donations for social welfare projects, especially those benefiting children and young people. In this spirit, the stores also became involved on location and had an open ear for requests from local organizations.

As a member of the Rhine/Neckar European Metropolitan Region, HORNBACH continues to support Mannheim Business School in undertaking extensive renovation work on its listed building. To help boost scientific excellence in the region, over the next five years HORNBACH-Baumarkt-AG is also supporting a research project in the field of molecular neurobiology at the German Cancer Research Center (DKFZ) in Heidelberg with half a million euros. The parent company HORNBACH HOLDING AG is providing a donation of the same amount. Among other measures, this will enable a professorship to be established for a young female scientist of international standing.

Over and above this, the basic rules of social responsibility as practiced by HORNBACH include recognizing the international standards set out in the conventions of the International Labor Organization. The company thus only procures its products from factories meeting minimum standards, such as exclusion of child and forced labor, no intimidation of employees through maltreatment or verbal threats, adherence to work safety regulations, and compliance with environmental legislation. Suppliers have to ensure that these standards are also met by their upstream suppliers. Standardized factory audits are used to monitor compliance with these regulations.