Carrefour: cosmopolite on crossroads

“I don’t believe there is a crisis in the French hypermarket model,” was one of the defiant statements of Michel-Edouard Leclerc, president of French retailer Leclerc, to the audience of the CIES World Food Business Summit last June in Budapest, Hungary. With hypermarkets of some 4,200 m² on average, managed by independent retailers who – supported by Leclerc – focus on their commercial performance in local markets, Leclerc’s hypermarkets “[…] perform fairly successful,” says Leclerc.
Despite referring to the French hypermarket model in general, Leclerc obviously had his own hypermarket business model in mind, or a similar model operated by Système U. This is another independent hypermarket operator in France with whom Leclerc collaborates.
French hypermarkets in general, however, have not been as successful in recent years. Especially the larger ones, which are the dominant feature in Carrefour’s hypermarket store base. Carrefour’s hypermarkets in France have an average size of some 9,000 m² and therefore cannot be located in the proximity of residential areas, like the smaller stores of Leclerc. Customers increasingly tend not wanting to travel large distances to visit the larger stores. Not only because of time constraints and the fact that shopping at discounters has become more accepted in France, but also because of sky-high fuel prices that make a longer shopping trip less worthwhile. There is, however, another side of the coin when it comes to fuel prices. Selling fuel has become a lifeline to the large hypermarkets, where fuel sales account for some 17 tot 20 per cent of total sales.
“In France, Carrefour’s dominant hypermarket format has allowed itself to be ‘trapped’ by the regulatory environment – namely the Galland Law – and the group is no longer keeping one step ahead of rivals in fields such as communications, marketing and product range as it proudly claimed to do in the past,” reads a recent analyst report of CM-CIC Securities. “The Promodès merger and the centralisation policy adopted over the last ten years have left Carrefour labouring under bloated and complex centralised management that is stopping its stores from truly being local retailers, adapting to local market conditions as they see fit.”
The charismatic Président of Leclerc will be the first to agree with this analysis, which outlines the key factor of Leclerc’s independent retailers’ success in a market that has been so tough for Carrefour recently.

Duran and Vandevelde
A new team at the helm of the company is to turn around Carrefour: José Luis Duran (CEO and president of the management board) and Luc Vandevelde (president of the supervisory board). “Duran is considered by many observers in the retail world to be merely an accountant in the first place,” reads a company update of Commerzbank, which was published in February 2005 after the announced management changes at Carrefour. Duran’s previous positions were CFO of Carrefour and CFO of Carrefour Spain, where he successfully steered the integration process of the Pryca and Continente hypermarket operations, following the Carrefour/Promodès merger in 1999.
“More recently, Duran acknowledged that crucial time was lost in the repositioning process of the French Carrefour hypermarkets,” comments Commerzbank. “He also admitted that management believed in a crucial misreading of market trends in that the decline of market share was largely attributed to the integration issues with Promodès.”
To the dismay of its shareholders, Carrefour lost half of its stock exchange value since the merger with Promodès, which Planet Retail qualifies as “[…] an undisputed triumph of French state-supported empire-building in order to create a French counterweight to the increasingly dominant Wal-Mart”. This makes the return of Luc Vandevelde remarkable. He used to be CEO of Promodès before the merger and left for Marks & Spencer in February 2000, shortly after the merger with Carrefour.
Planet Retail connects Vandevelde’s return at the helm of Carrefour with the fact that Promodès’ founding family Halley is now the main shareholder in Carrefour. “[…] The founders of Promodès who had handed their enterprise over to Carrefour and its management five years ago, were instrumental in making their old CEO the new head of Carrefour,” reads Planet Retail’s Bulletin of 10 February 2005.
“It is clear that the family shareholders are in the driving seat,” acknowledges CM-CIC Securities, pointing out that the clear shift to a dual management structure with a management board (Duran) and a supervisory board (Vandevelde) creates a structure under which family shareholders can exercise their control. The success of Carrefour’s repositioning depends on how well Duran and Vandevelde can work together. CM-CIC Securities calls the appointment of Vandevelde “at least paradoxical” as Vandevelde is “[…] a man reputed to be a tough manager as well as being known for his iron will and his close and long-standing links with family shareholders. While Mr Vandevelde’s appointment makes sense in a time of crisis – or simply transition – it is harder to justify over the long haul. It will be worth keeping an eye on the degree of scope given to José Luis Duran,” reports CM-CIC Securities, adding that it will be looking at the relationship between the two men.

Market share rather than square metres
According to Commerzbank, Duran already pointed out Carrefour’s future strategy in 2004, when he – still the retailer’s CFO – decided to buy back shares, dispose of non-core assets, reduce net debt, focus on higher dividend payouts and expand largely via leasehold contracts in central Europe.
At an analyst meeting on 29 June, Eric Reiss, the successor of Duran as Carrefour’s CFO, said that thanks to continued investment in cutting prices and expanding existing stores in France, Carrefour managed to regain some domestic market share during the first half of 2005. At home and abroad, Carrefour seeks to divest non-core or underperforming activities while investing in tactical acquisitions in countries and formats where it sees opportunities to improve its financial results.
A recent example of this strategy is the intended acquisition of German retailer Rewe’s French discount stores (101 Penny Markets in the North of France, 55 of which are freehold, representing €262mn of sales in 2004), which was announced late June. At the same time, Carrefour announced the sale of its food service operation Prodirest (a €526 million business that distributes food products via 26 warehouses to 40,000 customers in commercial and institutional catering) to Transgourmet, a joint venture between Rewe and Coop Switzerland.
On 30 June and 1 July, Carrefour outlined its future strategy during the investor days it organised. There, Reiss said that Carrefour’s financial and operating strategies go hand in hand as Carrefour targets leading market positions – in the top three in every market where it is represented – which support profitable and sustainable growth. “Every business unit must achieve a return in excess of its cost of capital (capex),” Reiss said. “We must focus on winning market share and market leadership rather than just opening new square metres.”
Between 2001 and 2004, Carrefour added 0.8 million m² per year to its worldwide sales area. Between 2005 and 2008, it intends to almost double this annual increase to 1.5 million m². In order to achieve a return in excess of capex, this increase comes from targeted, strategic acquisitions or from developing new formats that had better fulfil customers’ needs.
In the first half of this year Carrefour already added over 400,000 m² of selling space via acquisitions (see table X), which on a 2004 basis would have represented additional net sales of €1.2 billion under banners. On the other hand, in the same period Carrefour divested its operations in Mexico (29 hypermarkets representing some €519 million of sales plus two sites for hypermarket development), Japan (eight hypermarkets with 2004 sales of €326 million) and in France the already mentioned Prodirest food service business (€526 million of sales).

Commercial property company
In order to exceed returns on cost of capital, Carrefour says it designed an expansion strategy that is profitable and sustainable. “We develop internal processes which enable us to open more square metres, more cheaply and more profitably,” Reiss said during the investor days late June, commenting that Carrefour aims for freehold when it comes to large sales areas in mature markets, whereas for smaller areas in emerging markets leasing could me more appropriate. “Major sales & leaseback transactions are no longer on the agenda,” Reiss told the investors. “We are one of the world’s biggest commercial property companies and we are committed to actively develop our shopping mall activity worldwide.”
According to Carrefour, the retailer owns 64 per cent of the 11 million square metres of sales area under its banners worldwide. It manages some 1,000 shopping centres at its sites, representing 1.5 million square metres of leased selling space for which it receives €335 million in rental income from 16,000 leaseholders.
A major change for Carrefour is that it will develop and roll out new formats such as compact hypermarkets, urban supermarkets and super discount stores. It develops these hybrid formats on the basis of its existing format and banner portfolio Carrefour (hypermarkets), Champion (supermarkets) and Dia (hard discount stores).
Carrefour acknowledges that the large hypermarkets of some 9,000 m² are not only extremely capital intensive but they do not respond to customers’ wishes either. Thierry Garnier, Carrefour’s managing director of supermarkets in France and member of the executive committee, answered during the investor days the question why new format development means a fundamental change, by stating that “because the needs of the customer and not only the size of the store will define the format/concept.”
Spain is the test market for Carrefour’s new formats such as compact hypers which it calls ‘small hypers’, that can be deployed in areas that do not allow for a – as Carrefour calls it – ‘classic hypermarket’. Examples in Spain are the ‘hyperChampion’ and ‘Carrefour Mini’ formats (see table 2). Under its Dia hard discount banner, Carrefour developed a ‘discount supermarket’ format branded as Maxi Dia. A fourth new format has been developed for city centres of big cities. Not in Spain, but in France and Belgium Carrefour is testing this high street format under its Champion supermarket banner (see table 3).

Franchising
Launching and rolling out these new formats, Carrefour has a keen eye on organisational synergies – e.g. back office alignment – and investment levels in order to optimise return on capital employed. “Franchising is a lever enabling us to leverage the profitability of these new formats,” Garnier said. “Franchising allows us to build sales and secure a revenue stream without committing our own capital.”
Representing 20 per cent of sales under banner brands, 20 per cent of the group’s sales surface, ten per cent of consolidated sales and 16 per cent of group EBIT, franchising is already a significant and very profitable business for the group, says Garnier. “Still we don’t fully exploit this source of sales and profitability.”
Only Carrefour’s Dia hard discount operation and its convenience stores use franchising to develop organically. Carrefour’s five largest hypermarket operations of France, Spain, Italy, Belgium and Greece represent nearly 95 per cent of franchising, said Garnier, pointing out growth options in markets like China and Poland, and in specific regions such as Corsica in France or Puglia in Italy. In addition, franchising can improve profitability of hitherto unprofitable business models (Garnier mentioned supermarkets with low sales densities and/or difficulties in markets like Brazil and Argentina). Finally, franchising enables Carrefour to enter new countries or add new formats to its operations in countries where it is already present (Greece, the Emirates and North Africa are examples Garnier mentioned).
Key to its new direction indeed leading to success, Carrefour depends on optimising cost efficiency without compromising on customer understanding in the various markets where it is represented worldwide, and especially in its domestic market France. Adding new square metres and formats to its operations and leveraging its purchasing scale – especially in private label where Carrefour this year will push its purchasing via its Dia discount operation to the benefit of the group – Carrefour aims for sustainable growth while maintaining its margins.