Michel Pattou (ITM): The main musketeer’s dilemma
Elsevier Food International Vol.8, No.4, November 2005 Pascal Kuipers
Last 29 August, a sigh of relief must have resonated in Michel Pattou’s executive office in Bondoufle, just south of Paris. The main musketeer could finally close one of the blackest chapters in the history of ITM (Intermarché) or ‘Les Mousquetaires’ (The Musketeers), as the French retailer and its adherents call themselves.
On 29 August, the Musketeers finally received approval from the German competition authorities for the sale of their German Spar operations to Germany’s market leader Edeka. Their press release breathes their relief: “The approval of the Bundeskartellamt is unconditional. For the Musketeers, this agreement is the final stage for a way out of Germany with head erect, leaving behind a healthy business. This because the Musketeers have always supported Spar, so its independents can approach the future with confidence alongside Edeka.”
Pattou can be sure that one day he will enter the Musketeers’ history books as the man who did lead ITM out of the retail swamp east of the river Rhine. There, ITM allegedly lost almost one billion euro since 1997 when it acquired Spar Germany. Ever since, ITM’s German subsidiary performed badly.
One year ago, in an interview with the French trade publication LSA, Pattou described the German restructuring process as a “grim, complicated, sad and very costly” operation. According to Pattou, the integrated Spar stores accounted for most of the losses. He said there have been some 350 underperforming integrated Spar stores, of which there were still some 15 to restructure by November 2004. Therefore, Pattou said a year ago, the operation drew to its end. And last 29 August, “our problem number one” as Pattou called it, was ended officially.
Passionate people
Late 2001, Michel Pattou was part of a group of four influential executives within the Musketeers’ organisation who offered their resignation to express their discontent with the strategy followed by Pierre Gourgeon, Pattou’s predecessor as president and executive of the SCM (Société Civile des Mousquetaires). In September 2002, after mounting internal pressure to reform the organisation, Gourgeon decided to quit “for personal reasons.” This cleared the way for Pattou, who was unanimously elected to lead the SCM.
Until then, Pattou used to be director of services and publicity at ITM Entreprises, the operational body of the Musketeers’ organisation. Known as an advocate of change, Pattou was elected on a reform programme with four priorities: to get Intermarché commercially going again, financial restructuring, a more democratic function and a restatement of the adherent’s position within the organisation.
His job was to create new inspiration, as for several years the esprit among the Musketeers had been far from ‘all for one and one for all’. After its foundation in 1969, the Musketeers recorded an impressive growth in the 1970s and 1980s. However, the rapid expansion of the store network all over France and government limitations on opening of new, large surfaces caused internal competition in local markets. In the early 1990s, the Musketeers’ growth engine faltered, which led to management’s decision to expand abroad in search of new sources of growth. This, however, aggravated the situation, as most foreign operations did not bring in the expected returns. Since 1997, the German operation was constantly bleeding the Musketeers’ financials.
Due to all this, the solidarity among the independent retailers was severely challenged. They felt being put under pressure, having to give in to their margins in order to fill the financial gaps created by the loss-making expansion abroad, and the amounts of money invested in the Musketeers’ production facilities. According to an article published in December 2002 in the French magazine Capital, French independents said that an Intermarché had a margin of 14 per cent on average, compared to 18 to 24 per cent for a Super U store, a banner of the French cooperative retailer Système U.
The French press used the words ‘putsch’ and ‘revolt’, to describe the events at the Musketeers’ between April and September 2002, leading to Pattou taking the helm of the organisation. Pattou denies this in an interview with LSA in November last year. “It was no revolt, even if it was interpreted likewise by the outside world. What happened is intrinsic to the way in which we function. We are a group of passionate people who are highly involved in the progress of the group. This provokes from time to time outcries which, compared to conventionally managed companies, appear like revolutions or radical reorganisations.”
Conviction is needed
Living up to the Musketeers’ philosophy, allowing retailers to be truly independent with the opportunity to switch to another commercial organisation at will, Pattou’s job looked like trying to keep birds in an open cage. In recent years, many malcontent Musketeers turned their backs on their organisation to become a member of other independent groups like Leclerc or Système U, or even engage in a franchise agreement with multiples, Carrefour being the main example.
Carrefour in particular provoked the wrath of Pattou, who in October 2004 in an interview with the French financial newspaper Les Echos declared that the Musketeers would take legal action. “We see members leaving us to join other banners,” he said, alluding to independents being actively tempted to do so. “We state a large offensive from integrated retailers, notably Carrefour. […] We are going to prosecute Carrefour for unfair competition,” said Pattou, pointing out that in his view Carrefour did not use its shareholders’ funds for the retailer’s performance, “[…] but for the purchase – sometimes overly priced – of market share.”
The complaint is still pending and given the delays in the French judicial system, this will be a long-term affair. Therefore, this seems more of a psychological trick, creating a common enemy in order to close the Musketeers’ ranks. “With us, one does not command. Conviction is needed,” he said back in November 2002 in an article in L’Expansion.
Still, Pattou did see to it that one of the programme points for his election – concerning the adherent’s position within the organisation – was carried out in order to limit flow-out of members. A delicate issue, as he did not want to compromise the Musketeers’ philosophy of independence. Originally, the contracts were based on trust and a belief in the member’s wish to be an independent retailer. In late 2003, the Musketeers’ organisation voted for a change in contract agreements, “[…] to avoid behaviour of start-up members who went to and fro. This is unsupportable for the group,” he said to LSA. New members now have to stay at least 15 years – originally this was ten years – and in case of an intended sale, ITM has the right of priority to purchase the store. In addition, the standards for depreciation and valuation of the adherents’ enterprises have been restated. On the other hand, the Musketeers created a funding to support the integration of young entrepreneurs in its organisation.
The musketeer’s dilemma
This underlines the dilemma that Pattou has to deal with. Strict measures must be taken for recovery but diplomacy and tact is needed to uphold the independent identity. Consensus by conviction is extremely important, because in France and abroad, the Musketeer’s credibility is at stake. A Solomon’s judgement is no option for Pattou. He could not let down a German independent for the sake of a French peer, despite the complaints of the French members that they had to suffer the financial consequences for the failure in Germany. There was simply no easy way out of Germany and Pattou deserves the credit for finding the solution to this problem, while at the same time giving Intermarché’s international business a new impetus.
Obviously, selling Spar to Edeka and welcoming the German market leader to Alidis – the purchasing alliance established in September 2002 by Intermarché and the Spanish-Basque retailer Eroski – were two parts of one deal. This has, however, not been acknowledged, nor has the sum been disclosed that Edeka paid to gain control over Spar AG, which accounts for a wholesale business of €2.5 billion, catering to 2,000 stores.
“This agreement accelerates the Musketeers’ debt reduction, it gives us the opportunity to restart the combat by enforcing our position on the French market but also in Europe,” commented Pattou in the press release of 29 August.
Debt reduction has been one of Pattou’s priorities. In LSA, he acknowledged that debt levels increased dramatically due to the losses that Spar incurred, and at the end of 2002 the debt was almost 1.8 times the Musketeers’ own capital. Intermarché’s ground rule is that debt levels would not exceed its own funds. Furthermore, the banks were concerned and ordered an audit by Deloitte in the spring of 2003. “That was in the heydays of the Enron affair,” Pattou said in LSA. “Deloitte concluded that our business fundamentals are healthy and that we are capable to generate the cash-flow needed to redeem our debts.”
Due to the sale of real estate and non-core activities, ITM’s financial position improved. The sale of Spar is a further and meaningful impetus to the Musketeers’ financial health, which allows the Musketeers to invest in the development of their hard-discount banner Netto in France.
Modern capitalism
Having been a member of the Musketeers for many years and having operated at different levels within the group, Pattou disposes of diplomatic skills and the authority needed to convince a critical and emotional audience. He is a strong advocate of the notion that all business is human and he clearly distances himself from the increasingly tough business practices that he witnesses especially among listed companies, which he characterises as “pure and tough capitalism.” “Trading partnerships represent a more human commerce – modern capitalism – and represents a true alternative,” he said in May 2005 during a conference of the ‘Fédération des Coopératives de Commerçants’ (Federation of Cooperative Traders) which ITM and Leclerc joined in March 2005. According to Pattou, groups of independent retailers are primarily partnerships of people. “Surely, lots of pedagogy, explanation, conviction is needed, but its operation has an undeniable advantage due to good knowledge of the market,” Pattou said during the conference.
Militant by nature, the Musketeers fight the expensive lives their customers have to deal with, both in France and abroad. With independent allies such as Leclerc and Système U, they are fiercely opposed in France to the Galland law that prohibits selling below cost. Abroad they are united with their partners Eroski and Edeka in Alidis/Agenor, to leverage their international buying power.
Having relieved the Musketeers from its German trauma, Pattou is clear about the Musketeers’ international ambitions: no more acquisitions but focus on organic growth.
Profile
Since 1976, Michel Pattou (56) has been involved with Intermarché. Owner of an Intermarché store in the north of France, he became leader of the northern region of Intermarché. Later he was employed at the Musketeers’ headquarters as director of services and publicity at ITM Entreprises. Since September 2002, Pattou is the Musketeers’ executive president.
Company characteristics
With some 4,000 outlets in Europe and 2004 sales of €38 million, the Musketeers claim to be France’s second largest retailer and the fifth largest in Europe. The core business is in grocery retailing which accounts for almost 90 per cent of sales. The table below shows a breakdown per format, banner and country. Other business areas in which the Musketeers are involved are restaurants, DIY stores, clothing stores, car centres and music/video stores.
Sources: LSA, Capital, Les Echos, Le Monde.
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