Carrefour - A Giant At The Crossroads!

Published by MBA Skool Team, Published on September 27, 2012

In the latter half of the 20th century, the need for convenience shopping and consumption coupled with growth in car ownership led to a growth of supermarkets and hypermarkets, particularly in Europe and North America. The global retail industry has evolved from a small beginning to an industry where it is now valued over $17 trillion (Alpen Capital Retail Sector Report, 2011). People’s ability (disposable income) and willingness to buy drove retail sales. But what if this ability and willingness takes a hit?


Let us look at the situation in the backdrop of the ongoing euro-zone crisis, where rising prices, muted wages, high taxes and austerity measures have squeezed disposable incomes and altered the shopping habits of people. Gone are the big trips to out-of-town hypermarkets in favour of increasing visits to local supermarkets, and any retailer without a strong online presence is finding itself at a disadvantage. With weak profit outlook for European retailers looming large for this year, the retail boom (pun intended) in Europe might just be a matter of time. In the eye of this incoming storm is the French retailer Carrefour, the world’s second largest retailer behind Wal-Mart, the American giant.

Let us explore the story and challenges of Europe’s largest retailer in the last couple of years. While doing so we will also look at strategies that it adopted to arrest the growing slump and then take a look at how effective those strategies have proved for Carrefour. July, 2011 marked the shareholders concern for the sagging share price of the French company and the profit warnings have come thick and fast since then. The last couple of years are also marked with the trend of planned strategies being abandoned for the European retailer, an example being Carrefour’s failed Brazilian deal.

The planned merger of Carrefour’s Brazilian business with CBD’s Pão de Açúcar, an upmarket food chain in Brazil, reached a dead end when Casino, a French rival of Carrefour, which already owns 37% of CBD’s stake, protested furiously. Obviously Casino did not want a further concentration of the growing and lucrative Brazilian retail market as it was itself eyeing it. The protests led to the Brazilian Development Bank withdrawing its backing of the deal and CBD withdrawing its offer to merge with Carrefour.

Let us now try to get an insight into the challenges that Carrefour is facing from all quarters. Two powerful shareholders, Bernard Arnault, the boss of LVMH, a luxury-goods group, and Colony Capital, a US property-investment firm jointly own 14% of Carrefour’s shares and 20% of its voting rights through an investment vehicle called Blue Capital. They are desperate to recover their investment made in 2007 when Carrefour’s share was more than twice as high as in July, 2011. A look at the figures indicates that their investment of $5.5 billion was worth less than $2 billion in 2011.

Some further analysis shows that probably LVMH and Colony Capital got the timing of their investment wrong. Soon after their investment, Carrefour’s markets came under huge amounts of economic pressure which have persisted till date. Moreover, Carrefour is facing immense pressure on its home turf, France, the source of 44% of its sales and the story is similar in the rest of Europe which accounts for another 31% of Carrefour’s business. With predictions of a 23% fall in the operating profits for the first six months of 2011, Carrefour went on to issue five profit warnings in 2011 and reported slumping third-quarter sales in key Western European and Asian markets.

It is worthwhile to pause here and take a quick look at Carrefour’s history of early 2000’s which analysts believe is the origins of most of its domestic problems. In 1999 Carrefour merged with Promodes, another French supermarket chain, to become the world’s second biggest retailer but analysts say that the integration went badly. As a result, rivals started stealing market-share in France and profit warnings had started ringing in 2004 leading to the ouster of Daniel Bernard, the boss at Carrefour for more than 12 years. With speculations being rife of a possible takeover of Carrefour by Wal-Mart or Tesco, the image of the company had taken a big hit. With four top executives replaced between 2010 and 2011 and more than two-third plunge in shares since 2007, what really went wrong for the company that opened the world’s first big-box superstore in 1963?

In trying to address the above question, we need to look at some obvious and some not so obvious factors. Europe’s restrictive planning laws that have resulted in out-of-town stores, the rapidly changing shopping behaviour of the Europeans and Carrefour’s big pricing blunder are some very obvious reasons that point towards the retailer’s woes, however what is not so obvious is the strategic blunder of Carrefour in recent times – that of over-aggressive expansion abroad.

Carrefour’s rapid international expansion, a strategy adopted to offset slow growth in France, stretched the company too thin as it entered 24 countries between 1994 and 2004. Since 2000, Carrefour has sold off operations in 10 countries, including Mexico, Russia, Japan, and South Korea, and has publicly mulled a retreat from others. Its hypermarkets are located in ageing, congested suburbs, and zoning restrictions make it hard to build new stores. Customers are deserting the chain for smaller stores in more-accessible city centres, or to deep-discount merchants such as Germany’s Aldi and Schwarz Gruppe’s Lidl chain.

These trends, along with e-commerce, are changing the way Europeans shop, particularly for high-margin, non-food items. On the pricing front, Carrefour has lost its reputation for low prices. The early 2000’s focused on margins rather than sales volume while Leclerc and Auchan, its main domestic rivals, and deep-discounters such as Aldi and Lidl, cut prices to increase sales. Furthermore, Carrefour’s inability to cut prices (something which giant retailers are expected to do), which can be sustained, has hurt it badly. But doing so might just displease the already-in-loss investor Blue Capital, as short term profits might take a hit.

We now take a look at Carrefour’s CEO in 2011, Lars Olofsson’s “Carrefour Planet” plan to script a turnaround for the company. With an envisaged spending of $2.1 billion towards refurbishment and redesigning 500 hypermarkets around the world within two years, the new strategy was intended to shift focus from wide range of non-food items to a few specialist areas, such as electronics and textiles, and offer extra services such as baby-sitting and hair care. Though there were encouraging signs drawn from results of pilot stores where the plan was implemented, warning bells had started to toll for Carrefour’s CEO.

Carrefour’s performance had dipped further in the wake of string of profit warnings, abandoned plans and failed mergers and with weak profits expected in the first quarter of 2012, Mr Olofsson’s future looked bleak. Were Mr Olofsson’s strategies alone to be blamed for Carrefour’s present woes? If you look closely, the answer is probably no. The company was already struggling with a weak business model operating in a stagnant economy when he took over but with big spending and unrealistic goals, he compounded the problems. With Blue Capital breathing down heavily on Mr Olofsson to recover its losses, it was harder for him to devise any long-term strategy.

Now, Carrefour’s competitive advantages of low prices, vast range of products and the convenience of all under one roof have also taken a hit with more and more people shopping from infinite choices online. European demography is also hurting Carrefour where populations are ageing and local stores are being preferred to hypermarkets. Mr. Olofsson’s huge investments in “Carrefour Planet” failed to impress the cash-strapped European shoppers who want bargains and not overpriced vegetables. With the sword hanging perilously over Mr.Olofsson’s head it was not long before names were being discussed which could likely be his replacement.

The warning note for Carrefour lies in the fact that though Carrefour has a good business in emerging markets and a hefty market share in 32 countries, yet Europe, especially France, is where it is highly concentrated. Indeed, if the company does not act soon, investors may demand that its fizzy emerging-market business be spun off from its flat European one. Ironically and true to its name, Carrefour is now at crossroads. With European shoppers slowly beginning to revolt amid restrictive retail practices, the trend of replacing top executives continued at Carrefour when they finally announced the replacement of Lars Olofsson, with Georges Plassat in June, 2012.

Analysts predict that Carrefour’s problems are a mere rumble compared to the earthquake that is about to hit European retail. It is predicted that e-commerce or even m-commerce will do to retailers just the same as it did to music and media (minus the piracy). For Carrefour, it seems that the best way forward now is to follow a lean strategy and adapt quickly to the changing buyer dynamics of its operational geographies.

This article has been authored by Sandeep Kumar Ram from XIMB.

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