Carrefour's Spanish performance bodes well for French revival

The company has performed well in the French discount sector in recent quarters - sales there rose 13 per cent in the third quarter, compared to just 2.1 per cent for the French business as a whole - but restrictions on store development, and the maturity of the market, make the opportunities for gains in other segments much scarcer.

But Carrefour's successful handling of its foray into the Spanish market could prove to be the blueprint for generating growth in France - despite the significant structural differences between the two retail markets, according to analysts at Goldman Sachs​.

Carrefour has had to work hard to make its Spanish operations work, given the tough legislative framework there and the mechanics of integrating the Pryca business acquired in 1999 with its existing Continente unit.

At that time, new laws designed to protect small shop owners were introduced, making it far harder to get planning permission for new hypermarket developments. But supermarket growth was not restricted, resulting in a double whammy of small shopkeepers disappearing anyway and hypermarkets seeing their market share rapidly eroded.

Carrefour's problem, according to GS, was that its existing Spanish supermarket unit, Simago, part of the acquired Pryca business, was in desperate need of restructuring, making it hard for the group to benefit from the impetus in the supermarket sector.

Five determining factors​

Four years down the line, Carrefour's newly integrated Spanish business looks set to show like-for-like sales growth of around 5-6 per cent, the analysts said, helped by a number of factors which could also be applied to the beleaguered French business.

Firstly, logistics. Carrefour had 30 Spanish distribution centres in 1999 but is on target to reduce this to 11 by 2006 - which should allow it to reduce logistics costs as a percentage of sales by some 120 basis points, GS estimates. In 2001, this percentage was 4.65 per cent.

Secondly, the necessity of creating a single IT system for the merged Pryca/Continente business allowed Carrefour to upgrade its operations, with a likely reduction in IT costs next year of 25-30 per cent, the analysts said.

The inevitable merger of the two companies' administration operations has already contributed to a reduction in costs of 61 per cent, GS said. But savings were also made through greater automation (helped by the IT upgrade) and further savings can still be achieved (up to 75 per cent) as even more technology is introduced.

The fourth element which contributed to Carrefour's success in Spain was the sharing of services - such as central purchasing and pricing negotiations - which should generate savings of up to €25 million by 2004. And finally, the advances in systems and logistics have helped the company improve its working capital management: inventory rotation has improved by 20 per cent since 2001, according to Goldman Sachs.

Creating lower prices​

All of this got the Spanish business back on track, but did not solve the problem of how to win back its market share. Hypermarkets, in both France and Spain, developed as discount alternatives to supermarkets, but legislation stopping below-cost selling put paid to that line of development, GS said. At the same time, Spanish supermarkets such as Mercadona made rapid steps in their move to become more price-driven, narrowing the gap even further.

So Carrefour and other hypermarket operators in Spain found themselves forced to look elsewhere to create - and maintain - the low price differential which had served them so well in the past.

Firstly, the company drastically reduced its branded product range and expanded its own labels (as here it could be competitive on price and still improve margins), GS said, while its strategy of blanket price cuts throughout the store was also refined - thanks to targeted consumer research - allowing it to focus on products most likely to benefit from lower prices.

Finally, the company increased its non-food offer - a source of significant margin improvements - from 37 per cent of sales in 2000 to an estimated 42 per cent by 2004.

Champion a different challenge​

But the Champion supermarket arm also has faced a torrid few years in Spain, so how has Carrefour handled that side of the business?

According to Goldman Sachs, the chain's development has been hamstrung by the lengthy process of integrating the Simago stores, with the result that its store portfolio has remained largely unchanged, despite the relative ease with which new developments can be made.

But where Carrefour has been lucky is in the relative weakness of other operators there, Mercadona apart. Champion is currently the fourth largest supermarket chain in Spain, behind Mercadona, Eroski's Consum banner and Caprabo, but it has faced little or no competition from smaller chains such as El Arbol and Superdiplo, both Dutch owned (by Laurus and Ahold respectively) and both now seen as surplus to their parents' requirements- El Arbol has already been sold while Ahold's Spanish unit has just been put up for sale.

So with the integration and restructuring now largely completed, Champion is in a position to really grow the business, and has already made significant progress in the areas of range reduction, own label expansion and price cuts -although Champion is still far more expensive than Mercadona).

Still plenty of work to be done, then, in the Spanish supermarket unit, but with most of the groundwork already completed, GS predicts further price reductions in the coming year and a subsequent narrowing of the gap with the market leader.

French translation​

So what can Carrefour draw from its Spanish experience to help revitalise its business in France?

According to GS, the sheer size of the French business (three times that of Spain) makes it much harder to predict a similar turnaround there, but the analysts did highlight some areas which had worked well in Spain and which could prove equally as successful in the home market.

Similar savings could be made in the logistics operations, for example, with potential distribution centre closures. But France's tough employee protection rules (it can take up to 530 days to make an employee redundant in France, GS said) mean that the benefits of closures - and headcount reductions - could take some time to be seen.

Spain is also far more advanced than France in terms of automation, again partly due to the labour laws which make it hard to replace people with machines, but there are potential cost savings to be made here too.

Further price cuts are unlikely to materialise, according to GS, with no real price competitor in France to match Mercadona in Spain. But where the Spanish unit has been strong in communicating price reductions - through targeted consumer marketing - the French business still has some work to do to get the message across.

And finally, GS suggests that there is still room in France for further range reductions - and working capital improvements - a factor which has worked well in Spain and would not fall foul of labour laws in France.

Some of these elements may be transferable from Spain to France, but whether Carrefour adopts these practices or opts for a different strategy, it will have to do something to improve its domestic hypermarket and supermarket business in the near future.