Carrefour's results belie shaky strategy, claim analysts

After a year of aggressive domestic price wars and extensive overseas expansion, the retail behemoth saw operating profits in France fall 16 per cent. Fourth quarter operating profits in France tumbled 8.4 per cent.

Although a one-off €372m charge has been attributed to the fall in net income from €1.79bn in 2004 to €1.44bn last year, the results were below analysts predictions of around €1.82bn.

Despite this, the firm, second only to US giant Wal-Mart, said sales before VAT totaled €74.5bn, representing a 2.5 per cent rise on the previous year. This was bolstered by strong growth in rest-of-world sales, as international contributions rose 19 per cent to account for nearly half the group's income for the first time.

Consequently both Fitch Ratings and Standard and Poor's have downgraded the chain, citing the decline in its domestic hypermarket performance as a serious concern, even though the company has slashed prices to remain competitive. They claim this shows consumers aren't biting, in spite of increased efforts to attract custom.

"Carrefour's new CEO has defined a strategy that focuses mainly on price competitiveness and store openings to fuel top line growth. Although economies of scale are often described as the key for success in retailing, it is likely that the price investment and required capital expenditure will hurt free cash flow for the sake of increased sales,"​ said Frederic Gits, senior director in Fitch's European corporate team.

But Carrefour's chairman, Jose Luis Duran, explained that 2005 was a year of transition, and key structural and policy changes have best positioned the company to compete against rival multinational and local firms.

"I'm sure we have delivered on the targets for 2005, despite the fact that we knew there was a certain price to pay in order to fit and, I would say, to turn around the French situation. So we can't say that the results in France are good from an operating result point of view - we have seen a double-digit fall in operating profit in France - but it was the price we knew we had to pay if we wanted to turn around the situation in France,"​ he said in a company presentation.

During the results announcement Carrefour also revealed plans to plough on with an aggressive overseas expansion policy, pouring €10bn into the project over the next three years to open up hundreds of new stores and strengthen its brand name.

Almost half of the 100 planned hypermarkets will be built in Asia, and an average of 23 will open in China each year until 2008.

Brazil, Italy and Turkey will also account for a large chunk of the new shops, as Carrefour said it would also open 1,000 smaller international stores to increase its presence in these key markets.