International Business: France
En Garde, Wal-Mart
Retail rival Carrefour bulks up
All right, so it's not quite as good as winning the World Cup. But the French, dispirited after months of fruitless haggling to create Europe's largest bank, have bounced back by creating Europe's No. 1 retailer with the merger of homegrown chains Carrefour and Promodes Group. Carrefour's $16.5 billion acquisition of Promodes, announced on Aug. 30, does far more than give France a national champion, though: The merger creates a much tougher playing field for Wal-Mart Stores Inc. in its drive to expand internationally.
With 8,800 stores in 26 countries and combined revenues of $65 billion, Carrefour is set to challenge Wal-Mart around the globe. As Europe's new top dog, Carrefour can use its buying clout to extract deeper discounts from suppliers, undercutting rivals and accelerating a push toward consolidation in the industry. The Promodes deal also widens Carrefour's impressive lead in several Latin American and Asian countries. What's more, Promodes brings to the union a reputation for solid inventory and distribution systems, an area where Carrefour has long lagged behind Wal-Mart. "We're creating a worldwide retail leader," says Carrefour Chief Executive Daniel Bernard, who will head the merged company.CRITICAL MASS. In Europe, the deal puts pressure on Wal-Mart to make another acquisition. The retailer already has holdings in Britain and Germany. But if it doesn't grab another partner soon, it could be left without the critical mass to become a major European player. Its biggest European holding, Britain's Asda Group PLC, is only one-fifth the size of the bulked-up Carrefour. Likewise, Wal-Mart needs to counter Carrefour's expansion in emerging markets. Only hours after unveiling the Promodes deal, Carrefour announced the acquisition of three Brazilian chains, boosting its market share there above 20%, vs. 1.4% for Wal-Mart.
Certainly, Carrefour isn't about to dethrone Wal-Mart. Now the global No. 2, Carrefour is still far behind Wal-Mart in sales and market capitalization (table). Even if Wal-Mart has trouble growing in Europe, it has room to expand in the U.S., especially in the grocery business. Carrefour, by contrast, has fewer opportunities in its saturated home market. And despite Carrefour's headstart in Asia and Latin America, Wal-Mart has plenty of openings because mass-scale retailing in many countries is only starting to develop. "The scope for growth all over the region is tremendous," says Hans Vriens, a Hong Kong-based vice-president for the U.S. consulting firm APCO Asia.
But Carrefour is a nimble competitor. Since 1963, when it opened the world's first hypermarket, selling groceries, clothing, and other merchandise under one roof, it has been a marketing pioneer. Today, a Carrefour shopper who stops in to buy groceries or a pair of tennis shoes can also get a watch repaired, order mobile-telephone service, rent a car, or book plane tickets and hotel rooms for a vacation. Wal-Mart offers few such services.
Carrefour also has been an innovator in store design, softening the look of its warehouse-size buildings by installing wood floors and nonfluorescent lights in some departments and putting service counters in the food department, where shoppers can get meat, cheese, and bread sliced to order. "Carrefour has incredible depth and breadth of range," says Philippe Kaas, a partner in Paris of OC&C Strategy Consultants. Such services also boost margins: Carrefour's 1998 profits, up 13.6% from the year before, were $755.2 million on sales of $32 billion.
Equally striking has been Carrefour's successful push into foreign markets. It began expanding across Western Europe and into Latin America during the 1970s, opening its first store in Brazil in 1975. During the past decade, it has moved into Asia and Eastern Europe. Merged with Promodes, Carrefour is the No. 1 retailer in Brazil, Argentina, and Taiwan, as well as in France, Spain, Portugal, Greece, and Belgium. True, Carrefour has had setbacks. It made a disastrous foray into the U.S. market in the early 1980s, when it opened a handful of stores in the Philadelphia area and soon closed them because of weak sales. Emerging markets are risky business, too. Carrefour reported a net loss of $10.4 million in Asia last year. Latin America's economic woes could hit Carrefour's bottom line this year.
A key challenge for Carrefour is logistics. Wal-Mart has clobbered its U.S. competitors by creating tight links with suppliers and fine-tuning its distribution system, squeezing out costs and allowing it to keep prices low. To compete, Carrefour will have to tighten control over its operations, which have been decentralized, says Ajay Hemnani, international retail analyst at Management Ventures Inc. in Cambridge, Mass.
But Carrefour has already proved its mettle in head-to-head combat with Wal-Mart. "They're just relentless--the toughest competitor I've ever seen anywhere," says a retail executive who watched Carrefour ward off Wal-Mart in Brazil and Argentina in the mid-1990s. To counter Wal-Mart, Carrefour slashed prices, remodeled, and even relocated stores. When a planned Wal-Mart store opening in one Argentine city was delayed by construction problems for four months, Carrefour seized the opportunity to renovate its closest store.
Wal-Mart, by contrast, has taken a cautious approach to foreign expansion, moving into Mexico in 1991 and then Canada before pushing into South America and Europe. It's the No. 1 retailer in Mexico, but foreign sales last year accounted for only 9% of Wal-Mart revenues, vs. 44% for Carrefour.SHOPPING LIST. Carrefour, saying it sees greater growth potential elsewhere, has stayed out of Britain and Germany, the two European countries Wal-Mart has recently entered. Wal-Mart likewise has stayed away from Carrefour's strongholds in France and southern Europe. But that could soon change as European retailers brace for a shakeout. Governments in France, Germany, and other countries have moved to protect small merchants by placing a near-moratorium on large new stores. So the only way to grow is to acquire stores and squeeze more profits out of them.
Analysts expect Wal-Mart will look for an acquisition in France. That would not only give Wal-Mart a piece of Europe's No. 2 retail market after Germany but would also become a link in a Europewide distribution network. That's key if Wal-Mart is to compete with players such as Carrefour, whose networks are already well-established.
Wal-Mart, however, is a careful buyer and is unlikely to rush into a French acquisition. No matter. Other big European chains, including the Netherlands' Ahold, have said they are eyeing French retailers. "If Wal-Mart wants to get in, it really has to act quickly," says analyst David Shriver of Credit Suisse First Boston. Whether in Paris, Sao Paulo, or Seoul, these two global heavyweights will be duking it out for some time to come.By Carol Matlack, with Inka Resch, in Paris and Wendy Zellner in Dallas, with Bureau ReportsReturn to top