What's Shackling France's Big Chains

Unable to trim prices, hypermarkets are losing share to smaller no-frills shops

It's not every day that a store advertises that, no, it's not lowering prices. But that's what French hypermarket group E. Leclerc did in a billboard-and-radio campaign a few weeks ago. "The French lost 1% of their purchasing power in 2003, yet the law forbids us to lower prices," the ads said. "How long can this go on?"

Stirring Leclerc's wrath is an eight-year-old law barring retailers from wringing deep discounts or rebates from suppliers of brand-name goods. That, in turn, puts a floor under the prices customers pay. Leclerc and other big chains are lobbying to repeal the law, which is intended to protect small shops.

But statutes aren't the biggest problem facing French hypermarkets, megastores that sell everything from foie gras to washing machines. Carrefour and other big retailers are losing ground to no-frills discount stores that offer a limited selection of goods. Hypermarkets' share of the French grocery market fell to 51% last year, down from 54% in 2000, while discounters such as Germany's Aldi and Lidl upped their share from 9% to 12%, says market researcher TNS Secodip. Hypermarkets are fighting back -- mainly by expanding their own discounters -- but the battle won't be won easily. "We have one main challenge for 2004: our French hypermarkets," Carrefour's chief, Daniel Bernard, told analysts after announcing 2003 results in March.

So far the challenge is proving formidable. Carrefour's first-quarter sales in France fell 1.1%, even as worldwide sales rose 3.2%. French operating profit was up just 3.9% in 2003 -- far behind the 19.6% growth recorded elsewhere in Europe. At Casino Guichard, another big retailer, first-quarter hypermarket sales fell 0.5%. Leclerc and Auchan, the two other major French hypermarket operators, are also battling sluggish sales at home.

While hypermarkets have spread worldwide since Carrefour opened the world's first near Paris in 1962, no one has embraced them as warmly as the French. The big stores have lured customers by stressing variety and quality as much as price, with upscale touches such as in-store butchers and vast cheese selections. But now that formula is under siege. Discounters sell less expensive, private-label brands and keep overheads low by stocking limited amounts of perishables that require close attention. And because the discounters are small -- averaging 600 square meters, vs. 6,000 for hypermarkets -- they can move into densely populated areas where customers don't have cars or don't want to battle traffic.

BIGGER ISN'T BETTER? Perhaps most worrying, French shoppers are casting doubt on megastores' raison d'être: a vast array of goods under one roof. "Carrefour is so big, I waste time looking for things, and then there's a long queue at the checkout," says Tibouchra Mahfod, a 29-year-old shopper at an Aldi discount store in the Paris suburb of Asnières. The huge stores -- so vast that some employees wear roller skates -- also risk alienating France's growing elderly population. "At Carrefour, you have to walk and walk. You get lost," says Irène Laudat, a retiree who shops mostly at Aldi.

Now hypermarket chains are investing in their own discount stores. Carrefour's low-price Ed l'épicier chain added 100 outlets in 2003, for a total of 600. Casino's discount arm, Leader Price, has grown from 16 stores in 1990 to 350. The hypermarkets are also promoting cheaper products. Carrefour has introduced private-label items that it says are cheaper than many discounters' brands. "We are making a massive, long-term reduction in prices, and you'll see the effects in our sales figures by the second half," says Bernard Dunand, executive director of Carrefour France.

Most hypermarkets can cushion their French results with growth abroad. Carrefour draws half its sales from other countries in Europe, Asia, and Latin America. Auchan and Casino also have big foreign outlets. The exception is privately held Leclerc. It draws 96% of sales from France and, as a cooperative of franchisees, can't easily expand overseas. Michel-Edouard Leclerc, who heads the group, is pushing into new businesses, from jewelry to home improvement. But it could take some time before Leclerc and others have good news to advertise.

By Carol Matlack with Adeline Bonnet in Paris

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