Once Wal-Mart's Equal, Carrefour Falls Behind

When Wal-Mart Stores began expanding outside North America in the 1990s, its toughest rival was the French retail chain Carrefour. After opening the world’s first big-box superstore in 1963, Carrefour spent three decades spreading its combination grocery-and-general-merchandise stores across Europe, South America, and Asia. Today, the retailer is in trouble around the globe. On Oct. 13, Carrefour issued its fifth profit warning in less than a year as it reported slumping third-quarter sales in key Western European and Asian markets. Chief Executive Officer Lars Olofsson, recruited from Nestlé in 2009, is the company’s third CEO in seven years, and four top executives have been replaced in the past 12 months.

Carrefour shares have plunged nearly two-thirds since 2007, when LVMH Moët Hennessy Louis Vuitton CEO Bernard Arnault along with U.S. real estate investment group Colony Capital spent $5.5 billion on a 9.8 percent stake. That investment is now worth less than $2 billion. They “got the timing wrong” on Carrefour, says Royal Bank of Scotland analyst Justin Scarborough. “The markets they’re in have come under huge amounts of pressure since 2008 and lots of those pressures aren’t going to go away.” Arnault and Colony declined interview requests.

That means Carrefour has fallen far behind $467 billion Wal-Mart. Though they have about the same number of retail locations (9,667 for Wal-Mart, vs. Carrefour’s 9,631), Wal-Mart’s international sales now top $109 billion, almost surpassing Carrefour’s total $114 billion in revenues. While Wal-Mart has generated roughly 7.5 percent operating margins in recent years, Carrefour managed only 5.5 percent. In profits, the divide is particularly acute: Walmart last year logged net income of $7,804 per employee while Carrefour earned just $1,260.

How did Carrefour veer so badly off course? Its rapid international expansion, intended to offset slow growth in France, stretched the company too thin as it entered 24 countries between 1994 and 2004. It has succeeded in some, notably China, where its $5.8 billion-a-year operation wins praise for innovative marketing such as in-store produce and fish departments modeled on traditional Chinese street markets, complete with salespeople urging customers to stop and see what’s on sale. But Carrefour since 2000 has sold off operations in 10 countries, including Mexico, Russia, Japan, and South Korea, and has publicly mulled a retreat from others.

Wal-Mart also has stumbled in some international markets, including Germany, where it pulled out after only nine years. But it expanded more cautiously than Carrefour, building a thriving business in Mexico before moving into South America and Asia. Wal-Mart could afford to take its time because it has a vast domestic market where big-box retailing still flourishes. In France—the source of 43 percent of Carrefour’s sales—it operates scores of hypermarkets in aging, congested suburbs, and zoning restrictions make it hard to build new stores. It’s increasingly a similar story in the rest of Europe, which accounts for another 31 percent of Carrefour sales. Customers are deserting the chain for smaller stores in more-accessible city centers, or to deep-discount merchants such as Aldi and Schwarz Gruppe’s Lidl chain. Those trends, along with e-commerce, are changing the way Europeans shop, particularly for high-margin, non-food items, says Natalie Berg, an analyst at Planet Retail in London.

Carrefour is “stuck between a rock and a hard place,” she says. “You could say that they’re structurally flawed.”

Olofsson, in an Aug. 31 analyst call, promised “a new game plan to fix what hasn’t worked and allow us to regain momentum.” Over the past year, the company launched a makeover of 500 superstores in Western Europe, including lower prices and more private-label goods. But with Europe’s debt crisis threatening to further pinch consumer spending and fears that France could slip into recession next year, some analysts worry any rebound will be slow. After promising in June to invest $2.2 billion in the store revamp, Olofsson in August announced that spending would be scaled back.

Investors can’t count on asset sales to revive Carrefour’s fortunes. While it spun off all of discounter Distribuidora Internacional de Alimentacion on the Madrid stock exchange in July, a plan to take public a company holding 25 percent of its European real estate assets was floated and then shelved in May following opposition from investors and unions. Carrefour last year also pulled the sale of units in Malaysia and Singapore after a strategic review, and a proposal to merge its Brazilian unit with Cia. Brasileira de Distribuiçao Grupo Pao de Açucar fell through in July. That same month, former chief financial officer Pierre Bouchut said that a public stock listing of Carrefour’s China operations was years away. For now, predicts Sanford C. Bernstein analyst Chris Hogbin: “There may be more pain before there’s gain.”


    The bottom line: Carrefour, whose global expansion failed to offset stagnation in Europe, has seen its stock fall 63 percent since 2007.

    Before it's here, it's on the Bloomberg Terminal.