EU: Reinventing hypermarkets key to Carrefour recovery

Carrefour must reinvent the hypermarket, the combined supermarket and department store format it pioneered in Europe in the 1960s, if it is to deliver on a turnaround plan announced in June.

The world's second-biggest retailer needs to shrink the size of its megastores to appeal to more convenience-focused shoppers, either selling or renting out space or creating separate specialist shops itself, analysts believe.

It must also sharpen its price image, cut back in some struggling non-food markets like home furnishings and boost profit margins with more own-brand goods, they say.

"Carrefour practically invented the hypermarket. Now they face their biggest challenge yet in re-inventing it," said Greg Hodge, research director at consultants Planet Retail.

Fixing problems at Carrefour's French hypermarkets is vital because they have long been the group's Achilles' heel and were a key factor in three profit warnings over the past 16 months.

But the group faces an uphill struggle, as smaller, more environmentally aware and time-pressed families in its main French market flock to local and discount shops like Aldi, Lidl and Casino's Leader Price.

"The big, all-in-one shop does not have the appeal it used to," said Daniel Lucht, analyst at retail researchers Verdict.

Any solution also needs to retain as much as possible of Carrefour's planned 2.1 billion euro ($3.1 billion) cost cuts in order to boost profits.

PLENTY AT STAKE

There's plenty to play for, with French hypermarkets accounting for as much as 23 percent of sales in 2008.

Chief Executive Lars Olofsson, brought in earlier this year, raised hopes he could get to grips with Carrefour's problems in June when he unveiled a big cost cutting and restructuring plan.

This was well received by investors and, despite recent under performance, the group's shares trade at 13.1 times earnings forecasts for next year, above bigger rival Wal-Mart on 12.8 and European No.2 Tesco on 12.2.

Shrinking the hypermarkets could boost earnings per share.

Societe Generale analysts suggest Carrefour could cut French hypermarkets to a maximum size of 10,000 square metres, and calculate renting out the freed-up space would add 4 euros a share to the group's market value, while selling the space would add 5 euros a share.

They add the model could also be exported to other markets where Carrefour's hypermarkets are struggling, such as Belgium.

Carrefour has yet to come out with a blueprint for the French hypermarkets, a point highlighted earlier this month with the departure of the head of that division alongside weak third-quarter sales figures.

Carrefour has said only it is working on a number of potential options for the hypermarkets which will be trialled next year before a roll-out can begin in 2011.

MAKE SPACE COUNT

Societe Generale analysts think hypermarkets can be adapted to twenty-first century trends and say Carrefour can learn from the better performance of French rival E. Leclerc.

A key part of any turnaround plan will have to involve reallocating space, analysts say, with most concluding it should involve a significant downsizing.

"Carrefour could maybe reallocate parts of their hypermarkets to other retailers," said Roland Bosch, an analyst at F&C Asset Management.

The group is cutting the size of its Portet-sur-Garonne hypermarket to 18,000 from 24,400 square metres, and Planet Retail's Hodge thinks any vacated space would be snapped up by specialist retailers eager to tap into hypermarkets' high customer numbers.

The French real estate market appears to be warming up just in time, with transactions jumping 64 percent in the three month to Sept. 30, according to data from broker Cushman & Wakefield.

An alternative would be for Carrefour to use freed-up space to create specialist outlets itself like a Carrefour bookstore, travel agency or baby clothes retailer -- a model which has boosted growth at Leclerc.

Within the remaining hypermarket space, Carrefour needs to shift the product mix towards stronger performing grocery categories and away from non-food lines which currently account for about 30 percent of goods on sale, according to analysts.

It also needs to improve its price image.

"The question of price perception is crucial ... You are only going to travel to a hypermarket if you're certain you're going to save money," said Aurel-BGC analyst Jean-Marie L'Home.

Cutting prices without hurting profit margins will be a challenge, but could be helped if Carrefour steps up sales of higher-margin own-brand products, like its Carrefour Discount range which is already enjoying some success.

Carrefour has pledged to spend 600 million euros on cutting prices this year, and has said it can also invest the 1 billion euros it plans to save from improving its purchasing terms.

But rivals like Auchan and Leclerc will not cede market share without a fight, and Planet Retail's Hodge fears the group may have to cut investment further in emerging markets, following its decision to leave Russia earlier this month.

"If that happened, it would be the first sign of them waning as an international retailer and surrendering their spot as the world's second-biggest retailer," he said.


Source: forexyard.com

Publication date: 10/30/2009

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