Carrefour Summary

Carrefour Case Discussion Strengths  Business Strategy:  First to create a popular concept of the hypermarket (1 st mover advantage)  Clear and defined business strategy on location, easy access, etc.  Strategy of inexpensive construction and inexpensive land provided a cost advantage of 2/3 over traditional retailers, Low cost of land gives advantage in investment / m2 (1/3 of traditional supermarkets)  Broad Product Assortment: Evenly split share of food/non-food sales & gasoline  Ratios:  Gross margin of 15% which is lower than competitors, but made up for through higher turnover  Growth >50% from 1965-1971  Negative working capital – vendor financing  Management and ownership structure:  Decentralized management gave managers sense of ownership and creativity  Managers are creative and intelligent to come up with solutions like joint ventures and franchises to solve problems  Experience 28 total stores in 1971 – plans for 15 more in 1972, in spite of the difficulties, they can get 2 construction permits per year  Popularity of concept is growing because:  Offered convenience of one-stop shopping  Offered low prices/high volume. Gross margins were 15% vs traditional outlets’ 20-25% Weaknesses  Strong opposition from small retailers and industry groups  Gov’t took action to make it difficult to obtain construction permits  Legislation passed to tax retail store to provide pensions for small shopkeepers unable to continue in business. – heaviest burden borne by large stores  Low margins due to low cost/high volume strategy  JV and Franchises take longer to reach full potential then fully owned stores Opportunities  Partnering with other retailers to increase expansion possibilities  Large growth potential in other parts of Europe  Fragmented market yields even greater opportunities for expansion.  Improved profits through improved distributions systems (country infrastructure)  Acquiring competitors with high cash balances Threats  Market was already nearly 50% saturated; limited growth prospects left in France  Decentralized management may result in inconsistent store strategy  Increasing competition  Mergers of smaller of competitors  High political power of small shop keepers  Difficulty to obtain construction permits  Extra taxes to be paid  Competition abroad seems to be better financially prepared  Liquidity problems 1. How is Carrefour financing its growth? How risky is this financial strategy?

Sou 1965-1971 15 Earnings 101 17% 16 Special provisions 1 0% 17 Long-term debt 61 10% 18 Accounts payable 77 13% 19 Trade notes (noninterest bearing) 228 39% 20 Other cur. liabilities 119 20% 587 100% Trade notes and A/P combined for 52% of financing the growth – VENDORS have been critical to financing this growth Most of the growth financing is coming from current liabilities, thus adding risk because stores may take several years before they are profitable. Also, if vendors change terms, this jeopardizes growth stategy. However interest coverage is strong. They may have a liquidity concern because they have a lower current ratio than the industry.  Cash cycle is quick (high inventory turnover and minimal A/R)  They have negative working capital  Profit margins are solid – above the average 2% vs. 1.3% in 1971 and 2% vs (2%) for France only Country Firm 1967-68 1968-69 1969-70 1970-71 - - - - - - - Profit margins France Au Printemps 0.3% 0.3% 0.1% 0.0% Carrefour 1.9% 1.6% 1.6% 2.0% Casino 1.3% 1.1% 1.0% 1.2% Docks Remois 0.8% 0.8% 0.8% 0.9% Galeries Lafayette -0.9% -0.8% -4.4% -14.3% Belgium G.B. Enterprise 2.1% 2.0% 1.8% 2.2% S.A.Innova tion 2.4% 1.8% 1.8% 1.3% Germany Karstadt 2.7% 2.7% 2.7% 2.5% Kaufhof 2.2% 2.3% 2.5% 2.2% Nechermann 1.0% 1.1% 0.4% 0.6% United Kingdom Great Universal 7.2% 6.9% 6.7% 7.0% Marks & Spencer 7.4% 6.8% 6.9% 9.4% Italy La Rinascente 1.8% 1.7% 1.6% 1.5% Average all countries 2.3% 2.2% 1.8% 1.3% France average 0.7% 0.6% -0.2% -2.0% 2. Would you alter the mix of wholly owned stores, joint venture stores, or franchise stores in the future? How? What are the financial implications of each type of growth? Let us go back to strategy and what drives success