Carrefour Predicts Profit Drop

    Carrefour Predicts Profit Drop

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    French retail giant SA, reeling from the collapse of a proposed merger in Brazil, on Wednesday defended its growth in emerging markets amid crumbling sales at home and an expected drop in profits.

    Second-quarter sales rose 1.6 per cent to €22.4 billion from €22.1 billion last year. The world’s second-largest retailer after Stores Inc. said first-half operating profit will total about €760 million when it unveils the bottom line next month. The anticipated drop compared with last year, when operating profit stood at €989 million, is the result of rising supplier prices in particular in France and falling market share.

    "We were affected by an increasingly competitive environment which stiffened in May and June," Chief Financial Officer Pierre Bouchut said on a conference call. The effects are likely to drag out through the year. Mr. Bouchut said Carrefour has a "handicap" to meet its full-year objective of increasing sales and operating profit.

    France, which accounts for 44 per cent of sales, was a punishing market for Carrefour. Sales increased 1.6 per cent to €9.86 billion thanks to the rise in gas prices, since many of its stores have gas stations.

    Efforts to revive its slumping hypermarket chain—huge stores selling everything from baguettes to bicycles—didn’t seem to register with consumers. Stripping out gas sales and the impact of a late Easter, hypermarket sales fell 3.3 per cent and Carrefour said it lost market share. Carrefour is in the midst of a €1.5 billion program to revamp its hypermarkets, a program that Mr. Bouchut says will now be accelerated to try to turn around sales.

    Carrefour sought to contrast deteriorating sales in pockets of France, Spain and Italy with Brazil—a market that has been in the spotlight for weeks. Sales in Brazil, Carrefour’s second-largest market, jumped 11.3 per cent to €3.07 billion in the second quarter. Mr. Bouchut said the group’s cash-and-carry chain Atacadao was particularly robust, and that it is "stopping the bleeding" at 28 hypermarkets in Brazil that aren’t performing well.

    The focus on growth in Brazil sought to bolster the idea that Carrefour can go it alone in the booming consumer market. Late Tuesday, a controversial merger plan between Carrefour and Brazilian leader Cia. Brasileira de Distribuição, owner of the high-end Pão de Açúcar supermarket chain, collapsed after the government-owned bank that was financing the project pulled its support. Pão de Açúcar’s partner, France’s Groupe Casino, a rival of Carrefour, vehemently opposed the project.

    Carrefour acknowledged the collapse of the potential deal. "The conditions necessary to the completion of this proposal have not been met," Mr. Bouchut said. However, he left the door slightly ajar to a revival of the project if other investors come forward to bankroll the Gama investment vehicle. "If for whatever reason, Gama comes up with a new proposal, then our board could maybe decide to meet again," he said.

    Yet Carrefour is suffering even in some of its emerging markets. Sales in China, the other major emerging consumer market into which retailers from around the globe are staking out their territory, were nearly flat. Carrefour said it has been impacted by a new law prohibiting discounts on nonfood goods —electronics, furniture, clothing, for example—that it sells in its hypermarkets.

    The dismal performance at Carrefour’s French hypermarkets is ushering in a new age of austerity. Mr. Bouchut said all of Carrefour’s units around the world will be expected to contribute to new cost-cutting measures. "We want to rapidly reverse our negative performance," he added.

    Mr. Bouchut admitted that Carrefour’s price strategy is off. Carrefour has been plagued by an image of high prices for years. To correct that, Carrefour has invested heavily on promotions and loyalty programs.

    But now, Mr. Bouchut said Carrefour is spending too much on that and not enough on permanent low prices. Its French competitor Leclerc "has always been about 2 per cent cheaper than Carrefour hypermarkets," Mr. Bouchut said. Yet he expects the price increased from suppliers, who are passing on rising commodity costs, to hit his competitors in the coming months. Still, "our permanent prices are too high," Mr. Bouchut said.

    Source : Wall Street Journal