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    Carrefour’s Shaky Recovery Prospects


    The wheels seem to be coming off ’s shopping cart.

    On Tuesday, the French retailer’s planned merger of its Brazilian operations with retailer Brasileira de Distribuicao collapsed after the Brazilian government withdrew support in the face of opposition from CBD’s co-controlling shareholder, Groupe Casino. Then on Wednesday, it warned that operating profits are likely to have fallen by about 23 per cent in the first half of 2011 despite a 2.7 per cent rise in sales.

    That has raised fresh doubts over whether Carrefour can achieve its full-year target to beat 2010’s operating profit of €2.7 billion ($3.77 billion). That looks like a stretch: Carrefour would need to increase operating profit 13 per cent in the second half.

    Carrefour’s French stores, which account for half of the company’s operating profit, continue to lose market share to rivals, which have held prices up to 5 per cent lower. The retailer hopes competitors will raise prices following supplier negotiations in September. But that isn’t guaranteed: E. Leclerc, the most aggressive competitor, is closely held and better able to live with lower margins.

    Meanwhile, conditions elsewhere in Western Europe, which accounts for 20 per cent of revenue, appear to be getting worse. Sales fell 3.2 per cent from January to June. Carrefour has said that its French operating profit fell 35 per cent in the first half, which suggests Western Europe operating profit may have dropped by about 30 per cent, estimates Sanford C. Bernstein.

    That leaves the retailer leaning more on emerging markets. In Brazil, Carrefour’s largest market after France, its Atacadão wholesale stores delivered double-digit-percentage growth in the second quarter. But Carrefour’s larger hypermarket network is struggling as Brazilian shoppers spend their money in smaller stores. And Chinese same-store-sales growth was flat in the second quarter after the government banned retailers from offering promotions on nonfood items like electronics and furniture. Hypermarket operators rely on deals to get customers in the door.

    Carrefour’s shares have fallen 18 per cent since January, but still trade in line with the European retail sector. At this level, investors are betting that Carrefour’s efforts to lure back shoppers in France and its overhaul of hypermarkets will be successful. On recent evidence, that looks optimistic.

    Source : Wall Street Journal