Carrefour, Bompard and the Reputation of Management vs Business

Alexandre Bompard, the young and alert new CEO of troubled French retailer Carrefour, will soon have a chance to show if he can thwart this priceless but nonetheless true observation from Warren Buffett:

« When a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact. »

Although Buffett’s quotes and business principles are probably not what he studied at the elite school he attended, Bompard still has a frightening task.

Here are some daunting facts:

  • Carrefour suffers a c.500 bps disadvantage in terms of price position in its French hypermarkets (France represents EUR35.9 bn or c47% of total revenue of EUR76.6 bn in 2016). This is despite the fact that Carrefour is n°1 retailer in France in terms of market share (c22%).

French hypermarkets are estimated to represent c15% of group EBIT (and 25% of sales). But supermarkets are also super important, since their contribution to consolidated EBIT is estimated at 18% while their contribution to sales is only 15%.

  • Carrefour lacks earnings growth drivers outside of France. Its key markets are Brazil and China in the emerging world, and Spain and Italy in Europe, are all suffering right now and don’t provide significant earnings upside potential to finance a turnaround in France. At some point, Bompard might be obliged to sell assets (China included, per Exane BNP Paribas recent report).

Note that Spain and Brazil are very important levers to improve profitability since it accounts for 25% of EBIT, per Exane BNP Paribas estimates, while Brazil is at 35% (same as France).

  • Carrefour has been late to recognize the importance of e-commerce and deploy the appropriate strategy there. It’s estimated that e-commerce represents only 1.5% of revenue vs 4% for Ahold-Delhaize (Source: UBS). The deal just announced with Showroomprive is clearly an answer on that front.

  • Supply chain and the search for efficiencies. Inventory turnover and volumes per SKU have deteriorated, which means Carrefour will have to work harder while negotiating with suppliers to gain pricing power and share it with consumers.

  • Cost rationalization is badly needed. According to broker reports, SG&A expenses represent 18% of sales vs 16-17% historically. That’s meaningful for a EUR76 bn company that earned only EUR2.3 bn in operating profit in 2016 and is expected to earn EUR2 bn in 2017 and EUR2.17 bn in 2018 (per IBES consensus data).

Savings (or « self-help » as brokers brand it) could be somewhere between EUR500 million and EUR1 bn, much of which will be reinvested in pricing. But achieving such a goal will be difficult. As Exane’s analyst remind us in a Jan 10 report, Lars Olofsson (CEO before Georges Plassat, the CEO before Bompard) mentioned in 2010 that Carrefour EBIT could reach EUR6.4 bn in 2015 (while it was only EUR2.4 bn, a 60% miss).

  • Competitors are circling around Carrefour in all of its markets (a major blow might come if Amazon where to announce his entry in the French food retail market ; but that would also be true for domestic competitors to Carrefour, yet it would be the company that might have the most to lose).

  • Bompard has no experience in food retail but a stronger one in non-food retail. His first key act was to sign a partnership with Fnac Darty, a company he lead until end of last year when Carrefour recruited him.

In summary, Carrefour turnaround relies on its ability to regain market share in France, reposition itself in the non-retail food segment, raise profitability by saving more money that is reinvested in prices, and be able to resist the competition from hard discounter (Lidl, Aldi for instance), other retailers (especially Leclerc) and online retailers (such as Amazon).

Bompard has already laid out some ideas but much of his turnaround plan is expected on Jan 23, between FY sales report (Jan 17 after market close) and FY results report (March 1st before market open).

Current share price clearly shows investor fatigue. The appointment of Bompard has bearly moved the needle and the share is heavily under pressure.

Personally, as a Carrefour shareholder, I’m not sure Carrefour’s board has taken the appropriate decision regarding how Bompard will be motivated to refresh the retailer. Are his interests fully aligned with other shareholders and set for the long run, or he is going to make tons of money no matter what he delivers ? That’s the whole question and even Bompard won’t probably dare to answer it.

Carrefour share price history (in euros)

Source: Morningstar

Carrefour vs European peers (rebased)

Source: Morningstar