Carrefour's Makeover Plan: Become IKEA of Groceries

Carrefour's Makeover Plan: Become IKEA of Groceries

The Wall Street Journal

September 16th, 2010

By Christina Passariello

PARIS—Carrefour's old slogan promised"quality for all." The France-based retailer

vaunted its gourmet butter cookies and wide organic selection and kept sales high

by raising prices. Now Carrefour SA, the world's second largestretailer, after Wal-Mart Stores Inc.,

is undergoing a fundamental change instrategy. Chief Executive Lars Olofssonwants to transform Carrefour from a big

box selling other companies' brands into a consumer label in its own right. And hewants those in-house brands to be the least

expensive around, making Carrefour to groceries what IKEA Group is to furniture.

Carrefour's new slogan: "The positive is back."

"What's very important is price image," the Swedish native says in an interview in his ninth-floor office on the outskirts of Paris.

"If I'm the No. 1 preferred retailer…I'm the most likely to be the most profitable."

Mr. Olofsson, 58 years old, plans to announce Thursday how much Carrefour will invest to overhaul its declining giant

supercenters and focus on Carrefour-brand products. Analysts expect the investment to total hundreds of millions of euros.

He will also offer details on a cost-savingstock-management system pioneered by the company in China.

The strategy is urgent because Carrefour has lost world-wide market share in its

core supercenters for five straight years, according to research firm Euromonitor

International, and risks losing its supremacy in its home market.

Mr. Olofsson says Carrefour needs a leading position to justify its presence in

any given market, because the added leverage with suppliers improves profit.

Earlier this year he put Carrefour's businesses up for sale in Malaysia,Thailand and Singapore businesses up for

sale, where Carrefour lags behind stronger competitors. Mr. Olofsson—whose buzz-cut white hair and tall, fit physique give him the look of a general—joined Carrefour from Nestlé SA at the beginning of last year. He says the biggest problem is the chain's reputation for high prices and that he needs three years to change that perception. He already has rolled out the Carrefour Discount line of store-brand groceries: lower-priced versions of basics such as Camembert cheese and chocolate that sell for less than standard Carrefour-brand products and as much as 50% less than

manufacturer brands.

The chain is promoting a Carrefour Discount complete meal— shepherd's pie,

celery salad and rice pudding—for less than a euro.

Some consumers say they already see a difference. "They're cheaper than

Franprix," Carrefour's local rival, says Estève Pedrono, an elderly woman shopping at a Carrefour supermarket on

Paris's Left Bank. "They've made a big effort on price."

But the low-cost strategy is risky. Last year's price cuts and promotions reduced Carrefour's operating profit by

€639 million ($831 million). Mr. Olofsson says he hopes that by helping consumers spend less, Carrefour's sales volume will

increase. That will enable the company to negotiate better deals with food producers, improving margins.

At 3.2%, Carrefour's operating margin is the lowest of any major retailer and half that of its closest competitors, Wal-Mart

and Britain's Tesco PLC. But Mr. Olofsson says Carrefour is on course to save morethan €1 billion through cost cuts for this

year and last, and will continue to slash costs. "The margins are not going to stay half of the others," he says.

The change in strategy follows a decade in which European consumers, who form the bulk of Carrefour's customers, have

become more cost-conscious amid economic weakness. Carrefour's competitors—including "hard-discount" supermarkets, such as Lidl Stiftung & Co., who sell mostly, if not entirely, their ownlabel— boasted of their lower prices and

took market share from Carrefour. That cost Mr. Olofsson's two predecessors their jobs.

Results have been weak after he took over, as well. Sales dropped 2.7% last year at

stores open at least a year to €96 billion. Operating profit fell 16%. Mr. Olofsson says Carrefour's problems

are of its own making. In particular, he says the retailer failed to profit from a slapdash 1999 merger that created the

company in its present form. Carrefour, which specialized in giant supercenters, tied the knot with Promodès, which had

more supermarkets and convenience shops. But the new entity never fully integrated, he says, meaning it didn't reap the cost

savings it should have. Describing the company as a "layer cake," he says, "We lost our speed and agility to

react in the market."

In addition, the new group was eager to build on its strong international presence but financed it with profit earned at home,

Mr. Olofsson says. "One way of getting profitability is to raise prices," he says.

"But you lose touch with the consumer and you start losing market share."

Influential shareholders started complaining, including French luxury tycoon Bernard Arnault and California based

private-equity firm Colony Capital LLC, who jointly bought a 14% stake in

Carrefour in 2007.

Carrefour Chairman Amaury de Sèze in mid-2008 contacted Mr. Olofsson at

Nestlé, where he was head of world-wide marketing and sales, about Carrefour's top job. Carrefour's shares slid sharply in the

summer of 2008 as it lost market share at home to competitors such as Groupe Auchan SA and Intermarché.

After Mr. Olofsson took the reins at the beginning of last year he started the Carrefour Discount line with simple

packaging, white and blue labels, that recalled Tesco's successful store-brand products.

Mr. Olofsson recently installed a new marketing team to promote the chain's products, hiring managers from such

consumer-goods companies as Procter & Gamble Inc. and Reckitt Benckiser PLC.

He plans to advertise the larger Carrefour line of products more heavily, a strategy he so far has used only for Carrefour

Discount.

"We didn't have a marketing approach," Mr. Olofsson says over a cup of Nespresso,from the high-end coffee line that he

cultivated at Nestlé. "We just put it on the shelf."

There are some early signs of success. Carrefour Market, the group's supermarket chain, gained market share in the 12

months to June, according to a study out this month from Kantar Worldpanel. The consumer research group credits the

Carrefour Discount line with improving the retailer's price image.