Carrefour Rethinks Its ‘Bigger Is Better’ Strategy

As a top executive at Nestlé, Mr. Olofsson had helped to make the Nespresso coffee business the top in its class, and it was hoped he could bring some of that magic with him.

Carrefour helped to pioneer the giant stores known as hypermarkets, but it had stumbled amid a badly coordinated international expansion. Investors applauded Mr. Olofsson’s decision to refocus on West European markets and fast-growing countries overseas, while scaling back where prospects looked uncertain.

He also took a risky bet: At a time when the financial crisis was nudging consumers back toward basics and many competitors were taking a hard look at store scale, he championed the hypermarket model, spending heavily to renovate the biggest stores of up to 10,000 square meters, or 108,000 square feet, in the upscale “Planet” format.

That gamble has not gone well.

Today, with Carrefour’s shares down about 27 percent since he took over, the bloom is long off the rose, and negotiations are under way to replace Mr. Olofsson with Georges Plassat, a clothing industry executive who previously worked for Carrefour, people with direct knowledge of the situation say. An announcement is possible within the week, the people said.

“He put together a good team, but maybe not the right team,” a person close to Carrefour said. “The mayonnaise didn’t quite set.”

The person, who asked not to be identified because he was not authorized to speak publicly, said the focus on the Planet stores, which were meant to make Carrefour’s out-of-town stores into shopping destinations, had been ill advised considering the economic situation.

“He forgot the French market is highly competitive, that customers are more interested in low prices than in a new shopping experience,” the person said.

“The trend in European retail since 2003 or so has been toward compact hypermarkets,” of 3,000 to 5,000 square meters, said Jürgen Elfers, an analyst at Commerzbank in Frankfurt. “The compact format has important advantages, including lower capital expenditures, but management at Carrefour ignored the trend.”

The average size of a Carrefour hypermarket grew to 9,647 square meters in 2010 from 8,927 square meters in 2000, he said, even as others’ average size shrank. That dependence on the biggest of big-box store formats means that Carrefour now relies more on sales of nonfood items than do its competitors.

The company has already started dismantling Mr. Olofsson’s vision, saying Jan. 19 that the Planet store plan was being “pragmatically reviewed.” Carrefour, which had to cut its results estimates five times in the past year and a half, also said its fourth-quarter sales fell about 1 percent from a year earlier, to €24.2 billion, or $31.9 billion.

The Carrefour press office declined to make Mr. Olofsson available for an interview. Mr. Plassat did not respond to requests for comment.

Wal-Mart and Tesco, the British retailer, are also suffering in their home markets from reliance on the XXL-size format, said Natalie Berg, director of global research at Planet Retail in London. But she said those two companies had done a better job at adapting to the changing retailing environment.

Carrefour’s business model “is inherently flawed,” she said. “It opened its first big-format store almost 50 years ago, but consumer shopping habits have changed so much. For one thing, people do a lot of their nonfood shopping online now.”

Mr. Elfers said the jury was still out on whether the hypermarket format might be doomed, though he acknowledged that “it certainly has challenges now, when customers’ disposable income is under pressure.”

The stores, he noted, “are terribly expensive to build” and operate. “You can probably build four compact hypermarkets for the price of one,” he said, as European rivals like Leclerc and Kaufhof have shown.

“I think adding fresh blood at the top will certainly be good,” Ms. Berg said, adding that changing the leadership would not solve the company’s problems. She predicted the new chief executive would “pull the plug on the Planet format, at least temporarily,” and would probably seek to pull in more Internet shopping. Otherwise, she said, “there’s not much future for the hypermarket model.”

Mr. Olofsson’s successor will face another challenge in trying to turn around the business while maintaining smooth relations with Blue Capital, the company’s biggest shareholder. Blue Capital — a venture between Bernard Arnault, the boss of LVMH Moët Hennessy Louis Vuitton, and Colony Capital, a U.S. real estate investment firm — holds about 15 percent of the stock and 20 percent of the voting rights.

Article source: http://www.nytimes.com/2012/01/28/business/global/carrefour-rethinks-its-bigger-is-better-strategy.html?partner=rss&emc=rss