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ANALYSIS-Carrefour looks to new CEO to plot road to recovery

Published 03/06/2009, 05:50 AM
Updated 03/06/2009, 05:56 AM
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* Firm needs to focus on low prices, own-label, branding

* Should downsize hypermarkets, rebalance int'l portfolio

* New CEO to give first presentation on March 12

By Mark Potter and James Regan

LONDON/PARIS, March 6 (Reuters) - Carrefour needs to take its cue from successful turnaround plans at peers like Ahold and Morrison and focus on low prices, own-brand goods and marketing if it is to rebound from two profit warnings in 2008.

New Chief Executive Lars Olofsson, who gives his first presentation at Thursday's annual results, also needs to address the French group's specific problems with its underperforming hypermarkets and over-exposure to mature western markets.

This could include downsizing hypermarkets by renting out space to third parties, exiting lacklustre Belgium and Italian businesses and expanding in emerging markets like Russia.

None of that will be easy in the teeth of an economic recession, and analysts are not expecting a comprehensive blueprint for recovery until later in the year.

But after a big fall in Carrefour's shares, Olofsson could get a good reception if he diagnoses the group's problems and sets out his priorities for addressing them.

"All in all, we need to be given the confidence that management understands its own problems and the strategic threats it faces," said JP Morgan analyst Jaime Vazquez.

Carrefour, which employs around 490,000 people in over 15,000 stores and 30 countries, had a torrid 2008, hit by a consumer downturn in its main western markets, its exposure to non-food items, which have seen a bigger drop in demand than groceries, and by growing competition from discounters.

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The group is expected to report a 2.1 percent rise in 2008 operating profit to 3.36 billion euros ($4.25 billion) according to the mean forecast of 26 analysts polled by Reuters Estimates.

That compares with growth of 12 percent at Dutch group Ahold and 7.3 percent at French rival Casino.

The bad news may already be priced in to Carrefour shares, which have underperformed the DJ European retail index by 23 percent over the past year and trade at 9.1 times forecast earnings, below world number one Wal-Mart on 13.7 and number three Tesco on 11, according to Reuters data.

Carrefour is also the most shorted European food retail stock, with 10.1 percent of its shares out on loan to traders betting they will fall further, according to Data Explorers, the short selling data research firm based in New York.

So there is plenty of room for Carrefour shares to bounce if Olofsson gets the message right.

LEARNING FROM RIVALS

Jose Luis Duran, Olofsson's predecessor, did much to identify Carrefour's problems and start work on solutions which analysts think will be a good base for the new chief executive.

Duran's problem was implementation -- both effectiveness and speed -- and here Olofsson could learn from Carrefour's rivals.

For example, Duran cut prices and stepped up promotions, but drew criticism for not always doing so consistently, or communicating it well.

Natixis analysts suggest Carrefour could learn from Ahold which, after putting low prices at the centre of its recovery plan in 2003, has relentlessly focused on value.

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Duran also started a drive to unify branding by, for example, converting Champion stores to the Carrefour banner, which analysts think could have big benefits by, for example, centralising processes and improving customer loyalty schemes.

Olofsson, with a background in marketing, could be better placed to drive this through, analysts say, pointing to the success of marketing man Marc Bolland in revamping Britain's Morrison after its botched acquisition of Safeway.

Olofsson could also learn from the success of own-brand goods at another UK grocery recovery story J Sainsbury.

Like Carrefour, Sainsbury is associated with higher quality and higher prices than some rivals but it has defied predictions it would suffer in the downturn by urging shoppers to save money by switching to its often higher margin own-brand products.

Duran also started work on downsizing Carrefour's troublesome French hypermarkets and analysts think Olofsson should accelerate this, though it may be hard to find tenants for vacated space in the downturn.

Olofsson may also find it difficult to undertake any radical surgery on Carrefour's underperforming businesses in Belgium and Italy, as analysts see few obvious buyers.

But increasing the firm's exposure to emerging markets could be easier as the number of distressed sellers rises. Banking sources told Reuters last month that Carrefour was looking to buy Russian retailer Seventh Continent.

Even if radical change seems unlikely in the short term, analysts think Carrefour can follow the likes of Britain's Tesco and Germany's Metro by stepping up cost savings and cutting investment. Deutsche bank analysts think capital spend for 2009 could be cut back to 2.3 billion euros from 3 billion.

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UBS analysts argue that, with manageable debts and at least 15 billion euros of freehold property, there is no reason why, with the right strategy, Carrefour could not fight back.

"The last big food recovery play?" is how they titled a recent research note. ($1=.7909 Euro) (Editing by Jon Loades-Carter)

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