Carrefour‘s recent woes in Brazil highlight that while emerging markets can offer great potential, if mismanaged, their problems can tar the rest of a company’s operations.
In the wake of an EUR550m “malfunction in management” this week, Carrefour has renewed its commitment to the fast-growing BRIC country Brazil, with CEO Lars Olofsson describing it has having a “strong market position” and that its “transformation plan is fully on track”.
In the country, Carrefour operates three formats – hypermarkets, supermarkets and the highly successful Atacadao, a discount hypermarket and cash and carry format.
Of those formats, Olofsson said the only one that is actually struggling is its hypermarkets. “It is true that our hypermarkets’ performance, if I look back [for] many years, has not been up to our expectations.”
To get the troubled business back to a “sustainable growth trajectory” Olofsson said the company has put in place a new senior management team and is currently “reviewing its plans for 2011”.
While Olofsson was not keen to give away too much of the retailer’s strategy on Tuesday (30 November), he said it has stopped opening new hypermarkets in the country and is focusing on its supermarkets, proximity stores and cash and carry formats. The Carrefour boss added the Brazil management team is looking to see how many hypermarkets can be converted to the highly successful Atacado format.
The Atacado format, which the retailer acquired in 2007, driven growth in the region, with Carrefour opening outlets across South America alongside speculation that it might extend it into Europe as it looks to grow the banner.
Olofsson cited its successful turnaround plans in Poland and Thailand, before the sale, as testaments to its ability to fix its Brazilian operations. “In Thailand it was clear that we had to reorganise the team. The team put in place in 2010 did a great job fixed it very quickly, which is a good omen for our Brazilian operations and they posted an EBITDA margin that was one of the best in Carrefour”.
According to Olofsson, the retailer achieved the turnaround in Thailand through cutting wholesale, cutting operating costs and by putting together a “very smart commercial policy”. He added that the chain has had the same experience in Poland, where it has turned around the business and achieved a strong improvement in EBITDA margin.
Chief Financial Officer Pierre Bouchut added that the turnaround in Thailand took place in “around 12 months, so that shows the efficiency of how we can operate our stores much more efficiently.”
While analysts on the call speculated it might be easier for the retailer to dispose of its Brazilian operations to major competitors Wal-Mart or Casino’s CBD, Olofsson said he is sure that “with a minimum of work, we can turn around the business, especially when we compare our performance with competitors like Wal-Mart.”
With the country set to become the sixth-largest grocery market in the world, it’s no surprise that the retailer is keen to overcome its current issues in the country and remain market leader. Its two major competitors include CBD in second position, and Wal-Mart, which operates as the third largest retailer in the country, by sales.
According to Planet Retail data, the market is highly fragmented, with no retailer yet accounting for more than 10% of the market and the top five claiming around 25% of market share, making it an attractive growth prospect.
Before this week’s scandal and under the previous management, Carrefour announced plans to invest BRL2.5bn (US$1.4bn) in expanding its presence in the north and north east of the country, however, on the call it was unclear whether this strategy would continue as planned.
While Carrefour cleans up its shop in Brazil, the country’s leading grocery retailer will need to keep an eye on the competition, as Wal-Mart continues an aggressive expansion scheme in the country, with it boosting investment by 40% during 2010 to BRL23-2.2bn. Additionally CBD said in April this year that it “hasn’t stopped its acquisitions” and that it is also focused on the north east of the country.
While Brazil may be an attractive market for the retailer, it seems there will be a considerable amount of housekeeping for the retailer before it can reap the benefits of operating in such a fast-developing country. Olofsson said on Tuesday (30 November) that the issues in its Brazilian operations were “flabbergasting and unique” and that it is “hard to chase back [the]original accounting issues”, which he added had been accumulating for “possibly more than five years”.
The retailer will also have to work hard to regain investor trust following the incident. “Although management view the EUR550m in charges as unique to Brazil, they raise questions about the underlying profitability in Brazil as well as the broader management of Carrefour’s international operations,” said Bernstein analyst Christopher Hogbin.
While the retailer is currently putting in place further internal checks and balances to make sure such errors don’t happen again, Hogbin expects investors to remain concerned about the possibility of similar issues elsewhere “since the problem seem to have arisen from poor management rather than fraud, and as Carrefour still operates a fairly ‘siloed’ organization.”
The misstep is likely to cost the retailer more than EUR550m, with shares falling sharply on the news, while Hogbin called into question the “credibility of Carrefour’s aggressive long term financial targets announced at its recent investor day.”
“Especially as an increasingly competitive environment in France, as well as economic weakness in Europe cited by the company suggest Carrefour may struggle to retain benefit of its cost cutting initiatives,” he added.
I suppose the lesson to be learned from Carrefour’s current issues in Brazil is that while emerging markets may offer great rewards, but unless managed closely, they come at significant risk.