Carrefour has witnessed a decline in its fortunes. The French retailer's reputation has taken a battering and it has failed to deliver a consistent message to consumers and investors alike. In his first analyst presentation since becoming CEO six months ago, Lars Olofsson this week laid out his turnaround plans. Katy Humphries suggests that while Olofsson has begun to tackle some of the retailer's more pressing challenges, the road to recovery remains a long one.

Carrefour is a company with a problem. Europe's largest retailer has lost its leadership edge - especially in France and other developed European markets. This has resulted in declining market share, lacklustre growth and unsatisfactory profit margins.

Yesterday (30 June), Carrefour's management revealed how the company plans to improve its performance, delivering a turnaround package designed to "transform" the Paris-based retailer's business.

The company presented strategic initiatives that it claimed would help it become the "preferred retailer" in key markets - therefore generating sales growth - while also improving efficiency to bolster margins

Carrefour said that over the next three years it expects reduce costs by EUR4.5bn (US$6.4bn).

This, management claimed, would be achieved by cutting operating costs by EUR2.1bn, purchasing costs by EUR1bn and reducing inventory hold times from 37 weeks to 30 weeks to save around EUR1.4bn.

"That [EUR4.5bn figure] is based out of five different levers - here we're going to talk about how can we improve the way we are working in the stores, how can we improve our supply chain, how can we improve our overheads, SG&As, and ultimately the purchasing," Carrefour CEO Lars Olofsson (pictured) said.

These cost savings represent a significant top-to-bottom re-evaluation of the way Carrefour does business. Moreover, they are relatively substantial in nature and could offer a material boost to margins in the medium- to long-term.
 
However, operational efficiencies can only take Carrefour so far. The company must also focus on gaining sales momentum in core markets, which have delivered dreary performances for some years.

Carrefour said that in order to drive sales gains it will focus on improving its showing in four key western European markets - which the group terms its "G4" countries - France, Spain, Italy and Belgium.

Carrefour's home market is its largest market and, arguably, the one that has proven most problematic.

According to Olofsson's assessment, Carrefour has struggled to effectively manage the Carrefour brand and communicate clearly to consumers.

With echoes of former CEO José Luis Durán's 'One Carrefour' strategy, the company said that it would continue to accelerate the roll-out the Carrefour banner across its French supermarket and hypermarket portfolio. 

One of the company's biggest past mistakes, Olofsson suggested, has been its failure to send out a consistent pricing message - first discounting to drive sales, then hiking prices back up again to save margins.

Since Olofsson took the helm at Carrefour, the retailer has moved to address this by investing in pricing.

A spokesperson for Carrefour told just-food that the company has made it a "priority" to "restore" its price image in France and Olofsson has already committed EUR600m to furthering this goal.

The group has driven down prices at its French outlets and launch its own-label low-cost line in April. 

By boosting the level of own-label sales in Carrefour's sales mix, the company would likely see a benefit in terms of margins - as own label is more profitable than other brands. There is also a hope that by making Carrefour-branded products a more prominent part of the company's offering it will foster a higher degree of customer loyalty.

During yesterday's presentation, Carrefour said that it would build on these steps by extending to France the 'Carrefour Competitive Pricing' programme already implemented in Spain, which allows enhanced pricing management through a better balance of everyday low prices, promotional offers and loyalty benefits.

The final major hurdle that Carrefour must tackle in France is the thorny question of what to do with the company's hypermarket business.

"We know we have a problem in the hypermarkets, we just have to solve it," Oloffson said.

Olofsson indicated that Carrefour needed to "optimise" and "reinvent" its hypermarket format, by improving the assortment, shopping experience, store and site attractiveness and rightsizing stores.

However, the Swede was not able to offer a conclusive answer on the best way to "solve" the hypermarket problem. Carrefour merely said it would have proposals for how to address the issues in its hypermarket business by the end of this year, ready to test in 2010.

Meanwhile, over the past six months, Carrefour has done a lot to improve its Spanish business. Following its Spanish model, Carrefour said that it would reinvent its Ed discount stores in France in an attempt to emulate the success the group has seen with its Dia business south of the Pyrenees. The company plans to have 20 Dia stores in France by the end of the year.

Looking to the remaining "G4" markets, Carrefour's plans for Belgium and Italy seem a little cloudier. The company said that it would restructure its Italian business, selling stores and focusing on the north, while the strategy for Belgium has not been determined.

While Carrefour has taken the long overdue step of re-evaluating its offering in western Europe, its increased emphasis on developed markets raises the question of what the group has in store for emerging markets - which have been Carrefour's growth engine for the past five years or more. Indeed, the company recently opened its first hypermarket in Russia, and rumours abound of Carrefour's imminent entry into India.

Olofsson has laid out a clear strategy for how to tackle some of Carrefour's difficulties in France and the company has made significant strides in Spain. The group's margins will likely benefit from cost-cutting measures and an increased focus on own label - even as they are put under pressure by increasing price initiatives.

However, a number of not-inconsequential questions remain unanswered and Olofsson will have to grapple with these before Carrefour can truly be said to have mastered the roadmap to recovery.