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April 11, 2008

FRANCE: Verdict forecasts shake-up in retail sector

A new report from Verdict Research has suggested that the French retail market could be set for a shake-up if key pieces of legislation are reformed.

A new report from Verdict Research has suggested that the French retail market could be set for a shake-up if key pieces of legislation are reformed.

The report forecasts that liberalisation is on the cards as a result of a public outcry over purchasing power levels and high average food costs resulting from France’s strict retail regulations and global food price inflation. “This could lead to a change of the status quo of French retailing, which remains more fragmented than the EU average,” Verdict continues.

According to Verdict Research, while French retailing has grown steadily over the last couple of years, a “growth revolution” could be on the cards if the shackles of the current regulatory backdrop are loosened or removed. A major factor inhibiting growth is France’s regulatory environment, specifically the Raffarin, Galland and Dutrueil laws, which make it hard for retailers to grow their operations.

The Raffarin law in particular has curtailed the opening of new retail space in the country, Verdict states. “Due to the loi Raffarin it is often easier to grow a retail business in France by acquiring a player already in possession of freeholds, outlets and necessary planning permissions than opening new space organically,” said Daniel Lucht, senior analyst at Verdict Research and author of the report.

Hypermarket operators often blame the Galland law for stifling growth in the segment, though Verdict suggests complacency among the key protagonists could also explain the current weakness of the sector. During an era of rapid expansion abroad many of the major players had taken their eyes of the ball at home, and left some players leaving themselves exposed domestically, the report states.

In addition, Verdict argues that the Galland law, which hinders price competition among the leading players on branded goods by letting suppliers set a price floor, has had an ambivalent effect. While private labels have gained share and shelf space across the EU, as major French retailers’ profits from branded goods were virtually guaranteed for a number of years, many of the French players were slow initially to move into private label.

While the Galland law safeguarded retailers’ profits, it did not guarantee sales volumes at hypermarkets and many consumers left the format in droves to shop at discounters, the report contends. “As the major multiples were then barred from below-cost selling by the law and hence competing with the hard discounters, market share erosion of the hypermarkets became endemic,” the report states. So Verdict believes the Galland law also partly explains discounter growth.

The combination of the regulatory background, discounter growth and a lack of focus has seriously impacted on growth in the hypermarket sector, Verdict concludes. However, with liberalisation looking increasingly likely, this could be about to change. New retail space could be easier to develop after a reform of the loi Raffarin. New price wars could be instigated by a reform of the loi Galland/Dutreil.

Verdict also predicts more competition on service provision, continued expansion into non-food, new format development, brand simplification, new locational strategies and a continued push of multi-channel offers, especially internet retailing.

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