July 26, 2019

Carrefour-Casino and the elephant marriage

Elephant marriage (photo: nattanan726/Shutterstock)
Elephant marriage (photo: nattanan726/Shutterstock)
The mating of elephants is a surprisingly delicate business. These pachyderms are said to be exceedingly coy and, despite their huge size, take fright easily. The same would seem to apply to French retail giants Carrefour and Casino who are believed to have had a tiff on their first date last autumn.

If trade gossip is to be believed, Carrefour CEO Alexandre Bompard and Jean-Charles Naouri, the main shareholder of Casino, met at the home of illustrious matchmaker Alain Minc.

Both Bompard and Naouri are internationally renowned figures, but you probably won't know Minc. This is because 'le grand Alain' deliberately cultivates a low profile despite, or precisely because of, his legendary business and political contacts. One thing is for sure, though, you only do big things with Big Alan, and it is highly unlikely that the three gentlemen convened to play tiddlywinks.

But did this trio ever get together at all? At least one of the parties involved claims that there was no such meeting, two of them have argued publicly as to who approached whom first. This is all very amusing and a field day for journalists, but doesn't really help us further.

The whole matter can and should, perhaps, be archived under the title 'curious stories'. Over the last few weeks, however, speculation has again flared up in Parisian financial circles that informal contacts may have restarted...

Partial to the odd merger

Alexandre Bompard, CEO Carrefour (photo: Carrefour)
Carrefour CEO Alexandre Bompard
Alexandre Bompard has poured fuel on to the amorous cinders of past fires recently by stating that he sees more concentration in French retailing over the coming years.

This would be harmless talk coming from a business student or branch manager, but Bompard is, after all, not only the boss of France's leading grocer. He is also the man who, in his former role as CEO of French entertainment electronics giant FNAC, instigated a major merger with consumer electronics group Darty.

Casino in torment

Only a few days ago, Barclays bank produced a 'what-if-they-did-get-together' scenario. The boys in pinstripes point both to Bompard's recent words about trade concentration as well as to Casino's low share price and the heavy indebtedness of its rather opaque holding companies.

Jean-Charles Naouri (source: Groupe Casino)
Jean-Charles Naouri, the principal shareholder of Groupe Casino (source: Groupe Casino)
Meanwhile there is a much-touted rumour in trade circles that the French competition authorities would waive through a mega-merger rather than risk the dissolution of Casino and huge attendant job losses.

So are we going to see the creation of a global giant with combined annual sales of around €62bn in Europe alone, a 28.5 per cent market share in France, and massive dominance in Brazil?

Let the experts speak

As none of the chaps involved are likely to stand for interview, we asked three international retail experts to assess the plausibility of any such deal. In alphabetical order of surname, these were Gildas Aïtamer, senior analyst at LZ Retailytics, Marcel Corstjens, marketing professor at French business school INSEAD, and Bruno Monteyne, senior analyst at Bernstein in London:

"They didn't meet just for coffee" 

INSEAD-Professor Marcel Corstjens (photo: Mark Mackenzie)
(photo: Mark Mackenzie)
Marcel Corstjens
Gentlemen, how credible are the recent rumours regarding a possible merger between Carrefour and Casino?

Marcel Corstjens: They are at least plausible. Neither company is doing particularly well at the moment. Alexandre Bompard and Jean-Charles Naouri are very bright guys, but both have difficulties. Bompard's past management experience is essentially local and in domestic white goods. He is faced with the daunting task of trying to effect a turnaround at a food retailer active in 30-odd countries.

Naouri has financial problems at Casino. The share price has fallen so low, that there might now be companies interested in a takeover. Therefore, it is possible that any discussions could be a purely defensive measure on Naouri's part. And, while we are in the realms of pure speculation, it might be that Carrefour are only softening Casino up for a hostile bid in order to obtain the jewel in its crown, which, of course, is the Monoprix supermarket chain.

So there are a number of push factors for both gentlemen to come up with some kind of a deal or cooperation.

Bruno Monteyne, Bernstein Ltd (photo: Bernstein)
(photo: Bernstein)
Bruno Monteyne
Bruno Monteyne: As a rule, we at Bernstein never comment on rumours in financial markets.

The recent sell-side reports that explore such an option represent, however, a valid discussion regarding the potential upside (buying synergies) and potential risks (regulatory approval) of any such deal.

It seems clear that there was a high-level meeting between both companies almost a year ago. It is unclear what the exact scope of the discussion was, but, in my view, it was broad enough in scope to potentially discuss a merger.

Gildas Aïtamer: A merger may appeal to financial investors, and speculation concerning this could benefit Casino as a higher share price is critical to its financial viability and independence. However, there are several factors that would speak against the current rumours. Retailers are always talking with one another.

Also Carrefour has been multiplying various alliances with all sorts of different partners (Fnac Darty, Tencent, Tesco, Louis Delhaize). In this context, discussions with other French grocers, including Casino, wouldn't appear unlikely.

Do you believe Bompard and Naouri negotiated with each other last year?

Aïtamer: Casino claims that talks took place, Carrefour denies that they did.

Corstjens:If they met, then it wouldn't have been just for coffee. Casino convened an extraordinary board meeting soon afterwards, which could have been in connection with such a meeting. However, they may not necessarily have discussed a merger. They could have talked about swapping subsets of their businesses, forming a joint-venture in Brazil, or a whole range of other subjects. So, much remains pure speculation.

Monteyne: I think they had some very early discussions, but with no fixed agenda. Just initial 'get-to-know-each-other' meetings, and not 'how-can-we-merge' meetings. But they very quickly came to nothing.

How do you interpret their very public argument as to who spoke to whom first last year?

Monteyne: A PR failure, it also reduces the probability of a deal happening, as a lot of goodwill was burnt.

Bompard sees further consolidation in French retailing over the coming years. Do you agree with his analysis?

Corstjens: There is a lot of local competition, which explains why Auchan, Carrefour and Casino are not doing so well. Therefore, the case for more consolidation is not an unreasonable one. 

Monteyne: I would agree. The French market is particularly challenging (six large supermarket-style competitors, in addition to hard discounters Lidl and Aldi North as well as lots of family franchisee ownership). So French food retail would benefit from consolidation. But I think it could take a long while because politicians completely misunderstand the current state of competition and supermarket power (or rather lack of power).

This is why politicians much prefer to have their picture taken with Jeff Bezos during election campaigns than to do something about the changing nature of competition and how to tax both online and bricks & mortar retailers fairly. This is because there are no votes to be won by saving a supermarket.

Gildas Aïtamer (photo: GIldas Aïtamer)
(photo: private)
Gildas Aïtamer
Aïtamer: France is broadly in line with other large western European markets. The Top 4 retailers in Germany and the UK have a combined market share of around 47.6 viz. 41.2 per cent. France, with around 44.4 per cent, is almost in the middle of these and considerably more concentrated than in Spain or Italy. A Carrefour-Casino merger, however, would create above-average concentration.

Incidentally, consolidation in France has already taken place, albeit indirectly, through the game of buying alliances. One should never say never, but, apart from Carrefour-Casino, consolidation prospects appear limited.

An attempted tie-up between Auchan and Système U ended in failure. Other French independent retailers have not shown much interest in merging their networks. Auchan is under significant pressure, but its international scope and reliance on hypermarkets make it an unlikely target choice.

Casino and Carrefour are the only listed grocers in France. Should either party wish to grow, this would be the easiest option, particularly given Casino's current vulnerability. Increased market penetration in France and Brazil would boost sales volumes and create the second-largest grocer worldwide. For Carrefour, a merger would also lessen its exposure to hypermarkets and support its e-commerce ambitions.

A Carrefour hypermarket facade in France (source: Veja/Shutterstock)
A Carrefour hypermarket in France (source: Veja/Shutterstock)
So, given the intense competition and low profitability on their local French market, a merger would seem to make sense for both grocers. Are there, however, any factors that would make the deal unlikely?

Monteyne: Yes, for a start, anti-trust legislation would probably block it. Meanwhile, Carrefour has a good turnaround plan, a good management team, and rapid cost-cutting execution. So things will get better. Whether it makes a good stock market investment is a completely different question.

Also, there is no need for Casino to fail. All the problems financial markets see are related to its ownership structure (i.e. Rallye and other holding companies), the quality of its financial reporting, high levels of leverage etc. All of these issues can be solved without a merger with Carrefour.

Aïtamer: I agree that the merger would cause problems with the competition watchdogs. Let's also not forget that Carrefour suffered for more than a decade after its merger with rival Promodès in 2000. The company may well want to be more careful going forward. I also agree that Bompard's transformation plan is still on-going, and it is unlikely that management would want to add more complexity by doing such a big deal.

A Casino hypermarket facade in France (source: Defotoberg/Shutterstock)
A Casino hypermarket in France
I am, however, not quite so sanguine as Bruno regarding both companies. Carrefour, like other retailers in mature economies, needs to re-invent its big-box models in the face of structurally-unfavourable headwinds. After a decade of lacklustre plans aimed at reinventing its larger hypermarkets, we at LZ Retailytics don't expect a significant change in sales performance going forward.

Casino has taken drastic measures to reduce its high debt level so as to reassure its investors. These have included the sale of major assets in South-East Asia and Brazil as well as the divestment of unprofitable stores in France, but with limited results to date for its share price.

This type of situation obviously creates rumours regarding major divestments and potential acquisitions. Therefore, a merger could make sense, at least financially, because it would attract investors.

This said, one shouldn't forget that partnerships and buying alliances are less radical options, and that both retailers have committed themselves in this direction over the past years. So this might be a preferable option.
Talking of options, Casino subsidiary Monoprix already has a partnership with Amazon France. Given increasing consumer demand for online shopping, wouldn't it be better for Casino to deepen this relationship rather than team up with another essentially bricks & mortar retailer like Carrefour?

Monteyne: That is wishful thinking: Every struggling retailer hopes to get bought by Amazon, but why would the Americans want to buy Casino?

Aïtamer: Groupe Casino's operations enjoy strong independence, which has made them relatively sucessful in the past. Even if Monoprix has ties with Amazon, we should not forget that Casino also runs Amazon's largest competitor in France. Therefore, a merger between Casino and Carrefour would also represent a major shift in online power to their favour in France. So why do a deal with Amazon?

Corstjens: When it comes to e-commerce, I don't believe that food in France will go anything like the same way hard lines have. If you look at online penetration in most countries, with the exception of Korea, the UK and China, it has taken around 20 years to gain only around 4 or 5 per cent of most national markets.

Amazon is admittedly immensely ambitious, but they are still very small in food. Put another way: Amazon doesn't have food in its DNA.

Also, at the end of the day, home delivery always comes down to logistics. Pure players like Ocado in the UK have found it costly to run customer fulfilment centres. This is why successful food online retailers will always also need physical and so-called dark stores.

Even Amazon has confirmed this indirectly by spending billions of dollars on the purchase of physical stores via its acquisition of leading US organics retailer Whole Foods.

Casino (source: François Daburon)
François Daburon
One of many Casino urban stores
If it ever comes to a deal, some experts believe that the French cartel authorities would wink the merger through despite a combined retail market share of 28.5 per cent. They point to political fears regarding huge job losses if Casino were to fail. Do you buy this line of argument?

Corstjens: Local cartel authorities and parliamentary commissions often have little understanding of retailing and have frequently been indoctrinated by big brand owners to believe that large retailers have a vast monopoly of power. This is a joke because the trade is still fiercely competitive. One should also remember, however, that all this is happening in France.

It could be that the competition authorities in Paris would prefer a big local merger to the entrance of a foreign player into the market.

Aïtamer: Carrefour and Casino would dominate France and Brazil, but there are no significant geographical overlaps beyond these two markets. On such a mature market as France I am concerned that the merger would create an entity about as large as the no. 2 and no. 3 retailers combined with dominant positions in some channels.

Both players are already well-established in French cities thanks to their dense network of supermarkets and mini-markets. So they would almost certainly need to divest a number of their urban stores.

This said, it is indeed possible that the competition authorities would ignore these issues as politics play a comparatively big role in the French economy. Job losses are going to come anyway as retailers restructure themselves and reduce their reliance on large hypermarkets.

Retail mergers tend to fail. Would a Carrefour-Casino tie-up prosper or merely be a coalition of the weak?

Monteyne: It all depends on how deep the integration goes. If it is an operational and banner merger, like Morrisons and Safeway in the UK, then the odds are high that it would fail. If they mainly join buying power and reduce back-office costs, while keeping their banners separate, then the chances of success are much higher.

Corstjens: The majority of mergers fail because they simply add up problems rather than create solutions. This is certainly often the case in retailing. The only positive mergers I can think of are Ahold and Delhaize as well as the way Jumbo has built a strong number-two position in the Netherlands by purchasing regional retailers.

So, to put it facetiously: When two drunks get together in order to drive a bigger car, it doesn't necessarily mean that they will get to their destination in one piece.

Lebensmittel Zeitung with its online sisters (photo: LZ)
photo: LZ
Our German retail B2B newspaper, Lebensmittel Zeitung, in print & digital
Read in German: 'Fusionsgerüchte um Carrefour und Casino flammen wieder auf' and 'Die Geschichte ist zumindest plausibel' by international editor Mike Dawson on page 8 of Lebensmittel Zeitung, no. 30, 26.07.2019

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