March 16, 2012

Adieu Carrefour CEO Lars Olofsson

Lars Olofsson, CEO Carrefour (photo: Carrefour)
Lars Olofsson: "I think it better to leave the answer to your question to the new team"
Departing CEO & Chairman Lars Olofsson was gently licked by retail analysts and financial journalists in Paris last week following his presentation of the Carrefour's annual results for 2011.

Despite a 13.6 per cent reduction in net debt to €6.9bn, and above-target cumulative cost savings of €1.5bn, they should have savaged him like pit bulls.

After five (!) profit warnings last year, ebitda at the French retail giant declined 11.3 per cent to €3.9bn. Net income "affected by significant one-off elements" fell by 14.3 per cent to €371m. Meanwhile net sales remained virtually stagnant at €81.3bn (plus 0.9 per cent).

Ominously, Olofsson attributed these figures to “external and internal problems”.

Planet failure

Capex of €369m, earmarked for the remodelling of Western European hypermarkets to the new “Planet” concept, has failed to halt their decline in revenues. In fact, sales at the 81 stores converted to the “Planet” concept fell since opening by 1.4 per cent in Europe and 3 per cent in France last year.

Olofsson’s remark that at least this was better than the even greater decline in the rest of the non-converted European store base (-5.4 per cent) doesn’t sound so reassuring when one remembers that hypermarkets are the largest part of Carrefour’s business portfolio.

The rollout of the new concept, which was sold to shareholders in the past as the miracle weapon that would revive the fortunes of the struggling retail giant, has now been “put on hold”.

Adroit sidestepping
 
When pressed by his audience to define what “business practices” needed to be “remodelled” and which “operational issues” resolved, Olofsson repeatedly sidestepped:

“It’s for the new management to present the new road map…I think it better to leave the answer to your question to the new team.”

All Olofsson would confirm was that the hypermarket division, which is by far the largest business in France, is the “least profitable” compared with the company’s supermarket and proximity store operations.

As he played on his smartphone, Olofsson left it to his latest country manager for France, Noël Prioux, to identify the “problems in organisation, IT systems and out-of-stocks”.

Alarmingly, Prioux spoke of the multiple’s need to “redonner une vie de commerce” to Carrefour. This must have France’s independent quaking in their boots.

Gloom in homeopathic doses
 
Preferring to dispense the gloom in small homoeopathic doses, the audience were later told by Olofsson that the French retail leader’s share of the national fmcg market continued to fall last year, declining by -0.5 to -0.6 percentage points to 21.3 per cent.

Here, the Swedish manager instructed his audience “not to look at market share” as Carrefour had “decreased its prices”. He also reminded those who had not been attentive at school business classes: “If you are not losing market share, you are not executing well.”

This admonition is fine as far as it goes, but how come Intermarché, Leclerc, Système U, and probably also Aldi and Lidl, were able to increase their market share during the same period? Did they really freeze or hike their prices?

Share price nosedive

After a fall in the Carrefour share price last year of around 40 per cent, shareholders have now to accept a higher reduction in dividends than expected to “slightly above average CAC 40 market levels”.

New CFO Pierre-Jean Sivignon tried to sell this as a virtuous contribution to cost reduction. Did, however, the CAC 40 fall by an average of 40 per cent last year?

As his colleagues spoke, Lars Olofsson seemed bored and continued to play with his smartphone. He also looked a shadow of the man we saw when he arrived at the company in early 2009.

Then, he exuded tremendous self-confidence as he towered above the burly bodyguards posted on every corner and stairwell of Carrefour head office.

Viking of yore
 
Switching effortlessly from French to English in an immaculate suit, the former Nestlé manager told his audience that he hadn’t come on a “Viking ship down the river Seine”.

Instead, it was suggested by his many admirers at the time that Olofsson would use his skills as a brand manufacturer to forge Carrefour into a retail brand.

At any rate, Olofsson made it clear that he wished to preserve the “Dia”/”Ed” discount formats (“the golden coin in our purse”) and that he was not convinced as to the virtues of sale & leaseback. A little later, of course, he touted “Planet” as the great white hope.

Since those heady days of limitless promise, shareholders, staff and management have been treated to a series of strategic U-turns on virtually all counts with numerous reshuffles in corporate upper echelons.

Dia was spun off via an IPO, Olofsson seems to have changed his mind on sale & leaseback, and Planet has, to put it in his own words, “not met our original expectations”. Above all, he has not delivered the goods in terms of share price, revenues and earnings.

Enough is enough

Most observers were therefore not overly surprised when Olofsson’s employers, LVMH owner Bernard Arnault and US private real estate investment company Colony Capital, pulled the rug from under their former protégé.

After all, they are sitting on estimated book losses of around €2bn since their investment in Carrefour in 2007.

Olofsson clearly sees this differently: “It’s been three extraordinary years with many achievements…we have expanded our footprint in growth markets, extended new banners and concepts, achieved unprecedented cost reductions, and actively managed our asset portfolio.”

Despite this “I felt it was the right time to pass on the baton and informed the Board that I would not be renewing my mandate.”

Laughing all the way to the bank

French sources disagree as to the size of Olofsson’s golden parachute. B2B publication Linéaires suggests an indemnity of €1.5m, permission to retain around 100,000 shares, and a big fistful of stock options. The 60-year-old will also receive an estimated annual pension of €350,000.

His temperamental successor Georges Plassat will be joining the company as COO on April 2 and as CEO on June 18. Apparently, Plassat will receive a basic annual gross salary of €1.5m – a hike of more than 10 per cent on Olofsson’s wages – and a results-related bonus of 100 to 150 per cent.

Whatever the exact figures, one thing is clear: Although the new man is French, a genuine retailer, and a former Carrefour manager, Georges Plassat will inherit the “internal” problems of his luckless predecessor.

It is not hard to speculate what these might be. Blue Capital SARL, the investment holding company of Groupe Arnault SAS and Colony Capital, has presumably taken a highly leveraged investment in what is known to be a low net margin business. This is a risky situation.

Strip and lease-back
 
When Blue Capital invested in Carrefour 2007, it was probably based on Colony’s previous experience of stripping French Accor hotel chain from its real estate.

The idea was relatively simply: sell the whole real estate and cash back the investment. Unfortunately, however, retailing differs from the hotel industry, and being a tenant in one's own stores scuppers your long-term cost base.

Since 2007, Colony hasn’t succeeded in realising cash fast, but they have managed to lose a lot of retail talent on the board.

At the end of the day, the current state of Carrefour surely represents a very sad example of short-term-oriented shareholders not being aligned with the company’s long-term best interests.

Ultimately, of course, this is the responsibility of the board. However, we are now in a situation where two parties, who even today have only around 16 per cent of the capital, determine virtually all the board.

Wasn’t there a time when this was called poor governance?

 
Related article in German: By Mike Dawson in Lebensmittel Zeitung, no. 11, 16.03.2012


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