Tuesday, 24 May 2011

Carrefour: Doubling up in Brazil?

Reports in the French press that Carrefour is considering a merger of its Brazilian unit with Grupo Pão de Açúcar, the country’s largest retailer, had economists scratching its head.

After all, a quick scan through the French retailer’s 2010 results seems to paint a picture of a Brazilian business that is in good health (especially when compared with the poor performance at Carrefour’s European hypermarkets).

Sales in the South American powerhouse rose 5.5 per cent last year. At €12.5bn, sales from Brazil accounted for over eight percent of total group sales and makes the country Carrerfour’s third largest market by sales after France (where sales rose 1.4 per cent) and Spain (down 2.6 per cent).

In total, Carrefour has around 500 stores in Brazil, including more 50 cash-and-carry Atacadão stores, 49 Bairro supermarkets and around 160 hypermarkets.

This compares with Pão de Açúcar which, following its merger with Casas Bahia, a household goods chain, employs 140,000 people in 1,800 stores, including supermarkets, hypermarkets, cash-and-carries, chemists and petrol stations.

However, what the news doesn’t show is the problems that Carrefour has had with its operations in Brazil. Years of mismanagement of its hypermarket stores and accounting irregularities forced the French retailer to take a €550m charge last year to its results.

In this context, merging its Brazilian business with Pão de Açúcar to gain a bigger slice of the fast-growing Brazilian consumer market could make sense.

As one leading sector analyst pointed out, local purchasing scale in food matters. And a merger between Carrefour’s Brazilian unit and Pão de Açúcar could save Carrefour 2 per cent on purchasing costs. Moreover, the analyst said, Pão de Açúcar is better run and so could transfer best practice to Carrefour’s scandal hit unit.

But that is assuming a deal takes place – which many in the sector think is unlikely.

Not least because Carrefour’s French arch-rival Casino owns 34 per cent of Pão de Açúcar. It also has an option to increase this stake to 41 percent next year – a move that would allow to take voting control of the business.

Given how important Brazil has become to Casino (the country generated €15bn in revenue in 2009 for the retailer), it is unlikely that Jean-Charles Naouri, the group’s chief executive, would want Carrefour to crash its party.

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