Reference no: EM131284141

Hypermarkets are giant stores as big as four or more football fields. Part supermarket and part department store, they feature a wide array of product categories-groceries, toys, furniture, fast food, and financial services-all beneath one roof. Hypermarkets have flourished in Europe for more than three decades. France's Carrefour SA opened the first hypermarket in 1963; with help from the French government, zoning laws ensured that competing stores would be kept from the vicinity. By 1973, the hypermarket concept had been introduced in Spain; today, Carrefour is the world's most global retailer with 15,000 stores in dozens of countries. Most of the European stores were well established before competing retailing concepts such as shopping malls and discount stores made the Atlantic crossing from America. Now the hypermarket concept is being transplanted around the globe.

Carrefour has established a strong presence in Asia; in December 2000, it became the first foreign retailer to open a hypermarket in Japan. In the United States, retailing channels are quite diverse. In addition to long-entrenched shopping malls and discount stores, wholesale clubs such as Pace and Sam's offer rock-bottom prices, and Toys 'R' Us, Circuit City, and other "category killers" offer tremendous depth in particular product categories. In February 1988, Carrefour ("Crossroads" in French) opened its first U.S. hypermarket, a gigantic store in Philadelphia with 330,000 square feet of floor space. Carrefour soon built a second American unit, but then shut down both stores in October 1993. The problem? Many shoppers simply found the stores too big and too overwhelming.

Also, although the product assortment was very broad, there was little depth in some product categories. For many products, only one brand or one flavor was available. "In the future, we will have local companies or global companies but not much in between. Globalization will lead those who are not in the first team, or who are national retailers, to make alliances." Daniel Bernard, former chairman and chief executive, Carrefour Despite problems in the United States, hypermarkets are thriving elsewhere, for several reasons. First, in countries where shoppers must visit many smaller stores or markets to complete their shopping, the mega-store concept is viewed as a welcome innovation, even though many customers feel loyalty to traditional family-owned stores. Also, hypermarket operators offer free parking in spacious lots, a lure to shoppers in countries where parking spaces are in short supply.

A third reason is demographic: As more women enter the workforce, they have less time to shop. While U.S. shoppers can choose from many discount stores and supermarkets, consumers in other countries find that hypermarkets are the only convenient alternative to shopping store-to-store. Venezuela's first hypermarket, Tiendas Exito, opened in May 2001. A French-Venezuelan-Colombian partnership opened the store despite Venezuela's relatively small population of 24 million people and an economy mired in recession. The partners reasoned that the soaring cost of living would motivate consumers to go bargain hunting. Carrefour has been fine-tuning its global strategy for years.

In November 1999, it acquired French rival Promodès; valued at $13.6 billion, the deal was the world's largest retail acquisition. In their quest to build a global brand, Carrefour executives changed the names of hundreds of Promodès' Pryca and Continent stores in Spain and France to Carrefour. Confused by the changes, some shoppers took their business elsewhere. Meanwhile a competitor, the Netherlandsbased supermarket operator Royal Ahold NV, is retaining local store names as it expands around the globe. As the company's chief executive said, "Everything the customer sees, we localize. Everything they don't see, we globalize." Carrefour has pulled out of Japan, Mexico, and South Korea while establishing a presence in markets with stronger potential such as China and Brazil. "Carrefour has a proud history as the most international retailer, planting its flags in many countries.

But I am not proud of putting my banner anywhere, at any price." José Luis Duran Meanwhile, in Europe, Carrefour is facing intense competition from Aldi and other so-called "hard discounter" chains that feature private-label brands at lower prices. The French market is critical because it generates 44 percent of sales and 60 percent of profits. Spain, Italy, and Belgium are also key markets. Ironically, as the European retail environment grew more challenging, the real estate value of Carrefour's stores soared. This situation attracted the attention of Colony Capital LLP and other investment groups seeking to unlock the hidden value in Carrefour's assets. It is not uncommon for retailers to sell their properties and then lease them back.

After José Luis Duran became chief executive in 2005, one of his first priorities was "to get France right." Duran sent a message to his French store managers: henceforth, a major part of bonuses would be based on price competitiveness. Following Walmart's strategy, Duran put an end to one-time discounts and implemented across-the-board low prices. Although Carrefour's financial results for 2005 were hurt by a profit decline in France, sales and market share increased. Having addressed the price issue, Duran set about improving service in an effort to win customers from specialty stores. Stores that were understaffed have added more personnel. Duran also took a more flexible approach to store size and design with new formats such as a "MiniHyper" and "Carrefour Express," a scaled-down supermarket.

In January 2009, Duran stepped down. Lars Olofsson, a former Nestlé executive, assumed the CEO job. Conceding that Carrefour had lost its focus on European consumers, Olofsson committed significant resources to repositioning the brand in terms of low prices. In a recent interview, he also acknowledged one of the threats that had faced his predecessor. "In the last 15 years, specialty stores came in, so now we have to find another reason to be in nonfood products," Olofsson said. The challenges are varied.

For example, it is difficult for Carrefour to compete with teen-oriented "fast-fashion" specialty retailers such as Zara and H&M. Moreover, European consumers are cutting back on purchases of durable goods such as electronics and home appliances. Olofsson has responded by updating display counters and shopping areas in Carrefour's stores. As Olofsson noted in recent interviews: The hypermarket is no longer king in the country in which it was created. We have got to put back the excitement-the "hyper" into hypermarkets. . 

The hypermarket hasn't changed significantly since Carrefour invented it 47 years ago, but consumers have. Despite the difficulties in Carrefour's home market, Olofsson remains bullish on the prospects for the hypermarket business model. He is speeding up the pace of global expansion. In China, for example, the retailing market will be worth an estimated $600 billion in 2010. Carrefour has acquired local partners in order to build a supplier network capable of serving more than 100 stores in 23 Chinese cities. One challenge: persuading Chinese consumers to spend more. The typical hypermarket shopper in China spends less than $10. By contrast, Western consumers spend an average of $31 per visit.

Discussion Questions

1. What is the biggest competitive threat facing Carrefour as it expands in global markets?

2. When Lars Olofsson became chief executive of Carrefour, one industry observer described the position as "one of the most difficult assignments in the industry." Why do you think the job is so challenging?

3. Suppose you are a consultant to the chief executive of Carrefour China. What recommendations would you make to encourage Chinese shoppers to spend more money?