Carrefour in front line as French retail price war heats up

By Dominique Vidalon and Pascale Denis

PARIS (Reuters) - Carrefour (CA.PA) is in the front line of a French retail price war that is showing signs of becoming bloodier than expected as supermarkets scrap for market share in a sluggish economic recovery.

After Carrefour lowered prices last year to regain some lost custom, rivals such as Auchan, Leclerc and Casino (CO.PA) are fighting back - just as the spectre of deflation is piling the pressure on retailers to offer the best value for shoppers.

As retail market leader in France with a 20.5 percent share, Carrefour depends on the country for a little under half of its sales - more than its only major listed domestic rival Casino, which makes two-thirds of earnings in emerging markets.

What's more, Carrefour makes about a quarter of its sales in French hypermarkets - the main battleground for the price-conscious French shopper given hard-discounters such as Aldi and Lidl, which dominate markets in Germany and Austria, have a comparatively low market share of 12 percent in France.

That leaves Carrefour both heavily exposed to a French price war, and also short of an obvious investment benchmark - a particular headache for analysts given the refusal of Chief Executive Georges Plassat to offer forecasts since he took over in 2012 after a series of disappointments and target misses.

Existing 2014 earnings forecasts put Carrefour shares at a price/earnings premium of 20 percent to European peers following its recent signs of recovery. Some analysts argue the market has yet to factor in growing signs of tougher competition to come.

"The price battle will be tough in the second half of 2014 due to a still tense consumption climate. As Carrefour regains market share, Leclerc and Auchan have become more restless," said Yves Marin, senior manager at the Kurt Salmon consultancy.

French consumer confidence fell unexpectedly in April as debt-burdened households grew more wary about their deteriorating finances and high unemployment, official data showed last month.

Inflation in France and the broader euro zone has also fallen steadily amid weak demand, with signs of deflation creeping into some sectors. According to researcher Nielsen, within the French Fast Moving Consumer Goods sector, the prices of national brands fell 2.1 percent year-on-year in March, after falling 2 percent in February and 1.9 percent in January.

FIGHTING FOR THE PRICE AGENDA

The current wave of price competition among French retailers dates back to 2011, when Carrefour, battling to reverse years of underperformance in Europe and notably in France, went on the offensive, ditching confusing promotions in favour of lasting price cuts. It was followed by Casino in late 2012.

Auchan has now joined the fray, cutting prices in March by up to 5 percent and making clear its determination to continue.

"The price war is continuing. We will not be the first ones to end it," Phillipe Courbois, head of client relations for Auchan France, told Reuters by phone.

Auchan earmarked nearly 200 million euros ($275 million) for the battle after its like-for-like French hypermarket sales fell 2.4 percent and its market share dropped 0.2 percentage points to 11.3 percent last year.

Leclerc, a cooperative of independent store owners which has vowed to overtake Carrefour as market leader in 2014, reduced prices in April, specialist blogger Olivier Dauvers said, a move analysts said could prompt Carrefour and its peers into action.

"It is increasingly the central scenario that Leclerc will pull harder on the price lever to reassert its market share gains and ownership of the price agenda," Exane BNP Paribas analyst John Kershaw said in a recent research note.

Leclerc declined to comment for this article, but the latest data from market researcher Kantar WorldPanel showed Leclerc did indeed regain some market share in April.

For the four weeks to April 20, while Carrefour remained the French leader with a 20.5 percent market share, it lost 30 basis points. Leclerc came in second with a market share of 20 percent and a gain of 30 basis points, followed by Intermarche, down 20 basis points at 14.1 percent. Casino gained 10 basis points at 11.5 percent and Auchan lost 20 basis points at 11.2 percent.

MARGIN PRESSURE

Last month, Plassat acknowledged price competition could intensify in France, but was confident Carrefour could cope.

"The price war will continue. It's going to be latent, it's going to be real, but we have the means to fund it," he told an annual shareholders meeting. Carrefour declined to comment for this story.

Plassat is banking on the continued remodelling of Carrefour's French stores to help sales growth and on an ongoing project to merge hypermarket and supermarket supply chains and revamp IT systems to generate savings.

Analysts peg these savings at up to 250 million euros but caution that though they will start this year, their full impact will not be felt before the end of 2015.

The premium Carrefour currently attracts for its shares reflects investor confidence Plassat will deliver on his plan to revive the core French business.

But its stock sank 4.4 percent on May 2 alone after Kepler Cheuvreux downgraded the world's second-largest retailer to "hold" from "buy", citing increased risk of a price war.

"Carrefour will need to cut prices by more than we thought already this year. It may find it difficult to do this and increase the EBIT (earnings before interest and tax) margin at the same time," analyst Fabienne Caron said.

Kepler now expects Carrefour's French operating margin to fall 15 basis points in 2014, compared with a forecast eight basis point rise previously. That translates into 2014 earnings per share (EPS) of 1.51 euros, or 4.3 percent below the ThomsonReuters I/B/E/S consensus estimate of 1.58 euros.

EPS of 1.51 euros this year would put Carrefour shares on a price to estimated earnings ratio of 17.7 times - against 15.90 times based on the more optimistic consensus forecast.

Last year marked a turning point for Carrefour as its hypermarket sales returned to growth in the third quarter and the group's operating margin in France jumped by 80 basis points to 3.4 percent of sales.

That helped lift the group margin to 3 percent from 2.6 percent in 2012, although that still lagged the 4.9 percent at Casino and the 4.6 percent of Britain's Tesco (TSCO.L).

Casino also recently started to reap the market share benefits from price investments as its Geant hypermarkets returned to sales growth in the first quarter.

(Editing by Andrew Callus and Mark Potter)