Financial Analysis of Carrefour

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Chapter 5 Carrefour S.A. Teaching Note Version: March 2007

Introduction The Carrefour case is a financial analysis case. Carrefour S.A. is one of the world’s largest retailers. During the first half of the 2000s, the company’s share prices steadily declined, despite the fact that the company reported above-average returns on equity. Students are asked to analyze Carrefour’s financial statements and segment data to find explanations for the company’s poor share price performance and to make recommendations for the future. The discussion of the financial analysis is preceded by a discussion of Carrefour’s strategy and accounting. Both the accounting analysis and the financial analysis are affected by Carrefour’s switch from French GAAP reporting to IFRS reporting in 2005 but specialist knowledge of French GAAP and IFRS (and first-time adoption) is not required. Questions for students 1. 2. Analyze Carrefour’s competitive and corporate strategy. What are the key risks of the company’s strategy? Analyze Carrefour’s accounting (including the effects of Carrefour’s switch to IFRS-based financial reporting). Are any adjustments to Carrefour’s financial statements necessary? Analyze Carrefour’s operating management, financial management and investment management during the years 2001 to 2005, making use of both financial statement data and segment data. What are the primary drivers of the company’s poor share price performance? Summarize the key findings of the financial analysis and provide recommendations for improvement to Carrefour’s management. What actions could management take to regain the confidence of Chrystelle Moreau and her fellow investors?

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Case analysis Question 1 Key characteristics of Carrefour’s strategy and the associated risks are the following: - Competing on price and product. Carrefour follows a strategy that combines some elements of a differentiation strategy with elements of a cost leadership strategy, especially in its hypermarkets. Specifically, the hypermarkets differentiate themselves from competitor supermarkets (1) by offering a much broader assortment (more product categories (food and non-food) as well as a wider choice of brands within one product category (including its own brands)) and (2) investing in customer loyalty programs (e.g., the “Pass” card). This strategy is backed up by a strong marketing campaign. At the same time, however, Carrefour realizes that—especially during economic downturns—its customers have low switching costs and are relatively price

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sensitive. The company therefore wishes to keep the prices in its hypermarkets at economic levels. The way in which the company can achieve this is by: o Keeping a close eye on what consumers want (through customer surveys and building a “customer behavior database” using data gathered through, for example, the company’s customer loyalty card) and by timely adjusting its assortment and pricing to changes in consumers’ preferences. o Having a well developed logistics network. This keeps turnover high and helps to control costs. o Benefiting from economies of scale, not only in logistics but also in purchasing of supplies (aggregation of purchasing; international negotiations with suppliers). o Selling low-priced products under Carrefour’s own brand name. An important risk of following a combination of strategies is that Carrefour’s hypermarkets become “stuck in the middle.” The planned changes that Jose Luis Duran—the new CEO—announced after replacing Daniel Bernard suggest that this happened during the first half of the 2000s. While many of Carrefour’s competitors, such as Leclerc, Auchan, Aldi, and Lidl, were able to aggressively lower their prices during the economic downturn, according to Duran Carrefour had focused too much on differentiation and improving its margins per square meter of store space (which mixes percentage margins and asset turnover). Consequently, the company lost its competitive edge to...
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