Carrefour, the French retail giant, has undergone a significant transformation in the past two years under CEO Alexandre Bompard's leadership. Dubbed "Carrefour 2022," the plan has focused on revitalizing the brand, improving price competitiveness, and embracing digital and e-commerce initiatives. The company proudly touts its "cultural revolution," driven by an obsessive focus on customer satisfaction, as a key component of its ongoing success. While the overall picture presented in the Q4 2019 earnings call is one of growth and optimism, a closer look at the French hypermarket segment reveals a potentially troubling narrative hidden beneath the surface.

Carrefour openly acknowledges the challenges faced by its French hypermarkets, admitting to a previous "gap in competitiveness" and the need for a "radical" transformation. The strategy has involved shrinking square footage, streamlining assortments, and transitioning towards a more franchise-based model. While these actions have contributed to a 15.6% increase in French ROI in 2019, the company's language regarding future hypermarket performance is notably cautious. Bompard refers to a "re-conquest phase," implying a long road to recovery for the struggling segment.

The call raises a crucial question: is Carrefour's hypermarket "re-conquest" merely a temporary reprieve masking a deeper, unresolved crisis? While the company celebrates improvements in customer satisfaction and volume performance, these gains may be primarily attributed to short-term price investments and store closures, rather than a genuine reversal of underlying structural issues.

Bompard's insistence on "biting the bullet" suggests that further painful adjustments are inevitable. The question is, how much longer can the company afford to sacrifice turnover in pursuit of profitability? External data paints a mixed picture. While Kantar reports improved customer perception for Carrefour, Leclerc, its primary competitor, is also experiencing positive trends. This suggests a highly competitive environment where Carrefour's gains may be quickly eroded.

The lack of a specific operating margin target for the French hypermarket segment, despite Tesco and Fnac Darty's willingness to provide such guidance, further fuels speculation about the segment's long-term viability. While Carrefour cites "macro environment" volatility as a reason for this omission, it's plausible that the company is hesitant to commit to a target it may struggle to achieve.

Carrefour's French Hypermarket Performance

Here's where the numbers come in. Carrefour's total French revenue in 2019 was €36.6 billion. If we assume hypermarkets account for approximately 50% of this revenue (a conservative estimate), the segment's turnover would be around €18.3 billion. A 1% decline in hypermarket like-for-like sales would translate to a €183 million revenue loss, potentially offsetting a significant portion of the company's cost-saving initiatives.

Furthermore, Carrefour's reliance on franchise expansion as a driver of future growth carries inherent risks. While franchising can offer financial benefits, it also reduces direct control over customer experience and operational consistency, potentially impacting NPS scores and long-term brand perception.

Revenue Growth by Segment

Based on information from the earnings call, Carrefour is experiencing strong growth in convenience stores and Cash & Carry (Atacadão), while the hypermarket segment is struggling. The following chart illustrates the potential disparity in revenue growth between these segments.

The Q4 2019 earnings call paints a complex picture of Carrefour's French hypermarket segment. While the company is actively addressing challenges and celebrating recent progress, there are warning signs suggesting a potentially deeper crisis lurking beneath the surface. The company's focus on "customer satisfaction" and "cultural revolution" may be a strategic narrative aimed at distracting investors from the segment's underlying vulnerabilities.

The next few quarters will be crucial for assessing the true health of Carrefour's French hypermarkets. Will the re-conquest prove sustainable, or will the company be forced to confront a more radical restructuring of its core business model? Only time will tell.

"The information and quotes in this article are sourced from the Carrefour SA (OTCPK:CRERF) Q4 2019 Earnings Conference Call held on February 27, 2020. You can access the full transcript here: https://seekingalpha.com/article/4330737-carrefours-crerf-ceo-alexandre-bompard-on-q4-2019-results-earnings-call-transcript"

"Fun Fact: Carrefour was the first retailer to open a hypermarket in France, back in 1963. This innovative format revolutionized the retail landscape, offering a wide range of products under one roof. However, the hypermarket format is now facing increasing challenges from smaller, more agile competitors, forcing Carrefour to adapt and evolve."