Strategic grocer like yoghurt, at a cost

The French Finance Minister is not afraid of calling Food Retail strategic and being ridiculed for it, as was his predecessor when yoghurt (aka Danone) was promoted to similar highs.

The Minister is seeing an issue with Canadian Couche Tard bidding for Carrefour. Carrefour does not control much more than 20% of the French grocery market and should it stop business tonight, its competitors will be happy to fill up its shoes in the following few hours. Calling Food Retail strategic is right if it encompasses the full value chain which has proved extraordinarily competent anywhere in the world when dealing with the pandemic. Nothing Gallic here. The reverse of that same coin is that Carrefour has nothing to boast about keeping its shelves filled up and has exactly no strategic value without the rest of the value chain including all of its foreign suppliers. 

Worse, by creating a special status around Carrefour, only centre stage because it is listed, the Minister is running the risk of destabilising the whole ecosystem. In short, this is ridiculous unless the Minister is in a mind to bargain a higher price on behalf of Carrefour shareholders. This would be very stupid though and looks unlikely.

Carrefour shareholders presumably will not believe their luck after losing so much of their worth over the last 13 years. The following chart shows that if the current CEO (since 2017) has stopped the rot there is a long way to go to chase the performance of the sector (AholdTescoOcado) let alone that of the Stoxx600. Incidentally, Ocado and its logistical tools currently worth £18bn are certainly more strategic to the Food Retail industry than Carrefour at its post bid €14bn market cap.

The above performance chart is backed by the EBIT margin trend of Carrefour vs. its sector: consistently lagging. Its improvement since 2018 is largely due  to the fact that it collapsed then and should not fool anyone.

Carrefour’s EBIT margins lag the sector’s

It also helps to look at the FCF generation of Carrefour. At €1.3bn in 2020, not little helped by the fact that buying food was the only thing to be done this same year, it is still below that of 2008 and 2009. Such a figure is on a par with that of Tesco’s but less than half that of Ahold’s. 

FCF generation: better Carrefour (pink) but not a big contributor to the sector (blue)

So that Carrefour shareholders can only be happy to be offered to see their money now rather than later on some obscure concept of strategic assets.

We had a look at ‘Strategic Danone’ EBIT margin development and compared it with Nestlé’s. It looks as if the word ‘strategic’ is a recipe for operational disaster with Danone’s margins now 500bp below that of Nestlé. Between 2007 and 2021, the market cap of Nestlé has gained €79bn while that of Danone gained €9bn. ‘Strategic’ has a cost.

Strategic Yoghurt (blue) margins vs. Plain Coffee ones (Nestlé in pink)