A Nation of Shopkeepers Rejoices as Tesco Trumps Carrefour

(Bloomberg Gadfly) -- A tale of two grocers unfolded last week.

On Wednesday, Carrefour SA said sales growth was at the low end of analyst estimates. It picked an unfortunate time to disappoint. Just hours earlier, Tesco Plc reported a 28 percent increase in yearly operating profit, progress on its margin target and a full-year dividend. We shouldn't be too hasty in judging the French retail giant's new management, but it has a long way to go to win back investor confidence. Even its British peer isn't quite there yet.

Tesco is, though, more than three years on from the worst crisis in its near century of existence. A 250 million pound ($357 million) earnings black hole and a slump in performance culminated in a 6.4 billion pound loss in 2014/15. Chief executive Dave Lewis was parachuted in to clean up the mess.

As I've noted before, there are many similarities between his strategic plan and that of Carrefour's new boss Alexandre Bompard. Both focused on cost-slashing, job cuts, closing head offices, less spending, selling assets and smaller stores. Carrefour is investing heavily in digital too, and trying to improve the quality of its food.

When Lewis had been in his post for a similar length of time to Bompard, who took the job in July, he was already seeing a few tentative signs of progress. The number of Tesco store transactions was rising.

But like-for-like sales in the U.K. remained negative. That didn't change until Lewis was in place for more than a year. It was only after two years that he sought to rebuild Tesco's collapsed operating margin. It is still about half its historic peak.

Meanwhile, Tesco's share price, which has strengthened lately, has been in the doldrums for much of Lewis's tenure.

Carrefour's recovery will take time too. And there are other complicating factors. Tesco's problems were much more extreme than its French rival's. That galvanized the group. Carrefour has been deteriorating for years; harder to reverse than a sudden downward lurch.

The U.K. is very competitive because of German discounters Aldi and Lidl. But traditional competitors Wm Morrison Supermarkets Plc and Walmart Inc's Asda have had problems too. That hasn't been the case in France, where Carrefour faces formidable competition from Leclerc. Another longtime rival Casino is talking to Auchan about a buying alliance.

Plus it's easier to cut jobs and stores in Britain. Lewis says 5,900 management roles have gone in three years. Recent French strikes show radical moves may be more difficult for Bompard.

Some of the things holding back Carrefour may be temporary. One of the wettest winters in 60 years hurt non-food sales at its hypermarkets. It would improve its chances by cutting prices more aggressively. While Lewis has made Tesco more competitive, he could have been sharper on this too.

So far, the market is understandably cautious about Carrefour. The shares have fallen about 15 percent since Bompard set out his strategic vision in January.

They trade at about 14 times forward earnings, a deserved discount to Tesco. Lewis isn't without challenges, primarily making his 4 billion pound acquisition of Booker work. But Tesco is on a more solid footing now. The same can't be said for Carrefour.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

©2018 Bloomberg L.P.

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