By Dominique Jacquet

This month’s vidcast is dedicated to a distribution company that is struggling to maintain its margin in its original territory. Number 2 in France with a turnover of 42 billion Euros in 2022, Carrefour is behind Leclerc which generates revenues of 58 billion.

When a company wants to increase sales and gain market share, it can either “win” customers or “buy” them. In the latter case, it makes acquisitions, which Carrefour does by spending a little over a billion Euros to acquire the 175 points of sale of Cora and Match and add more than 5 billion Euros in additional revenue to its income statement. As a result, its market share (household consumption) will increase, going from 20.1% to 22.5%, which allows it not to be too much left behind by Leclerc, but not to take away its leading position (23.9%).

At the same time, Leclerc, whose commercial and operational practices do not have the reputation of being friendly and wait-and-see, “takes advantage” of inflation to increase its market share by 1.5% in 7 months, a spectacular commercial performance.

Leclerc is originally a “movement” with members (some could say, franchisees…). The company’s slogans are “cheaper” and “maintaining purchasing power”. In times of inflation, the argument rings true and, through its aggressive communication, Leclerc “demonstrates” that its products are indeed “cheaper”.

It is obvious that selling at a lower price comes at the expense of the margin. Indeed, retail distribution operates with high capital turnover and low margins. Therefore, any reduction, even limited, in selling prices has a significant impact on financial performance.

What impact for shareholders?

Lower performance means loss of value. This is why, we have mentioned it several times in the Ecademy (videos, blogs), some companies use the power of their brands to impose price increases on customers and preserve their margins… but to the detriment of volumes. Unilever presents its 2022 accounts by announcing an increase in revenues of 8%, due to an 11% price increase generating a 3% loss in volume… Initially, the markets welcomed the power of the brands, but the publication of the accounts for the first half of 2023 showed a different face. Some firms, for example Colgate Palmolive, have seen their share price fall following the announcement of sustained profitability at the cost of a loss of customers.

This reminds us of the famous “Marlboro Friday” of 1993. When Philip Morris lowered the prices of the famous cigarette to win back its customers, the stock market value initially fell but rose again when it realized that placing the customer portfolio at the top of its priorities was a good strategy. A great lesson in finance which reminds us that we must remunerate our shareholders, but that we can only do so with customers… 18 months were necessary for financial investors to validate Philip Morris’ strategy. It seems that the lesson has been understood, the reaction is faster today.

Impact on Leclerc’s stock price? The company is not listed, it is owned by individuals who make decisions about their personal assets. Impact on margin? No listing, no financial communication. Comments from professionals in the sector report that members have agreed to give up their margin to benefit from growing volumes. How can we survive without making a margin? Apparently, by collecting only the rental income generated by the shopping mall of which the members own. It is also necessary that this income is not mobilized to pay financial costs and repay real estate investment debts.

Carrefour chooses to fight in the area of external growth by announcing synergies (economies of scale) generated in 3 years by the integration of Cora and Match. This means that the return on investment will go to customers, not shareholders. The firm’s stock price suffers a little, but customers will benefit from lower prices.

The customer is moving up in strategic priorities, which is good news. But this can only be implemented in an environment where competition is possible and intense. Promoting competition between firms is, therefore, a tool to combat inflation that is rather effective and more pleasant for citizens to live with than an increase in interest rates which impoverishes consumers. It is then necessary for decision-makers to know microeconomic theory and practice and not limit their macroeconomic understanding to a single-factor correlation…