Carrefour at a major crossroads

Updated: Mar 31 2007, 06:58am hrs
Carrefour, Europes answer to Wal-Mart and the worlds second-largest retailer, is in turmoil. It is a classic story, involving a dynastic squabble and pressure from powerful interlopers hunting for profit. But it is also a very French story because the value of the treasure at the tales corenearly 20 million square feet of high-priced commercial real estate .

Carrefour, which means crossroads in French, was started in 1959 by two disciples of American retailing, Marcel Fournier and Louis Defforey, who came up with the idea of hypermarketsexpanded supermarkets that sell a wide range of general merchandise under one roof. Paul-Auguste Halley, a grocer in Cherbourg, France, also became inspired by the American fashion for supermarkets that spread through France after World War II. Together with his sons, Paul-Louis and Robert, he bought grocers across Normandy and formed the Promodes supermarket chain in 1961.

The two chains merged in 1999 and while the stock price steadily lost half of its value in the years after the merger, its underlying valueliterallyhas continued to swell. Commercial real estate values in France soared, even as the profit margins of retailers thinned. Now worth as much as 21.5 billion euros ($28.63 billion), according to Morgan Stanley, the real estate is too ripe to ignore.

Last month, the American real estate investment firm Colony Capital and the richest man in France, Bernard Arnault, chairman of Christian Dior and the luxury goods conglomerate LVMH Moet Hennessy Louis Vuitton, announced that they had acquired nearly 10 percent of Carrefours shares and hoped to translate that value into a fat capital gain.

Colony Capital and Arnault are now talking to the Halley family. People familiar with them say the older generation are reluctant to sell the companys real estate, believing that owning the bricks and mortar is the only way to control fixed costs in a low-margin, cyclical business. Fabienne Caron, an analyst at Morgan Stanley in London, says If youre in a mature market where everyone is fighting on price, those who dont own their real estate will be at a competitive disadvantage, adding that the money spent on rent would reduce the margin available for price reductions.

NY Times / Craig S. Smith