To prevent Géant from becoming the cheapest banner in France, Leclerc cut its prices a few weeks ago. We doubt the other retailers, especially Carrefour, can afford to see an increase in the price gap with Leclerc. Carrefour needs to react even at the expense of short-term margins (2014) as most of the savings from Caravelle will not materialise until 2015. We downgrade from Buy to Hold with a new TP of EUR29.5.
* From zone pricing to national pricing
We have gathered more evidence over the past two weeks that Leclerc has been reacting to Géant at national level (pricing is rather centralised at Leclerc) in order to protect its price leadership and prevent Géant (which is preparing a national advertising campaign for end-May) from presenting itself as the cheapest banner in France. While the other French retailers are reacting on a local basis, Leclerc has a national response given its pricing structure.
* Short-term pain ahead…
Carrefour will need to cut prices by more than we thought, already this
year. It may find it difficult to do this and increase EBIT margin at the same
time, given that the EUR243m savings we estimate from Caravelle will
mainly materialise in 2015. As a result, we cut our French EBIT margin and
now expect a 15bps YOY decline for 2014 versus +8bps before.
* …but we take Plassat’s word
Carrefour has a long history of stop-and-go in prices. Moreover, its price
index has been fairly stable lately, whereas Auchan has cut its prices.
Georges Plassat emphasised at the shareholders’ meeting that the group
wouldn’t compromise on price for the sake of short-term profitability. We
take his word. We see this as the best strategy short-term, as we doubt
efforts on marketing will be enough.
* We expect EBIT of EUR2,269m this year, 5% below consensus
We think Spain should help this year, but not enough to offset further
price investment in France. We expect no support from Italy. Carrefour’s
long-term recovery story remains intact, and we have been buyers since
May 2012, but the focus on French profitability is unlikely to prevent the
company from being competitive on price. If the price war between Géant
and Leclerc were to calm down, we would be ready to review our stance
on the stock.