By Camilla Palladino
www.breakingviews.com
It's a stark contrast. Tesco, the biggest UK supermarket group, is roaring ahead; its French peer, Carrefour, seems to have hit yet another glitch.
When Carrefour last reported results at the start of September, it said it had cut prices without slicing into margins, and pointed to a small uplift in French market share. So Investors were optimistic about the effect a second set of price cuts, planned for the second half, would have. But Carrefour's strategy has been thrown into doubt by a report that in July and August its hypermarkets lost share in food, and by a profit warning from Guyenne et Gascogne, which has a joint venture in hypermarkets with Carrefour.
This might not be quite as bad as it looks. After all, August was a dismal month for sales of fresh produce in France. This would have benefited the hard discounters – Carrefour's arch-enemies – as they tend not to sell fresh food. The overall figure for French market share will be mitigated by supermarkets, where Carrefour gained market share. Moreover, Guyenne et Gascogne is a much smaller operator than Carrefour, with a different cost structure. Price cutting would hit its margins much harder.
All the same, Carrefour could be facing some difficulties. The reported 0.5 percentage points of market share its hypermarkets have lost in food, taking it to 12.8%, suggests that its first lot of price cuts isn't having the desired effect.
A charitable explanation is that it takes time for shoppers to realize that cuts have been made. Changing consumer perceptions isn't easy – as the UK's Safeway is finding to its cost. It might also be that the next lot of price cuts will help more than the first ones did.
But the fear is that Carrefour's rivals have also been cutting prices, maintaining the price differential intact. What's more, Carrefour is still suffering intense price competition from hard discounters, whose own-label brands tend to be very cheap. It might have to cut prices by more than the €200 million planned for the second half to really make an impact.
The worry is that the group might end up having to make further cuts – to defend a further weakened market position. So Carrefour's 11% discount to UK rival Tesco on this year's earnings looks more than justified.
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