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GLOBAL BATTLE

LONDON -- There's a new No. 2.SN's third annual list of the world's largest food retailers shows the industry continues to consolidate on a global scale.The list is still headed by Wal-Mart Stores, which last year took part in the trend by snapping up Asda of the United Kingdom for $10.8 billion. But Wal-Mart now faces a more potent international challenger as a result of the $16.7 billion purchase

LONDON -- There's a new No. 2.

SN's third annual list of the world's largest food retailers shows the industry continues to consolidate on a global scale.

The list is still headed by Wal-Mart Stores, which last year took part in the trend by snapping up Asda of the United Kingdom for $10.8 billion. But Wal-Mart now faces a more potent international challenger as a result of the $16.7 billion purchase of Promodes SA by its fellow French retailer, Carrefour SA.

The deal created a behemoth with estimated sales of $80 billion, more than 8,000 stores and positions in 26 countries worldwide. The enlarged Carrefour will still be less than half the size of Wal-Mart but its reach is much more international than that of the U.S. retailer, which remains tiny outside the United States.

"Unlike some of our competitors, including the Americans, we are not just now learning about internationalization," Daniel Bernard, the chairman of Carrefour, said in announcing the deal with Promodes. "For us at Carrefour and Promodes that's a lesson we began 20 years ago. The consequence of that choice is that we are the most international of the world's major retailers."

Carrefour still gets 84% of its sales in Europe, generated primarily by its dominant position in France. And it isn't sitting still in the rush to consolidate among European food retailers. Last year it bought a 66-store chain in Spain and earlier this year moved to merge its Pryca and Continente operations in that market, where it's struggled in the past. Carrefour also bought a controlling stake in Gruppo GS SpA, Italy's second-largest food retailer, in March. It already has footholds in Belgium, Portugal, Poland, the Czech Republic, Greece and Turkey.

Its other advantage over Wal-Mart is that it is more firmly rooted in Latin America and the Far East than its American rival. Both Carrefour and Promodes have been expanding into South America for decades and Carrefour is now the market leader in Brazil with 152 stores, including 69 hypermarkets. It also has stores in Chile, Colombia, Argentina and Mexico, although it has been forced to adapt its strategy in Mexico after disappointing results. Bernard said in his annual report to shareholders that the group now will focus on developing clusters of stores in specific regions in Mexico rather than expanding throughout the country.

In the Far East, the group is represented in South Korea, Taiwan, Thailand, Malaysia, Singapore, Hong Kong and China, where it is the largest overseas retailer with 22 hypermarkets. Bernard said Carrefour will open its first hypermarket in Japan this year, probably in October, with more expected in 2001. The stores will be in Tokyo or Osaka and will be 100,000 to 120,000 square feet in size. It's important for Carrefour to be in Japan because it's the world's second-largest consumer market, he said.

The question is how long its international lead will last. Analysts said they believe Wal-Mart will definitely accelerate its expansion outside the United States over the next few years. Its scale and expertise in information systems, sourcing and logistics give it distinct advantages even over the likes of Carrefour.

"Wal-Mart has the financial capacity to grow extraordinarily fast," Christian Goyut, retail analyst with Credit Lyonnais Securities in Paris, said. "I can easily imagine it catching up to Carrefour [in non-U.S. volume]."

But that doesn't mean Carrefour is simply going to roll over. Analysts said it's been aware of the competitive threat from Wal-Mart for years and has been investing heavily in information systems, stores, products, logistics and people to keep up. While Wal-Mart has an advantage in scale, Carrefour's advantage is that it's been a global retailer for far longer.

"Two key factors have and will continue to determine the winners and the losers: financial capital, which Wal-Mart definitely has, and management capability," said David Shriver, a retail analyst with Credit Suisse First Boston in London. "There is one company that stands out with a huge amount of management capability it can employ on a global basis and that's Carrefour. There is no other company with the depth of international expertise it has."

Carrefour's other advantage over Wal-Mart is that it takes a completely different structural approach. While Wal-Mart continues to centralize all its management functions at its headquarters in Bentonville, Ark., Carrefour is more decentralized and flexible.

"Carrefour is seen as a pioneer of the French hypermarket model but I'm not sure there is one," Shriver said. "Carrefour hypermarkets throughout the world are different in what they try to do. It is extremely flexible in its choice and use of real estate and is always adapting the product assortment and pricing to adapt to local market conditions. It's had 25 or 30 years' experience in that and that's not something you can replicate overnight."

While Carrefour and Wal-Mart already go head-to-head in such developing markets as China, Brazil and Mexico, the main battleground in the short- to medium-term is likely to be Europe. Wal-Mart's moves into Germany and the United Kingdom are one of the reasons Carrefour and Promodes decided to get together and will place even greater pressure on Carrefour to enter those markets, some analysts said.

"Germany is the largest consumer market in Europe and the biggest industrial country," one analyst said. "That's why Wal-Mart chose it first and why Carrefour has to enter it. There are 1,100 hypermarkets in Germany, similar to the number in France, but they have lower productivity per square meter."

The most likely merger or acquisition candidate for Carrefour would be Metro, which has been pushed down to fourth position on this year's Top 25 list as a result of the Carrefour-Promodes deal and the acquisition spree in the United States by Kroger Co.

There continue to be reports, which it denies, that Metro is rattled by the arrival of Wal-Mart in Europe and is looking for a merger with a major European food retailer.

"There is no one else," Goyut said, pointing to Tengelmann's well-documented problems in Germany and the complicated structures of companies like Rewe or Edeka.

But Wal-Mart also is under pressure from the increased size of Carrefour in Europe. The new Carrefour's dominance of France and strong positions in Italy, Spain and Eastern Europe mean the U.S. company has to move quickly to enter those countries before it's too late. Casino SA or Auchan SA are the most likely candidates in France, observers said. While they operate many small stores, they also own hypermarkets that could be converted to Wal-Marts. Other French retailers like E. Leclerc would be more difficult to buy because they are basically cooperatives.

"We have yet to see the real impact of Wal-Mart across Europe," said Mike Godliman, an analyst at consultants Verdict Research in London, which recently issued a report on European grocery retailing. "What is clear is that with representation in less than 50% of the European marketplace, Wal-Mart is only at the very early stages of its market-entry strategy."

But Wal-Mart and Carrefour aren't the only European retailers looking for acquisitions or mergers. SN's Top 25 list shows the scale needed to compete globally just keeps getting bigger and bigger. Retailers that two years ago comfortably made the list with annual sales of $13 billion are now too small. The cut-off point has risen by $1 billion to the $14.1 billion sales of Winn-Dixie Stores.

The wave of deals in Europe may have ebbed but analysts say it's only a matter of time before new ones take place. Ahold and Delhaize have said they would consider a European acquisition while Tesco plc, Cheshunt, England, and J. Sainsbury plc, London, could be bought by the likes of Ahold or Metro because of the depressed share values of food retailers in Britain. Analysts believe Tesco, Britain's largest food retailer, must at some stage make an acquisition if it is to remain a global player. Tesco, though, has said it's sticking with its slow-and-steady expansion program in Eastern Europe and the Far East.

The retailers that are staying on the sidelines in the global expansion race continue to be the Americans. While Kroger and Albertson's are in the Top 5, no other American retailer features in the Top 10. Analysts say they believe U.S. companies will at some point have to break out of the American market if they are to remain competitive in the long-term.

Some observers also say that Carrefour eventually will have to re-enter the American market if it is to be truly global. Bernard hinted to French journalists several months ago that the French retailer might return to the United States at some stage. Carrefour opened three hypermarkets in Pennsylvania and New Jersey in the early Eighties but ultimately pulled out of the market. Analysts believe it might make a run at another American mass merchandiser, although the problem is that such companies as Kmart would require a great deal of time and investment to turn around.

Bernard so far has hedged his bets when asked whether Carrefour will do so. "The U.S., the U.K. and Germany are very important markets where we are not present," he said at the company's annual general meeting. "We need to find the best moment and opportunity to enter and that most likely would be by acquisition."

There are some who question whether it ever has to enter those regions. "We are seeing a new emergence of global buying in food and the more leading markets you can bring to suppliers the better deals you will get," Shriver said. "But Carrefour doesn't have to be in the U.S., the U.K. or Germany. It would be nice if it were, but it can pick and choose its time and buy assets at their lowest value. We can easily see a scenario where Northern Europe is a Wal-Mart fiefdom with a presence in the U.K., Germany and perhaps some of the Benelux countries and Carrefour dominates Mediterranean Europe."

Analysts and other industry observers believe Carrefour's enlarged scale and buying power will bring major benefits to the group. Bernard said he expects Carrefour's continued expansion in these regions, as well as the synergies gained from the deal with Promodes, to result in a doubling of the group's profits over the next three years. Carrefour had net profits of $838.5 million in 1999.

The group's focus in the short-term will be on combining the operations of Carrefour and Promodes. Bernard said all the company's hypermarkets will be rebadged Carrefour by the end of the year, while its supermarkets will be focused on common names in each country, such as Champion in France and Spain. In France, it plans to roll out its new food concept for its hypermarkets, called Magali, as well as its new nonfood concept. Bernard said he expects the merger to lead to major improvements in the control of store inventories as well as in logistics.

"Our medium-term strategy is to develop a European-wide logistics system," he said.

In addition, Carrefour is stepping up its involvement in the Internet. Bernard announced plans in March to invest $1 billion in the Internet over the next three years with the development of a new Internet company @Carrefour. The plan is to have a full offer in a few countries by the end of this year, including an Internet-service provider and local content, he said. It then would roll out to eight more countries next year and by 2003 be in 15 countries worldwide.

Carrefour also plans to launch its on-line grocery retailer Ooshop in the Paris area by the end of the summer and to roll it out to other cities over the following months. William Anderson, the former Kmart executive appointed as head of @Carrefour, said that the on-line grocery service will be available in three countries next year and in seven by 2003.

Its business-to-consumer Internet investment is in addition to Carrefour's 30% stake in GlobalNetXchange, the business-to-business site that also includes Sears, Oracle, Sainsbury, Kroger and Metro. Anderson estimated the exchange can represent a volume of $175 billion and could go public within 18 months.

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