On Monday Carrefour's new CEO Alexandre Bompard presented his five year plan for Europe's largest food retailer, the highlights of which were €2bn in cost savings, a focus on quality food sourcing and traceability, a tie-up with Tencent and Yonghui in China, and €2.8bn investment to accelerate ecommerce with the aim of achieving the same share of the French grocery market online as it currently has offline (20%). The plan was well received by shareholders, sending the share price up 6%.
While the ambition and broad outline of Bompard's plan appears admirable, commentators and investors seem to have missed a rather important, not so positive point. What Carrefour has just done is to quantify how much the growth of ecommerce is adding to the cost of staying in the game (i.e., maintaining market share). For investors, that means €2.8bn of incremental opex and capex (the mix is as yet unclear) to be deducted and added respectively to the top and bottom parts of the ROI calculation. While overall annual capex is being cut by 10% to €2bn, this is at the expense of organic growth from new stores and remodelings.
We’ve already seen the impact of this increased "pay-to-play" rate in the UK grocery market, where margin pressure arising from the online race space that kicked off over a decade ago was one of the factors that made market "leaders" Tesco and Asda reluctant to take pre-emptive price-cutting action to stem the growth of Aldi and Lidl in the wake of the 2008 financial crisis and recession.
A similar space race is now about to occur in France, driven by Carrefour trying to play catch up with Leclerc and the fear of Amazon ramping up its grocery presence. Ditto the US, where Kroger’s CFO already warned at quarterly results last September that the expansion of Clicklist is a drain on store profitability.
“There's no doubt that ClickList is a headwind on earnings currently and we've even continued to accelerate the speed in which we put ClickList in, so it's an incremental headwind,” Kroger said. And that’s despite them charging $4.95 for the service, which is free at Wal-Mart, and before i) the acceleration of home delivery, which surveys show is preferred to click and collect by three-quarters of US consumers in markets where they have the choice; and ii) Amazon integrating Whole Foods properly.
In my view the increasing cost of staying in the omni-channel grocery game is going to be a bigger issue than the growth of Aldi and Lidl in the medium-term. The only way out is to automate online order fulfillment down to the store level, so you are leveraging instead of deleveraging existing fixed assets, and to shift the corporate mindset from optimisation of the existing business model to fundamental transformation.
Such reinvention by incumbents from within is of course notoriously hard to contemplate, let alone execute. Currently it is the former "pure online" players such as Amazon and Alibaba that are leading the transformation of grocery retail. This may help explain why the world's biggest brick and mortar players are suddenly rushing to form partnerships with their online counterparts, i.e.: Carrefour - Tencent, Walmart - Rakuten & JD.com, Kroger - Alibaba. These look like smart strategic moves and on paper such combinations have many attractions, if the cultural and organisational challenges can be overcome - the $trillion question.