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April 25 (Reuters) - (The following statement was released by the rating agency)
French super/hypermarket groups such as Carrefour SA (Carrefour) (BBB/Positive)and Casino Guichard-Perrachon SA (Casino) (BBB-/Stable) are using their recoveringprice image and wide offering to entice customers away from discounters. Returning customers,improved footfall and volumes could lead to improved French operating profit in 2014 and 2015.
Fitch notes the stabilisation in their domestic market shares in 2013, despite continued competitive pricing from leading discounters such as Aldi and Lidl. With France representing a significant percentage of Carrefour's and Casino's profits, this trend could also be positive for their financial flexibility and credit profiles in the medium term.
Carrefour has increased its market share to around 21.1% at end-March 2014 (from 20.7% in August 2013) due to slowly recovering hypermarket sales (organic growth excluding petrol and calendar effect: +1.3% in 2013 and +0.7% in 1Q14). Casino Geant is stabilising its market share in the hypermarket sector, thanks to increased footfall and volumes (+4.2% and +7.0% in 1Q14 respectively). This is against the general European trend, where food discounters are or have been gaining market share over traditional food retailers through keen pricing thanks to targeted, but more restricted, food ranges which allow them to obtain better pricing from suppliers.
Carrefour's and Casino's improving hypermarkets sales are driven by recent strong price reductions. Better product assortment and accelerated store refurbishments further support this trend. Lower prices were specifically helped by the 'Modernisation de l'Economie' law (LME), which put an end to the price inflation spiral created by the 'loi Galland' measures. The current pace of recovery is in line with the timing of price cuts, with Carrefour leading the pack with price cuts since end-2011. It was followed by Casino in 2012 while Auchan, which entered the race more recently, has seen deterioration in competitiveness in 2013.
The renewed attractiveness of hypermarkets has contributed to French food discounters' market share decline, from 14% in 2009 to around 12.6% currently (source: Kantar Worldpanel). The decline was also due to the major roll-out of convenience stores and a large 'drive-through' network, which reflect profound changes in consumer habits. The diverging fortunes of discounters in Europe are largely echoing consumers' idea of 'value-for-money'. In Germany discounters continue to be a prominent feature with nearly 40% of the food retail market. French customers have turned back to traditional food retailers, as product quality and shopping experience are as important to them as price. In the UK, polarisation between premium food retailers such as Waitrose and Marks and Spencer (BBB-/Stable) and discounters continues, leaving traditional food retailers such as the UK's 'Big Four' supermarket chains - Tesco plc (Tesco, BBB+/Negative), ASDA, Sainsbury's and Wm Morrison Supermarkets plc (Morrison) - squeezed in the middle and struggling to maintain market share.
In a fiercely competitive UK food retail market, where traditional retailers are struggling to compete while maintaining product range offer and service levels, discounters such as Aldi and Lidl are however aggressively building market share, achieving a combined market share of 7.5% as per 1Q14 (source: Kantar Worldpanel). Although low by European standards, UK discounters are growing revenue at an annual rate of over 30% and this is putting pressure on the established UK retailers. ASDA and Morrison, the UK's 'Big Four' supermarkets with the largest overlap with hard discounters, have reacted by announcing a further round of price cuts. This discounting is expected to spread throughout the industry via existing price matching schemes, thereby leading to some form of margin erosion if not offset by other cost saving initiatives.
Margins in the UK however are still healthy compared to other European countries such as France, reflecting the dynamic growth observed in the UK convenience store segment. These offer higher margins compared to the hypermarket format prevalent in France. Tesco still benefits from above eurozone average operating profit margins (5.1% at end-2013 vs. around 3% for Carrefour), which gives them some flexibility to compete with and counter any further price cuts by discounters.
