Liberalisation set to revolutionise French retailing

As a result of a public outcry over purchasing power levels and high average basket costs resulting from France's strict retail regulations and global food price inflation some form of liberalisation is on its way. This could lead to a change of the status quo of French retailing, which remains more fragmented than the EU average.

According to Verdict Research, while French retailing has grown steadily over the last couple of years (by 14.3% over the 2002-07 period), a growth revolution could now be on the cards, once the shackles of the current regulatory backdrop are loosened or removed. A major factor inhibiting growth is France's regulatory environment specifically the Raffarin, Galland and Dutrueil laws. This backdrop is making it very hard for retailers to grow their operations. The Raffarin law in particular has curtailed the opening of new retail space in the country.

Daniel Lucht, Senior Analyst at Verdict Research and author of the report, comments: “Due to the Raffarin law it is often easier to grow a retail business in France by acquiring a player already in possession of freeholds, outlets and necessary planning permissions than opening new space organically.”

In the same vein as Carrefour (Europe's biggest retailer) was the result of a merger, the one growth avenue open to retailers in France, many foreign players have left the country for the very reason that growth was hard to come by organically. In grocery the Rewe Group sold its Penny fascia to Carrefour, while Edeka and Tesco exited the market, in Furniture Kesa divested its But operation, in Electricals DSGi sold its operations, in DIY OBI divested its business to Leroy Merlin – to name just a few.

Alternative explanation

While hypermarket operators often blame the Galland law for throttling growth in the segment, an alternative explanation for the current weakness of the format looks at the complacency of the protagonists.

According to Verdict Research, many of the wounds are self-inflicted. During an era of rapid expansion abroad, many of the major players had taken their eyes of the ball at home. French retailers were internationalising their operations early on and have been thorough and methodological in their approach. Preferred markets for the likes of Carrefour, E. Leclerc, ITM and Auchan were the Mediterranean countries Spain, Italy, Portugal and Greece, but recently the focus has shifted to Eastern Europe and most recently to Bulgaria and Romania in particular and beyond the EU with Auchan's move to the Ukraine. However, the rapid speed of international expansion led to some players leaving themselves exposed domestically.

Carrefour serves as a good example. Daniel Lucht comments: “While it is now getting its house in order, domestically the retailer has been less than impressive for a number of years. The recent move to standardise its portfolio and drop the Champion brand should have happened years ago.”

Rivals Auchan, Leclerc and Casino also struggled in France in the past. Verdict finds, that the development of non-food, private label ranges, pricing architectures and Health & Wellness and organic ranges in France still lag significantly behind other markets in the EU.

Verdict argues that, the Galland law, which hinders price competition among the leading players on branded goods by letting suppliers set a price floor, has had an ambivalent effect. While private labels have gained share and shelf space across the EU, in France this development was initially slowed by the constrictions of the Galland law. As major retailers' profits from branded goods were virtually guaranteed for a number of years by the provisions of the law, many of the French players became complacent and have been slow initially to react to the attractive margins to be had in private label.

While the Galland law safeguarded retailers' profits, it did not guarantee sales volumes at hypermarkets though and many consumers left the format in droves to shop at discounters. As the major multiples were then barred from below cost selling by the law and hence competing with the hard discounters, market share erosion of the hypermarkets became endemic. In this sense, Verdict believes the Galland law also explains discounter growth to a certain extent. That said, as retailers' own labels did not fall under the scope of the law they became an area of competitive battles – and now the Galland law helps to drive the share of private labels up in the hypermarkets.

A damaging combination

The combination of three key factors – the regulatory background, discounter growth and a lack of focus – has seriously impacted hypermarkets in France.

Over the 2002-07 period Carrefour's and Casino's hypermarket sales densities declined by 13.8% and 24.3% respectively – due to a combination of stagnant or declining sales growth of the format and continuous space extensions. Despite the country being the birthplace of the hypermarché, the format has hit the growth buffers.

However with liberalisation looking increasingly likely, this could be about to change. Verdict predicts that liberalisation could have several impacts on the French retail environment. New retail space could be easier to develop after a reform of the Raffarin law. New price wars could be instigated by a reform of the Galland/Dutreil laws. The matter of employment reform will be crucial both for retailers in their function as employers as well as net beneficiary of rising purchasing power levels as incomes rise.

Brushing up and relaunching

Anticipating changes to the legal environment, hypermarket operators have started brushing up on their retail skills. Many players are now relaunching and extending their private label ranges (Carrefour, E. Leclerc, Auchan, ITM, Syteme U) introducing more focussed non-food ranges (clothing especially, but also electricals and DIY) and at last reacting to the health & wellness trends and ethical demands.

A make-over expected

Looking ahead, Verdict Research predicts more of the following from the hypermarkets: competition on service provision, continued expansion into non-food, new format development, brand simplification, new locational strategies and a continued push of multichannel offers, especially internet retailing.

As competition on price has been stifled by the Galland law, the leading players have focussed their competitive battles on other areas. In general, the service provision (petrol, banking and internet, mobile phones) is much better developed in France than in other EU countries. Another focus of the competitive battle has been price comparison websites (now copied by UK players). According to Verdict, the one stop shopping offer in France is on a higher level than anywhere else and we expect more development in this area going forward.

As locational strategy is highly restricted due to the Raffarin law, players have started to test untried solutions. The electricals/music & video retailer Fnac is moving its newest stores OOT. Furniture boulevards provide a new solution for furniture specialists. Grocers' “drive throughs” have also become increasingly popular. At the same time both ITM and Kingfisher are trying city centre locations with a new convenience outlet while Conformal is also moving on to the French high street.

Finally, the internet remains a massive growth opportunity. Online commerce is increasingly becoming an integral part of many retailers' strategies in France with French consumers enjoying a high level of broadband penetration that has spawned a buoyant online market.