CARREFOUR S.

By

Group Members

Roll No.

ABU ASIF HASAN

MP13001

AJIT KUMAR SINHA

MP13003

AKASH PRIYRANJAN

MP13004

ASHUTOSH K TRIPATHY

MP13017

GYANESH DUBEY

MP13026

SUMANTRA KUMAR KHAN

MP13060

XLRI
JAMSHEDPUR

ANALYSIS :

The goal of working capital management is to ensure that the firm is able to continue its
operations and that it has sufficient cash flow to satisfy both maturing short-term debt and
upcoming operational expenses.
Working capital management entails short term decisions based on cash flow and
profitability. Cash flow could be measured by cash conversion cycle.
Profitability usually measured by ROC (Return on Capital) or ROE (Return on Equity). Firm
in managing their working capital use combination of policies and techniques in cash
management, inventory management, debt management, and short term financing, such
that cash flow and risk and return are acceptable.

STRATEGY
Carrefour main strategy was to generate high sales volume by maintaining a very small margin.
From the Re-arranged Operating Statement. Carrefour net profit margin was averagely 2% which means
that each dollar sale give 2 cents return. It was lined up with Carrefours low price strategy. These values
are majorly affected by Sales (Net), purchase and operating expense. Figure shows increasing amount in
operating expense followed by an increment in net sales over the past seven years. On average, the net
sales each year was increasing around 53% which was considered to be a great number. The company
grew at least by half of its company size every year. The short table below gives a quick picture of the net
income percentage within seven years :
In millions of
France
Net Sales (net
VAT)
Net Income
% Net Income

1965

1966

1967

1968

1969

1970

1971

Avera
Ge

153
3
1.96
%

215
3
1.40
%

332
7
2.11
%

513
10
1.95
%

878
16
1.82
%

1,250
23
1.84
%

1,936
44
2.27
%

1.91
%

Although this percentage of net income was relatively low. Exhibit 2 shows mostly its fund was
covered by short-term debt from external parties. Ideally, a short-term investment should be supported by
a short-term debt. However, from the balance sheet, Carrefour kept increasing its net fixed asset, which
was assumed to be an investment in land and buildings. The investment in net fixed asset was financed
mostly by non-interest bearing note (short-term debt). Net fixed asset is again categorized as a longterm investment. This is where Carrefour had a mismatching between a long-term investment and
a short-term financing.
Carrefour was maintaining a positive Net Operating Working Capital (Net Working Asset) within 7
years. The NOWC had increased starting from 1965 1968 and dropped in 1969
1970. This was due to an increase in the amount of account payables.
Carrefours negative free cash flow results in high long-term investments.
The negative free cash flow could reduce in the value of the company. In this case, external investors
might start to think twice in order to put their investments in Carrefour.
Carrefours Return on Earning (ROE) was greater than Return on Invested Capital (ROIC) which
means that Carrefours financing strategy was more provided externally. Note that its Turnover, which is
calculated by dividing Sales by Total Capital, showed a number greater than 1, means that sales covered
more than enough compare to its total capital. This is closely related to its Cash Conversion Cycle which
will be explained on Exhibit 11. Moreover, this strategy still correlated with Carrefour strategy by making
huge sales revenues and maintaining small margins.
Carrefours cash conversion cycle had generated a fast cash. Please refer to Figure 1.3 for
Carrefours cash conversion cycle diagram. Cash conversion cycle represents the net time interval

between the collection of cash receipts from sales and the cash payments for the various resources used
by the firm. The cash conversion cycle, which Carrefour had on average, was around 13 days (Exhibit
11). This means that Carrefour would have to finance the buying-selling cost for a 13-day period. It might
be better if later Carrefour could shorten its cash conversion cycle without hurting its operations. On the
other hand, Carrefours current ratio (one type of liquidity ratios) shows a small number, less than 1.0. The
low current ratio is due to the fact that as a retail store, Carrefour has to maintain high inventory levels
which mean that most of its funds is tied in inventory. This, however, is not a bad sign since Carrefour
enjoyed a small inventory turnover ratio, average of 0.06 times, which means that the company is
effectively managing its inventory. Moreover, in terms of Carrefours low current ratio, with the quick cash
conversion cycle could still fund its operations.

RECOMMENDATIONS
Based on the analysis above, we observe two main factors that raised several issues in its working
capital management as below :
1.Maintaining a negative net working capital
2.High Debt-to-Equity ratio

These two conditions above are considered as a risky financial management. Negative net working
capital could be a sign for a company facing a bankruptcy or serious financial problem. This is due to the
higher current liabilities (or debts) compare to its current assets. If Carrefour in some situation cannot
generate a fast cash conversion cycle, it will end up with having lots of debts that cannot be covered by its
assets.
Carrefour should adjust its negative net working capital by reducing its current liabilities. Based on our
balance sheet projections in 1972 (exhibit 9), we have made two scenarios to compare which one of
Carrefours capital structure suits the best for Carrefour.
Prior to arranging the two scenarios, our team decided to project Carrefours sales performance in
1972. We found that the average percentage growth of net sales was 79% (about F 3,485 million). In
addition, we made several calculations to support our projected income statement and balance sheet in
order to project the financial statement that results in a positive net working capital.
Knowing that Carrefours negative net working capital was being affected by its high short- term debt,
our team propose a better composition between the short-term debt and the long-term debt that will lead
to a positive net working capital. To meet Carrefour capabilities in fulfilling the investment activities, we
suggest Carrefour to increase their equity by releasing some new stocks (shares) to the market. This will
later finance its growth in a better way. Consequently, this low total debt and increase in equity will lower
the Debt-to-Equity ratio.
Since in 1972 Carrefour was planning to open 15 new stores, with three different type of business
units, it appears that wholly owned will give a higher return based on our forecasting (please refer to
exhibit 13 and figure 1.6) ; however, since the French government limited a number of new opening stores
(maximum 2 stores each year) under the same company, the chance for Carrefour to grow rapidly would
be constrained. As a result, Carrefour can only open a maximum number of 2 new stores in a year. This
will leave 13 new stores with two types of ownership.
Comparing the return between the two types of ownership, it is obvious that Carrefour would prefer
to choose a joint venture. However, we tried to look over its business risk. Based on our risk calculations
(exhibit 12), we started to forecast the rate of return for each type of ownership. We found that wholly
owned stores placed a 54% rate of return, where joint ventures occupied 18% and franchise was 28%.
Comparing with Carrefours plan in 1972 to open 2 new wholly owned stores, 7 joint ventures and 6

franchise company, our team decided to leave the composition. We support our detail analysis from the
risk and return (exhibit 12) that shows a number of standard deviation 11.54%. Comparing with Carrefour
successful way in adding its joint businesses within 1969 1971 in order to increase its Investments and
advances to affiliates (current assets), this risk can be assumed as low risk and high return.
The hypermarket competition in France started to increase that would later slow down the future
growth. According to the Carrefours management observation, there had a bigger potential market that
could be explored outside France. Carrefours winning strategy by lowering cost could be done, for
example in Belgium. However, Carrefour needs to open either a joint venture or franchise ownership, for
example with SA Innovation. The reason was that initial entry in other countries could be difficult for
foreign company. Besides, Carrefour might lack of knowledge and experience in expanding the territory
outside France. Carrefour, however, could later do the tactical acquisitions of smaller competitors and
emerged to be one of the giant hypermarket all over Europe.
6

IMPLEMENTATION CONSIDERATIONS
Our team founded an article about Wal-Mart in which that they could manage a shorter cash
conversion cycle in which it had a negative number in 2006. Therefore, it will be better for Carrefour to
shorten its cash conversion cycle from 13-day period becomes to a lower number.