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Carrefour S,A

Carrefour S,A

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Published by: ketut_widya on Mar 24, 2010
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Case 2 : Carrefour, S.A.
Working Capital Management 
Course : Financial Management, MMUGM Sby AP 7Instructor: Dr. Erni Ekawati, MBA, MSA
Group member :
1.Yuli Rosiana2.Hidayat Akman3.I Ketut Widya N.4.Robby S. Irawan5.Yogik H. Wijayanto
Carrefour had been maintaining a negative net working capital that is considered as arisky financial strategy. A negative net working capital that a company currently isunable to meet its short-term liabilities with its current assets (cash, accounts receivableand inventory). In case of temporary recession occur during payment of short term debt,the firm may unable to pay the debt.
Its Debt-to-Equity (D/E) ratio showed an increasing number over a period of time and itwas relatively higher than other competitors. A higher debt-to-equity ratio means that themore debt that is used and the greater risk that the entity might be forced to liquidate andgo out of business. Carrefour financed its capital mostly by using a non-interest bearingtrade note. Consequently, Carrefour indeed should find a way to make a slightly higher net working capital and reduce its debt-to-equity ratio.
Maintaining a short Cash Conversion Cycle (CCC) was a good thing for Carrefour;however, having a negative Free Cash Flow (FCF) might not be good. Some investors believe that FCF gives a much clearer view of the ability of the company to generate cash(and thus profits). On the other hand, a negative FCF also shows that this company wasdoing large investments. If these investments earn a high return, the strategy would be aworth for a company to provide a potential to pay off in the long run. Moreover,Carrefour’s current ratio (liquidity and risk ratio) seems to look awkward in which that itsnumber is less than 1.0 while other competitors maintained a number greater ratio.
As a rapidly growing company, Carrefour had great opportunities to be accepted by itscustomers excitedly as a convenient and one-stop shopping center with its cheaper pricecompare to other available stores. This lead to a number of 40% of other small retailshops or approximately 80,000 stores had closed down in 1971. In order to solve thisissue, French government to some extend decided to make tighter regulations to slowdown the significant enlargement of hypermarket, such as Carrefour by limiting thenumber of new opening store each year (maximum of two stores per year). Another way
to approach the issue broadly was increasing the tax to hypermarket and subsidized thetax income for small shopkeepers that could not maintain their sustainability.
While Carrefour was trying to manage its capital management, Carrefour created twotype of businesses besides its wholly owned stores. This was accomplished in order towork out their capital shortages. Some stores were in form of joint ventures and theothers were in a franchise type of businesses. Each type of business generated differentnet income in which joint ventures gave Carrefour a profit between 10-50% of theownership, while franchises provided a fee of 0.2% of total store sales. The strategy wasquite successful by means that Carrefour’s investments and advances to affiliates hadgrown up to F 19 million. The main concern of Carrefour was to create maximum returnsand minimize risks as low as possible by combining these three type of businesses.
Carrefour was facing an increased competition in France and the future growth was beginning to look limited. It was estimated that 50% of market saturation had already been taken. Furthermore, it was expected in the next few years, the market fohypermarket stores would be completely saturated at current growth rates. Therefore,Carrefour considered expanding their strategy by investing in others countries. As aresult, Carrefour needed to observe several possible ways to set up stores outside France.
Working capital represents operating liquidity available to a business. It’s usuallycalculated by subtracting the current asset with current liabilities. Decisions relating to workingcapital and short term financing are referred to as working capital management. The goal of working capital management is to ensure that the firm is able to continue itsoperationsand thatit has sufficient cash flow to satisfy both maturing short-term debt and upcoming operationalexpenses. Working capital management entails short term decisions based on cash flow and profitability. Cash flow could be measured by cash conversion cycle, meanwhile profitabilityusually measured by ROC (Return on Capital) or ROE (Return on Equity). Firm in managingtheir working capital use combination of policies and techniques in cash management, inventorymanagement, debt management, and short term financing, such that cash flow and risk and returnare acceptable.Carrefour main strategy was to generate high sales volume by maintaining a very smallmargin. From the Re-arranged Operating Statement (Exhibit 1), Carrefour net profit margin wasaveragely 2% which means that each dollar sale give 2 cents return. It was lined up withCarrefour’s low price strategy. The percentage incremental of both EBIT and Net Incomeaveragely returned a positive value (60% and 62%). These values are majorly affected by Sales(Net), purchase and operating expense. Figure 1.5 shows increasing amount in operating expensefollowed by an increment in net sales over the past seven years. On average, the net sales eachyear was increasing around 53% which was considered to be a great number. The company grewat least by half of its company size every year. The short table below gives a quick picture of thenet income percentage within seven years :Although this percentage of net income was relatively low, Carrefour should observe athow its profitable investment was being financed. Exhibit 2 shows that the composition betweeninvestment activities and financing activities. The composition between these two activities wasmismatching. Carrefour’s fund was more than enough to support their operating activity. Mostlyits fund was covered by short-term debt from external parties. Ideally, a short-term investmentshould be supported by a short-term debt. However, from the balance sheet, Carrefour keptincreasing its net fixed asset, which was assumed to be an investment in land and buildings. Theinvestment in net fixed asset was financed mostly by non-interest bearing note (short-term debt). Net fixed asset is again categorized as a long-term investment. This is where Carrefour had amismatching between a long-term investment and a short-term financing.One important thing to note is that using a non-interest bearing note gave Carrefour anadvantage financial performance since it did not force the company to pay the interest whichconsidered as a cost that could more reduce its net margin.
In millions of France
1965 1966 1967 1968 1969 1970 1971
Net Sales (netVAT)153 215 332 513 878 1,250 1,936
Net Income3 3 7 10 16 23 44% Net Income1.96%1.40%2.11%1.95%1.82%1.84%2.27%1.91%

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