Retailers have had a hard time of it over the last few years, and many continue to struggle. In the UK, as elsewhere, many retail names have disappeared from the high street.
So, how are the world’s biggest and best coping, and what are their prospects for the future?
The big three
The US’s Wal-Mart Stores (NYSE: WMT.US), France’s Carrefour and the UK’s Tesco (LSE: TSCO) are the world’s top three publicly listed retail groups. The latest ‘Fortune 500’ list, which ranks companies by turnover, shows Wal-Mart to be the largest retailer — indeed, the third-largest company in the world. Carrefour ranks at 39 and Tesco at 59.
The companies have some similarities and some differences in the histories that have made them into retail giants.
Tesco is the smallest of the three, but has the longest history, its roots going back to 1919 when Jack Cohen began selling groceries from a market stall in London’s East End. The first Tesco store opened in 1929 and by 1947 Tesco had become a listed stock-market company. Tesco has grown to dominate the UK supermarket sector and today has its hands on around a third of the nation’s groceries shopping.
Tesco’s larger rivals, Wal-Mart and Carrefour, were founded more recently, in 1962 and 1958 respectively, but both have likewise grown to dominate their home markets.
Wal-Mart has the same ‘one-man-band’ origins as Tesco, though founder Sam Walton was a renegade franchisee rather than a market trader. Wal-Mart was listed on the New York stock exchange in 1972 and, unlike Tesco, remains a family-controlled business to this day.
In contrast to both its rivals, Carrefour was founded as a group enterprise. Marcel Fournier, Denis Defforey and Jacques Defforey were inspired by US retail guru Bernardo Trujillo to launch their first Carrefour store. Twelve years later, in 1970, the growing company was listed on the Paris stock exchange.
Dominators of their home markets, all three retailers have been expanding internationally over the past decade or two.
The following table gives some numbers to show the current state of play with regard to the global reach of each of the retail giants.
Company Total revenue (£bn) Revenue from home market (£bn) Revenue from outside home market (£bn) Number of countries operating in
Wal-Mart 282 192 90 27
Carrefour 69 30 39 33
Tesco 65 44 21 13
Wal-Mart and Tesco are very similar in that around a third of their revenues are generated outside of their home markets, albeit in absolute terms Wal-Mart’s international revenue is more than four times that of Tesco. Wal-Mart has also penetrated more than double the number of international markets of Tesco.
Carrefour’s international profile is somewhat different. Not only does it operate in the largest number of international markets, but international sales also account for a whopping 57% of group revenues.
Looked at alongside Wal-Mart and Carrefour, Tesco is considerably less of a global company — indeed, its established international operations essentially amount to a small cluster of countries in Central Europe and a small cluster in South East Asia. Wal-Mart and Carrefour are both long established in South America, have made steps into Africa and are ahead of Tesco in that tough-to-crack but huge and potentially lucrative market of the future, China.
The three companies face many of the same challenges, including the China conundrum, the opportunities and pitfalls of the digital shopping age, and the need to manage expansionary capital investment carefully in the prevailing economic conditions. But they also face a number of company-specific challenges.
Wal-Mart, to be fair, is in pretty good shape considering many investors and industry observers a few years ago were predicting an interminable period of declining sales and earnings. Wal-Mart has continued to grow its sales and earnings — and its dividend — and maintained its operating margin at close to 6%. The shares have recently touched their previous all-time high – $75.24 around the turn of the millennium when the price-to-earnings (P/E) ratio was about 50!
Tesco had shown similar resilience, until it announced a profit warning in January. The company acknowledged that it had not only got its Christmas offer wrong, but that the performance reflected deeper-rooted problems within the UK business coming home to roost. Tesco is now intent on trying to get its core UK operation back on track, while at the same time trying to crack China and another extraordinarily tough market for outside retailers — the USA.
Tesco’s earnings growth is set to stall this year, the operating margin is forecast to drop to around 5.3% from its previous Wal-Mart-like level, and analysts predict only a modest increase in the dividend at best.
Carrefour has been trying to deal with its problems for a lot longer than Tesco, and has seen falling sales and declining margins over the past four years. The operating margin for the latest year was just 2.7% and the company decided to cut its dividend by more than half. Carrefour may be the most geographically diverse of the world’s top three retailers, but it is also the only one with significant exposure to Greece and the other desperately struggling economies of the Mediterranean. It hasn’t been doing too well in its home market, either. Carrefour appointed a new chief executive this year, who said his turnaround plan for the group would take at least three years to execute.
At the checkout
Which retail giant is the best value today? Here are the current-year forecast P/E and yield numbers:
Company Forecast P/E Forecast dividend yield (%)
Wal-Mart 15.3 2.2
Carrefour 12.6 3.0
Tesco 10.0 4.4
Wal-Mart has the highest P/E and the lowest yield, but we are talking about the king of retailers here. It may surprise you to know that Wal-Mart’s P/E has only been this low in a few years during the last quarter of a century.
Carrefour strikes me as expensive for a turnaround story that won’t turn around for some time, while Tesco looks a more attractive recovery prospect — even if my gut feeling is that things could get worse before they get better.
Legendary US investor Warren Buffett increased his stake in Wal-Mart earlier this year, but also added significantly to his holding in one of Wal-Mart’s two biggest rivals.
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