CAN THE SWORDFISHSURVIVE CARREFOUR?

REUTERS/DamiR Sagolj

Lars Olofsson is caught in a revolt at the worlds second-biggest retailer. If he fails, shareholders might push for a break-up

By DominiqUE ViDalon, PaScalE DEniS anD maRk PoTTER

PARIS, JUNE 20

LARS OLOFSSON WAS known as the swordfish when at food maker Nestle. He seemed ferocious, his detractors sneered, but he was hardly a Great White.

Now at Carrefour, the 59-year-old Swede is fighting for survival, his fate inextricably linked with a multi-billion dollar bet by Bernard Arnault, Frances most successful businessman and the man who hired him.

He was in a swimming pool, said a former Nestle colleague. Now he is swimming in the sea, and its full of sharks.

Olofssons task is to deliver a turnaround

at the worlds second-biggest retailer. But it is getting trickier by the day. Earlier this month, Carrefour warned first-half earnings in France, its home market, would fall about 35 percent.

If Olofsson fails in his plan -- one of the most ambitious in retail history -- frustrated investors may try to break up Carrefour. As the company is Frances largest private sector

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employer, such a move would have ramifications well beyond the boardroom.

Luckily for Olofsson, the biggest predator circling Carrefour is its top shareholder: Blue Capital, an alliance between Arnault, Europes richest man, and U.S. property tycoon Tom Barrack. For the time being at least, they are behind him.

But they are also partly responsible for getting him into the hole he now finds himself in, after strong-arming him into a plan to spin off part of the French groups property estate following two profit warnings in 2010.

Within days their move sparked rebellion among top managers, trade unions, at least one founding family and an influential U.S. investor. All were up in arms, fearing that ceding full control of stores would weaken Carrefours ability to compete.

Olofssons response was a tactical retreat. He shelved the property spin-off, fired the man hed hired only 15 months earlier to run the French business and took control himself.

The big surprise was that Olofsson managed to retain the support of Arnault and Barrack.

They are not 100 percent happy with everything, said a source close to the top shareholders. But there is (only) so much you can blame on a single man in a situation so complex... They are very happy with the leadership. Olofsson, Arnault and Colony Capital declined to be interviewed for this story.

Others suggest Blue Capital had little choice but to stick with its man and his turnaround strategy. The investor already faces losses of about 1 billion euros ($1.4 billion) and is likely to keep up the pressure for quick fixes, risking another blow-up with rival interest groups and sowing discontent and uncertainty within.

CURSE OF CARREFOUR CARREFOURS IDENTITY CRISIS comes just over half a century since it was founded in 1959 by the Fournier and Defforey families. Since then it has become second only in size to U.S. group Wal-Mart, with more than 100 billion euros in annual sales.

Its hypermarkets, a hybrid of the supermarket and department store, were hits with Europes post-war baby-boomers hungry for choice and the latest consumer goods at

bargain-basement prices.Global expansion followed. Coupled with a

merger with French rival Promodes in 1999, this created a retailer that employs 475,000 staff in more than 15,500 shops across 34 countries.

But Carrefour was slow to adapt to changing consumer demands and to take advantage of economies of scale. In 2010, its operating profit margin in France was just 4.1 percent, compared with the 6.1 percent achieved by Britains Tesco in its home market.

Meanwhile French rivals like Auchan and E Leclerc have continued to grow. Some think this is because they give store managers more freedom, unlike Carrefour which has piled on management layers and lost its edge.

For Maurice Levy, the boss of advertising giant Publicis which counts Carrefour among its five biggest clients in France, the problem has been choosing the right leader. Entrepreneurs made Carrefours fabulous history.Since the merger with Promodes, Carrefour has had no entrepreneur at its helm, he said.

A procession of leaders has tried to solve the problem: all have failed. Carrefour is a cursed company, it swallows its chief executives, said one veteran industry watcher.

THE BLUE PERIODJOSE LUIS DURAN, the CEO who

opposed a first attempt to spin off property, succumbed to the curse and was dispatched early in the Blue period.

Bernard Arnault and Sebastien Bazin --

UnDER PRESSURE: Carrefour CEO Lars Olofsson, here in Brussels in April, faces opposition inside and outside the company. REUTERS/THiERRy RogE

Sources: Thomson Reuters Datastream

Carrefour underperforms

Reuters graphic/Scott Barber

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BlUE PoWER: Bernard Arnault has demanded change. REUTERS/ValEnTin FlaURaUD

who runs the European operations of Colony Capital for U.S. billionaire Tom Barrack -- replaced him with Olofsson.

Both men can be ruthless. Arnault, the 62-year-old scion of construction entrepreneurs, took on some of Frances most famous businessmen to turn LVMH into the worlds biggest luxury goods company. Bazin,

a 49-year-old golf fanatic, has a reputation for shaking up management, having seen off two chief executives since investing in Europes largest hotelier, Accor, in 2005.

It was Bazin who convinced Arnault to invest in Carrefour in 2007. For him, the value of the retailers property assets was being masked by problems in its western European business, which needed radical restructuring.

For Arnault, Carrefour was a rare venture outside the luxury world and a purely financial investment. Creating Blue Capital, the duo amassed a 13.5 percent stake -- a fifth of Carrefours voting rights -- and took three out of 11 board seats.

But this only hints at Blue Capitals power. Blues influence is very important. They

approve everything, right down to marketing releases, said one Carrefour insider.

Blue Capitals early focus was to hive off Carrefours property assets in the hope investors would value two separate businesses more highly than one. But that plan -- and Carrefours profits -- were hit by the economic downturn.

ANOTHER PLANET BLUE CAPITALS CHOICE of Olofsson was a surprise one. But Arnault and Bazin saw in the silver-haired Swede a combination of attributes that made him ideally suited for the task in hand.

As head of Nestles French business in the 1990s, Olofsson proved he could deliver

in a country notoriously resistant to radical corporate change. Then as boss of Nestle Europe, he led a modernisation programme, sweeping away local fiefdoms and making regional decisions that delivered economies of scale. With a keen eye for consumer trends, and a flair for communication, Olofsson also showed the personal touches -- making a point of greeting everyone in a room, and listening to all opinions -- that made tough actions more palatable.

Hes a guy that can kick ass, but people dont actually mind their asses being kicked by him, said James Amoroso, an investor relations consultant whose clients include Carrefour and who has known Olofsson for over 10 years.

The early signs were good. After just six months at Carrefour, he announced a three-year transformation plan aimed at delivering 4.5 billion euros of savings. He showed he was in touch with the consumer mood by launching a cut-price Carrefour range, and recruited top retail talent, including James McCann from Tesco to run the French business.

Last September, Olofsson unveiled the missing piece of his jigsaw, a 1.5 billion euro plan to reinvent the hypermarket.

Out was the old slogan of selling everything under one roof. In was Carrefour Planet, with specialist zones for categories like clothing, beauty, media and organic foods, and in-store theatre from cooking lessons to massage sofas.

Buoyed by Olofssons forecast that Carrefour

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could more than double operating profit to 6.4 billion euros by 2015, its shares surged to a two-year high of 41.28 euros, close to the average price of 45 euros that Blue Capital had paid for its stake.

CALLED TO ACCOUNTTHEN OLOFSSONS PLANS started to unravel.

A regular audit uncovered accounting mistakes in Brazil. Initially estimated at 180

million euros, the costs grew to 550 million euros, ensuring Carrefour would miss its 2010 profit target. Early results from Carrefour Planet were mixed. Market share gains in France started to reverse amid discontent about the leadership of McCann, Olofssons star hiring.

At 6 oclock in the morning, he would descend on a store and reprimand staff in pretty crude terms about how they were presenting fresh products or vegetables, recalled one person familiar with McCanns style. He wanted to apply Anglo-Saxon methods, night-time working. That wasnt going to happen.

With the share price sliding again, Olofsson was under pressure to deliver good news. In November he agreed the sale of the groups Thailand business for $1.2 billion -- a price which seemed to confirm Blue Capitals suspicion that individual assets were worth more than the sum of the whole. But Carrefours shares barely moved. By the end

of 2010, Blue Capital was pushing to revive its plan to spin off property, and also wanted to hive off the groups discount chain Dia.

After a disappointing Christmas, Olofsson agreed, though by this time, he knew he would have a fight. McCann was one of the most vocal of a group of managers who argued that ceding control of stores would weaken Carrefour, and that Olofsson was bending too much to the will of Blue Capital.

He said it high, and he said it loud, said

one source familiar with the tensions, adding McCann was joined by senior managers of French hypermarkets and supermarkets, and a top international markets manager.

To add to Olofssons woes, U.S. activist investor Knight Vinke started an external campaign against the property plan, raising similar objections. Its founder and chief executive Eric Knight, in a letter to the board on April 11, said most shareholders hed canvassed opposed the plan, as did trade unions and Herve Defforey, the son of one of Carrefours founders.

Olofsson was left with little choice but make a u-turn and put himself directly in charge of delivering his turnaround plan. By May, McCann was gone.

PRICING SMOKESCREENCRITICS SAY OLOFSSON is taking a huge risk by rolling out Carrefour Planet so quickly, after such a short period of testing. There are concerns too that Carrefour Planets upmarket

feel will reinforce a perception that it is more expensive.

Changing the store is nice, but its a smokescreen -- perhaps a way to make us swallow the pill when we get to the check-out counter, said Sandrine Divaret, 37, shopping in the new Carrefour Planet in Les Ulis near Paris.

The profit warning on June 17 did nothing to alleviate such concerns. Olofsson named Noel Prioux, a Carrefour lifer, as the new head of France, but reiterated that he would oversee operations there. Critics arent sure thats a good call, given his lack of retail experience.

We do not really know where Carrefour is going, said Michel Enguelz, Force Ouvriere union representative at Carrefour and head of Carrefours employee fund. We need to put in place people who come from the retail world.

Vincent Verdier, director of applied research at consultants Kantar Retail, believes that in focusing on Carrefour Planet and on operational improvements, Carrefour has fallen behind rivals in key growth areas like online shopping and convenience stores.

Since Lars Olofsson arrived and set up the new management structure there hasnt really been a clear retail growth strategy rolled out into the business, either at the national level ... or the European or the global stage, he said.

SAVING CARREFOUR OLOFSSONS OTHER BIG challenge is to manage conflicts between shareholders with fundamentally differing views.

Men like Arnault, they are hard, without pity. They do their job and make their return on capital. Olofsson ... has never managed such a situation, said a former colleague.

A person close to Blue Capital told Reuters it would give Olofsson time and space to work, without making distracting demands. But Carrefour, and its lagging share price, risks becoming a stain on the reputation of both Arnault and Colony.

Arnault does not want to admit he made an error. That is why he is putting so much pressure on Carrefour. Arnault is obsessed with Carrefour, one veteran business consultant said.

Within weeks of the property spin-off being shelved, it emerged that Carrefour was holding talks with retail tycoon Abilio Diniz about a possible deal involving its Brazilian business. There are persistent rumours that the retail giant might sell assets from China and Indonesia to Poland and Italy.

Were it to pursue such a strategy, it seems likely there would be fresh opposition. If you start to sell everything with a high value, whats left? Countries that nobody wants,

SPEcialiST ZonE: Carrefour Planet in Lyon, June 7, 2011. REUTERS/EmmanUEl FoUDRoT

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coVER PHoTo: Shoppers leave a Carrefour supermarket in central Bangkok January 22, 2011. REUTERS/DamiR Sagolj

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Knight Vinke CEO Eric Knight told a small group of reporters last month.

Olofsson must also convince critics he is managing the business for all, and not just Blue Capital.

The governance problem is at the top of the pyramid, said Pierre-Henri Leroy, director of shareholder advisory Proxinvest who is also critical of Carrefour chairman Amaury de Seze.

Nobody knows how to oppose the decisions of Blue Capital.

But Olofsson does have some high-profile supporters. Publiciss Maurice Levy is confident Olofsson, whom he has known for 30 years, can get the job done. No doubt. He has already made considerable progress.

If he fails, the danger is that Arnault and Colony will seek to salvage what money they can by breaking Carrefour up.

It is hard to imagine French politicians agreeing to such a move, particularly so close to presidential elections in early 2012. As Eric

Knight says: Carrefour is part of Frances heritage. Everybody thinks he owns a piece of Carrefour.

But if Arnaults track record is anything to go by, he may put being a businessman ahead of being a Frenchman.

(Additional reporting by Natalie Huet in Paris; Editing by Alexander Smith, Simon Robinson

and Sara Ledwith)

cHoRUS: Employees demonstrate at a Carrefour store in a suburb of Brussels in March 2010. REUTERS/THiERRy RogE