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CASE
37
Carrefour S.A.
With total sales of (euros) EUR53.9 billion from more than 5,200 stores, Carrefour
S.A. was Europe’s largest retailer in the summer of 2002. Over the previous four
years, Carrefour’s growth, including several large acquisitions, had occurred almost
entirely outside France. The company maintained retail operations in 26 countries
across the globe.
In funding its ongoing expansion, Carrefour faced an immediate debt-financing
requirement of EUR750 million. Historically, Carrefour management maintained a
practice of funding capital needs in the same currency as the respective business oper-
ations. Its investment banks, Morgan Stanley and UBS-Warburg, however, had
recently suggested that Carrefour consider borrowing in British pounds sterling
through the eurobond market in order to take advantage of a temporary borrowing
opportunity in that currency. As a basis of comparison, the investment bankers pro-
vided alternative rates across various currencies for a proposed 10-year Carrefour
bond. The bankers estimated that the bond could be priced at par at a coupon rate of
51⁄4 in euros, 53⁄8 in British pounds, 35⁄8 in Swiss francs, or 51⁄2 in U.S. dollars.

Carrefour
In 1963 in the small French town of Sainte-Geneviéve-des-Bois, southeast of Paris,
Carrefour transformed the world of retailing with the introduction of the “hypermar-
ket” concept. This retail format combined a supermarket, drugstore, discount store,
and gas station into one massive, one-stop-shopping megastore. The original Sainte-
Geneviéve-des-Bois store boasted 2,500 square meters of retail space, 12 checkouts,
and 400 parking spaces. Leveraging this concept, the company expanded rapidly in
France and beyond, opening its first store outside France (Belgium) in 1969, and out-
side Europe (Brazil) in 1975. In addition to strong organic growth, Carrefour pursued
selective acquisitions, including notable mergers with Euromarche and Montlaur in

This case was prepared by Professor Michael J. Schill. It is based exclusively on public sources and contains
some fictionalized content. It was written as a basis for class discussion rather than to illustrate effective or
ineffective handling of an administrative situation. Copyright © 2005 by the University of Virginia Darden
School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to
sales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a retrieval
system, used in a spreadsheet, or transmitted in any form or by any mean––electronic, mechanical, photo-
copying, recording, or otherwis––without the permission of the Darden School Foundation. Rev. 1/09.

513
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514 Part Seven Analysis of Financing Tactics: Leases, Options, and Foreign Currency

1991 and Promodes in 1999. Exhibit 1 provides a history of Carrefour’s store port-
folio from 1992 to 2001.
Carrefour was profitable in all major operating regions. In 2001, the company
generated operating profits of EUR2.8 billion on total net sales of EUR69.5 billion.
Of that profit, 5% originated in Asia, 2% originated in Latin America, and 26% orig-
inated in Europe outside France, with the remainder of profits coming from French
operations. The regional-sales breakdown was 7% from Asia, 12% from Latin
America, and 32% from Europe outside France. For Carrefour, 2001 marked an impor-
tant milestone as the first year that total international sales exceeded total domestic
French sales. Carrefour was the largest retailer in France, Belgium, Greece, and Spain.
Exhibit 2 details Carrefour’s consolidated financial statements.
The company expected to maintain its expansion trajectory. Carrefour’s CEO,
Daniel Bernard, stated that in 2002 the company would increase sales by 5% on con-
stant exchange rates and increase recurring net income by 10% to 15%. He asserted
that the company would continue to gain market share in most of the countries where
it operated, notably in Italy, Belgium, Brazil, and Argentina.

Carrefour’s Financing Policy

With such broad international reach, Carrefour was highly disciplined with respect to
its management of exchange rate risk. Within each country, Carrefour operated prima-
rily within the local economy for sourcing its products. Any foreign-currency exposure
on imported goods was generally hedged through forward contracts on the currency.
A currency forward contract was a financial agreement whose value was deter-
mined based on the difference between a predetermined forward rate and the pre-
vailing spot rate at a particular point in the future. For example, suppose Carrefour
purchased a U.S. dollar forward contract on EUR1 million in one year that was priced
at (U.S. dollars) USD0.891 per euro. The gain on the contract in one year would be
equal to 1,000,000 multiplied by the difference between the forward rate of USD0.891
and the prevailing dollar-to-euro exchange rate in one year (the spot rate). Suppose
that the prevailing dollar-to-euro exchange rate was USD0.90 per euro. If the dollar
appreciated to a dollar-to-euro exchange rate of USD0.85 in one year, Carrefour would
gain USD41,429 on the forward contract [(USD0.891 ⫺USD0.85) ⫻ 1,000,000]. Car-
refour gained in this scenario because it owned a contract that gave it USD0.891 for
every euro in the contract when the prevailing exchange rate only gave it USD0.85
per euro. If alternatively the dollar depreciated to a dollar-to-euro exchange rate of
USD0.95, Carrefour would lose USD58,571 on the forward contract [(USD0.891 ⫺
USD0.95) ⫻ 1,000,000]. Carrefour lost in this scenario because it was locked into a
contract that required it to receive only USD0.891 for every euro in the contract when
the prevailing exchange rate gave them USD0.95 per euro. In summary, with this par-
ticular forward contract Carrefour gained if the dollar appreciated and lost if the dollar
depreciated.
Banks offered forward rates based on the equivalent rate that could be syntheti-
cally locked in by borrowing and lending in the two currencies. For example, sup-
pose that the prevailing dollar-to-euro exchange rate was USD0.90 per euro and the
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Case 37 Carrefour S.A. 515

prevailing interbank one-year interest rate is 4% in dollars and 5% in euro. If the bank
wanted a forward position of receiving dollars and paying euros, it could borrow in
euros at 5%, convert the proceeds into dollars, and invest the dollars at 4%. In con-
structing this “synthetic forward contract,” the bank would generate dollars from euros
at a rate of (1.04)(USD0.90) ⫼ (1.05) or USD0.891 per euro. Through borrowing in
euros and investing in dollars the bank could simulate the same forward conversion
of currency as that of a forward contract. Since the forward contract generated the
same currency conversion as the synthetic forward contract, it was sensible that the
fair forward rate for the USD/EUR exchange rate was determined by the same syn-
thetic forward pricing formula:

(1 ⫹ RUSD,T)T
f TUSD/EUR ⫽ SUSD/EUR
(1 ⫹ REUR,T)T

where f TUSD/EUR is the forward rate for T-years, sUSD/EUR is the prevailing spot
exchange rate, and RUSD,T and REUR,T are the prevailing interbank interest rates for
T-year maturity in dollars and euros, respectively. The pricing relationship applied to
all currency combinations and maturities. Another way of arriving at the same for-
ward contract pricing formula was to assume that in competitive markets the bor-
rowing rate in one currency could not be meaningfully different than the rate achieved
by borrowing in another currency and hedging the exchange rate risk with forward
contracts. This condition was commonly called covered interest rate parity.1
In 2001, total Carrefour borrowings were EUR13.5 billion, of which EUR6.4 billion
were in publicly traded bonds. Carrefour’s debt was denominated in many currencies.
Exhibit 3 details the recent composition of Carrefour’s borrowings by currency.
Foreign-currency borrowing was generally hedged so that total debt requirements were
currently 97% in euros.

Current Market Opportunities

As Carrefour management considered the bond-denomination decision, it also con-
sidered the current inflation, interest-rate, and exchange-rate environment.2 Over the
previous three years, long-term bond yields had declined in all four currencies. The
Swiss franc’s interest rate, however, had consistently been the lowest rate. The deci-
sion also hinged on future movements in exchange rates. Over the previous five years,

1
Standard international finance theory prescribed that the forward rate represent an unbiased predictor of the
future spot exchange rate. The empirical evidence overwhelming rejected this notion, finding that forward
rates were poor and biased predictors of future exchange rates (see Ken Froot and Richard Thaler, “Anom-
alies: Foreign Exchange,”Journal of Economic Perspectives 4 [1990]: 179–92, for a readable summary of
the empirical evidence). In fact, the research literature suggested that the current spot exchange rate was
generally a better predictor of the future exchange rate than was the forward rate.
2
Because the bonds would be offered in the eurobond market, they would be subject to similar issuance
costs, liquidity, and specifications regardless of the currency denomination. Eurobonds uniformly followed
an annual coupon convention.
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516 Part Seven Analysis of Financing Tactics: Leases, Options, and Foreign Currency

the euro had depreciated against most major currencies. Should this trend continue,
paying down foreign-currency debt with euro-denominated cash flow would become
increasingly expensive. Exhibits 4, 5, and 6 provide information on trends in infla-
tion, government-benchmark bond yields, and exchange rates in the various curren-
cies. Exhibits 7 and 8 provide information on prevailing current spot exchange rates
and the yield curve.
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Case 37 Carrefour S.A. 517

EXHIBIT 1 | Total Number of Consolidated Stores

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

France 485 546 828 840 761 805 1,256 1,703 1,726 1,295
Spain 40 43 46 50 53 56 58 1,858 1,939 1,952
Portugal 2 2 2 2 2 3 4 278 277 281
Italy 0 1 6 5 6 6 6 52 413 305
Turkey 0 1 1 1 1 2 2 14 46 99
Poland 1 3 13 23 60
Czech Republic 3 6 9
Slovakia 2 2
Belgium 129
Switzerland 8
Greece 146 323 338
Argentina 6 7 9 12 15 18 21 128 361 400
Brazil 28 29 33 38 44 49 59 152 189 222
Mexico 2 7 13 17 19 17 18 19
Chile 1 2 3 4
Colombia 1 2 3 5
United States 2
Taiwan 5 7 8 10 13 17 21 23 24 26
Malaysia 1 1 2 3 5 6 6 6
China 2 3 7 14 20 24 24
Korea 3 3 6 12 20 22
Indonesia 1 5 7 8
Singapore 1 1 1 1 1
Hong Kong 1 2 4 4
Thailand 2 6 7 9 11 15
Japan 1 3

Total 568 636 936 968 919 996 1,489 4,448 5,423 5,233

Source: Carrefour S.A., annual report, 2001.

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518 Part Seven Analysis of Financing Tactics: Leases, Options, and Foreign Currency

EXHIBIT 2 | Financial Statements (in millions of euros)

2001 2000

Sales, net of taxes 69,486 64,802

Cost of sales 53,875 49,920
Sales, general, and admin. exp. 11,729 11,236
Other income 645 763
Depreciation 1,702 1,685
EBIT 2,826 2,725
Interest expense 646 707
Income tax 586 650
Net income from recurring
operations 1,594 1,369

Fixed assets 26,561 27,840

Inventories 5,909 5,716
Trade and supplier receivables 2,946 3,146
Other receivables 3,258 4,387
Cash and marketable securities 4,797 2,941
Total assets 43,470 44,031
Shareholders’ equity 8,192 8,932
Provision for long-term liabilities 2,027 1,772
Borrowings 13,471 13,949
Trade payables and other debt 19,781 19,377
Total liabilities and shareholders’ equity 43,470 44,031
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Case 37 Carrefour S.A. 519

EXHIBIT 3 | Breakdown of Borrowings by Currency

(in millions of euros)

2001 2000

EUR Euro 12,267 12,201

JPY Japanese yen 342 90
USD U.S. dollar 110 115
ARS Argentine peso 238 903
CHF Swiss franc 191 161
NOK Norwegian kroner 61 61
TRY Turkish lire 49 65
CNY Chinese yuan 39 28
BRL Brazilian real 35 143
MYR Malaysian ringgit 29 70
COP Colombian peso 26 7
TWD Taiwanese dollar 25 71
KRW South Korean won 15 30
Others 15 3
Total 13,471 13,949

Source: Company documents.

EXHIBIT 4 | Trends in Inflation Rates (GDP deflator)

4%
U.S. U.K. Switzerland France

3%

2%

1%

0%

–1%
1996 1997 1998 1999 2000 2001 2002 2003

Data Source: Datastream.

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520 Part Seven Analysis of Financing Tactics: Leases, Options, and Foreign Currency

EXHIBIT 5 | Trends in 10-Year Government-Benchmark Bond Yields

8%

7%

6%

5%

4%

3%

2%

1%

0%
Jan-99
Mar-99
May-99
Jul-99
Sep-99
Nov-99
Jan-00
Mar-00
May-00
Jul-00
Sep-00
Nov-00
Jan-01
Mar-01
May-01
Jul-01
Sep-01
Nov-01
Jan-02
Mar-02
May-02
Jul-02
EURO/EUR £/GBP SF/CHF $/USD

Data Source: Datastream.

EXHIBIT 6 | Trends in Foreign-Currency Spot Rates

1.8
1.6
1.4
1.2
Spot rate

1.0
0.8
0.6
0.4
0.2
0.0
Dec-98

Mar-99

Jun-99

Sep-99

Dec-99

Mar-00

Jun-00

Sep-00

Dec-00

Mar-01

Jun-01

Sep-01

Dec-01

Mar-02

Jun-02

SF/Euro US$/Euro £/Euro

Data Source: Datastream.

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Case 37 Carrefour S.A. 521

EXHIBIT 7 | Cross-Exchange Rates (spot prices, 7/31/2002)

EUR GBP CHF USD

EUR 1.000 1.593 0.688 1.020

GBP 0.628 1.000 0.432 0.640
CHF 1.453 2.315 1.000 1.482
USD 0.980 1.562 0.675 1.000

Data Source: Datastream.

EXHIBIT 8 | Inter-bank Interest Rates by Currency

Denomination1 (percent)

Maturity EUR GBP CHF USD

1-year 3.514 4.258 1.125 2.099

2-year 3.816 4.622 1.713 2.767
3-year 4.110 4.910 2.172 3.432
4-year 4.342 5.088 2.498 3.922
5-year 4.530 5.190 2.743 4.308
6-year 4.688 5.249 2.948 4.619
7-year 4.819 5.292 3.120 4.873
8-year 4.928 5.331 3.267 5.081
9-year 5.017 5.358 3.394 5.264
10-year 5.087 5.374 3.499 5.413

1
Rates equal to zero-curve fixed-to-floating swap rates.
Data Source: Datastream.