Goodbye Coles. Bonjour Carrefour?

Carrefour means crossroads in French, and that is exactly where KKR, the 800kg private equity gorilla is currently situated, as it valiantly tries to shape an attractive offer that will entice the shareholders of Coles Group. An offer that will trump the one made by Wesfarmers.

As luck would have it, Carrefour is also the name of the world’s second largest retailer.

Wesfarmers, sporting the green ‘n’ gold and currently the front runner in the bidding for Coles Group, two weeks ago took off its gloves in the war for the hearts and script of Coles Group shareholders.

Wesfarmers’ advertising had a lot of things going for it. It was proactive. It sought to placate anxious Coles shareholders. And it appealed to nationalism.

In its advertisement of April 11, Wesfarmers mentioned “Australia” or “Australian” no less than five times. The company trumpeted its “Australian heritage”, its “Australian businesses” and its “Australian” experience. The only things lacking in the advertisements were pictures of lamingtons, freshly baked Anzac biscuits, crates of Victoria Bitter and rows and rows of the Southern Cross. But I expect these will all feature in subsequent ad campaigns, as Wesfarmers talks up its Australian-ness while obfuscating details of its plans to revitalise Coles.

The real battle for Coles has not even begun.

In their advertisements Wesfarmers admit they are to seek information from Coles before they can move the offer forward. But Wesfarmers has fired the first salvo in another battle. The battle for public opinion. Wesfarmers knows that a good story must have certain elements such as a theme, a hero, and a beginning, middle and end, to make it compelling. The theme is a “better” Coles; the hero is a “proud” Australian firm (Wesfarmers) and the beginning is to talk up its dinki-di-ness. The “end” is victory for Wesfarmers. The middle, well, that's yet to be authored.

So far, good storytelling.

In the blue corner, KKR is well aware that it can’t win a fight with Wesfarmers on the battlefield of nationalism. But victory is assured if it offers a better deal to Coles’ shareholders.

To find favour with shareholders: KKR’s offer must beat the nominal prices offered by rival bidders; and  KKR must neutralise any CGT benefit that Wesfarmers is offering. For instance, KKR can sweeten the pot by promising existing Coles shareholders that they’ll be able to swap their Coles shares for cash and shares in a KKR/Carrefour retail operation. KKR could legitimately trumpet a new dawn in Australian retailing by bringing the cheese eating multinational, Carrefour, to our shores.

With an alliance in place with Carrefour, KKR could honestly say that it is redressing the abysmal state of Australian retailing, by bringing over world class operators. More importantly, KKR could list the new corporation on the ASX. The dismal state of our local supermarkets is a direct result of zero innovation from the two horses that constitute the race in Australian retailing. Any visit to a Carrefour hypermarket in Asia or Europe will blow the socks off anyone used to the stale customer service and pedestrian product range that is typical at Coles, Woolworths, K-Mart or Big W.

So what is Carrefour like as a retailer?

Rewind to September 2005. Remember the news story of the Danish cartoons satirising the Prophet Mohammed? The cartoons were published in Aarhus, Denmark’s Jyllands-Posten before running worldwide.

By way of reply to the Danish media’s exercise of its right to free speech, the Islamic world erupted in violence. Property was destroyed and death threats (known as fatwas among the faithful) were issued to the “infidels” who commissioned, illustrated and published the cartoons. Most are still in hiding.

Two aspects of that tumultuous event were broadly ignored by the Australian media. First, in order to find favour with Islamic adherents, Carrefour publicly took all Danish foodstuffs off its shelves worldwide and erected massive signs storewide to attest to their love of Islam (and presumably contempt for Christian values).

Second, an email campaign was started in Belgium by concerned Christians for a boycott of Carrefour. The reason for this call: Carrefour’s ethnic cleansing of its shelves of Danish goods and the ensuing economic havoc created in the Kingdom of Denmark.

Carrefour’s shameless lust for Islamic patronage (at the price of Western principles including that of free speech) is not Carrefour’s only sin.

The firm has been criticised for the treatment of its workers throughout the world. For example, in Doha, Qatar, it employs workers from undeveloped nations, such as the Philippines, and houses the workers, usually six to an apartment, sharing one kitchen and one bathroom. Carrefour retains their passports and imposes a curfew at night, with a guard at the gate to apprehend violators.

Employees work six days a week, and minimal health insurance is provided; anything more than a basic check-up is not covered. At the standard pay scale of about 1,600 Qatari Riyals a month (approximately A$530) a medical emergency could easily wipe out two months earnings. At Doha's City Centre Mall, workers scheduled to work from 5pm to midnight, are then be expected back, bright eyed and bushy tailed, the next day at 7am.

Also, the workers are allowed a one-hour break, but managers will schedule their break as early as two hours into the shift, meaning they will have to eat "lunch" as early as 10am and work non-stop for the following six hours. Employees are not allowed private vehicles, so they must rely on the company shuttle bus. The worst criticism relates to Carrefour's "sub-contractor" sweatshops in Haiti, where workers earn as little as US$0.60 a day and no more than US$3.00.

Of course if Carrefour comes to Australia those practices will not be repeated. But that’s not the point. The point is: should we entertain a bid from a corporate citizen like Carrefour? All things considered, I think so. Here’s why.

Carrefour will bring competition. And that in itself is fantastic. Just like Sir Richard Branson redrew aviation retail behaviour, so too will Carrefour shake up the cosy monopolistic supermarket incumbents.

Carrefour specialises in hypermarkets, which is a superstore combining a supermarket and a department store. Think Fresh Food People meets K-Mart. then up the quality several notches. The result is a gigantic retail facility which carries an enormous range of products under one roof, including full lines of groceries and general merchandise.

When they are planned, constructed, and executed correctly, a consumer can ideally satisfy all of his or her routine weekly shopping needs in one trip to the hypermarket. And all sold at great prices. Great for Carrefour. Great for the consumer. Aside from hypermarkets, the retailer also runs supermarkets, major discount stores, convenience and cash ‘n’ carry shops.

Some Australians may take issue with Carrefour’s labour practices overseas. And on first blush that’s expected. But frankly, what Carrefour does in other countries is not only beyond our control but more to the point, Carrefour's behaviour is entirely consistent with local laws. Will those Australians who take issue with foreign labour practices start boycotting all Chinese-made goods, given that sweat shop conditions in Chinese textiles, clothing and footwear factories run by or contracted to leading name brands are reported to offer even worse conditions to their staff?

Carrefour has stores operating nearly everywhere. In the Americas (mostly South America) Carrefour has 835 stores of which 169 are hypermarkets; 149 are supermarkets and 521 are hard discounters. In Africa, Carrefour has five stores of which three are hypermarkets. In Europe, it has a whopping 5,800 stores with a good spread among hypermarkets, supermarkets, convenience stores and hard discounters. In Asia, Carrefour has 471 stores of which 180 are hypermarkets and 234 are hard discounters. The balance is convenience stores and cash-and-carry.

What is particularly interesting is that while Carrefour is global in operations, only 7 per cent of sales are generated in Asia's 471 stores. And for Carrefour, “Asia” stretches from the Red Sea (Saudi Arabia) to the Pacific Ocean (Taiwan). A quick peek at its annual reports reveals a yawning gap in Carrefour’s ever growing retail empire: India and Australia. The latter of which offers not only a major icon up for sale, but an icon whose domicile is a cosy duopoly. Talk about upside potential!

The reality is beginning to dawn on the various players vying for Coles.

The Australian on April 26 reported that Woolworths is considering a tie up with the United Kingdom’s international grocer, Tesco Plc in a joint bid. Woolworths’ links with US retailer Wal-Mart are already well established.

That seems to only leave Carrefour.

KKR could do a lot worse than team up with Carrefour and make a bid for Coles. It could offer current Coles shareholders not only a fair price, but also CGT rollover relief by way of script in any proposed ASX listed joint venture. Imagine for instance, Carrefour Australia: where KKR has 51 per cent; Carrefour 26 per cent and Coles shareholders - who didn’t want a straight cash deal for their shares - 23 per cent.

Such a venture would be a boon for Carrefour, extending its global footprint with most of the capital put up by KKR. It should help KKR bag this deal. And it would be a sound investment by current Coles shareholders. KKR may even consider re-listing its 51 per cent on the ASX in due course, with the proviso of giving existing shareholders first bite of the cerise in any public offer.

Such a scheme has many attractions to KKR, to Carrefour and to existing Coles shareholders. And for those like me who have no shares in Coles, Woolworths or Carrefour whatsoever, while we won’t enjoy any financial gain from a buy out, at least we’ll be able to look forward to our weekly shopping experiences becoming a whole lot plus agréable.