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VIVE LA RETAIL REVOLUTION

FRENCH PRESIDENT SARKOZY HAS PLEDGED TO REVITALIZE THE COUNTRY'S RETAIL SECTOR BY DISMANTLING RESTRICTIONS ON CHAINS

By Nicky Godding

The French retail sector is governed (some might say choked) by laws and regulations ill-suited to the realities of modern commerce. So says Groupe Carrefour, one of the biggest supermarket chains in the world, as well as Auchan, Leclerc and other French retailers. No doubt these retailers are pleased, then, that French President Nicolas Sarkozy says he is determined to change the status quo.

Sarkozy wants to give more purchasing power to the people of France. But he faces challenges on several fronts, among them the mighty French trade unions, which worry that a shake-up in the current retail scene would mean a win for the big retail chains over smaller chains and local shops.

What is wrong with French retail? Lots of things, many in the industry say. For one thing, Sunday commerce is largely prohibited, though there are exceptions for family-owned and family-run shops, say, or for those in the tourism industry. On the Champs-Élysées, in Paris, the Louis Vuitton emporium convinced a court that it should be allowed to open on Sunday because the fashion museum it houses above its retail showrooms makes the store a place "of cultural significance." (In France businesses that embody such cultural or recreational elements are exempt from the Sunday-closure law.)

But Sunday trading is hardly the only issue, even if that is the one currently making national headlines. In any case, change is almost certain, though it will not happen overnight.

Among the laws Carrefour calls outdated is the Raffarin law, which requires regional authorization for stores measuring over 300 square meters. But reform of this law is already under way, giving hypermarkets the scope to extend and renovate stores more easily. The Galland law, which forbids retailers from selling goods below cost, is likely to be superseded by the Chatal law, intended specifically to lower prices on supermarket items and mobile phones. This is currently going through parliament and has the backing of French hypermarkets, although Carrefour complains that it does not go far enough.

Then there is the proposed liberalization of the Dutreil law, which regulates the relationship between supermarkets and suppliers; this should give retailers even greater scope to offer price cuts. Carrefour says that under current law the only possibility of negotiation between suppliers and retailers is the system of "slotting fees" (known as marges arrière, French for "margins back"), under which supermarket chains get discounts from suppliers in return for stocking their goods and providing in-store marketing. This is a French peculiarity that restrains competition and hurts the consumer, Carrefour asserts.

Chris Igwe, a France-based international retail specialist, welcomes anything that helps shake up what he describes as the current blandness of the French retail scene. "Developers and shopping center owners in France are not bold like those in the United States and elsewhere in Europe," said Igwe. "This is partly because there are so many rules, regulations and red tape to be tackled. It can take up to 15 to 18 years from planning, for a shopping center to open."

Igwe points out that French leasing laws make it hard for a shopping center to oust a tenant that has lost the spark of excitement or novelty and is no longer desirable. This, of course, is tough on centers hoping to boost traffic through remerchandising. And retailers that are reluctant to share sales information cause problems too, he says, though that could change now. "With international developers and investors entering the French market, I think it is only a matter of time before the industry will be forced to share such information."

But there is plenty of light on the horizon, says Bertrand Courtois-Suffit, who heads Kharis Conseil, a shopping center consultant firm, and who is past chairman of the ICSC European Board. "Retail turnover in France, excluding hypermarkets and department stores, has grown by 2.8 percent over the first 10 months of 2007, and over the same period, retail turnover in shopping centers has grown by 3.9 percent," Courtois-Suffit said. "The problems are mainly for hypermarkets for which turnover growth is flat and sometimes decreasing. The main reason is competition from hard discount stores such as Lidl and Aldi and from a change of consumer behavior back to neighborhood and downtown shops."

One of the biggest issues for shopping center developers is the time and cost involved in acquiring planning permissions. "Since 1973, regulations have existed with regard to building authorizations," said Courtois-Suffit. "Through the Raffarin law, every project to create retail spaces over 300 square meters needs special authorizations before the building permit is granted. The files needed to obtain these authorizations for big projects are very complex, expensive and take a long time to complete. Many in France, including economist Jacques Attali, consider this special authorization for the retail sector should be canceled. Only a building permit, including specific surveys, would be necessary to create new retail spaces."

The large retailers are not overly fond of new regulations that could ease the process of obtaining building authorizations, Courtois-Suffit says. "They consider there are enough big retail schemes and wouldn't like to compete with new players," he said. "As for smaller retailers, they are focused on other matters, such as the growth of rent index."

The immediate issue for shopping center development in France is balancing the costs of construction against rent levels that cannot legally be raised in direct proportion. Courtois-Suffit says this will lead to profitability problems for center developers and investors alike.

Igwe is upbeat about the future of the French retail market. "If anyone can change things, Sarkozy can," Igwe said. "He has the desire and the will."

Sarkozy's election in May and his promise to strengthen the French economy through the adoption of free-market policies such as those in the U.S. and U.K. instilled confidence in the likes of Germany's New Yorker, Japan's Uniqlo and a host of international retailers. Even Britain's Marks & Spencer, which pulled out of France some years ago, is taking a second look at the country.

Though the new government will need time to undo the decades of red tape that strangled French commerce, the future is brighter than it has been for some time, Igwe says. But he urges the government not to forget the smaller retailers as it frees up trading and planning regulations for the bigger ones.

Carrefour is of the opinion that without a change in the system, there will be little opportunity for it or any other large retailer in France to benefit from increased consumer buying power. Passivity is not an option.

"If Sarkozy cannot do it," said Igwe, "then foreign investment will simply go elsewhere."