An Important Juncture
As a member of the Halley family and the chairman of one of the top French retailers, Promodes, Paul-Louis Halley witnesses the $16.6 billion takeover of his family’s firm by its long time competitor Carrefour, on January 25th, 2000. This merger, prompted by growing threats from foreign retailers, will establish Carrefour as the top European retailer. Although these two firms have a long history of rivalry and competition, this move would be the obvious choice. Despite having put aside their differences, “the marriage was clearly an externally driven affair.” (4) Months earlier, in June of 1999, Wal-mart expanded its european holdings with a $10 billion investment ...view middle of the document...
Halley believed in his family’s vision for expansion, which had taken the firm to new heights through its entry into the American retail market, but the United States had became all too inhospitable for Promodes. Utilizing the experience garnered in the US market, how should Promodes have refocused its international expansion efforts?
Promodes: Expansion Philosophy
Promodes was created in 1957 when five separate families with minor food distribution operations decided to group together. The resulting company was lead by the Halley family (one of the five). Initially, wholesale food distribution was the focus of business, and would remain so for another 13 years. By the start of the 1970’s, there was a sense of “crushing competition among food retailers in France.” (3) One year later, in 1971, the direction of Promodes changed when Paul-Louis Halley took control of the company from his father.
Paul-Louis Halley would rapidly characterize his leadership direction through international expansion by necessity. While Promodes was becoming more up to date with local industry trends through the development of the Champion supermarkets and the Continent hypermarket, the market for these types of retail facilities would become heavily saturated by the mid 1970’s. Additionally, the European market was fragmented and individual markets were relatively small. Lower levels of concentration led to a heightened sense of necessity for European discount retailers to establish a presence abroad, in order to capture a larger and more available market.
Spain and Germany would be the first international markets for Promodes. As Promodes was still a privately owned company, investment capital for large hypermarkets on foreign soil was relatively low, so Halley chose not to enter these markets alone. A series of partnerships was established with local retailers, helping to produce greater economies of scale and purchasing power. Additionally, Halley felt that having such partners would provide an invaluable point of view on these foreign markets. His partners would be better acquainted with the desires and culture of the local population.
The Growth of the Leveraged Buyout Trend and the Effect on the Food Retailing Industry
The practice of the leveraged buyout, which may have begun as early as 1955, was an extremely influential component of the Mergers and Acquisitions aspect of business expansion in the 1980s. The concept behind the leveraged buyout is relatively simple; the acquisition of a firm is made through the use of equity and debt.
Typically, a private equity firm will us bank loans and bonds to generate enough funds to take over a public corporation. Then, the controlling entity may cut costs in order to increase the profitability of the company and cover the debt service. Although this may increase profitability in the short run, it will likely destroy future growth potential. Finally, the holdings are sold to...