Case Notes/Answers
Carrefour, S.A. By William Fruhan, Jean de Monton
Discussion Questions:
1. How is Carrefour financing its growth? How risky is this financial strategy?
2. Would you alter the mix of wholly owned stores, joint venture stores, or franchise stores in the
future? How? What are the financial implications of each type of growth?
3. In the future, should Carrefour concentrate its expansion in France or move elsewhere? If it goes
elsewhere, how should Carrefour alter its financing strategy?
, Carrefour, S.A.
Teaching Note
Substantive Issues
The case examines the growth strategy of a French retail food chain in the 1960s as the firm
led an industry consolidation. It explores the benefits of utilizing extreme leverage (generated in the
form of a very high level of short-term trade debt) in facilitating rapid growth. The case suggests that
given the proper competitive environment and operating strategy, super leverage need not generate
super risk.
Pedagogical Objectives
Carrefour presents a challenging opportunity for students to test their understanding of
working capital management. Students are asked first to understand how the company has managed
to finance a 50%-per-year growth rate (for seven years) with almost no external debt or equity issues.
Once the principal source of the financing (trade credit) has been identified, the risk of basing a
growth strategy on this source of financing must be assessed. Finally, students are invited to explore
alternative strategies for the firm to continue this extraordinary growth rate.
Opportunities for Student Analysis
Carrefour is a financial anomaly. Measured by traditional U.S. financial rules of thumb, the
firm is practically bankrupt. Its total debt represents nearly five times its equity at year-end 1971 (line
24, case Exhibit 2). Carrefour has a large deficit net working capital position. It is financing long-term
assets (bricks and mortar) with short-term debt. In short, the company is doing everything wrong.
Looked at from a slightly different perspective, however, the company is performing
extraordinarily well. At December 31, 1971, it is highly liquid, with cash representing almost 25% of
total assets. It is one of the most profitable large firms in France, with an average rate of return on
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Carrefour, S.A. By William Fruhan, Jean de Monton
Discussion Questions:
1. How is Carrefour financing its growth? How risky is this financial strategy?
2. Would you alter the mix of wholly owned stores, joint venture stores, or franchise stores in the
future? How? What are the financial implications of each type of growth?
3. In the future, should Carrefour concentrate its expansion in France or move elsewhere? If it goes
elsewhere, how should Carrefour alter its financing strategy?
, Carrefour, S.A.
Teaching Note
Substantive Issues
The case examines the growth strategy of a French retail food chain in the 1960s as the firm
led an industry consolidation. It explores the benefits of utilizing extreme leverage (generated in the
form of a very high level of short-term trade debt) in facilitating rapid growth. The case suggests that
given the proper competitive environment and operating strategy, super leverage need not generate
super risk.
Pedagogical Objectives
Carrefour presents a challenging opportunity for students to test their understanding of
working capital management. Students are asked first to understand how the company has managed
to finance a 50%-per-year growth rate (for seven years) with almost no external debt or equity issues.
Once the principal source of the financing (trade credit) has been identified, the risk of basing a
growth strategy on this source of financing must be assessed. Finally, students are invited to explore
alternative strategies for the firm to continue this extraordinary growth rate.
Opportunities for Student Analysis
Carrefour is a financial anomaly. Measured by traditional U.S. financial rules of thumb, the
firm is practically bankrupt. Its total debt represents nearly five times its equity at year-end 1971 (line
24, case Exhibit 2). Carrefour has a large deficit net working capital position. It is financing long-term
assets (bricks and mortar) with short-term debt. In short, the company is doing everything wrong.
Looked at from a slightly different perspective, however, the company is performing
extraordinarily well. At December 31, 1971, it is highly liquid, with cash representing almost 25% of
total assets. It is one of the most profitable large firms in France, with an average rate of return on
1
