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. Last Updated: 07/27/2016

Carrefour Will Rent, Not Build, Retail Space

ReutersEmployees working at a new Carrefour hypermarket in Krasnodar last week.

French retailer Carrefour is freezing its projects in Russia that involve the construction of hypermarkets and opting to develop its network in rented space.

Karfur Rus, Carrefour’s Russian division, is backing out of deals to buy land in the regions to build its hypermarkets, sources in several real estate consulting companies told Vedomosti. Earlier this month, a company called Primel filed a suit in the Penza Region Arbitration Court against Karfur Rus seeking “compulsion to sign an agreement,” according to information in the court’s database.

The first hearing is set for later this month.

Maxim Rogalsky, chief executive of BIG Development, which includes Primel, told Vedomosti that Primel signed a preliminary agreement in May with Karfur Rus on the sale of a plot of land in the Penza region for several million dollars, under which Karfur Rus was supposed to close the deal within 30 days.

“Karfur’s management told us that it did due diligence on the plot and received a positive report. But the company still hasn’t come through with the deal,” Rogalsky said.

A source close to Karfur told Vedomosti that expenses for the audit cost $500,000.

Ilya Shuravin, a partner at SA Ricci/King Sturge, which consulted BIG Development on the deal, confirmed that Primel and Karfur Rus had signed an agreement. “Karfur informed us that the deal wouldn’t happen, justifying it by saying the company ‘changed its development strategy,’” Shuravin said. He was not able to say what those changes were.

A representative of a consulting company that works with Karfur Rus explained that the company was freezing Russian projects to building hypermarkets, betting instead on being able to open stores in rented space.

The source close to Karfur said that this summer the French retailer unexpectedly abandoned several deals to purchase plots of land in the regions. Carrefour had intended to buy two plots of about 5 hectares each in Tolyatti — between Yuzhnoye Shosse and Obvodnaya Doroga, and between Ulitsa Avtostroitelei and Ulitsa 40-Letiya Pobedy, said a source in a Russian retailer that had previously been interested in the same land.

He said he thought Carrefour might be reconsidering its plans in Tolyatti because of limitations in the city’s power network, not to mention the difficult economic situation there because of cutbacks at carmaker AvtoVAZ.

Tolyatti City Hall had no immediate comment on Carrefour’s plans to buy land in the city.

Jacobo Caller, chief executive of Carrefour in Russia, declined to comment on land purchases in Penza and Tolyatti, saying the company does not discuss deals that have not been closed. He said, however, that “the company hasn’t received any claims related to these deals.”

A year ago, Karfur signed an agreement with the administration of the Krasnodar region on an investment project that would see it spend $100 million there — including to build hypermarkets — over five years.

Last week, as part of the agreement, Karfur opened a rented, 8,500-square-meter hypermarket in the Galaktika mall, which became the company’s second Russian store after its Moscow hypermarket.

So far, the company has not purchased any land in the Krasnodar region, said Alexei Shavenzov, Carrefour’s spokesman in Russia. He said the company was counting on renting space for now, but that it hasn’t ruled out other possibilities for expansion, such as building its own stores or mergers and acquisitions.

Renting is becoming increasingly profitable, as rates for commercial space have fallen this year by 10 percent to 40 percent, said Maxim Karbasnikov, director of the commercial property department at Jones Lang LaSalle, which is helping Carrefour look for space to rent.

Karbasnikov said the regions have the most free space now.