The big French optical retail franchisor is taking over the French and Spanish networks of optical retail stores ? 68 in France and the same in Spain - which have been set up by Carrefour, the large international chain of hypermarkets. Under a deal announced last week, Alain Afflelou also has an option of first refusal until the end of this year on 31 other optical stores operated by Carrefour in 3 other European countries - 11 in Italy, 13 in Poland and 8 in the Czech Republic - where it is now looking for suitable franchise partners to expand all of a sudden its international reach.

Afflelou has only a handful of franchised retailers in Belgium, Morocco, Portugal and Lebanon ? opticians who came to the French firm to replicate its success in their own countries ? but it has never gone actively after them, preferring instead to consolidate its own market share in France. At the end of 2001, Afflelou tried in vain to take over Lissac, a French family-owned chain of company-owned and franchised shops in excellent locations, which denied a few days ago a new wave of rumors about its possible sale, and last year it began discussing a possible venture in Germany, which remains a target for expansion at a later stage.

With the acquisition of Optique Carrefour, Afflelou is raising its share of the French optical market from 14 to 16 percent and setting the stage for its international development, creating a structure that should allow it to penetrate more deeply into neighboring Belgium. Considering also the planned start-up in September or October of a new chain in France under a different banner, which will include the name of Afflelou, the management now sees a potential for some 650 stores in France and 350 in Spain in a few years' time.

By the end of its fiscal year on Apr. 30, Afflelou had a total of 507 stores, only 28 of which were company-owned, with a total turnover of €373.7 million for the year. That was 19 units more than one year earlier and the company continues to envisage about 20 new additions every year under any format through organic growth. With stores averaging 120-150 square meters in size, the French market potential for the new format is estimated at about 200 units, offering an alternative to franchisees, but the management continues to keep silent on its features and its positioning.

Optique Carrefour's outlets are stand-alone stores located in shopping malls where Carrefour has an anchor store. Afflelou is going to propose to old and new franchisees to take them over one by one over the next 3-4 years at the same average price that it paid for them, which has been set at a level equal to about 120 percent of their sales, adding about 20 percent to make up for acquisition and transition costs. In those where Afflelou doesn't have yet a store, it will offer to them to run it under the new banner. Observers feel that the price will be high for the franchisees, considering also the franchising fees.

The takeover will temporarily raise Afflelou's debt-equity ratio from 12 to 70 percent. While it will take over the French Carrefour stores directly in the initial stage, financing the transaction with its own cash flow and a variety of loans, the Spanish Opticas Carrefour stores are being taken over by Apax Partners, the cash-rich investment group which already owns 24.3 percent of Afflelou. Their ownership will be gradually transferred to suitable franchisees, but Afflelou will have to set up a dedicated organization and some company-owned flagship stores in key downtown areas to help the licensees and to promote the banner in the country.

In a French optical retail market estimated to have grown by only 0.4 percent to€3.1 billion last year, Afflelou's stores raised their sales by 5.7 percent in absolute terms and by 3.3 percent on a same-store basis in the year ended last Apr. 30. Company-owned stores enjoyed a 17.3 percent sales increase to €28.0 million, with a gain of almost 10 percent on a comparable basis. With revenues from franchising up 0.5 percent to €67.8 million, Afflelou's publicly listed company had total revenues of €95.8 million for the year, or 4.9 percent more than in 2001/02.

Gross margins increased from 47.2 to 53.0 percent last year, thanks in part to the weakening dollar which affects 65 percent of the group's purchases of exclusive products. The group's operating profit grew by 14.1 percent to €25.4 million, or by 10.1 percent excluding extraordinary gains from last year's IPO. The pre-tax profit rose by 29.7 percent to €27.5 million. Net income was up 27.4 percent to €18.6 million, growing from 16.0 to 18.7 percent of sales.

Synergies should allow Affelou and its franchisees to augment the results of Optique Carrefour's present network in France, which last year generated a net profit of €1.9 million on sales of €46.6 million, and raise their turnover by about 10 percent. The same goes for the 4-year-old network of Opticas Carrefour in Spain, which should start delivering positive results in 6-8 months, although it will take some time and extra marketing efforts to establish the Afflelou brand name in that country. Their sales, which totaled only €18.5 million last year with roughly the same number of stores but a smaller average surface of 80 square meters, have increased by 27 percent in the first few months of this year.

The takeover of Optique Carrefour should allow Afflelou to negotiate better deals with its suppliers, resulting in better margins also for the franchisees, and to develop further its own private and exclusive label business, which contributed stable revenues of €20.2 million to the franchisor last year. They represented 26.1 percent of the stores' purchases, more precisely 32.9 percent in the area of glasses and 6.0 percent in the area of frames. The proportions were higher in the company-owned stores.

Afflelou plans to sell about 45,000 pairs of sunglasses in the first year of its new exclusive deal for sale of Puma branded eyewear in France, which may be supported by the sponsorship of a major sports personality before the end of this year, while recent market research puts the total sales of Adidas eyewear in France at only 16,000 units last year, followed by Nike with 15,000 pairs and Reebok with less than 10,000 pairs. Afflelou is now adding an exclusive license for children's eyewear under the name of Le Petit Prince, the famous French tale.

Based on a deal with Ocular Sciences, Afflelou's new line of one-day disposable contact lenses introduced last Fall, called Ephémères, has raised its sales in this category by 40 percent, representing 20 percent of the total French market. These and other product lines, including lenses and frames, are being supplied to 370 Afflelou stores based on an ingenious automatic stock replenishment system, called Facing Fixe, that minimizes inventories throughout the supply chain. It is now being extended to some of Safilo's products on an experimental basis.

Afflelou and its franchisees continue to invest about 7 percent of revenues on communication and advertising, but the budget has been raised by 13.5 percent for this year. The deal with Carrefour will give it access for direct marketing purposes to a database of 700,000 customers who will now be able to use their own fidelity credit cards for their purchases in Afflelou's stores.

Saddled by a high debt load, Carrefour is getting out of eyewear retailing to concentrate on its core business just at a time when one of its French rivals, Auchan, it moving into this territory and ASDA is developing its optical counters rapidly in Britain, taking its cues from Wal-Mart in the USA. Optique Carrefour has already closed the first 4 stores that it had set up in Turkey and sold the 10 units it had in Taiwan.

Other optical retailers, reportedly including GrandVision and Krys, had put in bids for Optique Carrefour but Afflelou and Apax presented the best offer. In France, the Optique Carrefour outlets will continue to trade under banner for a little while but they must drop it by Dec. 31. Jean-François Rocher, long-time managing director of Optique Carrefour, will continue to work for Afflelou.