Ahold’s move to reorganise its business with a view to expand its operations has prompted a flurry of speculation over the Dutch retailer’s future. With a sizeable war chest and the possibility to ramp up cost savings, Ahold is preparing to get its top-line moving and the market is buzzing with M&A rumours. Katy Humphries reports.
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Dutch retail giant Ahold has struggled to show strong top-line growth of late.
The company, which generates about 60% of its sales in the US, has seen revenues in the market come under pressure from food deflation and investments in pricing prompted fierce competition across the Atlantic.
Meanwhile, slowing food inflation and weak consumer spending have hit Ahold’s domestic operations. In a sales update issued last month, the group posted a decline in third-quarter underlying sales at its flagship Albert Heijn chain, the first quarterly decline from the stores in around six years.
A spokesperson for Ahold tells just-food that the negative impact on identical-store sales in the US and Europe was “partly due to deflation and partly due to price mix and promotion”.
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By GlobalDataHowever, the spokesperson emphasises, price investments are paying off in terms of positive sales volumes.
“Volumes have been positive across all our banners. Albert Heijn saw its highest volume uplift this year and we are very pleased with that. We saw great volume uplift at Carlisle and a significant increase at Landover.”
Ahold has also insisted that it is positioning itself for future growth, with the possibility of acquisitive moves looming large on the retailer’s radar.
Last week, Ahold announced that it was shuffling its management structure in Europe and North America.
In the US, the company is separating its core support functions from its store operations. The group is dividing its two US units – Stop&Shop/Giant-Carlisle and Giant Landover – into four divisions: Stop & Shop New England, Stop & Shop Metro New York, Giant-Landover and Giant-Carlisle. Each of these banners will then be served by a single back-end business.
Ahold also indicated that it would appoint new managers to oversee the day-to-day running of its US and its Dutch businesses.
Sander van der Laan will return to the Netherlands from his current role at Giant-Carlisle to head Albert Heijn and, in the US, Carl Schlicker has been appointed chief executive of Ahold’s US supermarkets.
Commenting on the new structure, chief executive John Rishton hinted that the reshuffle will allow Dick Boer, COO for Ahold Europe and CEO of Ahold Netherlands, and Lawrence Benjamin, COO for Ahold USA, to devote more time to developing growth opportunities.
This news built on Rishton’s previous statements that the group was ready to “seize opportunities” as the recession forces the pace of consolidation in the industry.
At the end of the second quarter, Ahold had EUR2.6bn (US$3.9bn) in cash and little debt, meaning that it has access to a sizeable war chest to pursue M&A.
“We have a financially strong position and solid operations. We are ready to start driving growth, which can be viewed as acquisitions, organic growth or expansion into new markets,” the Ahold spokesperson emphasises.
However, the spokesperson adds: “Any acquisition would need to be quickly integrated into our new organisational structure – they will be serviced by the same support group in Europe or in the US, and they will focus on the store operations in their specific market area.”
So, with Ahold spelling out its intention to drive its top line, attention has turned to what form this expansion will take.
According to German press reports, Ahold is looking at expanding its Albert Heijn chain into Germany and Belgium.
Refusing to rule out the possibility, Ahold reiterates: “We’re keen to grow into existing markets but also in new markets and we can do that in various ways by acquisitions or exporting our retail brands in the US and Europe.”
However, as Datamonitor emphasises in two recent reports on the food retail sectors in Germany and in Belgium, the challenge facing new entrants to these markets is not to be under-estimated.
“Large-scale, established retailers hold a natural advantage in operating businesses that benefit significantly from economies of scale, allowing aggressive pricing schemes that are not viable for smaller retailers. Strong branding exercises and fast paced expansion deepen this asymmetry,” Datamonitor analysts warn.
While Datamonitor concedes that established retailers in Belgium and Germany are not “invulnerable” to new entrants, the research firm maintains that “direct head-to-head competition is extremely difficult for new retailers”.
Other speculation has focused on the possibility that Ahold could link up with Belgium-based retailer Delhaize.
Delhaize has extensive operations in the US and Belgium and would further Ahold’s objective of expanding on both continents.
In the US, Delhaize operates the Food Lion, Hannaford and Sweetbay chains, with a presence in south-eastern and Mid-Atlantic states. A merger of Ahold and Delhaize would therefore provide the Dutch firm with a foothold beyond its north-eastern and mid-Atlantic stronghold.
Meanwhile, in Belgium, Delhaize has insisted that it is continuing to steal market share from its rivals, with third-quarter same-store sales up 4.6% in the country.
However, with low debt, strong cash reserves and potential to drive top-line growth, Deutsche Bank’s Sascha Levitt argues that Ahold and Delhaize are both “top potential targets” for other, larger retailers.
According to Levitt, the pace of European mergers and acquisitions is likely to more than double next year on the back of rising stock markets and confidence returning in the management of Europe’s largest companies.
Indeed, S&P Equity Research analyst James Monro suggests that Ahold’s new expansion drive could in fact be a defensive move.
“This may be a step by management to protect the group from becoming a potential target itself, due to its low valuation and lack of defined growth strategy,” he says.
Last week, ING issued a research note insisting that there is “compelling strategic logic” to the possibility of UK retailer Tesco launching a takeover bid for Ahold – due to the latter’s “perceived undervaluation”, the foothold the Dutch group would provide Tesco in the US and possible synergies.
“The US market is too big for Tesco to ignore, yet any attempt to increase the scale of Fresh & Easy [Tesco’s US venture] could prove very risky. Ahold should be viewed as a one-off opportunity to acquire an undervalued asset at a low point in the US consumer cycle,” the analysts wrote.
In this context, with Ahold cast in the dual roles of predator and prey, the need to boost the group’s share price is all too apparent. While the Dutch retail giant’s future remains unclear, what is certain is that the market’s reaction to Ahold’s third-quarter earnings, scheduled for release next week (18 November), will be telling.
