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Now, For Ahold's Next Course...


The Corporation: Strategies

Now, for Ahold's Next Course...

The Dutch giant has a lot of U.S. supermarkets, and it wants more. But will that plan win the food fight?

Greg O'Neill, a 32-year-old research analyst toting a shopping basket full of orange juice and rotisserie chicken down the aisle of his local grocery, has never heard of Royal Ahold. Told that the Dutch company owns the Giant supermarket in northwest Washington, D.C., where he's shopping, O'Neill shrugs. "It doesn't make any difference to me," he says, adding that he likes Giant's prepared foods and specialty goods such as Swiss dumplings and British biscuits.

That sentiment suits Ahold (pronounced ah-hold), the fourth-largest food retailer in the U.S., just fine. At a time when brands are king, Ahold aims to become the nation's preeminent grocer without its customers ever hearing its name. Instead, its strategy is to buy regional chains and use its global heft to streamline operations while retaining a strong local identity. Over two decades, it has snapped up mostly East Coast players such as Giant Food, Stop & Shop, BI-LO, Edwards Super Foods Stores, and Tops Markets. It now gets 60% of its annual revenues in the U.S.

But a failed bid last month for Carteret (N.J.)-based Pathmark Stores Inc. is calling into question Ahold's game plan. Although the company now pulls in about $20 billion a year in sales in the U.S., some investors fear it might not have the muscle to compete in an industry being transformed by consolidation, the growing might of Wal-Mart's grocery business, and the rise of Internet retailers such as WebVan Group and priceline.com. "Ahold's good story in the U.S. may have played out," worries John R. Ford of T. Rowe Price International Stock Fund, which last year sold its 1.9 million Ahold shares. "It looks exposed and expensive."

Over the past nine months, those fears have spread. After Ahold's American depositary receipts peaked at $42 a share last April, they began falling as the two largest U.S. supermarket chains, Kroger and Albertson's, issued profit warnings stemming from higher-than-expected charges related to acquisitions. Then came a punch from outside the U.S.: French chain Carrefour took control of its domestic rival Promodes, leapfrogging in size past Ahold in Europe, Latin America, and Asia. Then Ahold announced in mid-December that it was walking away from its $1.75 billion bid for Pathmark because regulators had raised concerns about its concentration in the Northeast. That pushed the stock down to around 26. It recovered, to about 30, after Ahold announced on Jan. 6 that worldwide sales grew by 29.1%, to $33.5 billion, last year. Earnings for 1999, which Ahold hasn't released yet, are estimated to be $750 million.

Century-old Ahold, which began as a corner grocery store in Zaandam, an industrial suburb of Amsterdam, began charging into the U.S. in 1977 by acquiring the Greenville (S.C.) chain BI-LO. When outward-looking Royal Dutch Shell alumnus Cees van der Hoeven arrived as CFO in 1986, the giant but fragmented U.S. supermarket industry looked ripe for the picking. Unlike Wal-Mart Stores Inc., which has expanded by fashioning a single, powerful identity, building new stores, and focusing on everyday low prices, Ahold has shelled out $6 billion in the past 10 years alone to acquire well-regarded, often family-owned regional chains with a more upscale profile. "People don't have to know about Ahold," says Bob Tobin, chief executive of Ahold-USA. "They just need to know about Stop & Shop and Giant."LOCAL PRODUCE. Once it buys a new chain, Ahold tries to hang on to the local managers, but it cuts costs by combining back offices. Last year, it set up a separate financial and accounting arm for its U.S. businesses, shaving $20 million in expenses. While keeping local brand names on the packaging, it also has centralized purchasing for private-

label products, which it estimates saves an additional $200 million a year. And it is pushing global suppliers hard to keep costs down. "We will always purchase our fresh vegetables and fruits locally," says van der Hoeven, the company's president and CEO since 1993. "But we will bargain globally for the best price with Coca-Cola, Procter & Gamble, and other multinational suppliers."

Ahold also leverages its technology spending. A worldwide intranet connects managers in its far-flung global operations, which number some 4,000 stores in 22 countries. The company's Dutch operation developed handheld price scanners to speed shoppers through the checkout line. Stop & Shop and its other U.S. chains now offer the devices here, allowing shoppers to tally their purchases. When they reach the cashier, they simply hand over the scanner and a credit card. "We are turning thoroughbred local operations into a powerful global operator," says van der Hoeven.

The strategy has worked, to a point. "Ahold is one of the truly superb food retailers globally," says Burt P. Flickinger III of Reach Marketing, a retail consultancy. Ahold's U.S. sales rose 29.1% last year, and it remains one of the industry's most profitable operators. It raised the operating margins of Giant Food Inc. from 3.5%, about par for the industry, to more than 5% within a year. "Ahold's margins are rising and put it in the top quarter of its peer group," says Patrick Roquasa, an analyst at Kampen & Co. in Amsterdam.

But Ahold's low-profile strategy is being tested as never before, thanks to a rapidly consolidating market where size, brand name, and purchasing power increasingly matter--and where the world's most efficient retailer is making a big move. Wal-Mart, whose supermarket-category sales are estimated to be at least $38 billion, has been steadily expanding north into Ahold's territory. Both Kroger and Albertson's, meanwhile, have grown into giants, each with U.S. sales about twice Ahold's. Analysts worry that Ahold could end up being squeezed into a regional corner of the market without the financial firepower to compete nationally. "All this consolidation, combined with a massive Wal-Mart fear factor, has undermined Ahold's valuation," says Kate Calvert, a retail analyst at HSBC Securities.

Ahold executives say they will continue to pursue U.S. acquisitions, but only in markets contiguous to the company's operations in the East and South. Van der Hoeven is currently looking at three acquisitions, all larger than the proposed Pathmark deal, in states such as Florida and Texas. Eventually, he plans to move West, though van der Hoeven says "a leap across the Rockies seems a little far for now."NET THREAT. Meanwhile, van der Hoeven plans to meet the Wal-Mart threat by wooing a different kind of shopper. "We are differentiating ourselves from Wal-Mart," he says. In the southern U.S., where the two companies meet head-on, Ahold has moved BI-LO upmarket, emphasizing fresh foods and ready-to-serve meals. "Over the last three years, BI-LO's performance has improved even as Wal-Mart has moved in with supercenters," says Ahold-USA's Tobin. "They hurt the mom-and-pa chain, not us."

Even so, Ahold faces a new challenge: the Internet. Wal-Mart recently announced it was creating a separate Net company with venture-capital firm Accel Partners, and e-tailers such as WebVan and priceline.com are making huge investments in online grocery ventures. Ahold says it, too, is gearing up for the e-revolution. It has forged a joint venture with e-tailer Peapod Inc. and expects online sales to rise from 1% to as much as 5% of its total within a few years. Van der Hoeven isn't worried about an Internet startup stealing the business. "If we talk about fresh fish, fruit, milk, and groceries, I think consumers will only trust local retailers with whom they already are familiar." Maybe. But that still leaves the question of how many of those local retailers Ahold will be allowed to put in its global shopping cart.By William Echikson in Brussels, with Amy Borrus in Washington and Wendy Zellner in DallasReturn to top


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