CHANTILLY, Va. -- For years, one of the biggest U.S. supermarket industry questions was, when will Ahold USA here make an acquisition that extends it beyond its Eastern U.S. concentration?
Last year the global retailer finally answered that question. In doing so, Ahold proved it looks at this country in more than one dimension. It gained a national presence not by acquiring another retailer but rather by plunging into a new business with the acquisition of U.S. Foodservice, Columbia, Md. And Ahold also jumpstarted its on-line shopping activities with the purchase of Internet grocer Peapod, Chicago.
Now that Ahold's American business is multi-dimensional, the company is in the early stages of making its new ventures work -- and ensuring that every part of its $27.5 billion U.S. operation works together. That approach mirrors Ahold's current blueprint for its $50 billion-plus world business, with operations in Europe, Latin America and Asia.
"We are happy with the basic principles of our strategy: multichannel, multiformat and multibrand operator in our various markets," Cees van der Hoeven, Ahold president and chief executive officer, told SN in an interview in which he was joined by Bob Tobin, president and CEO of Ahold USA, based here.
"We still have some ways to go to get everything out of it, but we're on the right track and our organization understands it," said van der Hoeven.
How is Ahold prioritizing the development of its diverse U.S. businesses? Van der Hoeven and Tobin outlined the following near-term goals for which activity is under way:
Creating synergies between the institutional food service and retail sides, and then rolling out new concepts to the company's U.S. and global chains.
Further developing on-line shopping services with the goal of becoming profitable in this sector before the initial target of 2003.
Boosting efficiency of centralized grocery procurement while ensuring that local retail companies have discretion to tailor assortments to their regions.
Taking a more diverse approach to potential acquisitions now that the company operates in multiple U.S. business sectors.
Gary Giblen, director of research and senior vice president, C L King Associates, New York, said Ahold is "smart to be thinking outside the box because there's only a limited number of quality supermarket acquisitions to be made."
Ahold first entered the U.S. market in 1977 with the acquisition of Bi-Lo, Mauldin, S.C. The company's retail chains remain the largest portion of its U.S. portfolio. It operates over 1,300 supermarkets in the United States through five retail operating companies: Stop & Shop, Quincy, Mass; Giant Food Stores, Carlisle, Pa.; Giant Food, Landover, Md.; Tops Markets, Williamsville, N.Y., and Bi-Lo. Ahold's total U.S. sales in 2000 rose 35.4% to $27.5 billion. That figure only included food service for a portion of last year. Ahold USA's food service business, which layered on additional acquisitions in the past few months, is projected to generate sales of about $12 billion this year while the retail operation's sales, including newly acquired assets, is likely to exceed $30 billion, according to a spokesperson.
Ahold releases its earnings statement on March 6 but has already said that 2000 operating earnings in all of its global regions will increase over 1999. The company said operating income for the United States increased 37.3% to $314.3 million for the third quarter and 33.6% to $981 million for the 40 weeks, largely reflecting the consolidation of U.S. Foodservice.
In the United States, Ahold's institutional food service business has attracted a lot of industry attention lately. Ahold's acquisition of U.S. Foodservice, the nation's second largest food-service distributor, was completed last April. The food-service company's network of distribution centers serves the majority of the country and takes Ahold's interests all the way to the West Coast, far beyond its previous Western outpost of Ohio, where the Tops operation has units. It also brings Ahold into the business of supplying food to restaurants, sports stadiums, hospitals, schools and other institutions.
Ahold further built on this acquisition with the purchase last December of PYA/Monarch, a food-service player in the Southeast, and the purchase earlier this month of Parkway Food Service, a food-service distributor in western Florida.
Ahold has been approaching the post-merger integration of U.S. Foodservice in stages, Tobin explained. "It was a lot easier to start with the backstage things, such as information technology, finance and insurance," he said. "They are learning some of the management tools we have, and vice versa."
The elements of the integration that would be visible to Ahold's customers "have been a little slower in coming because they needed to be," Tobin added. He was referring to the leveraging of the food-service expertise for Ahold's retail chains.
But the process is under way. U.S. Foodservice has already begun to show what it can do for Ahold's retail network. Giant of Landover recently launched a new retail format called "freshgo by Giant" that heavily relies on products from U.S. Foodservice. The 17,000-square-foot freshgo prototype unit is a hybrid restaurant/food store that incorporates meals, grocery and a pharmacy. The store offers cold, ready-to-heat dinner entrees ranging from lasagna to veal osso bucco, as well as a lunch cafe.
"And Giant will be doing other things. It will be rolling out in some 50 conventional stores a deli-salad/foods-to-go program supplied by U.S. Foodservice," Tobin said. Eventually, the rest of Giant and Ahold's other U.S. chains will receive the benefits of this expertise, Tobin added.
"Further down the line, we feel U.S. Foodservice can be a hub for food-service expertise around the world," he said. "In Holland and Sweden, we already have a well-developed program. But there are other areas of the world where there's no formal food service system. So it opens up new horizons for us."
Tobin conceded that while retail and food service will benefit from each other, "More things will accrue to the retail companies from U.S. Foodservice than the reverse."
He stressed that Ahold is "very happy with the results of U.S. Foodservice in just the short time we have them."
Tobin denied that Ahold's entry into the food-service business resulted merely from a frustration with government-imposed limitations on the company's retail acquisition efforts. Ahold abandoned its deal to acquire Pathmark Stores, Carteret, N.J., in late 1999 after the Federal Trade Commission opted for an analysis of the deal that would have reportedly led to the divestiture of many stores. The U.S. Foodservice deal was announced a short time later.
"We were working on parallel tracks" in retail and food service acquisitions, Tobin stressed in dismissing the notion that the collapse of the retail deal led to the food-service strategy.
The food-service focus has broadened the range of Ahold's acquisition prospects, which until recently were focused only on supermarket companies. Now that the concentration is on multiple businesses, "We have more opportunities than we can handle in the short term," van der Hoeven said. "One of our main tasks is to prioritize what we want to do."
Ahold doesn't want to favor one business over the other, but rather "grow in both areas when the right opportunities come along," he added. The increase in opportunities means "the bar has been raised in evaluating acquisitions."
On the supermarket side, one opportunity is asset transactions. Ahold earlier this month received the Federal Trade Commission's approval to acquire some assets of Grand Union, Wayne, N.J., which had filed for bankruptcy. Ahold is acquiring 58 supermarkets and eight sites. The stores will be integrated into the Stop & Shop and Tops operating companies.
"We foresee there might be further asset transactions that would add to our store base of existing companies," van der Hoeven said in assessing the U.S. market. "There's somewhat of a shakeout. The weaker operators are having challenges. This will have consequences for the way the industry is consolidating."
Ahold also continues to mull its options for picking up a strong retailer. "We are hopeful that at some point we are able to acquire another thoroughbred, a stand-alone, strong regional company with a very strong brand name," van der Hoeven said.
On the food-service side, Ahold is upbeat about its acquisition prospects. "We still have a lot of opportunities in food service, but they would be of a smaller size," van der Ho even said. "U.S. Foodservice is nationwide, so we don't prioritize by region. So you should expect some further additions."
Some analysts have predicted that Ahold will eventually be part of a merger with one of the big three U.S. supermarket companies, a notion that van der Hoeven downplayed.
"I should think that's more theoretical than practical," he said. "We are very happy with the way we have grown through acquisition -- or by joint venture outside of the U.S. -- involving the best regional companies. That's worked well for us, so that would be our priority."
Ahold wasn't content to limit itself to food-service acquisitions during 2000. It also became a big acquisitions player in the world of B-to-C commerce in a year when the fortunes of on-line shopping companies were riding a roller coaster.
Ahold acquired a majority of Peapod last spring in a deal that became a catalyst for Ahold's U.S. home shopping program and also rescued the Internet grocer from an extremely serious financial crisis. The new arrangement meant that Ahold could roll out fast-pick fulfillment centers at many of its stores in the coming years to foster local delivery. Peapod continues to supply non-Ahold retailers in Chicago, its oldest market.
Peapod purchased the Chicago and Washington operations of Internet grocer Streamline.com last September. It relaunched the Washington business as "Peapod by Giant," operating out of Streamline's Gaithersburg, Md., warehouse. Streamline shut down its business late last year after continued operating losses.
Peapod is initially working with Ahold's Giant Food and Stop & Shop companies as it fine-tunes its model before a wider Ahold rollout.
Ahold executives said they believe the Peapod arrangement helped put Ahold USA's home shopping program on the fast track. Ahold plans to turn home shopping into a profitable venture ahead of its initial 2003 target date, Tobin said.
"In the Peapod deal you see the happy marriage of their strong front-end knowledge with the Web site and interactive marketing and our fulfillment knowledge," Tobin said.
Analyst Giblen said Ahold is one of the few supermarket industry leaders in the B-to-C arena. "The way to do B-to-C is through a traditional operator," he said. "Ahold and Safeway will define the gold standard of food e-tailing."
Ahold executives believe the company is in good position to prosper in a bricks-and-clicks world. But the pure-play retailers that were riding high just last year left behind consumer expectations that home delivery doesn't come with an extra price, Tobin said.
"That was falsely articulated by some of those people that had money to burn," he elaborated. "The expectation was that you can have the retailers you have in the supermarket, have it delivered to your house, and it doesn't cost you anything, which is a fool's mission. But over time we'll reach a consumer proposition that is valid, understandable and honest. And there will be a demand for this service even at some other level of expense. It's like any other service that is paid for. So I'm very excited about our prospects for being successful in this venture that's been a graveyard for so many people."
Ahold has some reason to believe the excitement is justified. The company is actually breaking even with its home shopping business right now in the Netherlands and is rolling out the B-to-C program to that entire country, van der Hoeven said. Ahold is also "doing very well in Argentina with B-to-C," showing close to break-even results. In both countries, customers can order not only by Internet, but also by CD-rom, fax or telephone.
"There's no question the customers want it," van der Hoeven said. "The challenge, as we all know, lies in the fulfillment. We've worked very hard to improve the fulfillment."
Ahold will offer both home delivery and centralized pickup options to customers, with different pricing structures, van der Hoeven said.
Ahold's worldwide operations have grown with a strong emphasis on achieving efficiencies through the spread of best practices, and the company continues to pursue that road in the United States. For instance, late last year, Tops and Giant of Carlisle established a "shared services structure" that combined support functions in areas such as IT, real estate, private label development, human resources and advertising. The arrangement enables the two companies to maintain their separate identities to the consumer while generating cost savings behind the scenes.
This year improving efficiencies in grocery distribution is a major initiative, Tobin said. The project amounts to a "very complex grocery re-engineering that will allow us to buy with a lot more efficiency and still allow the local franchises or brands, which are our operating companies, to have a lot of say over the numbers of SKUs they have and the variety, to take care of their local merchandising and ethnic needs and anything else."
Along these lines, Ahold is studying the possibility of using a third-party distribution facility that would work in conjunction with Ahold's established distribution sites, said Barry Scher, vice president of public affairs, Ahold USA. Scher confirmed that C&S Wholesale Grocers, Brattleboro, Vt., is the lead third-party candidate, and the facility might be built in Pennsylvania. He stressed that the facility wouldn't be owned by Ahold and would not replace existing Ahold warehouses. A C&S spokesperson could not be reached for comment.
The facility would enhance efficiencies by acting as a dropoff center for product from Ahold suppliers, according to an Ahold spokesperson in the Netherlands. Product would then be shipped to Ahold's other regional distribution points.
"It could handle groceries in much the same way we do produce and meat: on an in-and-out basis," Tobin said. "Palette quantities would come in on demand and out the next day without the convoluted overstocking and buying truckloads when you don't really need a truck and having 40- or 50-day supplies."
Another avenue for boosting efficiencies is Ahold's heavy involvement in the WorldWide Retail Exchange, the Web-based business-to-business exchange launched last year. In addition to Ahold, WWRE includes a large number of U.S. and international retailers. The exchange is based in Alexandria, Va. Tobin was recently chosen as the initial WWRE chairman, a post which carries a one-year term. Tobin said the nonprofit nature of the exchange is one of the features that gives it a superior model compared to some competing initiatives.
"We should be the lowest-cost transaction player," he said of the WWRE. "We have the scale because we are approaching $800 billion in aggregate sales of the current membership, and we're not even recruiting right now because we want to swallow what we have. We believe the exchange will bring a lot of efficiencies to us and our consumers down the road."
Thus far the exchange has been focusing on auctions, which is among its more basic features, but the complexity of activities will increase during the year, Tobin said.
One of the biggest advantages will be to put the exchange's users on more of an equal footing with Wal-Mart and "many of the things Wal-Mart has an exclusive on," Tobin said. "The exchange may also dramatically alter how we communicate with our suppliers. It also holds the possibility of fewer snafus with paperless deductions. And it will allow our supplier base to be much larger than it is, with people all over the world."
Ahold's interest in the exchange stems from its desire to improve its global efficiency and execution. That is the backbone for Ahold's efforts to strengthen its link with customers in numerous parts of the world.
"We've improved margins almost everywhere and gained market share almost everywhere," van der Hoeven said. "So you're speaking with happy campers."