BRUSSELS, Belgium -- Citing aggressive promotional activity in the Food Lion division, and benefits lagging investments at Sweetbay and Hannaford, Delhaize Group last week predicted only modest sales and earnings growth for fiscal 2005.
Delhaize, which operates the Food Lion, Sweetbay/Kash N' Karry and Hannaford banners, expects comparable-store sales in the United States to grow between 0.5% and 1% for the fiscal year. Pierre-Olivier Beckers, president and chief executive officer of Delhaize America, delivered the news last week in a conference call discussing first-quarter financial results. Operating profit for the entire group, which includes operations in Europe, is expected to rise in the mid single digits, he added.
Stock in the retailer closed down nearly 12% on the news last Thursday.
In Food Lion's Southeast operating region, sales have been impacted by what Beckers called "unusually aggressive promotional programs" by a range of competitors. Food Lion intends to react by investing in its prices throughout the summer, added Rick Anicetti, CEO.
"We've seen a more aggressive environment building over the last five months in what traditionally has been a very competitive market to begin with," Anicetti said. "While we've remained competitive on price in total, what we have been seeing is a real sharpening in the aggressiveness related to promotional pricing across all classes of trade."
Anicetti said he believes recent rises in the cost of fuel have contributed to consumer awareness of price. "We've seen these cycles come and go," he said. "We have not been aggressive promotionally in the first quarter, [but we] would expect to see that building through the second quarter and throughout most of the summer."
The addition of acquired Victory Supermarkets in Massachusetts and New Hampshire, and the conversion of former Kash N' Karry stores in Florida to the Sweetbay banner, helped increase overall sales for Delhaize America. However, the company is working through investments in each that are running ahead of their overall benefits, it explained. Selling and administrative expenses in the United States increased to 21.2% of sales during the quarter ended April 2, compared to 20.5% in the same period a year ago.
Victory, the 20-store chain based in Leomister, Mass., that Delhaize acquired late last year, is in the process of being converted to Delhaize's Hannaford banner and Hannaford's everyday-low-pricing strategy. As a result, the company lowered the prices on thousands of items at Victory during the quarter. "Such a price decrease and the introduction of an EDLP strategy does not create an immediate sales uplift," Beckers said. "However, we are very confident about the value that our EDLP strategy brings to customers. We expect to see sales growth accelerate in the second half of the year."
Beckers said four of the stores have been converted to the Hannaford banner already. The pace of conversions will increase in June and is expected to be complete by the end of the year, he added.
In Florida, where Delhaize intends to convert all of its Kash N' Karry stores to the new Sweetbay model, expenses are "running a bit ahead of the benefit we'll see in terms of sales," said Beckers.
"We're very happy with the sales increases once Sweetbay stores are opened and launched, but we've got a chain of openings going on and a lot of work around labor training, opening and advertising costs that tends to be a little mismatched in timing to all the benefit," he added.
Delhaize has completed 10 Sweetbay conversions and has plans to complete 20 more by year-end. Store conversions in Ft. Myers and Naples, Fla., are seeing average sales increases of more than 40%, Beckers said.
For the 13-week quarter ended April 2, Delhaize America reported sales of $4 billion, up 4.3% from the same period a year ago, and a comparable-store sales gain of 0.5%. Adjusted for the earlier Easter holiday, comp-store growth was 0.3%. Earnings at Delhaize America increased to $69.5 million, up 66%, due mainly to a $54 million loss last year on discontinued operations.