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STREAMLINING THE CORE

CHANTILLY, Va. -- During 25 years of operating in the United States, Ahold became known as a determined consolidator with seemingly unlimited capital for acquisitions.But 2002 marked a major turning point for the Netherlands-based company, whose U.S. operations based here include more than 1,600 retail stores, a food-service division and e-commerce operations. In the midst of one of the toughest operating

CHANTILLY, Va. -- During 25 years of operating in the United States, Ahold became known as a determined consolidator with seemingly unlimited capital for acquisitions.

But 2002 marked a major turning point for the Netherlands-based company, whose U.S. operations based here include more than 1,600 retail stores, a food-service division and e-commerce operations. In the midst of one of the toughest operating environments in decades, Ahold was forced to refrain from major new U.S. retail deals and instead became focused on internal issues, including reducing debt and improving the balance sheet. Those priorities continue to the present.

But in interviews with SN, Ahold executives stressed that the present de-emphasis on major acquisitions does not signal the company is standing still. "Even if major things would happen in terms of consolidation in the marketplace, we would be on the sidelines," said Cees van der Hoeven, Ahold president and chief executive officer. "But organic growth in our company has always been relatively high and although it slowed down a lot this year, we will continue to invest and grow our existing businesses."

Bill Grize, president and CEO, Ahold U.S. Food Retail, pointed out that top Ahold executives until recently "had accessibility to capital that was unrivaled in our former lives." Although the company is not currently in the market for major acquisitions, "We'll do in-market deals, and we'll continue to have a very aggressive store strategy in all of our areas," Grize said. "There are plenty of opportunities to put up new facilities, to expand existing ones and replace outmoded facilities, which we'll continue to do to help us grow."

The other part of Ahold's game plan is to work on positioning its existing properties for the future. This includes further differentiating its chains from the competition in categories including perishables. It also includes enhancing efficiencies, technology, supply chain and back-office functions to build on the cost-savings and synergies it has already started in retail and food service. Despite years of pursuing many of these goals, executives describe a surprising number of opportunities in the near term to make progress, executives said.

U.S. Holdings

Ahold USA operates six retail companies including Stop & Shop, Giant (Carlisle), Giant (Landover), Tops, Bi-Lo and Bruno's. Ahold's wholly owned subsidiary U.S. Foodservice is the second largest food-service distributor in the U.S. Ahold also operates Internet grocer Peapod. Revenue in 2002 for Ahold's U.S. retail business was $26.3 billion, compared to $23.2 billion in 2001, and food service $17.4 billion.

Probably the most welcome bit of news for Ahold is that 2002 is now history. The $75.7 billion parent company, with operations in 27 countries, had a challenging year. Ahold bought out its Argentina joint-venture partner, which fell into bankruptcy. That costly episode led Ahold to back off from major acquisitions. Also, the company said it was considering divestiture of some non-core operations and the weakest of its core assets. For a short time there was even some question about whether van der Hoeven would be replaced as CEO (he was not).

But Ahold was far from the only supermarket industry player to experience a challenging year. In fact, Ahold's U.S. performance has compared well against some of its major American competitors. "We've outperformed the main competitors in terms of same-store sales growth in most of the quarters in the last five years," van der Hoeven said.

Patrick Roquas, an analyst with Kempen & Co. in the Netherlands, agreed that Ahold outperformed some major U.S. competitors, noting the company's 2002 U.S. identical-store sales growth was almost 1%. He said he forecasts Ahold's margin expansion will continue or expand at a slower pace.

"What's changed is that the main focus for them in the coming 12 months is on strengthening the core business and reducing debt," he said. "But it doesn't mean the company can't grow."

Van der Hoeven said Ahold has "made tremendous progress in getting our act together behind the scenes in centralizing backstage activities ... and we continue to benefit from that on the bottom line. We are in excellent shape overall."

He stressed that Ahold's major recent challenge -- the Argentina problem and the impact it had on the rest of the company -- overshadowed the good operating results elsewhere. "The U.S. has delivered according to expectations, or even better, in retail and food service," he said. "The Netherlands had a very good year. Scandinavia has had a phenomenal year. So that's 85% of our total business, if not more. It's a little sad to see there's been such a huge impact with write-down of assets and goodwill that this relatively small part of our business has had."

That development had contributed to a seemingly quick change in the positive buzz on Ahold and its CEO. "The sensitivity of the markets is huge," van der Hoeven said.

He conceded recently that he offered his resignation when the company first lowered its financial performance outlook in 2002, but the board did not accept it. "So I'm here to stay," he told SN. "I've been asked to continue, and I'm prepared to do that."

He said he takes full responsibility for the Argentina situation because he was responsible for that business arrangement in the first place. But he also points out he was responsible for acquisitions such as Stop & Shop and U.S. Foodservice, which are pillars of the business.

"I've joked that I had too much praise in the last 10 years but too much criticism at the present time."

Going Forward

The present for Ahold is all about evaluating its properties and internal opportunities, including streamlining assets. But van der Hoeven assured that the U.S. businesses are probably safe from divestiture.

"The divestitures we have in mind are unlikely to happen in the U.S., other than closing underperforming stores, which would be a regular thing to do in any case," he said.

Streamlining in the U.S. includes advancement of the shared services concept, which involves restructuring of back-office operations at certain divisions. Giant of Carlisle and Tops, which began this process two years ago, will now advance the process of integrating their merchandising and administrative operations, the company said. Bi-Lo and Bruno's will now follow that lead by restructuring certain business and administrative tasks to foster integration of functions.

Despite the latest development with Bi-Lo and Bruno's and the resignation last month of Bruno's CEO Jim Demme, Ahold is not considering a full merger of the two chains, van der Hoeven said. "Our concept is to be as local as you can be," he said. "Bruno's is a very strong name in Alabama and therefore it would not seem logical to have a name change. So when you talk about merger you talk about merging head offices rather than anything else. The shared services concept is doing a lot of that. So backstage activities are shared. But front end and the direct supporting organizations of the front end will remain separate."

Grize noted that Ahold is trying to streamline "the administrative functions, to allow people more time in interaction with customers and associates."

Any discussion of Ahold's operations has to be considered against the background of key competitive developments in the U.S. Chief among these is the relentless growth of Wal-Mart's food retailing formats, especially supercenters. Ahold has exposure to this activity, but its vulnerability in its core Northeast markets may be limited, Roquas said. "Ahold has a defendable position in the Northeast," Roquas said. "It is an upmarket area that's difficult for Wal-Mart to penetrate." He noted that Ahold is less price-focused than Wal-Mart, which gives Ahold an edge because it differentiates itself through its more upscale appeal. So Ahold's chains can compete better with Wal-Mart than can another price-oriented retailer, Roquas said.

One European analyst who insisted on anonymity said Ahold's longtime expectation of achieving higher margins is threatened by the need to pump margin back into product pricing.

"Some of Ahold's U.S. competitors are putting more margin into price," this analyst said. "But Ahold is very much a margin-driven retailer, and it can lose market share if it is not careful about the need to be competitive on price."

Not that Ahold doesn't attempt to stay competitive on price, according to van der Hoeven. "Part of the benefits [of the margin growth] is being invested back into the marketplace. We are price competitive in all of our markets relative to the traditional competition," he said.

The CEO also stressed that Ahold has a good read on how to compete with Wal-Mart. "It's a slightly different format and requires a somewhat different way of competing with them," he said. "We have a very good grasp of what Wal-Mart Supercenters are all about and how to best compete with them," although he declined to give examples.

Measuring Peapod

Another means of competing in the U.S. is Ahold's ongoing fine-tuning of its home shopping program under the Peapod umbrella. The service, a home shopping pioneer established in 1989, was acquired by Ahold in 2000 following the reversal in fortune of many of the dot-com grocery businesses. The retooled Peapod is now associated with two of Ahold's retail chains, providing consumers with an alternative to traditional shopping.

"Peapod has shown significant comparable-sales growth, which we define as growth within an existing marketplace out of the same distribution center," van der Hoeven said. Two key measurements regarding Peapod are sales growth and cost reduction. "We've been able to reduce our cost line and increase sales," he said. "There is a very innovative application of technology, both on the Web site and with the routing of trucks and the fact that we increase our density."

Given the continued improvement in results, "We believe in the fact that it's a viable business, provided it's associated with bricks as well," van der Hoeven stressed.

Food-Service Resource

The subject of Ahold's viable businesses definitely includes food service. Ahold's U.S. Foodservice operation is one of the leading broadline food-service distributors in the U.S. It has grown by acquiring other companies, including Alliant Foodservice, since Ahold first entered this business in 2000.

Analyst Roquas points out that Ahold has quickly become a major player in the U.S. business, along with Sysco. "In food-service, scale is just as important as it is in retail," Roquas said.

After Ahold and Sysco, the rest of the American food-service market is significantly smaller and fragmented, Roquas noted. Even more important is that "Wal-Mart is not a major player in food service."

Van der Hoeven stressed that "food service is one of the reasons we feel very good about the U.S. and our prospects. This business still has tremendous potential for growth and profitability. The market is to a large degree unconsolidated and there are still many opportunities where we can add value to existing food-service operations."

Roquas said that despite the halt to major retail acquisitions, Ahold may attempt "add-on acquisitions in food service. The food-service acquisitions are not so significant that it hurts the balance sheet."

But the promised synergies between the food service and retail sides of Ahold's business will have to wait. Ahold still sees great potential for each to enhance the other business but is still focused on internal company issues related to food service.

"U.S. Foodservice has not yet completed the process of integration of Alliant," van der Hoeven said. "We still have a few months to go. It's been an intense exercise. It will take 2003 to focus a lot on the integration of the systems in food service and to rebuild some of the lost sales due to the integration."

As a result, Ahold is still a year away from reaching for the synergies, he said. "We continue to see them. It's just that we need to be in top shape to start to address them."

Supply-Side Efficiencies

Ahold is not waiting on some other aspects of its business. This includes building efficiencies, supply chain and technology.

"Efficiency is just the entry into the game," Grize said. "You have to be good and keep costs down to effectively compete. We've really accelerated this over the past two years."

Ahold's recent activities in this realm include enhancing produce procurement, centralized buying in non-perishables and purchasing of not-for-resale product. Recent goals in technology include further centralizing processes and moving toward a common architecture with Ahold companies overseas. (See story Page 25 for more details on these efficiency and technology initiatives).

As the company seeks to centralize some functions, it also aims to differentiate its chains from the competition, a core part of its strategy. For example, Grize stressed that all of Ahold's chains are putting major emphasis on performance in perishables. He pointed to Giant of Landover, which has made great strides in improving its perishables presentations, and Giant of Carlisle, which has core formats in two sizes, each of which "does a very good job in deli, takeout and bakery." Ahold has always talked about differentiating itself, with terms like best of breed and thoroughbred companies. But the discussion of differentiation now seems to be accelerating along with the recognition of the need to stand out from other supermarkets and alternative formats.

"Differentiation was always in our business," Grize said. "But there's a huge need now to separate the wheat from the chaff."