Slowed Peapod growth due to operational issues, not demand drop

Operational problems at Peapod’s Chicago warehouse have dragged on Ahold Delhaize’s U.S. online grocery business, executives told investors in its second-quarter earnings call Thursday.

Sales growth has fallen from double digits to high single digits, executives said.

Dick Boer, president and CEO, said “all our focus is now [on] the teams to resolve that” issue, with the expectation that Peapod growth will return to double digits once fixes have been made.

Peapod had trouble getting its warehouse up and running in the New York market last year, which dragged on sales, but executives said those issues are now resolved and New York sales growth is in the double digits.

Executives stressed customer interest was not a reason for slowed sales growth this quarter.

“There's a strong demand for the U.S. on online sales. It's clear,” said Boer.

Peapod’s growth is especially disappointing compared with the retailer’s online business in the Netherlands, executives said.

“If we're expressing some disappointment, it's because we see the potential. For example, at ah.nl where we're growing around 30%. So it's a frustration that we can't fully meet the demand, but I'm sure the team is working on it and will turn that around, and we'll be reporting a better number shortly,” said Jeff Carr, CFO and EVP.

Carr was quick to point out that Peapod’s sales will total over $700 million this year, adding it’s “probably the biggest grocery home delivery business in the U.S.”

Executives said Peapod’s recent operational issues would not prevent the company from bringing its digital expertise to other areas of the combined business.

“On digital, I think we both have a big opportunity,” said Frans Muller, deputy CEO and chief integration officer. “So all the learnings that we will share, teams are now openly very receptive to sharing and take the best out of this, and that can also be for the U.S. an opportunity to grow in digital and e-commerce, and Hannaford To Go is a good program, but we don't have a home delivery service.”

Peapod recently revamped its website to make ordering easier for customers.

Boer also noted Peapod’s prices are better than those at online retailer FreshDirect, which competes with the Ahold Delhaize service in New York and Philadelphia.

“It's clearly a main competitor in that area,” said Boer, however “don't underestimate all other retailers. They also have their online propositions, often not with home deliveries. So we are unique with our home delivery system, where in most cases here, the supermarkets are pickup points.”

In contrast, the retailer doesn’t see Instacart as a competitor, Boer said. Giant-Landover is testing a partnership with Instacart. Boer said Instacart basket sizes have been smaller than the typical Peapod basket, which is about $120, adding customers appear to use Instacart to quickly get items they may have forgotten.

“So, that's clearly a difference, and I wouldn't mix both as the same solution,” said Boer. “They're clearly two different solutions.”