Chattanooga, Tenn. -- With its acquisition of Red Food Stores here, Ahold is breaking new ground in the way it absorbs and operates U.S. supermarket companies.
The Zaandam, Netherlands-based giant, whose six U.S. supermarket chains now account for annual volume of $7.2 billion, has been driving for efficiencies and synergies as it acquires operators along the East Coast of the United States. But the purchase of the 55-unit Red Food operation, completed last month, is taking that effort a step further.
For the first time, Ahold has placed two of its U.S. chains under one chief. Marshall Collins, president and chief executive officer of Ahold's Mauldin, S.C.-based Bi-Lo division, has been given those same titles for Red Food. Ahold purchased Red Food from French retailer Promodes.
In an interview with SN, Collins said that bringing the two chains under a common leadership will enable each to pare costs and benefit from the other's strengths.
"Ahold hasn't yet had a common president for two supermarket groups, but the acquisition of Red Food was a little unique for us," he said. "Never before have we acquired a company that was geographically located adjacent to one of [our] subsidiaries and with a size that made it difficult to stand alone. A freestanding $600 million-a-year company would have difficulty achieving efficiencies or lowering costs in today's environment." (Red Food's annual sales volume is $585 million.)
"The two companies together are $2.5 billion in sales now. That sales level will allow both of us to leverage costs and become more efficient. While we think most of the opportunity for improvement lies in Red Food, there are also opportunities to leverage costs from Bi-Lo's perspective, too," Collins said.
Red Food's Georgia and Tennessee marketing areas are near Bi-Lo's operating bases of North Carolina, South Carolina and Georgia. The two chains' operating areas are contiguous without overlapping. Even in Georgia, where they both run stores, each occupies a different part of the state.
In addition to Bi-Lo and Red Food, the other Ahold U.S. divisions include Finast-Ohio, Maple Heights, Ohio; Tops Markets, Buffalo, N.Y.; Giant Food Stores, Carlisle, Pa., and Edwards Super Food Stores, Windsor Locks, Conn.
Ahold, which also operates supermarkets in the Netherlands, Belgium, Portugal and in the Czech Republic, posted overall volume last year of $14 billion. While Red Food and Bi-Lo are expected to continue under separate banners, Collins envisions numerous advantages from the common reporting structure, including the following:
PROCUREMENT: Collins is hoping that procurement of food and other store items will reap big savings from the close association of Bi-Lo and Red Food. "We're looking at procurement up and down the spectrum -- from private label to perishables," Collins said. "We believe there's a lot of opportunities to combine our volume and lower cost of product."
STORE PROTOTYPES: The two retail chains have been independently developing new prototypes that are very similar. Indeed, in one case each operator was almost exactly on the same track with a prototype that is now under serious consideration, Collins said. "This is a very early call, but there's a 43,000-square-foot prototype with a pharmacy that is very similar to what Bi-Lo and Red Food were working on that might be something we look at for both," Collins said.
SHARING OF PROGRAMS: Bi-Lo has been successfully pursuing a program of reducing stockkeeping units across various categories. Asked if that type of program would be shared with Red Food, Collins said, "No question about that." Similarly, Bi-Lo has been pursuing a number of initiatives involving Efficient Consumer Response that could be shared with Red Food or other Ahold sister companies. This includes work in electronic data interchange, continuous replenishment, cross-docking, activity-based costing and category review efforts, Collins said.
OTHER MEASURES: The company is studying a number of other areas to find efficiency possibilities. One such sector may be advertising, Collins noted. While Red Food and Bi-Lo will be advertised as separate operations, "there could be leverage in things like the printing of circulars or media buying or whatever else."
All the aforementioned efforts underline the cooperative approach Ahold has been building across its U.S. businesses. Some 23 so-called synergy groups have been formed to spread ideas from one Ahold chain to another. Collins has already begun to rework the executive reporting arrangements of Bi-Lo and Red Food to foster a closer operating relationship. His main liaison at Red Food is Tom Farello, formerly that chain's senior vice president of store operations, who was named executive vice president and chief operating officer. A number of Red Food executives -- from the chief financial officer to management information systems executives -- are now reporting to the corresponding Bi-Lo executives as the two companies create "one business plan from a standpoint of systems, accounting, finance and other areas," Collins said. This process may result in elimination of certain positions, but Collins said it is premature for him to comment on that. The organizational changes are being enacted with an eye on the eventual prize. To underscore his point that both chains will benefit from the arrangement, Collins provided what he considers a key example:
"A cornerstone of Bi-Lo's business has been a commitment to low prices and the belief that we're a low-price leader," Collins began. "Red Food's strength is a similar commitment to customer service. We see the customer service focus helping Bi-Lo because that's an area where we believe we have opportunities to improve. And when it comes to sharp pricing, that's an area where we think Bi-Lo can help Red Food. So we think we can bring our mutual strengths to the equation and we'll both be better as a result." Red Food's pricing policies will be an early focus for Collins, who sees the need for significant improvements. Late last year the chain launched a four-pronged pricing structure aimed at helping it win back share in its highly competitive market. The pricing framework included 10% discounts on prepriced merchandise, everyday low pricing on key category leader items and bonus buys for high-demand items.
"That program has had some success," Collins observed. "But frankly, on the whole, Red Food needs to price more aggressively than they do today. And it's going to be our goal over time to make sure they are more competitive than they are today."
Also intended to make Red Food more competitive is the three-year $45 million capital improvement program announced by Ahold. "The bulk of that is targeted to improving market position by impacting store network, whether it's remodels, expansions, replacements or new stores," Collins said. "In terms of new stores, we'd like to think we can develop opportunities that would give us three to five new stores a year. "And we hope that $45 million is the minimum number. Through improving results over the next couple of years and the development of strong market positions, we can find more opportunities to invest in Red Food than the $45 million will fund, and we'll spend more than that."
The dollar infusion is aimed at keeping Red Food vibrant against an onslaught of new competition in its markets.
In the last several years, Food Lion and Bruno's (with Foodmax stores) have entered Chattanooga, and Winn-Dixie will enter the market beginning in 1995. In addition, Kmart and Wal-Mart are eyeing Red Food operating territories for supercenter placement. For instance, a Red Food unit in Rome, Ga., is already competing against both Kmart and Wal-Mart supercenters. "Red Food has been defending its share, but when you have a dominant share, it's difficult to maintain every last share point," Collins said. "The Chattanooga market will continue to get more competitive in the future, but Red Food continues to enjoy a strong position there and will deal with it." One of Red Food's strong points is its Chattanooga distribution program. Collins said he isn't considering merging the two chains' distribution systems despite their geographic proximity.
"Red Food has a good distribution function in Chattanooga, and it wouldn't be possible for us to service those stores from our warehouse in Mauldin, S.C.," he said. "First of all, we're out of capacity already, just for Bi-Lo. We are really becoming unproductive because of a lack of capacity. We are in the process of recommending to Ahold that we put up a satellite distribution center to relieve the pressure on our Mauldin facilities.
"So we believe there are ways to create distribution efficiencies by working together, combining some slow-mover volume with high movers in some warehouses, and we're studying all those alternatives. But we see the distribution function in Chattanooga as one that is long term as far as servicing Red Food."
In mapping out his overall program, Collins has put the emphasis on speed of execution. The executive is committed to seeing significant results early in his Red Food tenure.
"We should see results in six to nine months," Collins said. "We have a high sense of urgency to improve the operating performance of Red Food while lowering prices to the consumer. That's the thrust of our efforts."
By placing Red Food and Bi-Lo under a common reporting structure, Ahold is linking its largest and smallest U.S. chains. Following are some data on each one: