BRUSSELS — The 200 Food Lion stores that Delhaize revamped behind new price and service initiatives are improving sales as expected, but cost savings expected to pay for those improvements are coming along more slowly.
Sales at the newly revamped stores outperformed the rest of the chain, Delhaize officials said in a conference call last week, helping the retailer to a quarterly increase in U.S. comparable-store sales for the first time in two years.
With the sales came slimmer margins, and a 2.7% decrease in U.S. earnings. Officials said costs were higher than expected because the company eased into an integration of U.S. category management functions more slowly than anticipated. One analyst called those results “disappointing” and detected a signal that the second half of the fiscal year would be more difficult than previously expected.
Emphasizing the positives, Pierre-Olivier Beckers, president and chief executive officer, said the heavier volumes at converted Food Lion stores would lead to additional market rollouts of the new service initiative in the months ahead. The category management expenses, he said, came as a result of an abundance of caution as the company combines buying staffs and reassigns personnel. Those expenses would dissipate in the second half.
“In the U.S., we're particularly pleased with the solid volume trend improvements we are seeing in the Southeast,” Beckers said. “We're especially happy to see that the work we have done in the two Food Lion markets of Raleigh (N.C.) and Chattanooga (Tenn.) is paying off, with strong transaction and basket growth as well as good customer feedback.”
Food Lion launched the new brand positioning in those markets this spring looking to increase traffic and basket size behind better-quality perishables, cleanliness, service and lower prices. Beckers described it as a “holistic” approach emphasizing the shopping experience as a whole. “It goes way, way beyond prices only.”
Comps in the Raleigh and Chattanooga markets outperformed the rest of the network through significant increases in transaction count and basket size, despite the additional price investments, he added. Volume was up in the “high single digits,” said Ron Hodge, executive vice president, Delhaize.
“Clearly, we're pulling the right levers and going in the right direction,” Beckers said, adding that the company expects to decide what to replicate of the program in additional markets by the end of the year.
U.S. sales of $4.8 billion for the quarter increased by 4.3% overall, while profits dipped 2.7% to $205 million. Operating margins of 4.2% of sales slipped from 4.5% in the same period a year ago. For the first half of the year, sales were up 2.2% to $9.6 billion and net income was down 8.5% to $421 million.
Hodge said the company had not delivered all the cost-of-goods savings it anticipated as a result of the changes to the category management processes at the company. The changes involve consolidating category managers at the Hannaford and Food Lion chains, as well as giving those managers different responsibilities. The company also a few weeks later than expected is rolling out its new My Essentials private label, he added.
“It definitely required some training time and it required some new systems in place that they all had to get used to,” Hodge explained. “So we believe the delay is worthwhile. It is a long-term play for us and it will produce benefits. We are very sure.”
Bottom Dollar, Delhaize's discount chain, had “less than optimal” trial during its initial rollout in the Philadelphia area, but sales have improved upon a higher promotional spend, Beckers said. The company recently announced it would expand the brand to the Pittsburgh market early next year.
Patrick Roquas, an analyst following Delhaize with Rabobank in a report last week, said he expected Delhaize would have a difficult second half, citing an expected slowdown in consumer spending and the possibility of inflation and more intense promotions.