Ahold Eyes Next Step After VIP

MARK HAMSTRA

AMSTERDAM — Ahold here said it was preparing to unveil a significant new program this week at its Stop & Shop and Giant-Landover chains as it winds down the Value Improvement Program.

The move comes as the company reported strong margin expansion at the two chains in the second quarter.

In a conference call with analysts, John Rishton, Ahold's chief executive officer, said the “fairly major” initiative at Stop & Shop and Giant-Landover is designed to “drive more value” for customers to ensure that the chains continue to grow sales volumes.

Although Rishton did not provide details on the plan, one analyst said it was likely to involve additional price cuts.

“We can only assume it will be further price initiatives to strengthen their already market-leading position,” Matthew Truman, a London-based analyst with Normura International, told SN.

Rishton, asked by an analyst if the new initiative was a response to Wal-Mart's conversion of discount stores to supercenters in the New England market, said that was not the only reason.

“It's not a response to Wal-Mart alone,” he said. “Really, we're going on the offensive — this is an offensive step rather than a defensive one.”

Ahold launched the VIP effort in the fall of 2006 by reducing prices and trimming SKU counts, category by category, and taking other steps to improve the in-store experience and increase efficiencies.

The move has been seen as effective in improving customer perceptions about pricing at the chains, and has helped reverse weakening trends in sales volumes and market share, the company said.

With VIP wrapping up in December, Ahold is now preparing to introduce the next level of value improvement, Rishton said.

In the most recent quarter, Ahold reported that operating income was up 60% at Stop & Shop and Giant-Landover, to $200 million, and both chains reported identical-store sales gains for the period, compared with year-ago results. As previously reported, IDs rose 4.2% at Stop & Shop and 3.5% at Giant-Landover, excluding gasoline.

“What is becoming abundantly clear is that — with the possible exception of Kroger — Ahold's top-line performance was vastly superior to peers, and many face ‘doing a VIP’ in the face of a rapidly worsening environment,” Truman wrote in a report last week, referring to efforts by other chains to trim prices on commonly purchased items. “Ahold's business is already positioned strongly in this regard.”

Ahold's quarter-to-quarter volume growth of 2% in the period, more than compensating for a slowdown in inflation, reflects “the essence of VIP,” he wrote.

Total sales at Stop & Shop and Giant-Landover were up 2.8% for the quarter, to $4.1 billion, and 3.2% for the half-year period, to $9.4 billion, compared with year-ago results.

Giant of Carlisle, Pa., the company's third U.S. banner, invested heavily in margin in the quarter to drive sales in a more difficult competitive environment, the company said. Operating income at that banner fell by 6%, to $48 million, while identical-store sales rose 2%, excluding gasoline. Total sales fell 0.4% in the quarter, to $1.1 billion, and were up 1.7% through the first half, to $2.6 billion, vs. prior-year results.

Despite the slowdown from the torrid pace of sales and earnings growth that had characterized Giant-Carlisle in recent years, Rishton said the chain continues to perform well.

“Carlisle … has an astonishing record in terms of driving sales, identical-sales growth, and in delivering profitable identical-sales growth,” he said. “So I think it's a very well-run business and it's doing extremely well.”

The chain competes against Wal-Mart supercenters in 75% of its locations, he pointed out.

Consumers are continuing to trade down overall, he explained, as Ahold noticed smaller basket sizes and more frequent trips in the second quarter.

“We see people reducing the amount which they eat out, which is good for our business,” Rishton said. “They spend more in supermarkets.

“We see some trade-down in terms of what they buy, particularly some of the impulse sales. What we're seeing is an increase in the number of trips — we're seeing that everywhere, and I think everyone is saying the same thing — and a reduction in the size of basket.

“We're handling it reasonably well at the moment in absolute terms, and very well in relative terms compared to our competition.”

Rishton also said he believes the company has opportunities to expand with both new and existing formats, hinting that the company might have more opportunities for small-format stores following the test of a convenience format at Giant-Carlisle earlier this year.

“We see opportunities for growth in new formats, particularly in the U.S., where we pretty much have a single format in all of our operations,” he said.

Stop & Shop's 100,000-square-foot stores in the Boston area limit the chain's opportunities for market-share expansion, he explained.

* AT CONSTANT EXCHANGE RATES, SALES INCREASED 3.9% FOR THE QUARTER AND 5.2% FOR THE HALF. ALL FIGURES CONVERTED FROM EUROS AT CURRENT EXCHANGE RATES.