Ahold Leverages SKU Reductions

ELLIOT ZWIEBACH

AMSTERDAM — As Ahold here continues to reduce pricing and inventory levels at two of its U.S. chains, it is continuing to rationalize its assortment — a policy that gives it an edge in dealing with vendors, Lawrence Benjamin, president and chief operating officer of the U.S. operations, said last week.

“The threat of discontinuing SKUs is an enormously powerful point of leverage with vendors,” he said, “and our negotiations with them involve telling them that if they remain with us, we will give them growth. They all want growth. But somebody has got to go, and so we have our own sort of reality show where somebody has to get off the island, and that's what we present to every competitor, and it's very, very effective.”

Ahold has been reducing prices and simplifying inventories since September 2006 as part of a Value Improvement Program at Stop & Shop, Quincy, Mass., and Giant Foods, Landover, Md.

Since it launched the program by cutting prices in the produce category up to 50%, Ahold has discontinued approximately 25% of the items it was carrying while simultaneously adding new products, Benjamin told analysts during a conference call to discuss financial results for the year and fourth quarter, which ended Dec. 20.

“One of our reasons for being is the variety we offer our customers, and we're very conscious of balancing the need to simplify our SKUs while making sure we maintain the advantage we have of offering tremendous variety,” he explained.

“So it's a constant process of making sure we're doing this right, and when we've made some mistakes along the way, we've brought the product back in.”

Since initiating VIP in the produce category nearly 18 months ago, the two chains have reduced prices between 10% and 50% on 73% of the items they carry, encompassing paper goods, baby products, household items, cereal, pet foods, water and juice, cookies and crackers, dairy, coffee and frozen foods.

Ahold announced plans last week to lower prices on salad dressings, cooking oils and condiments. Benjamin said the company expects to complete the implementation of VIP to all categories by next fall.

Asked whether Ahold is rationalizing its store base while it works on improving pricing and inventory levels, Benjamin replied, “Historically, some of our ID sales have been weighted down by underperforming stores and how they respond to VIP.

“If they don't respond, then we want to rationalize them — as we did last year when we exited the Southern New Jersey market completely — and we will continue to do that as part of an ongoing program.

“But in simplifying the business, we want to make sure we focus most of our attention on high-performing stores and not give all our time and attention to the underperforming portion.”

Ahold said net income for the fourth quarter was up 9.2% to $402.6 million (262 million euros), while sales rose 0.2% to $10.1 billion; for the year, net income rose 222.2% to $4.5 billion — reflecting the sale of Tops Markets and U.S. Foodservice in the U.S. and a chain of stores in Poland — and sales rose 1.2% to $43.4 billion.

Fourth-quarter sales at Stop & Shop and Giant of Landover rose 2% to $3.9 billion, with ID sales, excluding gasoline, rising 1.2% at Stop & Shop and falling 0.5% at Giant of Landover.

At Giant Foods, Carlisle, Pa., sales for the quarter rose 8.6% to $1 billion — due in part to the acquisition a year earlier of Clemens Markets — and IDs, excluding gasoline, rose 3.8.