AHOLD REVISITED

MARK HAMSTRA

BRAINTREE, Mass. -- The buildup is over.

After 25 years of growth in the United States through a series of acquisitions, the retail arm of Ahold USA is hunkering down in its new headquarters here as a company that will have two major divisions and very little in the way of an umbrella organization.

In an interview with SN last week, Bill Grize, president and chief executive officer, Ahold USA, explained that Ahold's retail support operations will be absorbed in the next few years into those of Stop & Shop, Quincy, Mass., the chain that was seen as the crown jewel of the Ahold empire in the United States. The result, he said, will be a company that operates more efficiently, conducts promotions more effectively, and has the resources to grow within a smaller geographic region.

"What were once Ahold USA functions, or corporate functions, will ultimately be embedded in Stop & Shop, putting myself and people who work with me out of job," said Grize, who added that he would retire when the integration is completed. "So, we will have one less layer there, and much more homogenization with the companies that are left."

SN also spoke with Marc Smith, president and CEO, Stop & Shop, and Dick Baird, president and CEO, Giant of Landover, Md., who said the integration of those two chains was being carefully planned to minimize the impact on employees and customers when most of Giant's processes and systems are converted to those of Stop & Shop this summer.

As previously reported, Ahold USA Retail, which does not include the U.S. Foodservice division at the heart of the $1 billion-plus profit overstatement scandal that erupted last year, will be centered around four chains divided into two silos: Giant of Landover, Md., combined with Stop & Shop; and Giant of Carlisle, Pa., combined with Tops Friendly Markets, Williamsville, N.Y.

Ahold revealed earlier this year that it would seek to sell Bi-Lo, Mauldin, S.C., and Bruno's, Birmingham, Ala., the company's first and last U.S. acquisitions, respectively. Proceeds from the sale of Ahold's two southernmost chains -- and its convenience store banners -- are to be used to help pay down the company's $9 billion debt.

The company's Chicago-based Internet division, Peapod, will not be affected by the changes at the retail chains, Ahold said.

Ahold had already been undertaking a review of its operations to eliminate weak performers and consolidate its U.S. operations when the U.S. Foodservice scandal was revealed last year, but the sudden loss of previously recognized income from that division forced the company to accelerate the process.

Opportunities for Synergies

The integration of Tops and Giant-Carlisle, which began about two years ago, is largely complete -- so much so that Grize said they now essentially operate as a single chain. They will continue to operate separately from the Giant-Landover/Stop & Shop silo, although some of the support functions will be integrated into Stop & Shop's operations. Some of the overflow from Stop & Shop's Quincy, Mass., headquarters will end up here at the former Bradlee's headquarters, where Ahold has a long-term lease.

The Chantilly, Va., headquarters of Ahold USA, which employs about 100 people, will be largely dissolved.

"We saw a number of opportunities for synergies, without abusing the customer, but in fact augmenting the customer's experience," Grize said. "Those synergies are in [information technology], supply chain, in-store operations and sourcing.

"We've done a fair amount of the backstage things already," he said. "As far as Ahold USA Retail as a separate entity, it really in effect will go away."

Industry observers pointed out that Ahold never had an extensive umbrella structure anyway, but previously the chains were much more autonomous than they will be under the new organization.

Stop & Shop is by far the chain's largest banner, with 338 stores in six states, generating $10.05 billion in sales in 2003. Giant-Landover has 199 stores in five states, and had $5.34 billion in sales last year. The rest of the U.S. retail operations, including Peapod, had 2003 sales of $11.56 billion.

Grize said the company's plan to integrate some of the backstage operations of all four chains within Stop & Shop will simplify operations for the company's vendors as well.

"We've been somewhat criticized, and rightfully so, for not being the cheapest company to do business with," he said. "From a manufacturer's standpoint, having several different touch points doesn't make their life any easier. Instead of having to do seven calls, as they once did, they can now do one or two calls, and that's a big difference."

Already Ahold purchases more than 50% of its products on a central basis, he said, including all perishables, general merchandise, health and beauty care, pharmacy products and private-label items. In addition, all "not-for-resale" items like store fixtures are also purchased centrally.

"Are there more opportunities to pick up and do things better backstage? The answer is yes," said Grize. "Will it be on the order of magnitude of what we're doing with Giant-Landover and Stop & Shop and what we've already done? No, there's quite a bit that's been done."

Grize said the company already has become somewhat efficient at purchasing products, but hopes to become more efficient at promoting them as it combines the operations of Stop & Shop and Giant-Landover.

"We'll be able to do sales promotions on a centralized basis," Grize said. "We've been able to buy centrally, but we haven't been able to sell centrally."

Combining Stop & Shop and Giant

Grize said although Giant-Landover and Stop & Shop don't overlap, their territories are contiguous, with Giant-Landover's northernmost stores in New Jersey located just south of Stop & Shop's southernmost locations in that state.

"We have two companies that go to market in a virtually identical fashion," he said. "They appeal to basically the same demographics, they are contiguous, they are both high-low operators, and really, if Giant had purchased Stop & Shop, or Stop & Shop had purchased Giant, I doubt seriously that we'd leave them standing like that as two separate companies with just a few synergies, which is what we've done through Ahold USA.

"Collectively, we as a group said, 'There is a better way here,"' he said. "If we are to bring Ahold USA together in a more timely fashion, the key to that would be to bring the Giant and Stop & Shop teams together and get them integrated first. That's a work in progress."

Despite reigning in capital expenditures to save money while the parent company regroups, Giant-Landover and Stop & Shop are continuing their new-store development programs, with Giant-Landover planning 10 to 15 new stores per year and Stop & Shop planning more than 30 new stores in 2003.

"We're looking to have substantial growth in both those entities, and on a combined basis, it will be very significant," Grize said. "We're not holding back the racehorses. We're still feeding them."

Smith, who will oversee the Giant-Landover and Stop & Shop operations when the two chains are merged, said for the most part Giant's systems and processes would be converted to those used by Stop & Shop. That transition will likely be tested in a few stores before the full conversion to Stop & Shop's systems in July.

"We'll be essentially migrating to what will largely be a Stop & Shop-based system, and then going back and looking at the things that boost the operations of both companies," he said.

Although he said details about how the conversion to Stop & Shop's systems would take place were still being worked out, he said the technology and process systems would be integrated first, followed by things like payroll, accounting, category management, reorder buying and human resources.

"Fortunately, we have a lot of hands helping with the lifting," he said, noting that about 165 people have been involved at least on a part-time basis in planning the integration process.

Baird, who plans to retire from Giant-Landover this summer as the integration is completed, said one lesson learned from the merger of Giant-Carlisle and Tops is that the actual integration should be done as quickly as possible after a lot of careful planning ahead of time.

"From our point of view, it wasn't so much looking at Giant and Tops and learning what to do differently," he said. "They've been pretty successful. The more explaining you do on a timely basis and then go ahead and execute quickly, the better off you are."

He also said it's been important to stay in touch with the employees, which he said Giant has been attempting to do through group meetings and the company's intranet.

Minimizing the Impact

Baird and Smith said they also consider it important to retain as much local flavor in Giant as they can, although Smith said the process will involve some changes to Giant's operations.

"We know that whenever we put two companies together in the time frame that we've been provided, there are going to be issues that impact the business," he said. "We've got two companies that have been in business for a long period of time, and as much as they've been brought together over the past few years, there are still wide differences on a variety of different elements.

"I think it's important for us to recognize those differences and try to do our best to rationalize them in such a way that affect the consumer only in a positive way."

He said Stop & Shop learned the hard way not to force too many changes on consumers after it acquired the Purity Supreme chain in 1995, one year before Stop & Shop was acquired by Ahold.

"We thought our offering at Stop & Shop was so much stronger, yet when we put our offering in, it disillusioned some customers," Smith said. "If you have a brand like Giant and a brand like Stop & Shop, you have to be careful how you knit the two brands together."

Smith described thinking about the consumer as "job one," and thinking about the associates as "job one-A and one-B."

He conceded there would be "significant job loss" in the integration process.

"You can't put a different face on that," he said. "But how we treat people and how we build the organization and who are the people that populate it are very critical next steps. That's what we've been working on at the senior management level."

Individual department managers have been concentrating on how to integrate the departments of the two chains.

Smith said one element of Stop & Shop's operations -- its partnership with third-party food-service brands like Dunkin Donuts and Boston Market -- could be tested in some pilot Giant supermarkets.

Baird said one of the ways Giant-Landover will stay in touch with its local consumers is through its ties with local charities, which it will preserve through the transition. Those include the Children's Cancer Foundation and various local programs supported through United Way.

"In the end, it's very important to protect the Giant brand in the marketplace," he said. "By the Giant brand, I mean what it means to the consumer, and one of those things is the Giant commitment to the community."

Baird said he feels that Smith and the Stop & Shop team have made a strong effort to preserve the qualities that make Giant unique.

"There are clearly more things that are alike than different," he said. "Recognizing that there are some differences, there has been a commitment made to recognize those differences locally."

Smith said some of Giant's processes could be retained, especially those related to its pharmacy operations. He also said Giant's item database was superior to the one used by Stop & Shop, and would be examined as Ahold explores the creation of a new item database.

Ahold was expected late last week to unveil a new regional structure for the company in which a senior company manager was to be named as the divisional manager for Giant.

"We will be populating [the new division] with an organization whose primary responsibility is to be close to the customer and close to the associates in the stores," Smith said. "It will be a substantial organization, designed to ensure that the associates and customers come first."

Analysts See Benefits

Analysts said they were surprised by the announcement earlier this year that Ahold would integrate Giant-Landover and Stop & Shop because the two companies seemed to be performing so well independently. They said the company would be wise to preserve as much of Giant's local flavor as possible after the merger.

"It seems to me that the local strength of the Giant chain has a certain value," said Patrick Roquas, analyst, Kempen Securities, Amsterdam.

While he agreed the merger of Giant-Carlisle and Tops made sense, he said the benefits of a Stop & Shop merger with Giant-Landover "are less obvious because both chains are running rather well. It's likely that it's going to be more about finding ways to leverage the strength of both chains to improve the performance even further."

Jens Jantzen, an analyst in the London office of Bear Stearns, said he thinks the risk of Giant losing its focus on local customers was "fairly limited."

"They want to keep the two banners. They want to keep Giant operating with a slightly different focus, but they want to keep the Giant banner there."

He said Ahold has a history of managing its margins well while integrating bolt-on acquisitions, and he expects the company to be able to do the same with the Giant-Landover integration into Stop & Shop.

Burt Flickinger, managing director, Strategic Resource Group/Flickinger Consulting, New York, said he thinks the integration of Giant-Landover into Stop & Shop will give Giant increased leverage to better take on the increasing competition in the Washington area, where Wegmans Food Markets is approaching and where Target is reportedly planning to open two SuperTargets offering groceries.

He said the similar formats of Giant-Landover and Stop & Shop make them a natural fit for working together.

"The companies are very compatible because under Bill Grize and [former Ahold CEO] Bob Tobin's leadership, they were in share groups together, they worked together on labor management and other areas," he said. The two chains, he pointed out, along with Pathmark Stores, Carteret, N.J., were among the vanguard who rolled out superstores with pharmacies in the Northeast.

"Both companies focus on having very efficient one-stop shopping with food and pharmacy, and both have very strong loyalty-type programs," he said.

Flickinger pointed out that because of Giant-Carlisle's everyday-low-price positioning and its tendency to locate in rural areas, it would have been difficult to merge that chain into the operations of an entity run by Stop & Shop, which operates bigger stores and goes to market with a high-low pricing strategy.

Giant-Carlisle, he said, has been one of the chains that has been able to weather competition from Wal-Mart Stores, Bentonville, Ark., and has been one of Ahold's best-performing banners in recent years.

"Giant of Carlisle has always done well, but Tops had gone through some terrible times prior to [Tops' Executive Vice President and General Manager] Max Henderson coming on. By combining his heroic leadership in turning around Tops, combined with a longtime great working relationship with [Giant-Carlisle's President and CEO] Tony Schinao, they have proven to be a very effective leadership team across the Pennsylvania-New York borders."

Some analysts think Giant-Carlisle's influence alone may not be enough to resurrect the struggling Tops chain.

"Tops has been struggling for a couple of years, so they are looking for more radical action, either in terms of repositioning the format or converting the format, or doing something else," said Roquas of Kempen Securities.

Grize declined to comment on plans for Tops, other than to say Ahold had no plans to sell any other major assets in the United States.

"We have some issues with Tops, but the Giant team is doing a pretty darn good job of addressing those issues," he said.