AHOLD'S INTEGRATION MISSION

DAVID ORGEL

CHANTILLY, Va. -- Ahold USA's recent entry into the acquisition battle for units of Big V Supermarkets once again puts the company at the center of the food retail industry's consolidation drama.

That's been Ahold USA's role for some time, including last year, when the company acquired Bruno's Supermarkets, Birmingham, Ala., and Alliant Foodservice, Deerfield, Ill., announcing both high-profile moves in a single, breathtaking day.

But this year, Ahold USA -- a unit of the Netherlands-based global company Ahold -- is primarily focusing on activities that may not be as high-profile as its recent acquisitions, but are no less important. These include driving for organic growth and stepping back to fine-tune and integrate existing businesses.

Ahold's top executives Cees van der Hoeven, president and chief executive officer, and Bill Grize, president and CEO of Ahold USA food retail operations, discussed the company's business outlook in a recent interview with SN.

Because of Ahold's current goals, some other initiatives will have to wait. For the near term, Ahold will delay trying to achieve the promise of extensive synergies between its retail and food-service sides so that it can instead focus on integrating the new food-service operations into the company. Also, for the immediate future Ahold will hold off on expanding its Peapod home-shopping service in order to spend more time getting the model right. Such delays will make possible a year of solidifying core parts of Ahold's portfolio.

Ahold, whose worldwide sales reached $59 billion in the year ended Dec. 31, has far-flung operations that reach from Europe into Latin America and Asia, in addition to the United States. For 2002, the company forecasts a 15% rise in earnings per share across its worldwide divisions, resulting from organic sales and earnings growth, and the continued benefits from recent acquisitions and joint ventures.

Ahold considers four goals to be central to the success of its 2002 forecast: increasing organic sales growth, improving margin management, reducing operating costs and using capital more efficiently.

Ahold USA's most recent annual sales were $35.3 billion, which includes $23.2 billion in retail and $12.1 billion in food service.

Deborah Weinswig, a New York-based Saloman Smith Barney analyst, who recently covered the food retailing industry for Bear Stearns, wrote in a report that "overall, we believe that the [company's fourth-quarter] results were encouraging, considering the competitive environment and investor concerns regarding lower-than-expected results. We were also enthused to see that Ahold plans to achieve 15% earnings per common share growth in 2002, in line with our expectations."

Ahold has recently been the subject of industry speculation about improper accounting and tax practices, developments the company has repeatedly dismissed as "totally unfounded." Nevertheless, Ahold has promised to "step up our efforts to communicate the details behind our key performance indicators."

The company's reaction to these events appears to be helping its cause. Weinswig wrote that the concerns were "overdone," adding that "Ahold directly addressed the issue, and we do not foresee this concern holding back the stock."

The company has big plans for U.S. retail this year, expecting it to grow to about $27 billion in sales with organic sales growth of about 7%, according to a company spokesman. Ahold expects organic earnings growth from U.S. retail to be considerably higher than that percentage because of improving operational margins of existing chains, the spokesman said. The company's U.S. chain business is concentrated in the eastern United States.

Bringing Bruno's Into The Fold

Ahold executives point to the integration of retailer Bruno's as a process with a lot of upside possibilities. These Ahold executives gave high marks to the integration's course so far.

"The Bruno's integration is going along near flawlessly," Grize said. "We've learned from a series of acquisitions what to do and what not to do; we've learned from our mistakes."

Grize went further: "I think this is our best integration to date, in terms of effectiveness and also attitude and acceptance of change."

Ahold has lots of potential plans for Bruno's, a company that will extend Ahold's penetration in the Southeast. But the first goals are the more basic steps of integrating Bruno's into the Ahold environment. "We are first getting them on the same platform, systems and practices," Grize said.

Down the road, Ahold may explore shared-service concepts between Bruno's and other companies in Ahold USA, a process in which multiple companies share services such as human resources, administration and finance. Ahold has done that successfully in a relationship between two units: Giant Food, Carlisle, Pa., and Tops Friendly Markets, Buffalo, N.Y.

In fact, most of the goals for Bruno's involve backstage functions because Bruno's already excels in anything that involves customer contact, Grize said. "Bruno's is a pretty darn well-run company. We visited every store. We were amazed at the level of standards and execution and the conditions. The customer is already getting a good shake in service, cleanliness, in-stock conditions and value."

Ahold sees opportunity for lowering the costs of procurement for Bruno's, Grize noted. "There are nice upside opportunities between what they pay for products and what we pay. We can also be of help in the area of in-store productivity. We have systems and processes that they are anxious to get started on."

Bruno's is the latest U.S. retailer to become part of Ahold's best practices efficiency program. David Shriver, London-based managing director for the European food retail sector at Credit Suisse First Boston, said Ahold has some powerful advantages in its U.S. retail businesses. "They have opportunities to grow that many other U.S. retailers don't have," he said. "Stop & Shop is a benchmark for them in many respects in terms of best practices. So you have to see to what extent they can take many of these practices and spread them across the network, in order to bring down costs."

Shriver pointed to another emerging retail opportunity for Ahold on the procurement side. He noted that until now, the company's procurement savings focused on areas like nonresalables and private label. "But now they feel they are getting the benefits of scale across borders on national brands," he said. "And the highest value is with these A-brands."

Ahold will also move forward with new U.S. retail-merchandising directions, according to Shriver. "The company is very open to micro-merchandising and handling the perimeter of the store in innovative ways. That's where the growth is. That gives them a point of difference with Wal-Mart."

Food-Service Factor

The other side of Ahold USA, the food-service component, has a lot of work to do this year, company executives stressed. Jim Miller is the president and CEO of this unit. "The focus of food service for now will be primarily integration of the food-service business," van der Hoeven said. These include recently acquired properties U.S. Foodservice, Columbia, Md.; PYA/Monarch, Greenville, S.C.; and Alliant.

In 2002, Ahold's U.S. food-service operations are expected to reach between $18.5 billion and $19 billion in sales.

"Alliant is a major step forward for our food service," van der Hoeven said. He called the PYA integration "flawless," and said "the Alliant integration will take more effort." Because of this continued work, Ahold has temporarily put on hold efforts to further develop synergies between the retail and food-service sides of its U.S. operations. It has already made some progress in that arena through a pilot program with Giant Food, Landover, Md., which includes concepts in delicatessen, home-meal replacement and bakery. "It's close by to our headquarters, and we want to get the model right before rolling it out to other companies," Grize said.

Many of the benefits have also been incorporated into two other retail companies: Giant of Carlisle, and Tops.

But Ahold has just touched the surface in terms of potential benefits from food-service retail relationships, Grize said, noting there are great possibilities in the food-to-go arena. In fact, the retail side is expected to receive extensive benefits from the food-service unit's procurement abilities.

On both the retail and food-service sides, Ahold has made a practice of using acquisitions to jump-start sales. But it appears that will change because van der Hoeven has recently stressed that the company sees a reduction in merger activity.

Acquisition Outlook

In any case, despite the recent focus on food-service acquisitions, the universe of large merger candidates in that arena is very limited, van der Hoeven said. He put the food-service industry's sales in the United States at about $185 billion, with the top players including Sysco, Ahold's U.S. food-service operations and Performance Group. "Then it falls off pretty quickly to companies below $1 billion in sales," he said. "So our focus in food service will be on integration and organic growth. And then if we look at acquisitions, they would be of a much smaller size, which would involve regional fill-ins."

Contrast that to the potential acquisition universe on Ahold's retail side, and it's evident why the company has more potential for mergers there. "In retail, there's much more scope for sizable acquisitions," van der Hoeven said.

Ahold's most recent acquisition move involves the battle for Big V Supermarkets, the Florida, N.Y.-based company that is now operating in Chapter 11 bankruptcy. Ahold's Stop & Shop unit based in Quincy, Mass., filed a reorganization plan for Big V that includes the purchase of 26 Big V units. In another layer to this proposal, Stop & Shop said Pathmark Stores, Carteret, N.J., agreed to join the transaction and would acquire nine of the 26 Big V units if this deal is successful.

For years Ahold has talked about its acquisition strategy of going after only "thoroughbred companies," but Ahold is well aware that the years have reduced the pool of candidates. So it isn't pinning great hopes on large deals, particularly at a time when it plans an overall slowdown in its acquisition activity in favor of more organic growth. "We still think we're a good home for companies that want to keep their name and management, and add to the company's strengths," van der Hoeven said. "So we're still hopeful there are potential situations that may come our way. But it's not like we are aggressively pursuing any new acquisitions at this stage."

On the other end of the acquisition spectrum are asset transactions, in which Ahold would pick up real estate from an in-market company. This scenario was the case with the 56 Grand Union units acquired and remodeled by Ahold's Stop & Shop and Tops units last year. Current performance from that deal is exceeding Ahold's expectations. "We would continue to look at those situations," van der Hoeven said. "After a conversion, we can deliver the results."

Re-Tooling Home Shopping

A segment of the business that still needs to deliver results is Peapod, Ahold's online grocery operation. Ahold acquired Peapod in 2000 in a move that saved the Internet retailer from possible financial collapse. But Ahold is still fine-tuning the operating model for Peapod.

"This will be a watershed year for Peapod," Grize said. "We're making progress. We're not promoting the heck out of it in terms of expanding the base. We want to get the model right. It's still not a profit-making entity. We believe in the concept."

Ahold's attentions are centering on two areas. The first involves determining the best model for picking, sorting and packing grocery items. The second is the question of home delivery and the costs involved.

"When these get done and we feel the model is right operationally, we'll expand and promote it more vigorously," Grize said.

The question of picking has so far brought Ahold to a dual solution. It has built "ware-rooms" in a few Stop & Shop stores that house some 7,000 fast-turning products for picking. Ahold likes the low-cost nature of that solution, "but it reaches a plateau at some point" with increased levels of demand, noted Grize. That's where Ahold's warehouse solution enters the picture. The company currently has two warehouses: one in Chicago and the other in the Washington, D.C., market.

Despite the fact that Peapod is considered a work in progress, Ahold still expects the online service to be profitable by the end of 2003, Grize said. But for now it is more concerned with regional rather than overall progress, van der Hoeven stressed.

On The Global Front

As a global operator, Ahold's business sometimes relies on events it can't control, such as the European conversion to a common currency or the economic instability in Argentina.

According to Cees van der Hoeven, president and chief executive officer, Ahold, Zaandam, Netherlands, the introduction of the euro in six euro-zone countries this year was a positive event despite some skepticism.

"The euro conversion has gone much easier than expected," he said. "We were somewhat pessimistic about the transition, but we were proven wrong. It went very well. It will have a psychological effect on economic development. People feel very good about the common currency."

Ahold's sales in Europe rose 31.2% last year and operating earnings advanced 30%.

The company's recent experience in Latin America has been marked by different issues, including recession and currency devaluation in Argentina. "But our performance has been good under the circumstances," van der Hoeven said. "Argentina is a story in itself. It's amazing how we've performed. We've gained very significant market share because of our strong team."

The Latin American problems do not lead Ahold to question its future commitment to the region, van der Hoeven noted. "The outlook is uncertain, but we'll continue to be a major player there, because we are the best."

That kind of optimism isn't unusual for Ahold executives, who see many U.S. and international dynamics increasingly working in their favor as consolidation reduces the number of companies.

For instance, van der Hoeven is excited about the push toward standards of all kinds by the global industry. "The goal is to come to a global approach on technology standards in areas such as a data dictionary, CPFR [collaborative planning, forecasting and replenishment] and intelligent tagging. Likewise, food-safety standards are on the front burner in a period of heightened consumer fears over health risks.

"There are things we are all doing together that I don't think we've done before in a productive way," he said. "It shows the world is becoming smaller, and the fact that there are fewer major players helps to organize that."