AHOLD'S NEW LEVEL

DAVID ORGEL

Ahold USA is a very different company than it was a year ago.

At its helm is supermarket-industry veteran Robert Tobin, 60, who became president and chief executive officer of Ahold USA last summer. In its sphere are two new companies: Giant Food, Landover, Md., which it acquired last October, and Pathmark Stores, Carteret, N.J., which it has an agreement to acquire.

And still core to Ahold's game plan is a commitment to building synergies among its U.S. properties, only now that effort has been taken to a new level. Tobin has quickened the pace at which Ahold achieves economies of scale. He's also helped to standardize the way that Ahold goes about absorbing new companies.

"We now have this model of how it can be done," stressed Tobin. In an interview with SN, Tobin and Cees van der Hoeven, president and CEO of the Zaandam, Netherlands-based parent company, described the challenges Ahold faces in the United States and the rest of the world. Ahold operates more than 3,600 supermarkets, hypermarkets and specialty stores worldwide with 1998 sales of more than $30 billion.

Even as the bulging U.S. organization is being challenged to integrate companies, the global company is building enhanced operating relationships among its far-flung divisions and becoming more selective about acquisition targets.

The Pathmark deal puts the spotlight on the United States and builds the Dutch-based firm's hegemony on the U.S. East Coast. Ahold this month agreed to acquire Pathmark for $1.75 billion, less than five months after closing the transaction to acquire Giant Food.

The rest of Ahold's U.S. organization includes Stop & Shop, Quincy, Mass.; Bi-Lo, Mauldin, S.C.; Giant Food Stores, Carlisle, Pa. (including Edwards Super Food Stores); and Tops Markets, Buffalo, N.Y. (including Finast Friendly Markets, Maple Heights, Ohio). Ahold USA is based in Atlanta.

Pathmark will be built into a regional powerhouse in New York and New Jersey as the 70-unit Edwards chain will be folded into the 132-store Pathmark organization. How will Pathmark be melded with the full Ahold USA organization?

"We'll do the same as with Giant," said Tobin. "We'll take people from the other Ahold U.S. companies and do a gap analysis. That will determine which are the best practices at Ahold and which at Pathmark. And we'll see where Pathmark exceeds and falls short. That was terrifically successful in Washington D.C. [with Giant]."

The goal is to find synergies that save costs and enhance operations. Tobin first became involved in this kind of process when Ahold acquired Stop & Shop in 1996. At the time Tobin was Stop & Shop's chairman, president and CEO and led the integration process.

"We're now ahead of my timetable on integrating Giant," Tobin said. Giant's CEO is Richard Baird, who was named to the post last November. He was executive vice president at Stop & Shop.

"You'll find the Giant people are pleased with what has happened," Tobin said. "A lot of the apprehension and speculation are gone. The Giant integration has been fast, although it never stops."

As evidenced in the Giant case, Tobin's model for integration is a multistep process. "The things you do first are the easy ones, including changes in product mix," he said.

Citing a hypothetical example, he said Giant could borrow a merchandising idea from another Ahold division and make the change in 24 hours. "Those are the quick hits," he said. "Other things take longer, such as issues with union contracts and the need for third-party negotiations."

Store remodels and unit increases also involve more forward planning. "Those will take time, but we have the mechanisms in place and the procedures that have worked really well for us."

Sizing Up Pathmark

In the case of Pathmark, Tobin said it's too early to assess how the chain's best practices line up with those of Ahold's. But Tobin pointed to Pathmark's expertise in urban merchandising, general merchandise and pharmacy, and customer service. He sees Ahold giving Pathmark a hand with marketing, loyalty programs and consumer research.

But perhaps Ahold's biggest contribution will be capital. Pathmark's high debt levels had constrained it from growing in its very competitive market areas. Now the New Jersey-based retailer will be able to spruce up stores and experiment with new merchandising directions, including a smaller format already in the works. "The Ahold deal will mean Pathmark will be a much better capitalized company," said Ted Bernstein, an analyst with Grantchester Securities, New York.

Pathmark will fill in key territory for Ahold on the East Coast and support Ahold's overall U.S. strategy.

"Ahold already had Edwards in this territory, but the Pathmark deal gives them much better penetration from Philadelphia to Long Island to the Connecticut border," Bernstein said. The big picture for Tobin is creating a seamless U.S. organization in which best practices are shared and backroom costs are brought to a minimum. That has been a long-time goal for Ahold, which first entered the United States in 1977. But Tobin has brought a new level of determination to the effort.

"Bob is taking the natural further steps given the fact that we've come from 10 years ago as a very decentralized, your on-your-own attitude," van der Hoeven said. "We were proud back then that the companies were independent with their own support structure, because that made them strong. That was our point of differentiation. Now we're at the point where we want to preserve the local market franchise, but really behind the scenes pool everything together and get economies of scale."

Tobin retired last July as chairman and CEO of Stop & Shop, a company he joined in 1960. By that time Tobin had already been involved with Ahold's Latin American operations and had served as interim CEO of Tops. In a surprise move a month later, Tobin was named to head Ahold USA.

Tobin is very well regarded for his experience and his knack for getting things done. He is very proud that he worked under industry pioneer Sidney Rabb during his Stop & Shop career. Earlier this year Tobin was given the 1999 Sidney R. Rabb Award by the Food Marketing Institute, Washington. That honor recognizes excellence in service.

"Bob Tobin is one of the great lights in the supermarket industry," said Gary Giblen, managing director of NationsBanc Montgomery Securities, New York. "He can accomplish anything. He sees it all and knows it all."

In his latest post, Tobin succeeded Robert Zwartendijk, who had run Ahold USA since 1989. Ahold credits Zwartendijk with taking steps to better realize the potential of Ahold's U.S. network.

"Rob started the transition process when he took over the U.S. operations," van der Hoeven said. "And he brought it to a level where there was a voluntary but close working relationship. Bob is taking it to the next level."

Project Compete, Ahold's name for the effort to build cooperation among the U.S. companies, has continued to evolve and improve operating results. It focuses on areas including logistics and distribution, information technology, procurement, marketing, administration and management development.

Accelerating U.S. Synergies

Tobin said he is raising the expectations on Ahold's U.S. companies at a time when the business has grown significantly.

"As a full-time American CEO, I have the time to be more involved," Tobin said. "I'm requiring our companies to be more open minded and synergistic. There are closer reporting arrangements."

Giblen's outlook is that "Ahold has delivered on U.S. synergies; they've proven their abilities to make these things work. They'll continue to get them."

However, he noted that execution is still a hurdle. "The strategy and management are there; it's just getting it done that's the challenge. They must maintain distinctive marketing and merchandising at the chains. They must avoid excessive uniformity. Yet they also must achieve best practices with common buying, private label and other things. So it's a hard balance to strike."

The private-label example is important because it ties into Ahold's larger mass of buying power. Tobin said there's still room to increase private-label market share with additional categories. "We think so," he said. "Even within the companies there's still a wide divergence among best practices."

Tobin cited the premium private-label Sensational as an area for growth. "All the companies will be adopting this," he said. "There will be limited SKUs, but it's an upscale, value-added private label. We'll have central procurement. Labels will be similar in design, but the name will say Stop & Shop, Giant, Tops, etc." Altering the packaging for each chain isn't a big effort but provides a major branding advantage for each franchise, he said.

"It's very important to understand the strength of a brand in the marketplace," van der Hoeven said.

That statement also explains why Ahold usually doesn't change banners on stores it acquires. "To basically disinvest yourself from that asset and do something else, you need to have a very good reason to do that," he continued. "We're convinced you get 90% to 95% of the benefits of economies of scale and the synergies anyway if you integrate everything that's going on behind the scenes. Admittedly, you don't get the last 5% to 10%. But that should be counterbalanced against shaking the customer up by putting a different name on it."

The decision to eliminate the Edwards banner wasn't made hastily, Tobin stressed. "It's always a concern," he said. "But we've done our homework on consumer attitudes in the market. The Pathmark name has more equity."

Analysts point out that Edwards' everyday-low-price format wasn't working as well as the promotional formats of most operators in the competitive Northeast market. Recently Ahold had begun to shift Edwards' pricing toward a more promotional format.

Bridging the United States and Europe

Ahold's longtime goal of exchanging best practices between the United States and Europe is starting to become a reality, van der Hoeven said. "It's starting to become true with the Netherlands and the U.S. We've always tried to get that process going. But we're clearly on the road now for the Netherlands to specialize in certain elements of the business while the U.S. specializes in other elements.

"In the U.S. more and more of our efforts are in customer-specific marketing, card-based marketing and micromerchandising, whereas in the Netherlands the focus is more on distribution systems and sales-based reordering. Albert Heijn [Ahold chain in the Netherlands], for example, has introduced a customer card which is mirrored after the very successful Bi-Lo card. Stop & Shop is working on a sales-based ordering system [computer-assisted ordering] that has been influenced by Albert Heijn."

As Ahold fills in its East Coast gaps, the expansion boundaries of some of its chains are being set. But Ahold USA's companies have additional growth opportunities in their existing markets, Tobin stressed.

"The potential within these large metro regions like Boston, Philadelphia, New York and Washington is tremendous," he said.

Tobin conceded that CEOs of Ahold USA companies might think they need expansion territory, but emphatically said, "They really don't.

"There's a tremendous amount of infill things that are very efficient and allow you to do more in the existing markets," he explained. "So we're not concerned that any of the companies have any growth potential extracted from them through any of the transactions. Quite the contrary."

Ahold's East Coast companies are seeing a paring down of competitors as the market consolidates, Tobin said. "Most of the markets in the United States are starting to take on characteristics of what happened in Europe," he said. "You get two or three players in most of the metro markets, whereas in the past you were up to five or six sometimes.

"This is being driven by economics, and will continue. And we need to get better so we don't get run over. Our job is to make sure we're the leader in each of those markets."

Acquisitions fuel those efforts in the United States and the world. But the company has narrowed its choice of merger candidates. "We have become extremely selective in new acquisitions in the U.S. and the world," van der Hoeven said. "We look at it as building a stable of thoroughbreds; no donkeys. We only want the best."

While some observers might view Ahold as racing for the No. 1 global position in food retailing, management isn't stressing the size issue. "We are not in this game only for size," van der Hoeven said. "We could have made some acquisitions that would have added substantially more size to our company. But we don't believe in that."

Ahold has altered its view of the importance of size after watching how consolidation has unfolded. "I tossed around with it a little bit in the early stages to think, 'if you become the best and most successful, you have a fair chance of becoming the biggest,' " van der Hoeven said. "What I've seen now is there are some mergers and acquisitions for which the economic reason is basically size. If that is taking place, then we may not be the biggest, because that's not up our alley. That's not what we want to be."

Scrutinizing Acquisition Targets

Ahold's acquisition strategy reflects its selectivity. The company develops a list of favored acquisition targets that it pursues. And Ahold can be very patient because it wants friendly takeovers with managements coming along.

Van der Hoeven noted there's barely a handful of U.S. companies that Ahold would like to acquire. Has the Pathmark deal reduced the likelihood that Ahold would strike again in the United States in the near-term?

"If something became available tomorrow that we wanted, we could act on it and handle it financially," Tobin emphasized.

Worldwide, van der Hoeven said, "There are three companies in Latin America and three in Southern Europe" that Ahold is pursuing. "And maybe one or two in the larger countries of Europe.

"We're ready to pay full price, because we realize that when only going for the best you must pay full price," van der Hoeven said. "But it means we're rejecting all kinds of propositions that pass our desk which don't meet our criteria."

Ahold considers itself a friendly acquirer, a view backed up by industry observers. "We have a lot to offer, and a record," van der Hoeven said. "The acquired companies preserve their management team. We add value to those companies through new technologies, economies of scale, identifying strengths and weaknesses."

It's an understatement to say Ahold has built a wide-ranging global portfolio of retail operations. In addition to the United States, Ahold operates supermarkets and hypermarkets in the Netherlands and other European countries including Portugal, Spain, the Czech Republic and Poland. Ahold also has operations in Latin America and the Asia Pacific region.

Van der Hoeven's view is that U.S. companies are disqualifying themselves from the global food-retailing game. With the possible exception of Wal-Mart, the Americans will not be able to catch up, he said. "This is a game that requires substantial amounts of experience and knowledge. And in fact most cards are being dealt as we speak. That's the end of the story in a few years time."

Ahold's presence in so many markets gives it the benefits of diversification but also the risks of exposure to economic and other problems in various regions. When economic crisis erupts in places like Asia or Brazil, Ahold is affected.

"I feel that if you take a long-term view, you should take that in your stride," van der Hoeven said. "You shouldn't be naive about thinking those economies are as stable as Northwest Europe or North America. But those economies also have tremendous potential."

But the high risks should be balanced by good returns, van der Hoeven stressed. "If you don't have superior returns, then forget it."

Weighing Risks and Rewards in Developing Countries

Ahold has been careful in timing its growth in many of the developing countries. "We could be looking at a substantial resurgence in Asia in two years time," van der Hoeven said. "Our strategy in Asia is quite simple. In my view we started at the back of the bus. We were hit by the crisis, but we were fortunate not to be at the front of the bus at that time. So it didn't hurt us that much. But our strategy is to be at the front of the bus when the economy starts to take off again. So we're moving our way up in the bus right now."

Tobin emphasized the importance of good joint-venture partners as Ahold builds around the world. "In most of these developing countries we're in joint ventures, and the choice of partner there is critical," he said.

Citing Brazil, he said, "The gentleman running our Brazilian joint venture has been working in this environment for 35 years. For him it's not the [currency] issue you read about in the newspaper -- that the world's coming to an end. At the end of the day he'll be ahead because the strong get stronger. So our joint-venture partners by and large are very substantial people with tremendous knowledge of their markets, and we just augment that with whatever they ask for. We're a menu for them to order off of. It works very, very well."

Even in the United States and Europe Ahold finds varying economic trends. "The U.S. and U.K. are always a little ahead of Europe in the economic development cycle," van der Hoeven said. "So there's some interesting counterbalance there."

But world economic cycles probably won't be the main focus of Bob Tobin and his U.S. team. Tobin's knack for getting things done finds him playing the roles of cheerleader and manager and trying to break through barriers.

"We've gotten through a lot of the pettiness and turf issues," Tobin said. "We just realized that because we have good competitors, we have no choice. Whenever someone is arguing about turf issues, I say, 'Do you think they are talking like this in Bentonville?' And you know something, everything stops. And we really have to think that way. It's a matter of survival."