AHOLD STUMBLES; STOP & SHOP, GIANT STRUGGLE WITH INTEGRATION

MARK HAMSTRA

ZAANDAM, Netherlands -- Ahold here last week said the integration of its Stop & Shop and Giant-Landover chains has been a bigger distraction than anticipated on its management, but added that the "physical" aspect of the merger is largely behind it.

As previously reported, Ahold has been migrating many of the back-office systems of its Giant of Landover, Md., chain over to those of Stop & Shop, Quincy, Mass., as part of a streamlining initiative.

The company also said during its second-quarter earnings conference call last week that it remained hopeful it would find a single buyer for its Bi-Lo and Bruno's chains. The company said it had received final bids on the properties and was in the process of "evaluating and negotiating" as it remains on track for a sale by the end of this year.

In a separate announcement last week, the company said the chairman of its supervisory board, Karel Vuursteen, had decided to resign due to personal circumstances. He will remain a member of the board until next year's annual meeting in May. Rene Dahan will serve as temporary chairman. Anders Moberg remains chief executive officer.

Ahold said the difficulties in integrating Stop & Shop and Giant-Landover had a negative impact on its second-quarter performance in addition to the $15 million in actual costs of implementing the plan. The company predicted a net benefit from the integration by the fourth quarter.

"I think it's fair to say that management has underestimated the effect of this refocus of attention toward the integration process," said Hannu Ryopponen, chief financial officer, told analysts during the conference call. "From May through June and into July, there were people from Stop & Shop and Landover fully focused practically 110% of their time on the integration process, not on actually running their day-to-day responsibilities, be it in logistics, store management or elsewhere."

The problem was more pronounced at Giant-Landover, the company said, because of that company's transition to Stop & Shop's computer systems.

At the same time, the company said it has faced increased competition from rival food retailers in the territories of both chains. In the Washington-Baltimore region where Giant-Landover operates most of its supermarkets, the company said new stores from Rochester, N.Y.-based Wegmans and Bentonville, Ark.-based Wal-Mart Stores have exacerbated the struggles Giant has faced in transitioning to the Stop & Shop systems.

Stop & Shop also has faced increased competitive pressure. In the Boston area, Shaw's Supermarkets, West Bridgewater, Mass., has been more aggressive on price since it was acquired earlier this year by Albertsons, Boise, Idaho, said Ahold.

Ahold's strategy to reduce its capital expenditures as part of its effort to recover from last year's financial implosion also has been a detriment to the performance of Stop & Shop and Giant-Landover, the company said.

However, despite a drop in profit margins in the U.S. Retail division during the quarter, the company said it remained confident in its ability to meet its goal of achieving a 5% earnings margin before interest, taxes and amortization by the end of 2005.

He said the company's Giant-Carlisle chain, which has been merged with the Tops chain in upstate New York, has "continued a strong performance, especially against Wal-Mart."

Use of an everyday-low-pricing strategy and other operating synergies from Giant-Carlisle has begun to have a positive impact on Tops, the company said.

Yet Bi-Lo and Bruno's have continued to struggle, Moberg said.

Operating income in the U.S. Retail division totaled $250 million, a drop of 30% from last year's results. Retail sales in the U.S. totaled about $6.26 billion in the second quarter, up 0.5% over results from the year-ago period. Excluding the impact of the divestment of the Golden Gallon convenience-store operations, the company said sales would have increased by 2%.

U.S. identical-store sales grew 0.3%, while comparable-store sales were up 0.9%, which the company attributed to the positive impact of the later Easter holiday this year and stable food-price inflation compared with the first quarter.

In addition to the integration costs and increased competition, other factors negatively affecting performance in the second quarter included higher operating expenses, lower real estate gains and fixed-asset impairment charges.