SOBEYS ILLUSTRATES THE VALUE OF FOOD-SERVICE ALLIANCES

David Merrefield

The food-distribution industry is constantly seeking related forms of business to enter in an effort to make up for the flat sales levels being produced by core categories. These can take the form of pharmacy, nonfood and convenience-fuel stores.

These product offers are useful and needed to produce growth, but what about taking the step of moving by way of alliance or acquisition into a more closely related business, that of food service?

It's being done to some extent -- notably by Ahold -- so let's take a look at what's going on.

Before we get to Ahold, though, let's take a look at the approach being taken by Sobeys, the chain that operates stores throughout Canada. As you'll see by looking at the news feature on this week's Page 1, Sobeys actually exited its captive food-service business by selling it to Sysco Corp., the largest food-service operator in North America.

But, in the wake of the sale, Sobeys forged a strategic alliance with Sysco that could prove useful to Sobeys. Plans call for the alliance to work toward better product sourcing, increased distribution efficiency, producing private labels and developing learning about changing consumer preferences.

These goals suggest something about how retailers and food-service operators can work together in ways that are seldom seen in North America.

Indeed, the only large-scale example of a retailer working closely with a food-service business is that of Ahold, the Dutch company that operates numerous retail banners in the United States such as Stop & Shop, Tops, Bi-Lo, Brunos and two Giants.

Ahold's adventure into the institutional food business started in 2000 when it acquired U.S. Foodservice. Subsequent to that, Ahold acquired food-service operators PYA/Monarch, Mutual, Parkway and, most recently, Alliant.

This gives Ahold a significant stake in food service; specifically, it's the second-largest food-service operator after Sysco.

In the short time Ahold has been in the food-service business, it has grown at a robust pace -- at an organic rate of 11% annually -- a growth rate that conventional supermarket operators would envy. Ahold's food-service business is adding more than $12 billion to its top line. When the more recent acquisitions annualize, these numbers should rise.

As judged by these numbers alone, it's clear that entering food service has been a winning proposition for Ahold. But what else could be realized from food service? Ahold executives have said lately they are still busy learning about the different product acquisition and distribution techniques used by their newly acquired food-service companies. But that doesn't mean that a closer union between retail and food service isn't in the future.

Ahold is the first mover into owning food service, and the market quickly dwindles after Ahold's assets are subtracted. It may be, though, that room still exists for supermarket chains to form an alliance with food-service companies, perhaps at the regional level, and to seek the benefits of the type Sobeys hopes to capture with its alliance with Sysco.

In a world where new businesses are prized, it might be a way to go.