BRUSSELS — Competitors looking to keep pace with the ongoing price reductions at Delhaize Group's U.S. banners had better come prepared to battle.
That's the word from Delhaize officials who insisted last week that the recent price adjustments at Food Lion are structural in nature and built to last.
“We're not making assumptions that sales alone are going to pay for the kinds of investments that we're making in lower prices,” Rick Anicetti, chief executive officer of Delhaize America Shared Services, told investors in a conference call reviewing fourth-quarter financial results last week. “Instead, these are fully funded throughout the course of the year from cost initiatives. And so for competitors to respond they either have to live with lower gross margins or they're going to have to find a way to do things structurally, which is a lot more difficult.”
Salisbury, N.C.-based Food Lion made about 1,000 price reductions last month as Delhaize kicked off a long-term strategy built around internal cost reductions funding local price leadership and a narrowing of the pricing gap between its stores and those of Bentonville, Ark.-based Wal-Mart. Officials said the program would fuel operating profit growth of 7% to 10% for fiscal 2010.
The program will also see an increase in the number of private-label products and in the promotion of those items, officials said.
Delhaize reported U.S. sales of $19 billion and an operating profit of $1 billion for fiscal 2009. Excluding a 53rd week in fiscal 2008, margins improved to 5.7% of sales, and operating profits increased 1.6% to $1.08 billion. Sales for the year were down 1.3%.
For the quarter, sales were down 8.5% to $4.7 billion, and comparable-store sales were down 2.8%. Officials attributed the sales declines in part to lapping a quarter of 6.5% retail food inflation with 2.1% deflation in 2009. Retail prices decreased faster than costs, however, as the company made price investments at the Hannaford Bros. banner in the Northeast and at Food Lion, officials said.
Although overall volumes were down, the number of items per shopping trip improved, officials noted. Stores saw more business from their loyal customers, but fewer visits from occasional ones.
“At Food Lion, we've seen a bit of a challenge with regard to transactions,” Anicetti explained. “I think in this economic environment there is a tremendous amount of pressure on consumers. We find that in six of the 11 states in which we operate we have unemployment rates that are significantly higher than the national average. Having said that, as we get underneath the covers so to speak we're finding that a lot of that transaction pressure is actually coming from consumers who were buying significantly fewer numbers of items.”
Pierre-Olivier Beckers, Delhaize's chief executive officer, said the financial results for fiscal 2009 illustrated a balance between managing the challenges of the economy and price deflation with a longer-term strategic outlook.
“On the one hand, we had to find an appropriate answer to the needs of a pressured consumer. We saw inflation turning to deflation during 2009, and increased competitive activity,” Beckers said. “On the other hand, we continue to make important choices for the future of our group. We believe that our 2009 results show that we have successfully navigated the many challenges of the current environment.”
Officials also said that they expected Sweetbay, the Tampa, Fla.-based banner that Delhaize converted from Kash n' Karry, could break even during the first and fourth quarters this year — and would continue to lose money in the second and third quarters — but indicated that sustainable profits for the chain are still a goal.
The 16 Food Lion and Bloom store closings announced along with the U.S. restructuring last month were completed. Delhaize confirmed plans to open 50 to 55 new U.S. stores in 2010, and remodel another 50 stores, including marketwide renewals in Roanoke, Va., and Greenville, N.C.
