New World: A ‘Reshaping’ Ahold Looks Ahead

Thirty-five years after arriving in the United States — and 10 since an accounting scandal nearly chased it out — the Dutch retailer Ahold has proven an enduring presence in America.

But what now?

Ahold’s marquee supermarket brands — Stop & Shop, Giant-Carlisle and Giant-Landover — have leading market shares in the country’s densest and most populous corridors. Sales aren’t exactly sizzling, but they’ve held up or grown slightly amid a decline throughout the channel, and a prolonged economic softness Ahold’s own chief executive recently acknowledged was “a new normal.” Many observers would argue that Ahold owes much of its current momentum to weathering those conditions better than many supermarket competitors whose results have been worse — at times dramatically so.

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“It’s survival of the fittest these days, and what Ahold has done best is pick up the pieces,” Richard Kochersperger, an industry consultant based in Philadelphia, told SN in a recent interview. “They’re in a position to gain more due to how badly some of their competitors are doing.”

Ahold officials won’t deny its opponents’ struggles, but say its momentum has more to do with looking forward and executing on the “Reshaping Retail” strategy introduced by CEO Dick Boer in 2011. The strategy seeks to leverage consumer trends toward value and convenience into growth opportunities, emphasizing increased loyalty, broader offerings and expanded geographic reach supported by cost reductions, and commitments to employees and local communities. The company last year layered a series of “promises” onto the strategy (“Better place to work, better place to shop, better neighbor”) that guides Ahold’s stores worldwide.

“The promises have given us one common platform to work off of,” Bhavdeep Singh, Ahold’s executive vice president of operations, said during a presentation at Ahold’s Capital Markets Days event late last year. “When you think about all the various elements in our business … all the processes, all the technology, all the sophisticated things that we’re doing, but when it comes down to running a store, it’s about some simple things. It’s about how do you create a great place for people to shop, how do you create a great place for people to work and how do you become a better neighbor.”

Ahold’s U.S. sales for the fiscal year that ended Dec. 30 totaled $25.8 billion, a 3.1% increase, with same-store sales for the year increasing 0.9%, excluding gasoline. The company operated 772 stores. Market share in all of its divisions improved during the year despite an overall decline in the supermarket share in its markets, Ahold said, citing scan data of products sold across the supermarket, mass, dollar, drug and warehouse categories.

Ahold’s leading position — plus a shored-up balance sheet made even more potent as a result of the recent sale of the ICA business in Europe — has given rise to speculation over the company’s next move. An active buyer within its operating areas, many see the potential for Ahold to make a strategic acquisition such as Harris Teeter Supermarkets, a successful, neighboring chain and a tempting offering now on the selling block. The potential cost for such a move is a cause for concern for some analysts — as is the question of growing volumes as older and weaker supermarket competitors give way to growing formats with superior price positioning.

Promises, Promises

Initiatives around Ahold’s strategy can be seen in efforts to provide more cost-effective ways of meeting shoppers’ desires to shop online — including the introduction of store pick-up points and construction of an automated warehouse to serve its Peapod division. These efforts help broaden Ahold’s reach as it captures both new customers and greater “share of wallet” from shoppers who use both Internet and traditional shopping options, Andrew Parkinson, president and general manager of Peapod, said.

The company is also applying customer insights to “supercharge” its value proposition through personalized offers and improving the in-store experience. Ahold generates more than 85% of its sales on customer loyalty cards.

Pick-up points help Ahold’s Peapod win more of its customers’ shopping.

Erik Keptner, Ahold’s executive vice president of marketing, at the chain’s Capital Markets Days presentation said that consumer testing of its national-brand equivalent private-label products indicated that roughly one in five items required reformulation. The company then relaunched those items to strong consumer response.

Similarly, the development of Ahold’s Guaranteed Value opening price-point line was guided by card data indicating the categories and products that were most important to the segment of shoppers who favored that brand. The insight led to the introduction of 150 new products — and the elimination of dozens of others with less appeal to those shoppers — and 19% growth of the value tier, Keptner said. These efforts are helping Ahold along a goal to generate 40% of its overall U.S. sales from private brands, officials said.

A Center Store reset known as “Project 100” is right-sizing selection in natural/organics and value.

Each of Ahold’s brand promises is supported with specific initiatives in stores, Singh explained in a presentation. For example, a Center Store reset known as “Project 100” is devoting appropriate shelf space in-store to create zones catering to trends toward natural/organic and value-minded shoppers. Ahold has also begun remerchandising some stores for local demographics including a Brooklyn store with a large Hispanic shopper base triggering a 45% sales increase in its initial period.

A promise to be a better place to work includes what Singh called “best in class” training programs built on electronic learning modules. The company is also focused on company processes that reduce costs in all areas of store operations. “Whether it’s how we unload our trucks, how we stock our shelves, how we clean the floors, how we slice meats in the deli department or how we check out our customers, we focus on efficiencies around productivity,” Singh said, noting sales per associate hour have improved by 7% over the last three years.

Geographic Expansion

Ahold’s commitment to expand its geography has played out in a series of in-market acquisitions helping to grow sales and leverage in places like Philadelphia, where Ahold bought 15 Genuardi’s stores last year, and in metro New York, where acquisitions of former King Kullen stores on Staten Island and the Norkus Foodtown stores in New Jersey have placed the company on the precipice of overtaking A&P for No. 2 share in the region.

Industry speculation today is whether that geography could expand more dramatically with a move to acquire Harris Teeter or perhaps another East Coast grocer. Mark Heckman, owner of Mark Heckman Consulting Group, Bradenton, Fla., said he felt Harris Teeter would be an ideal fit for Ahold, citing complementary geography and market positioning.

“When you’re talking about geographical area, Harris Teeter is a nice match for them and I think that’s one of the things we retailers look at when we’re speculating whether or not it’s a good fit. Just from a logical fit standpoint it makes a lot of sense.

“The other thing is the compatibility with the stores. You could argue Harris Teeter is a little bit on the upper end in terms of what they do, but certainly not dramatically. If you look at some of the newer stores that Giant and Stop & Shop have done, I think that’s where Ahold is heading in terms of the things they are doing and the relationship they have with shoppers. There is an awful lot of potential synergy there.”

Another observer, who asked not to be identified, expects Ahold could keep busy with “onesies and twosies” cast off from faltering rivals in its existing markets, and may want to avoid potential integration problems and sales declines in overtaking a large and successful chain like Harris Teeter.

“I could see Ahold making a play for [Supervalu’s] Farm Fresh, in the Virginia Beach area between Giant-Landover and its Martin’s stores in Richmond,” the observer said. “But I think they accomplish what they want to without a big gun like [Harris Teeter]. Let’s put it this way: If they bought it there’s probably not a whole lot of upside sales potential because you’re buying stores in good shape physically and that already have a strong sales base. It’s not like you’re taking a store that would grow sales by 10% the first year — there’s the potential that the sales could drop. And there’s also downside potential because of Publix coming and other competition.”

Edouard Aubin, an analyst covering Ahold for Morgan Stanley, in a research note published earlier this month expressed concerns that Ahold’s recent volumes have decreased vs. inflation, in part because pricing is still too high (10% to 15% more expensive than Wal-Mart, according to Morgan Stanley). This, he said, has raised concerns about Ahold’s ability to grow as sharply priced, highly efficient operators replace fading traditional competitors.

Ahold officials have pledged to make the company a better place to work behind “best-in-class” training programs.

“To what extent will efficient capacity (i.e., the discounters and leading supermarket chains such as ShopRite, Wegmans or Market Basket) replacing inefficient capacity (A&P, Shaw’s) increase [Ahold’s] need to improve relative price positioning?” Aubin wrote in as part of a series of open questions for Ahold management.

Ahold has not commented on reports of its interest in Harris Teeter. It has acknowledged a need to reduce costs as a means of investing further in price, and during 2012 increased its target for its worldwide 2012-2014 cost reduction program from 350 million euros ($453 million) to 600 million euros ($776.8 million).

“This is an aggressive but achievable goal to further drive our efforts to simplify our business where we see opportunities — such as optimizing our commercial processes and systems and driving own-brand profit through improved sourcing,” the company said in its annual report, published earlier this month.

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