In an industry where mergers and acquisitions frequently fail to live up to their promise, it is refreshing to see instances where things go according to plan. Almost two and a half years after Royal Ahold and the Delhaize Group came together, the combined company has all but completed the assimilation process, forged a common corporate culture and established a track record of consistently meeting financial targets. It is now turning its attention to accelerating growth across a 6,700-store network in 10 countries, stretching from Europe west to the United States and on to Indonesia.
“The merger and integration of Ahold and Delhaize have created a strong and efficient platform for growth, while maintaining strong business performance and building a culture of success,” said Frans Muller, who, along with Dick Boer, was one of the primary architects of the deal and succeeded the latter as president and chief executive officer of the retailer last July. “In an industry that’s undergoing rapid change, fueled by shifting customer behavior and preferences, we will focus on growth by investing in our stores, omnichannel offering and technological capabilities that will enrich the customer experience and increase efficiencies. Ultimately, this will drive growth by making everyday shopping easier, fresher and healthier for our customers.”
The Ahold Delhaize management team offered an in-depth look at how the company will go about that task earlier this month at its Capital Markets Day in New York City. The strategy, under the rubric Leading Together, is focused on five areas — omnichannel expansion, including e-commerce and meal solutions; such advanced technology as artificial intelligence and robotics; healthy and sustainable products and business practices; portfolio and scale efficiencies; and attracting and retaining top-flight talent. Muller and his colleagues believe that by speeding up progress in those fields, Ahold Delhaize can achieve its ambitious growth objectives.
They have a strong foundation on which to build. During the consolidation of the two companies, a process that is expected to result in 420 million euros in synergy savings this year and 500 million euros in 2019, financial results were solid. Despite low food price inflation, sales rose 2.1% in 2016, 1.7% in 2017 and 2.3% through the first three quarters this year. The retailer’s underlying operating margin has grown from 3.7% in 2016 to 4% so far in 2018, while free cash flow has increased from 1.4 million euros two years ago to an estimated 2 billion euros this year.
“Our commitment is to self-fund the investments needed to drive growth, as our new cost savings program will allow us to maintain a stable group margin through 2019,” explained Muller. “This will allow us to invest in our existing business, while we explore and seize new leadership opportunities in existing and adjacent markets.”
He told investors, financial analysts and members of the press that Ahold Delhaize is intent on fueling increases in comparable sales and market share, doubling online volume to 7 billion euros by 2021, and exploring opportunities to strengthen the company’s position via acquisition. Muller and other executives noted that many small and mid-size supermarket chains are finding it increasingly difficult to compete, creating a conducive environment for consolidation in the trade class.
Kevin Holt, CEO of Ahold Delhaize USA, the company’s largest division, which operates 2,000 stores in the eastern U.S., as well as the Peapod online grocery service, stressed that the fragmented nature of the food business translates into ample opportunity for the company’s American banners — Stop & Shop, Food Lion, Hannaford, Giant and Giant Martins — to grow. He said that Ahold Delhaize USA’s total brand share of about 18% is double that of its nearest rival, and that there are more than 150 competitors in the area where it operates. Market dynamics should position Ahold Delhaize and other large supermarket chains with the resources needed to invest in technology and improve the in-store experience as consolidators.
Ahold Delhaize isn’t relying solely on potential acquisitions to bolster its business. Harnessing the model used by Food Lion to reinvigorate its brand and chalk up 24 consecutive quarters of same-store sales growth, Stop & Shop has embarked on a market-by-market capital investment program to enhance its store base. Twenty-one stores in greater Hartford, Conn., have recently been renovated, giving consumers new reasons to patronize a market leader whose sales growth has flattened out of late.
Stop & Shop’s Hartford locations now feature larger presentations of such fresh categories as produce and meat; a growing mix of home meal solutions; merchandise assortments tailored by category to each store; and advanced technology-driven offerings, including click-and-collect facilities, digital coupons and interactive kiosks. In addition, the stores are benefitting from what Stop & Shop president Mark McGowan characterized as a meaningful investment in price, together with “amped-up value messaging and visual merchandising to improve price perception.”
Ahold Delhaize plans to spend between $1.6 billion and $2 billion to reposition more than 400 Stop & Shops over the course of the next five years. Long Island, N.Y., is the next market that will undergo the transformation.
The investment in stores in the U.S. and elsewhere will be complemented by a companywide push to equip Ahold Delhaize to be a world-class omnichannel retailer. (The Stop & Shop in Windsor, Conn., houses the company’s first micro-fulfill center, which is designed to help solve the riddle of last-mile delivery.) Muller and his team have every reason to believe that by pairing the buying and investment power of a 60 billion-euro-plus company with the emotional resonance of strong local brands, the oldest of which has roots that go back 150 years, Ahold Delhaize will remain in the top tier of global food retailers.