Delhaize recently declared an ambitious plan to quickly grow its U.S. discount format Bottom Dollar. So the question now is, what’s the outlook for this strategy?
As it turns out, the best way to ask this question is by splitting it in two: 1) What’s the outlook for the format? and 2) how will it impact Delhaize’s U.S. business overall? The format outlook is increasingly positive. Delhaize’s growth plan recognizes the compelling dynamics surrounding this style of retailing.
“It’s critical for us to grow where business is growing, and that’s in the value segment, and that’s where Bottom Dollar plays,” said Meg Ham, president of this unit, at an investor meeting earlier this month.
Six years of fine-tuning has enabled Bottom Dollar to evolve into a stronger format. It began as a brand converted from Food Lion stores, and eventually downsized to just under 20,000 square feet (with about 6,000 SKUs) before entering the Philadelphia market last year. It will continue adding units in Philadelphia and enter Pittsburgh early next year.
The biggest reasons for optimism are strong revenue growth in Philadelphia and positive reviews from consumers.
Now let’s tackle the second point: how Bottom Dollar impacts Delhaize overall. The Belgium-based global retailer operates large U.S. supermarket chains including Food Lion, Hannaford Bros., and Sweetbay. According to a new report from analysts at J.P. Morgan Cazenove, Delhaize’s U.S. margin and returns outlook could be more pressured in the near term as it repositions Food Lion and rolls out Bottom Dollar.
“We believe these [Bottom Dollar] stores (particularly prior to maturity) will place further downward pressure on margins and returns,” the report said, even as it noted that the stores would help raise the group’s sales growth.
The potential success of Bottom Dollar must be assessed against the reality that the chain is just a fraction of Delhaize’s overall U.S. business.
“Overall, we think the Bottom Dollar concept seems sensible, but even hundreds of stores on a five-year view will do little to move the dial at the group level,” the report added.
That doesn’t mean Delhaize is on the wrong track with its discount format. It just means the strategy won’t have a powerful group impact in the near term. So the bottom line for Bottom Dollar is this: It’s a good entry in a growth sector, but it’s not going to carry the ball for the larger company any time soon.