Ahold to Accelerate EDLP Rollout

AMSTERDAM It's full speed ahead for the new pricing strategy at Stop & Shop and Giant-Landover, but strap in for a bumpy ride, officials said. The retailer here said it would accelerate the rollout of its Value Improvement Program at its largest U.S. banners after they reported their third straight quarter of declining comparable-store sales. The change, which would essentially transition the traditional

AMSTERDAM — It's full speed ahead for the new pricing strategy at Stop & Shop and Giant-Landover, but strap in for a bumpy ride, officials said.

The retailer here said it would accelerate the rollout of its Value Improvement Program at its largest U.S. banners after they reported their third straight quarter of declining comparable-store sales.

The change, which would essentially transition the traditional high-low operators to EDLP strategies amid robust promotional competition, is key to reversing sales declines and ensuring the stores' long-term viability, Anders Moberg, chief executive officer, said in a conference call with analysts. But, he added, it will likely bring additional pressure onto already declining profits at the chains.

“We feel confident now that we can speed it up,” Moberg said. “Our limit will be how fast we can execute it in the stores more than anything.”

VIP involves lowering everyday prices while reducing selection and trimming costs in various store categories. It was launched in produce departments at Giant and Stop & Shop shortly before the end of Ahold's fiscal third quarter in September, and on Dec. 1 was applied to paper goods in both chains. Ahold credits a similar plan in the Netherlands for rejuvenating its Albert Heijn banner there.

Officials detailed the VIP strategy in a conference call last month. Analysts told SN then they felt results would be more difficult to achieve in the U.S., where competing retailers, particularly in the Northeast, are fiercely protective of their top lines.

Richard Withagen, analyst for SRS Securities, Amsterdam, said he felt Ahold also needs to differentiate its banners to make the VIP program truly successful.

“Somehow as a mid-tier retailer you have to differentiate yourself,” Withagen told SN. “It's all about differentiation and not having too high prices.”

While initial plans in the U.S. called for a department-by-department rollout of the VIP program over a two- or three-year period, a need to communicate the values of the new approach will likely result in a faster rollout through categories, Moberg said.

Introducing the pricing programs to shoppers used to a high-low approach is “a bit of dilemma,” Moberg admitted, adding that even a faster rollout will take some time to catch on with shoppers.

“You can change [pricing strategy] overnight, but that is not how the customers will get this,” Moberg said. “It will take awhile before we're through this phase.”

Moberg also expects the faster rollout will challenge Ahold to find accompanying cost savings quickly. Larry Benjamin, recently named chief operating officer of Ahold's U.S. retail divisions, is heading those efforts.

“We know that it will hit us short term and have an impact on margins, [but] we know it will work,” Moberg added.

Profit as a percent of sales fell from 5.3% to 4.4% at Stop & Shop/Giant during the quarter, which had only minimal impact as the result of the VIP launch. Moberg said he could not pinpoint the precise effect on margins VIP would have, but said he expected margins would continue to be tight through the fourth quarter. Overall retail margins for fiscal 2006 are expected to be at the low end of Ahold's previous estimate of 4% to 4.5%, he added.

At Stop & Shop and Giant-Landover, declining identical-store sales led to lower margins during the quarter.

Stop & Shop last reported positive comps in the fourth quarter of fiscal 2005; comps at Giant have fallen for at least seven quarters (See table below).

Same-store sales were down 1.8% at Stop & Shop, 0.5% at Giant-Landover and 6.1% at Tops. Comps were up 4.8% at Giant-Carlisle.

Moberg said profit margins also declined at Giant-Carlisle.

Overall quarterly profits of $278.5 million increased 7.5% from a year ago, excluding the effect of a lawsuit settlement in the year-ago period. Overall quarterly sales of $13.7 billion increased by 0.7%.

Falling Fortunes

GIANT-LANDOVER
PERIOD SALES IDENTICAL-STORE SALES* COMPARABLE-STORE
1Q05 -3.6% -3.6%
2Q05 -4.7% -4.1%
3Q05 -2.3% -1.8%
4Q05 -1.0% -0.7%
1Q06 -2.5% -2.0%
2Q06 -0.9% -0.4%
3Q06 -0.5% -0.2%
STOP & SHOP
PERIOD SALES IDENTICAL-STORE SALES* COMPARABLE-STORE
1Q05 -0.2% +0.2%
2Q05 +0.8% +1.3%
3Q05 -1.2% 0.0%
4Q05 +0.5% +1.3%
1Q06 -2.2% -0.8%
2Q06 -1.7% -0.2%
3Q06 -1.8% -0.8%

*Excluding gasoline sales