newpeapodahold.jpg Tim Boyle/Getty Images

Decentralized model driving Ahold Delhaize results

Inflation returns in Q2 to boost sales amid merger synergies

In its first earnings report since the one-year anniversary of its merger, Ahold Delhaize appears to be exceeding expectations for the synergies it will achieve from combining the two companies.

“Twelve months after the merger, the integration is well on track,” Dick Boer, president and CEO of the Amsterdam-based company, said in a conference call with analysts. “We are making good progress building our brand-centric organization, and synergies are coming in ahead of projections.”

The company unveiled for the first time during the call a target of 750 million euros (about $881 million) in gross synergies from the merger over a three-year period. Previous forecasts had projected net synergies of 500 million euros ($588 million), but had not forecast the gross synergies it would achieve.

Among those synergies are a projected $141 million from the company’s Retail Business Services (RBS) division in the U.S., which was created late last year to support the decentralized model the company is pursuing. In the second-quarter call, Ahold Delhaize also listed $82.3 million in costs related to the transition to the decentralized model in the U.S.

At the company’s Ahold USA division, which includes the Peapod, Stop & Shop, Giant Landover and Giant Carlisle banners, the company said a return of price inflation in the quarter helped boost results. Inflation was up 0.8% at those banners in the period, compared with a year ago.

“We are seeing inflation come back in almost all categories, particularly meat and produce — categories that had been deflationary in previous quarters,” said Boer.

Pro forma sales at Ahold USA were flat for the quarter at $6.5 billion, with comparable-store sales growth, excluding gasoline, up 0.3%. Underlying operating income was up 12.9% at constant exchange rates, compared with a year ago.

The company in late June rolled out price reductions on 800 products — mostly private label SKUs, but also some fresh items — that are helping better position the company against competitors.

Stop & Shop New England had “a great quarter,” Boer said, and is now better positioned against regional stalwart Market Basket, which he said has become less aggressive in its pricing recently.

All of the company’s U.S. banners gained market share, Boer said, with the exception of Giant-Carlisle, which operates in a Walmart-heavy region and also faced other competitive openings.

At the Delhaize USA division, which includes the Food Lion and Hannaford banners, inflation was only up 0.1%, held back by deflation at Food Lion. Inflation at Hannaford was about 0.8%, in line with Ahold’s banners.

Pro-forma sales at Delhaize USA were up 1.2%, to about $4.4 billion, with underlying operating income up 13% at constant exchange rates. Comparable sales in the division were up 1.3%.

Sales in both of the company’s U.S. divisions were positively impacted by the shift of the Easter holiday into the second quarter, partially offset by the negative timing of the July 4th holiday.

For the company overall, Ahold Delhaize reported that second-quarter pro form operating income was up 11.4%, to about $75.2 million, on a 1.8% increase in pro forma sales at constant exchange rates, to about $18.8 billion.

Edouard Aubin, an analyst with Morgan Stanley, described second-quarter results at Ahold Delahize as “relatively good,” with both sales and group earnings before interest and taxes ahead of analyst expectations.

Second-quarter results “should provide reassurance on the top and bottom line trajectory of the key U.S. division,” he said in a research note.

Investments in pricing “should be supporting to the top-line growth,” said Fernand de Boer, an analyst with Degroof Petercam.

He praised Ahold Delhaize’s sales and margin performance for the quarter, but said he was concerned by the additional integration costs, which rose by 30 million euros, to 380 million euros ($446.8 million).

Little Lidl impact

Food Lion so far appears to have felt minimal effects of the entry of Lidl into the Carolinas, the company said.

“Food Lion is well positioned in the new competitive environment,” said Frans Muller, deputy CEO and chief integration officer. “Clearly we know how to react, and we also know how to react to newcomers in the market.”

Boer noted that investing in private label has helped the company’s Albert Heijn banner compete against Lidl in the Netherlands, and Ahold Delhaize is taking steps to bolster its own-brand portfolio in the U.S. as well.

Beginning at the start of 2018, it is taking all of its own-brand management in-house, rather than going through brokers, the company said during the call. The move will give the company more control over sourcing, packaging and other aspects of the own-brand portfolio.

Ahold Delhaize is also looking at taking some of the learnings from its Hannaford to Go click-and-collect model and applying them to its Stop & Shop and Giant banners, where the company primarily relies up home delivery through its Peapod division.

“You need both models in the U.S.,” said Boer.

The company also is also investing in the delivery model by expanding its warehouse capacity — including a warehouse expansion in New Jersey for Peapod, which now handles 20,000 orders per week.

Overall, Ahold Delhaize is targeting 3 billion euros ($3.5 billion) in online sales this year, and 5 billion euros ($5.8 billion) by 2020.

Decentralization

Asked about the rationale for its strategy of decentralization, Boer said giving more control to local banners would enable them to be more responsive to both customers and competitors.

“Seven years ago Ahold centralized, but you need to decide on one model,” he said, noting that Delhaize had already operated under a decentralized model. “We believe the brand-centric model is better for our customers and to face the competition.”

Each of the company’s six banners in the U.S. will be responsible for marketing, merchandising and category management, pricing, operations and human resources, while RBS will handle own brands, digital, finance, HR systems, legal, IT and supply chain functions.

The centralization of back-end services such as technology procurement has already yielded results.

The U.S. accounted for about 60% of the total synergies the company achieved in the quarter, stemming from the consolidation of buying power in some categories, such as magazines and spices, but also including some fresh items.

“For example, in the U.S. we leveraged our volumes in rotisserie chicken with new and incumbent suppliers,” said Muller.

The company is currently evaluating existing contracts and combined sourcing in not-for-resale categories as well, he said.

“Procurement synergies are exceeding plans across all synergies and all geographies,” said Boer.

 

Hide comments

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish