AMSTERDAM — While newly implemented everyday low price programs have begun to grow sales in some categories at Stop & Shop and Giant-Landover, officials of Ahold here last week said they were confident greater benefits were on the way.
“We continue to base or model for the Value Improvement Program on the notion that price perception continues to grow over time as we gain credibility with our customers about pricing,” Larry Benjamin, chief operating officer of Ahold's U.S. operations, told analysts in a conference call last week. “First, customers look and they notice the price, and we know from our data that we're getting very good awareness that the price change is taking place.
“We now move to not only getting awareness, but [to] where we actually have people believing that the prices are going to stay low — that there's something different at Stop & Shop; that's a key point,” he added. “That starts showing up in unit improvement and continues to build over time as the credibility of the pricing change grows.”
Ahold launched its VIP program at Stop & Shop and Giant-Landover stores last fall by lowering everyday prices in produce, and has since repeated the process in five more categories: paper products, cleaning products, cereal and, most recently, pet food. Benjamin said last week the program — which eventually will lower prices on 75% of all items available at Giant and Stop & Shop stores — was about 25% complete. He expects the program to be 75% completed by year-end.
Ahold is funding the price cuts through cost reductions, including the elimination of service seafood and floral departments in some stores, store closings, reduced operating hours, and savings in distribution costs, as well as through reduced selections in categories. Those cost savings helped prevent dramatic erosion in margins in the U.S. despite the price reductions during Ahold's fiscal first quarter ended April 22.
Benjamin said improving price perception in the marketplace will lead not only to larger shopping baskets from existing customers, but will draw new shoppers to the franchise. He said he was encouraged to see initial unit declines improving again as customers accept the new program.
“We've seen good momentum in reversal of unit declines, and in some areas we've seen growth,” he said.
Sales at Stop & Shop and Giant-Landover improved by 1.8%, to $5.1 billion, during the quarter, Ahold said, with same-store sales up 0.3% at Stop & Shop and down by 1.1% at Giant. Operating income of $228 million was down $61 million from the same period a year ago, although the most recent quarter included a $9 million restructuring charge and the 2006 first quarter included a $27 million one-time benefit.
At Ahold's Giant-Carlisle division, quarterly net income improved 9.8% to $56 million on sales of $1.3 billion. Sales increased by 16%, boosted by the acquisition of Clemens stores.
Benjamin acknowledged that competitors have gained some advance notice as to Ahold's pricing adjustments by observing product reset and clearance activity in the weeks preceding the price cuts.
“It would be difficult for them to respond,” Benjamin said. “While they could match our pricing, it will be difficult for them to match our renegotiation with the entire supplier community.”
Overall, Ahold reported quarterly sales of $17.8 million, down 0.7% from the same period a year ago. Operating income of $568 million was down by $4 million.