In his first public remarks since taking the helm at Delhaize America last October, CEO Roland Smith discussed his priorities during a Delhaize Group earnings conference call last month. He said the retailer’s focus going forward would be on accelerating the transformation of Food Lion, strengthening the Hannaford banner though increased price competitiveness, and optimizing Bottom Dollar Foods. He also discussed the organizational changes he has put in place as he has sought to revitalize the retailer’s U.S. operations.
Smith told investors and analysts: “In terms of priorities, I believe it’s important that we focus our resources, people, money and time on the few critical priorities that will ensure we achieve our goals in 2013 and beyond.”
Accelerating the transformation of Food Lion, which accounts for more than 60 percent of the retailer’s U.S. volume, is Smith’s top priority. In May 2011, Food Lion began a strategic phase of rebranding its stores by reducing prices, enhancing quality and improving service. To date, 65 percent of the store base has been completed and the overall total is expected to reach 80 percent by May. Smith said the progress in these stores has been good, but that the work is not complete.
“While we are pleased with the continued progress of Food Lion, we know that we must continue to grow sales and market share and we also much better differentiate Food Lion from its competition,” Smith stated.
Among changes that Smith disclosed was the decision to abandon testing of running fewer promotions and more everyday low pricing, which it launched in the dairy and frozen departments of rebranded Food Lion stores in October. Originally, the company had planned to expand that test to other departments, but Smith said that the results did not create the volume increases in departments throughout the store and thus the focus will change to making the banner more competitive through a combined strategy of promotions and low pricing: “We have to do this product by product, category by category,” explained Smith, “being sure we’re competitive with what’s happening in the market and that we provide enough promotion pressure to get people into the store.”
A second focus for the retailer will be strengthening its Hannaford banner. Smith said that the retailer fares well in all categories except pricing, where they are perceived to be too high. In light of increasing competition in the Northeast, Smith said it is important to invest in price reductions at Hannaford to address the perception and drive sales momentum. He reported that fourth quarter results showed positive item growth and improved transaction trends, which they hope to build on. “This year, we will continue to improve our overall price competitiveness, which we believe will drive sales momentum at Hannaford.”
At the company’s discount banner Bottom Dollar Foods, Smith said the company will continue to grow sales and reduce operating costs as it creates a model that will be poised for future expansion.
Smith said he would provide greater detail about the overall transformation plans during the retailer’s annual investor conference May 8.
Smith also summarized the organizational changes he has made since his tenure began: “As you may have read, we restructured our organization above the store level to improve our efficiency and to create a more effective organization that is capable of competing and reacting to the changing environment in which we operate.”
In Smith’s reorganization, he made several changes to his senior management team in January. All positions were filled from within the existing organization with the exception of a chief people officer, which is still currently unfilled. Smith also reduced the number of officers in the company by 25 percent and relocated the majority of the senior leadership team to the company’sSalisbury,NCheadquarters. Previously, some of those posts were located in the retailer’sScarborough,MEoffices. Smith also eliminated about 450 positions above store manager level, and closed 45 Food Lion, Sweet Bay and Bottom Dollar Food stores in early 2013. Smith said, “We believe this new organizational structure is both more efficient and effective, and this will result in significant costs savings that we can reinvest.”
The retailer’s fourth quarter 2012 and year end results illustrate the urgency for improvement. In the fourth quarter, revenues at DelhaizeAmericadecreased by 2.5 percent to $4.7 billion. Comparable store sales were flat. The retailer said that volume growth was positive as a result of the Food Lion grand repositioning, continued price investments at Hannaford and the expansion of Bottom Dollar Food, but underlying operating profit decreased by 35.7 percent to $156 million mainly due to a decrease in gross margin resulting from the price investments. Underlying profit margin for the quarter was 3.3 percent compared to 5.1 percent in 2011.
For the full year, revenues forU.S.operations dropped 2.2 percent compared to 2011. Revenues for the full year were $18.8 billion and comparable store sales decline 0.8 percent During the year, 537 food Lion stores were impacted by brand repositioning.
Underlying operating profit for theU.S.division in 2012 decreased to 3.8 percent compared to 4.8 percent in 2011, mainly as a result of price investments. Underlying operating profit dropped by 23.5 percent to $705 million. Operating margin was 2.3 percent, mainly as a result of $249 million impairment and store closing charges.
In the second quarter of 2013, the retailer expects to launch the rebranding of the remainder of its Food Lion stores, approximately 180 units mainly in the Baltimore/Washington markets. The results at those units, as well as improved price competitiveness at Hannaford and cost savings throughout the company’s American operations, as well as improved results at Bottom Dollar Food and Sweetbay, are expected to partly help fund planned price investments.
Beckers commented on the 2012 results: “As indicated in January, our financial results in 2012 were within guidance. We are particularly pleased by our strong free cash flow generation
and we believe that we will generate an average of approximately €500 million free cash flow per annum over 2013-2015.”
He added, “In 2013, we will remain focused on accelerating the progress at Food Lion, revitalizing Delhaize Belgium and driving growth in Southeastern Europe. We remain encouraged by the continuation of several positive trends we experienced during the fourth quarter of 2012, particularly in the U.S. Over time, we believe that Delhaize Group has the ability to improve its operating performance in all of its markets, by staying focused on sustainable revenue growth and strict cost management.”
