Timing, Synergies Are Right For Potential Ahold-Delhaize Deal To Be Completed
Nobody should be surprised to hear that Ahold and The Delhaize Group are in preliminary talks to merge their large retail food empires. The two European merchants first visited their own chat room in 2006, when we’re told that egos and the ability to establish a fair value for the deal killed talks. Several sources have told us that the two large supermarket retailers have had several more top level conversations over the years.
Nine years ago, both companies were doing well by themselves, with Delhaize dominating the supermarket business in its native Belgium and Ahold holding more than an 80 percent share of the Dutch market. At that time, both companies were also producing better results in the United States, which accounts for approximately 60 percent of each retailer’s business.
Fast forward to 2015. While Delhaize America has shown improved results over the past 18 months, the company went through some challenging times in the five years prior to its recent rebranding. While several management changes in the U.S., store closures and sales to other retailers as well as its new rebranding program have produced slightly better results at its large Food Lion unit, not many trade observers believe that there’s enough ammunition in the Food Lion arsenal to make the once vaunted discounter a formidable player again. However, the company’s Hannaford unit remains very solid.
At Ahold USA, the view also has changed substantially since 2006. Flush with cash, great locations and a superior corporate chemistry, Ahold USA was viewed as the retailer poised to grow substantially, both organically and via acquisition. Something happened on that journey that stalled that potential growth effort. When Ahold USA decided to consolidate and centralize its corporate headquarters to Carlisle, PA, it lost some of that chemistry. And while “centralization” certainly reduced duplication and redundancy, it also cost the company much of its mojo, both with its corporate staff and ultimately its customers.
As we know, the Europeans love process. While process is necessary, in the grocery business it really pales to the importance of people and culture. A regime change at the top of AUSA in early 2013 has led to even more European-influenced process. And except for its Giant/Carlisle division, the other three AUSA units have produced flat or negative ID sales for much of the past 24 months.
The landscape has also changed significantly in the U.S. over the past nine years. Channel blurring is now a reality and the challenges to produce real same store sales growth are many (except if your name is Kroger, Whole Foods or Publix). Perhaps a more telling tale of Ahold’s changing persona could be seen when Harris Teeter announced it would sell in 2012. Ahold didn’t even make a bid for the North Carolina regional chain when most analysts viewed the upscale merchant as an ideal fit for Ahold (adjacency, consumer demographics and consistently positive sales and earnings growth). When Kroger ultimately acquired Harris Teeter, one financial analyst told me: “Ahold would have gobbled that up five years ago.”
In fact, in the M&A world, Ahold is not even viewed as a player today. As industry consolidation continues, it seems that Kroger and a limited assortment of private equity firms are the only entities interested in supermarket acquisition.
In Europe the story isn’t that much different. New and more aggressive competition has impacted the still large (but not quite as dominant) market shares of Ahold and Delhaize in their respective homelands (in fact, Ahold has expanded into Belgium in the last three years and has impacted Delhaize’s share).
At the end of the day, this potential deal would be driven primarily by the European mindset of both companies. The Belgian families that control a healthy portion of Delhaize shares appear more open than ever to selling their stake. And, both in Europe and in the U.S., the chances of Delhaize ever regaining the glory days of the past seem remote. For Ahold, a merger would be a crowning achievement for management while also deflecting some of the criticism it’s received in the past few years for under performance.
By almost any measure, Ahold would be the controlling company if such a union were to occur. The Zaandam-based retailer is about 40 percent larger than its Brussels-based rival. In the U.S., Ahold’s annual revenue is about $27 billion, compared to Delhaize’s $17.8 billion in annual sales, despite Delhaize operating nearly twice as many stores as Ahold.
Ahold USA also holds “on paper” advantages over Delhaize America when comparing quality of store locations, condition of physical plants (Food Lion, not Hannaford) and a more advanced online presence.
From a regulatory perspective, the deal would be relatively clean. Outside the United States, Delhaize also operates stores in Luxembourg, Greece, Serbia and Romania while Ahold also owns supermarkets in the Czech Republic as well as a few stores in Germany and in the aforementioned Belgium (which might be viewed as a minor conflict).
In the U.S., there certainly would be Food Lion overlap in the Baltimore-Washington market with Giant/Landover (would Ahold consider selling its struggling and unionized Baltimore-Washington chain if a deal with Delhaize is finalized?). There would also be significant conflict in Richmond with Martin’s (Giant/Carlisle) and Food Lion ranking one and two in the market. Since Stop & Shop pulled out of Northern New England two years ago, there would be about 30 Hannaford stores conflicting with Stoppie units in Massachusetts and in the Hudson Valley region of New York.
And then the bigger question in the U.S. becomes: what to do with Food Lion? Not only doesn’t the banner really fit with the other merchandising styles of the other Ahold or Delhaize banners, its future, in my opinion, is very much in doubt, despite recent improvements. Other than convenience, is there a compelling reason to shop at a Food Lion store? It may no longer be squarely in the middle of the road, but it occupies enough of the highway that I still consider the chain prime roadkill material (and that’s before Lidl opens, Wal-Mart expands its Neighborhood Market format and Aldi adds more stores).
From a shareholders perspective (mostly institutional investors), the deal sounds great, if only to produce greater efficiencies and increased buying power. (which would also likely drive the stock price up).
However, I’m not as optimistic that this potential coupling would improve the customer proposition for either company, whose images in recent years have both been mediocre.
If indeed there is to be a marriage, it’s going to take several months to distill. In the very early stages of discussions, I like the chances of a deal occurring this time. And if I were a betting man, I’d place the odds at 75-25 of it becoming a reality.
‘Round The Trade
Whole Foods next year will launch a new format that the company said will offer value pricing and a more standardized natural and organic product assortment (think Millennials and Gen-Yers). Co-CEO Walter Robb said that the new format will be “unlike anything that currently exists in the marketplace.” He added that Whole Foods has begun seeking sites and has organized a team to focus exclusively on the new concept. At the conference call to discuss the Austin, TX-based retailer’s second quarter earnings (profit increased 11.3 percent and comp sales rose 3.7 percent), founder and co-CEO John Mackey stated that by developing a second format, WFM can broaden the accessibility to fresh healthy foods by marketing itself to a more value-conscious customer. Personally, I think the strategy is risky. How many other grocery retailers have been truly successful using multiple formats? It’s going to take a significant effort to develop the new concept from a capital, training, site selection and marketing perspective, and Whole Foods doesn’t have nearly as deep a bench as Wal-Mart or Kroger. More details should be revealed by Labor Day. Incidentally, the new format does not yet have a name, leading our readers to offer their suggestions such as “Half Paycheck,” “Wholer Foods” and “Half Foods.”…another solid quarter for Supervalu with sales increasing 10.4 percent in its fourth quarter ended February 28. For the 13-week quarter (one more week than fiscal 2014), the Eden Prairie, MN wholesaler/retailer reported net earnings of $36 million – $66 million when adjusted for refinancing and other related charges. Save-A-Lot was the best individual performer among SVU’s divisions, posting a sales increase of 13.7 percent to $1.1 billion, with comparable store sales increasing 3.5 percent. Even SVU’s struggling retail food division – Shoppers Food & Pharmacy, Farm Fresh, Shop ‘n Save, Cub and Hornbacher’s – experienced sales growth. At its independent retail sales unit (wholesale), sales dropped marginally (when taking the 53 week year into consideration). For the entire fiscal year overall sales were $17.8 billion. “We finished the year with a strong quarter, highlighted by positive identical store sales at both Save-A-Lot and retail food as well as the transition of the first stores in our important new relationship with Haggen,” Supervalu president and CEO Sam Duncan said in a statement. “Overall, fiscal 2015 was a year of strategic investment in all three of our business segments and I’m pleased with how these investments have positioned us for growth in fiscal 2016.” Duncan would certainly get my vote as an industry all-star for the stellar work he’s done at turning around virtually every aspect of the once beleaguered firm. According to an April 16 SEC filing, Supervalu agreed to wind down services to two Albertsons related divisions (Albertsons LLC and New Albertsons Inc.). In exchange for these transition and wind down services, the SVU will receive eight payments of $6.25 million every six months for aggregate fees of $50 million. These payments are separate from and incremental to the fixed and variable fees Supervalu receives under the TSA. The parties agreed that these transition and wind down services would be provided by SVU in an orderly manner and timeline as reasonably determined by NAI, Albertson’s LLC and SVU. The parties also agreed to negotiate in good faith if either the costs associated with the transition and wind down services are materially higher (i.e., 5 percent or more) than anticipated by Supervalu or the wholesaler is not performing in all material respects the transition and wind down services as needed to support NAI’s and Albertson’s LLC’s transition and wind down activities. The original TSA agreement was to expire in September, but was renewed last year. Now, those backroom services will end in 2016…Wal-Mart continues to shuffle parts of its leadership team under CEO Doug McMillon. Among the key changes are the naming of Mike Moore as executive VP of the company’s SuperCenter unit and the promotion of Julie Murphy, who now assumes Moore’s old post as executive VP of Neighborhood Markets. The Bentonville, AR merchant has also eliminated the EVP titles for Wal-Mart east, Wal-Mart west and Wal-Mart Realty. Also being eliminated is the title of zone manager for the chain’s 4,500 U.S. stores, a move designed reduce process and create more associate empowerment. Now, if the Behemoth could only significantly improve its out-of-stock issue, customers might actually better notice the benefits of these recent changes. In other Wal-Mart news, the world’s largest retailer abruptly closed five stores last month (two in Texas and one each in Oklahoma, California and Florida) due to what it termed severe plumbing issues. The company said that repairing the problems would take 4-6 months to complete. However, some critics are skeptical, blaming the closures on an effort to penalize activist associates at those stores. To that end, a complaint was filed in late April with the National Labor Relations Board (NLRB) alleging the closures are a retaliatory move meant to punish workers for demanding better pay and conditions. A Wal-Mart spokesman reportedly told several media outlets that the lost jobs were not layoffs, and that rather than being recalled, employees would have to reapply as new applicants when the stores reopen. The NLRB complaint, filed by the United Food and Commercial Workers International union, asked for an injunction forcing Wal-Mart to reinstate the 2,200 workers displaced by the closures… a clarification from my piece last month about the stellar 69-year career of Robert Weis, recently retired chairman of Weis Markets. While I gave former CEO Dave Hepfinger credit for two strong years of producing stellar sales and profits at Weis, it should be noted that four years of his tenure produced excellent earnings, even if same store sales declined during the final two years of his reign…Consumer Reports has released its annual supermarket ranking and Wegmans has been judged (by 60,000 readers) as the best place to buy groceries in the U. S. Other merchants that fared well included Publix, Trader Joe’s, Market Basket, Costco, Whole Foods, Aldi and The Fresh Market. At the bottom of the ocean were Wal-Mart and three Tea Company affiliated banners – A&P, Pathmark and Waldbaum’s (that kind of reminds me of a tasteless joke from “Blazing Saddles” when villain Hedley Lamarr is searching for criminals to destroy the town of Rock Ridge and asks the potential recruits for their qualifications…)
Local Notes
Safeway’s Eastern division launched the first phase of what promises to be a major initiative when it broke with its new ad format on May 6. “Fresher, crispier, juicier, leaner, quicker, healthier, yummier, happy and friendly” was the message Safeway conveyed to its customers in the new ad design which also featured sharper pricing (including $10 off with a $50 purchase), a sleeker design and easier readability. For the past several months, Safeway’s eastern division has been cleaning up its stores, working hard to improve associate morale and has actually hired more clerks and meatcutters in its stores (adding more labor at its stores – that’s almost a revolutionary idea today). Since Albertsons/Cerberus acquired the big chain in late January, Safeway has been working fervently to become a much more decentralized organization, making local buying decisions and increasing the empowerment of its associates. There’s still more heavy lifting to do, but division president Steve Burnham and his boss, New Albertsons Inc. COO Jim Perkins (whose very familiar with the B-W market from his days at Giant/Landover), have done yeoman’s work in a short period of time to improve the culture at the once semi-inert division. Wonder what happened to some of those Safeway executives who didn’t make the cut (or chose to leave the company) when Albertsons took over? Three of those former executives have landed important merchandising jobs in the business. And all happen to be female, which is a very good thing. The most recent executive appointment comes at Target, which named Anne Dament as its new senior VP-merchandising, overseeing the beleaguered mass merchant’s strategic food business realignment. Actually, Dament comes from Pet Smart, but before that worked with Brian Cornell, Target’s CEO, as group VP-perishable strategy for Safeway. “Having previously worked alongside Anne, I know her industry expertise and proven ability to reinvigorate existing businesses make her the right leader to drive our reinvention,” Cornell noted. Other ex-Safeway executives with new Northeast jobs include Toby Noiles, who last month was named senior VP-chief merchandising officer for FreshDirect. She will be responsible for overseeing the Long Island City-based online merchant’s strategy including supervising all product categories, vendor relations, promotions and new product development. Noiles spent 29 years with Safeway, most recently as a senior VP. In February, we reported that Tonya Herring, another former Safeway senior VP, joined Ahold USA as senior VP-non-perishable merchandising…more Ahold news: at the big chain’s annual shareholders meeting held on April 15 in Zaandam, the Netherlands, not much new ground was covered. Concerning its U.S. business, CEO Dick Boer again noted the improvement in the economy which has led to lower gas prices and increased consumer confidence and better purchasing power. Boer reviewed the gains made by the retailer’s “Thunder” program, which he claimed has led to lower prices, improved consumer perception, better training and enhanced product quality. Boer also mentioned AUSA’s new training program, designed to produce better customer engagement with the company’s associates – “the skills they (the associates) are learning drive both customer and associate satisfaction. Some news about Ahold USA’s “new format” unit which was formed in 2013 and is headed by veteran AUSA executive Bhavdeep Singh. After opening up an experimental 3,000 square foot “lab” store on Walnut Street in Center City Philadelphia called Everything Fresh late last year, it appears that the experiment will go live later this summer when the new division cuts the ribbon on a larger store in the west Boston neighborhood of Allston. And two of my favorite people at Ahold USA have announced their pending departures from the Northeast’s largest retail food chain. Larry “The Dean” Stover will be retiring in July as senior VP-operations for the retailer’s Giant/Carlisle unit after an amazing 47 years with the company. Larry is simply one of the most outstanding ops guys in the business and has guided and trained thousands of associates, many of whom have flourished at Ahold USA. A gentleman, a teacher and great team player, Larry’s knowledge of how stores and how people operate are going to be missed. Also, a big tip of the hat to Tracy Pawelski, VP-external communications and community relations for Ahold USA, who will be leaving AUSA (she told me she’s too young to actually retire) in mid-May after 10 years at the big retailer. Prior to joining Ahold USA in 2005, Tracy worked for many politicians, both in Pennsylvania and on the national scene. I’ve been writing about the grocery business since 1973, and Tracy is among the finest communicators that I’ve ever dealt with. I’m going to miss her enthusiastic personality, accessibility (never backing away from the tough questions), knowledge of her craft and top shelf professionalism. ..Mars Super Markets has now officially closed the four Baltimore area stores it announced it would shutter early this year. The Rosedale, MD-based independent closed its Bel Air, MD store in February, its Aberdeen, MD unit in March and earlier this month pulled the plug on supermarkets in Riviera Beach and on North Rolling Road in Baltimore County…the area’s largest kosher supermarket, Seven Mile Market, located in Pikesville, MD, is about to get some new competition. Seasons, a New York kosher retailer, plans to open a 20,000 square foot store according to Mayer Gold, president of Seasons, which currently operates stores in Queens, Manhattan and on Long Island. Gold’s new unit could open as early as late 2015. The company is also building another new store in Lakewood, NJ…in Richmond, Aldi debuted its first two of what will be at least six discount stores in that market. New Aldi units opened last month on North Parham Road (HenricoCounty) and on Charles H. Dimmock Parkway in Colonial Heights (ChesterfieldCounty). Other Aldi units are slated to open in: Staples Mill Shopping Center (Henrico); Hanover Village Shopping Center (Hanover County); Myers Street, near Boulevard (City of Richmond); 7300 Forest Hills Road (City of Richmond); and at the junction of Robious Road and Mall Drive in Chesterfield County. With Wal-Mart opening two Neighborhood Markets in March, the discount presence in Richmond has increased substantially. The upscale demographic will also be served with new stores in the next two years as Kroger has three new stores planned (two Marketplaces and a conventional unit); Wegmans will enter the already overcrowded market with two new units and Whole Foods will add a second store on Broad Street…Elwood Thompson’s, the natural and organics grocer based in the Carytown area of Richmond, said it has raised its minimum wage to $10.10 per hour. “We want our 130 employees to feel we make an investment in their future at ET, with continuous learning and development,” the company said in a statement. “We are particularly proud to say that both of our store managers and 2/3 of our department managers and assistant department managers started with ET as hourly employees and were nurtured to the positions they have now. Ellwood’s employees are the heart and soul of this small, local business and we want to offer them a higher quality of life. We want our employees to be able to better support their families and call Ellwood’s their home,” the company added…and good news for our buddy Bobby Ukrop, whose company Ukrop’s Homestyle Foods (UHF) has announced that its “Good Meadows Homemades” baked goods line can now be found in 29 Virginia Kroger units. Kroger stores in the Richmond, Virginia Beach and Charlottesville will carry 22 of UHF’s freshly baked, locally produced items. It’s been five years since Ukrop’s sold its business to Ahold USA (can you believe it) and reinvented itself as UHF, which employs more than 440 associates from its headquarters in Richmond…there are two obits to report this month, including former Oa
kland Raider fullback Marv Hubbard, who passed away earlier this month at the age of 68. Hubbard, an undrafted free agent from Colgate (same college as our associate Kevin Gallagher, who also played football), was a straight-ahead tough runner and fierce blocker for the great Raider teams of the early 1970s coached by John Madden. During his eight year career, Hubbard rushed for 4,544 yards, caught 85 passes and scored 24 touchdowns. He was also named to three Pro Bowl teams. Entering the musical pearly gates was singer Ben E. King, who gained eternal fame by co-writing (with Jerry Leiber and Mike Stoller) and singing one of the classic songs of the past 60 years, “Stand By Me,” in 1962. King first gained acclaim by singing lead with the Drifters, whose hits included “There Goes My Baby,” “Save The Last Dance For Me” and “This Magic Moment.” He left the Drifters in 1960 to perform as a solo artist and shortly after hit pay dirt with “Spanish Harlem,” which was co-written by Phil Specter. That was followed by the song that music publisher BMI said was the fourth most played tune of the 20th, century. King was 76…a tip of the hat to CVS Health for announcing that it will rebuild the two Baltimore City stores that were set on fire last month during the protests and riots in response to the death of Freddie Gray. “We have a long history of serving inner city communities and we are 100 percent committed to serving our patients and customers in Baltimore,” CEO Larry Merlo said. The two stores are located at 2509 Pennsylvania Avenue and 2560 West Franklin Street…and finally, happy birthday wishes are extended to Yogi Berra, the New York Yankees Hall of Fame catcher who was voted to play in 18 all-star games and whose Yankee teams won an incredible 10 World Series. Yogi turned 90 on May 12 and to quote one of many phrases from Yogi’s lips that would most apply to my job: “You can observe a lot by watching.”
