On December 10, Ahold Delhaize USA (ADUSA) announced plans to transform and expand U.S. supply chain operations over the next three years by investing $480 million, including leases. The investment supports a strategy to transition the supply chain network into a fully-integrated, self-distribution model.
The move includes the acquisition of three warehouse assets from C&S Wholesale Grocers and new leases on another two facilities. In addition, ADUSA will partner with various companies to build two fully-automated frozen facilities. The initiative will provide the infrastructure needed to support aggressive omnichannel growth plans.
The announcement will likely mean a significant reduction of services (after 2023) between the retailer and C&S Wholesale Grocers, which has served as the primary supply partner to three of the company’s largest bands – Giant Food, Landover, MD; Giant/Martin’s, Carlisle, PA; and Stop & Shop, Quincy, MA.
In a statement, the Keene, NH-based distributor, the largest wholesale grocery supply company in the U.S., announced its support of Ahold Delhaize USA as it transitions to a self-distribution supply chain network over the next three years, continuing a 30-year relationship with Ahold Delhaize USA companies. C&S will continue to serve as the third-party labor provider at three locations Ahold Delhaize USA is acquiring, including two locations in York, PA., and one in Chester, NY.
“C&S is uniquely positioned for the long-term, we have a strong leadership team with some of the best industry veterans; an expanding footprint in key geographic areas; innovative technology solutions that enhance the consumer experience; and the most cost-efficient products and services in the market. We are confident about our future,” said Rick Cohen, chairman, C&S Wholesale Grocers.
Over the next three years, ADUSA said its companies will:
- Increase distribution presence with seven new and acquired warehouses, including two fully-automated frozen facilities in the Northeast and Mid-Atlantic;
- Pursue optimal facility locations near the local brands of Ahold Delhaize USA and their customers, enabling local product expansion, increased product freshness and speed of delivery;
- Innovate in warehouse design, including transforming facilities to enhance automation and leverage technology advancements, such as an integrated transportation management system and end-to-end forecasting and replenishment technology, designed to support the omnichannel experience and multi-channel growth;
- Continue to build upon relationships with vendors and suppliers, and through the integration, further deepen partnerships to enhance service, quality, innovation and efficiencies; and
- Expand Ahold Delhaize USA companies’ presence in local markets and reaffirm local community connections through the expected creation of hundreds of jobs in local communities, including positions in support offices.
“Today’s announcement is another example of how Ahold Delhaize USA is transforming our infrastructure to support the next generation of grocery retail,” said Kevin Holt, CEO, Ahold Delhaize USA. “Through this initiative, we will modernize our supply chain distribution, transportation and procurement through a fully-integrated, self-distribution model, that will be managed by our companies directly and locally. This will result in efficiencies and most importantly product availability and freshness for customers of our local brands – now and in the future – whenever, wherever however they choose to shop.”
Currently, ADUSA’s distribution networks include 15 traditional and ecommerce distribution centers, which service the local brands of Ahold Delhaize USA, which include Food Lion, Giant Food, Giant/Martin’s, Hannaford, Peapod and Stop & Shop. The network will grow to 22 facilities by 2023.
“Moving to a self-managed supply chain will enable Retail Business Services (RBS) to reduce costs for the local brands it serves, improve speed to shelf, deepen relationships with vendors and better position our companies’ distribution centers in the communities they serve,” said Chris Lewis, executive VP-supply chain for RBS. “These changes will enable us to take advantage of financial and strategic value within procurement, logistics and warehousing to provide the freshest product through the most advanced, efficient delivery network in the grocery industry. We will continue to partner with key providers for distribution center management services, including third party labor services, such as our longstanding partner C&S.”
With respect to the two fully-automated frozen facilities, one will serve the Mid-Atlantic market and the other will serve the Northeast. In addition, the company will also pursue two new leases. One lease will be on a newly renovated warehouse in Manchester, CT, and another will include the lease of a C&S facility in Bethlehem, PA.
“Part of our strategy is leveraging the best of automation and technology,” added Lewis. “Each facility will also maintain a significant workforce. We recognize the future of work is changing and we’re taking active steps to help our workforce adapt by enabling them to work more efficiently.”
From the financial perspective, the international merchant said it expects to see more than $100 million in annual savings following the transition period.
Excluding the transition expenses, the Zaandam, Netherlands-based retailer said the impact on Ahold Delhaize USA underlying operating income will be neutral in 2020 and 2021 and favorable in 2022 by $60 million.
The ongoing annual benefit on underlying operating income will be more than $100 million. During the first three years, there will be transition expenses of $160 million, impacting underlying operating income ($50 million in 2020; $50 million in 2021; $60 million in 2022).
The Dutch merchant pointed out that its previous group level annual free cash flow target of $2 billion (€1.8 billion) through 2021 expressly excluded M&A and other such transactions. Therefore, free cash flow will be impacted by an incremental $410 million (€369 million) in capital expenditures from 2020-2022. The total investment also includes an additional $70 million (€63 million) in lease commitments.
Ahold Delhaize said the investment will not materially impact 2019 results and there is no change to the outlook that was provided on November 6, 2019. The retailer added that it plans to spend approximately 3 percent of sales on capital expenditures on top of the amount to be spent on this transaction over the next few years.
Collectively, the companies of Ahold Delhaize USA comprise the largest grocery retail group on the East Coast and the fourth largest group in the nation, with nearly 2,000 retail stores and more than 6 million annualized online grocery orders.
Additionally, the companies of Ahold Delhaize USA operate one of the most extensive supply chain operations on the East Coast, including more than 1,000 trucks that travel more than 120 million miles annually and deliver 1.1 billion cases to local brands’ stores.