Europeans shop for U.S. grocers

October 09, 1994|By Jay Hancock | Jay Hancock,Sun Staff Writer

Stock in Giant Food Inc. isn't on many "buy" lists.

The Landover-based grocer isn't opening many new stores. Its sales are under attack by Wal-Mart and club warehouses. Its profit margin has shrunk by more than a fourth since 1990. Its share price has never beaten a high set five years ago.

J. Sainsbury PLC thinks Giant is a great prospect.

Last week, the big British retailer said it will spend $325 million to buy out Giant's co-founding Lehrman family, acquiring a 16 percent ownership stake and half its voting stock, along with three seats on its seven-person board. It hinted it might buy more Giant stock later.

Sainsbury is one of several European operators investing in what is widely perceived in the United States as a hypercompetitive, low-profit, low-growth business: U.S. supermarkets.

Food Lion and A&P both have European owners. A Dutch company, Royald Ahold NV, has quietly acquired 600 U.S. grocery stores and is now the No. 9 supermarket operator in this country.

The Europeans' interest proves the cliche about beauty and the beholder.

U.S. supermarket competition "is nothing compared to what the countries of Europe are experiencing," David Merrefield, executive editor and associate publisher of Supermarket News, a New York-based trade publication. "Compared to the United Kingdom and the Netherlands, the United States is an extremely big and, in their eyes, vacant place."

Expect European investment in U.S. grocers to grow, analysts ++ said.

Operators like Ahold and Sainsbury will not only expand European-style selling strategies here, such as emphasizing "private label" store brands, experts said. Long term, they're also expected to pursue more mergers, winning larger shares of the U.S. food trade and trying to boost profits by consolidating central-office expenses.

European companies "have tended to help the U.S. businesses grow," said Karen Brown, senior vice president of the Food Marketing Institute, a trade group based in Washington. "Their interest is in building the business as opposed to taking out of the business. It's tended to be a good thing."

Grocers aren't just being pulled across the Atlantic by the States' allure. They're being pushed, too, by restrictive real estate policies at home and the fact they've already grown by leaps.

Sainsbury takes 11.4 percent of grocery sales in the United Kingdom. Ahold "has fully saturated their existing Dutch market; 36 percent of the business is under their control," said Mark Husson, who follows the company for J.P. Morgan Securities in New York.

The grocers can't grow by buying smaller operators, either. In Europe an countries, the top five chains typically control up to 70 percent of the market -- vs. 21 percent in the United States, Mr. Husson said

And the grocers can't expand by building stores. Northern European countries have become increasingly hostile to large, corporate retailers that create traffic and threaten traditional mom-and-pop shops in the "High Street," or Main Street.

"Even in the last year, the planning authorities in the U.K. have become much tougher on new superstore developments," said William DeWinton, a London retail analyst for financial house Hoare Govett Ltd. "The authorities have been keen to promote the High Street. The High Street is part of British retailing life."

One result of the restrictions: fewer supermarkets with higher per-store revenues. Even medium-size European supermarkets often generate weekly sales equaling more than $1.5 million, a level not usually reached here except by huge warehouse stores.

But European real estate costs are inflated, too. As their domestic construction budgets have shrunk and cash reserves have grown, European grocers have looked where the land was cheaper and less crowded: across the water.

Delhaize SA of Belgium started buying Food Lion stock in 1974, and by 1989 owned 50.3 percent of the voting shares. Tengelmann Group of Germany acquired control of the Great Atlantic & Pacific Tea Co. in 1979. Ahold bought its first U.S. chain -- South Carolina's Bi-Lo -- in 1977.

All three have grown. Food Lion added stores one by one, rising from 100 to more than 1,000 now and expanding from its Salisbury, N.C., home all the way to Texas. A&P bought the Super Fresh, Kohl's, Pantry Pride and Big Star chains, among others. Ahold bought small chains across the East, including Tops, Finast, Edwards and another Giant, this one based in Carlisle, Pa.

Sainsbury, too, has been in the states for a while.

It bought a minority interest in Shaw's supermarkets of East Bridgewater, Mass., in 1983 and controlling interest in 1987. Shaw's has 87 stores and reported operating profit of $46.5 million on sales of $1.97 billion for its fiscal year ended in March. Stores and sales have roughly doubled in 10 years.

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