Giant deal was done for market share Competition, expansion difficulty seen as catalysts

Aim is to add to strength

Buyer Ahold has same philosophy, Giant's Manos says

Retailing

May 21, 1998|By Lorraine Mirabella | Lorraine Mirabella,SUN STAFF

The planned acquisition of Giant Food Inc. by Dutch grocery retailer Royal Ahold NV comes as store chains increasingly bank on consolidation to gain -- and keep -- precious market share.

For Giant, such a move would have been unthinkable as recently as the early 1990s, when Ahold first approached the chain about a possible deal.

But that was before the death of the homegrown chain's revered co-founder, before the chain's difficulty executing a northern expansion and before its bitter five-week Teamsters strike. That earlier Ahold proposal also came before grocery chains had to fight off "category killer" superstores, which sell paper towels, pet food and other staples to consumers by the case. On Tuesday, Landover-based Giant said it had agreed to Ahold's offer to buy the chain for $2.7 billion cash, or $43.50 a share.

Giant, which sprouted from a single Washington store in 1936 into the region's dominant chain, says the deal gives it the ability to build on its already strong position.

Ahold, a fast-growing conglomerate that owns four East Coast chains, said it plans to fold Giant's 179 stores into its empire, keeping local management and the well-known brand name. Giant hopes its newfound size translates into greater buying leverage and millions in savings.

"Today, you see so much consolidation out there. Long term the regional chains may not exist like they are today," Giant Chairman Pete L. Manos said yesterday. "Part of what we were doing was looking for the company that most approximated us. Ahold is like Giant in many ways."

Manos said he believed Giant could have stayed independent and competed "for a few years. But when we looked at the long term -- 2000 and beyond, this provided us with the opportunity to be part of a great company that has the same philosophy in running the business. An opportunity like this doesn't come along very often."

Under the new ownership, Manos said he expects the chain will be able to more aggressively expand from Giant's Maryland, Washington and Virginia base.

The chain, which has always built its own stores and made or processed baked goods, dairy items, ice cream, soft drinks and ice, might also find more success in containing costs with its new partner.

"Giant's results have not been up to par, and it could be that Pete Manos decided he simply wanted more strategic management advice than he could get from an outsider," said Kenneth Gassman, a retail analyst with Richmond, Va.-based Davenport & Co. "The company's operating costs are high, it's saddled with an expensive union contract, operating in a high-cost area and some of its systems are not state-of-the-art. When you're operating under those constraints, it may pay to bring in a big hitter."

For its part, Ahold had snapped up five grocery chains during a two-year shopping binge when it agreed to buy Giant.

The owner of Stop & Shop in New England, another chain named Giant in Carlisle, Pa., Bi-Lo in the South and Tops in Ohio and Upstate New York looked at the mid-Atlantic region and saw Giant Food in its path.

"There was a huge market gap in Baltimore and Washington, and they couldn't compete against Giant of Landover because of the quality of the operation," said Burt Flickinger, managing director of Westport, Conn.-based Reach Marketing. "A frontal assault by building new stores wouldn't make sense. It would have resulted in hand-to-hand combat and wouldn't justify the capital expense."

Besides that, "Giant was probably the last of the publicly held crown jewels of retailing."

As the industry has become more competitive, the larger chains have looked more and more to increase their presence -- and market share -- through acquisitions, said Leslie Beyer, senior editor of Chicago-based Grocery Headquarters Magazine.

Much of the consolidation is driven by changes in consumer buying patterns, she said.

"Not only are consumers buying dry goods cheaper at Kmart and Wal-Mart, now they're not even buying ingredient items -- they're buying more meals out," she said. "Wal-Mart and Kmart have huge grocery sections. A lot of these category killers have stolen supermarkets' share of groceries and non-food items traditionally bought within the supermarket."

Pub Date: 5/21/98

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