Changes due for Giant under Ahold Push for larger profits, cost-cutting measures expected

'Will not happen in 1 year'

Area food suppliers, assets in Landover could be affected

Supermarkets

May 24, 1998|By William Patalon III | William Patalon III,SUN STAFF Staff writer Jay Hancock contributed to this article.

For years, Giant Food Inc. has been one of the nation's more successful supermarket chains, with a market dominance that historically allowed it to charge prices that handed it a profit margin fatter than the industry average.

But last week, this family-run supermarket chain of 179 stores agreed to be taken over by -- and folded into -- the growing grocery empire of Royal Ahold NV, an acquisitive, nimble firm that parents such chains as Stop & Shop in New England, Tops Friendly Markets in upstate New York, Giant Food Stores of Carlisle, Pa., and Bi-Lo of Mauldin, S.C. Ahold is known for giving the managers of its four U.S. operating units -- which oversee six different chains -- a lot of autonomy over day-to-day operations.

Once the latest deal is complete, Ahold will have a string of supermarkets stretching from New England to Georgia.

Changes are clearly in store for the Maryland Giant stores, Ahold company officials and industry experts say. It's not completely clear -- even to Ahold, since the takeover won't be consummated until later this year -- what those changes will be. But they could have an impact on other chains and food suppliers in the Baltimore-Washington region. And the changes will be largely driven by Ahold's desire to push for larger profits at the Giant Food chain.

"This will not happen in one year," Ahold Chief Executive Cees van der Hoeven told analysts during a conference call Tuesday, the day the acquisition was announced. "We will make the company more profitable."

Historically, he said, the Landover-based Giant has had enviable profit margins of about 3 percent (Giant says actually about 2.5 percent), well above the industry average of 1 percent to 1.5 percent. But Ahold stores on average boast bottom lines of 4 percent -- and some of its chains, such as Stop & Shop, are said to do even better.

The most obvious way to boost profits is to cut costs, and van der Hoeven did tell analysts that Giant's "cost base is a little

higher" than other chains in the Ahold family. But officials with the Netherlands-based Ahold have not threatened to come in and cleave jobs a la turnaround celebrity "Chainsaw Al" Dunlap. In fact, they said Giant's job ranks will actually climb over time as the Maryland-based chain grows.

Van der Hoeven contends that "synergy benefits" will pare costs by $30 million next year and $50 million in 2000. Among those "synergies" are things such as enhanced buying power -- the ability to get suppliers to offer better prices because a company such as Ahold that will now have U.S. sales of $20 billion -- compared to only $4 billion for Giant by itself. Ahold buys in such huge volumes, Giant should benefit.

"With that buying power, you can go to the Cokes and Pepsis of the world and leverage that buying power across all of Ahold U.S.A.," said C. Douglas Hartmayer, director of community relations for the Buffalo-based Tops Markets Inc. "When a big gorilla steps on the [product seller's] desk, they generally tend to listen."

But industry watcher Bob Gatty is skeptical that such things as tougher bargaining with suppliers will yield huge dividends.

"I would find that argument a little bit suspect," said Gatty, editor of the Chicago-based Grocery Headquarters magazine.

Instead, Gatty says Ahold has to take a hard look at some of the things Giant does: It has its own truck fleet, a dairy operation, a bakery, soft-drink production, a real estate arm and a construction company. It even makes blow-molded plastic bottles for its milk and juices.

That's one reason for its higher margins -- it keeps the profits the manufacturer of these items would normally take, Giant says.

If Ahold believes that its supermarkets should stick to what they do best -- selling groceries -- then those pieces could be sold off. Giant's real estate portfolio alone is a "hidden asset" worth an estimated $50 million, van der Hoeven told analysts during the conference call.

On the other hand, assets such as the dairy operation's ice cream plant might be used to provide private-label ice cream to some or all of the other chains under the Ahold umbrella, Gatty said.

It also remains to be seen where Giant fits into the Ahold empire. When Ahold bought the Finast chain of Ohio, it kept the name but eventually folded the operation into the Tops Markets subsidiary. Another New England/New York chain, Edwards, became part of the family of stores headlined by the Carlisle-based Giant.

Those consolidations didn't always go smoothly, but industry observers say Ahold, in the end, has managed to let each store chain keep its own identity. During interviews last week, Ahold executives seemed to say that the two Giants would keep their independence. But clearly there are opportunities to save money by at least combining pieces of the two operations.

Take distribution. Landover-based Giant is strongly unionized and underwent a damaging Teamsters strike 18 months ago. With the unions, industry experts such as Gatty say it's likely that the Maryland Giant has higher wage costs. The Pennsylvania Giant is not unionized.

The deal clearly has implications for grocery distribution in the Mid-Atlantic region, said Kenneth M. Gassman, a securities analyst with Davenport & Co.

For instance, Giant of Carlisle is the biggest customer of Richfood Holdings Inc. of Richmond, Va. If Ahold folds the Carlisle Giant's distribution into the distribution system of the Landover Giant, Richfood Holdings would lose a huge account, Gassman said.

Conversely, Ahold could give the distribution account of its newest acquisition to Richfood, which was a major supplier of the Maryland Giant during the 35-day truckers' strike, Gassman said.

Pub Date: 5/24/98

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