Ahold deal viewed as `strategic shift'

U.S. Foodservice bid would set chain apart from rivals

Acquisitions

March 08, 2000|By Lorraine Mirabella | Lorraine Mirabella,SUN STAFF

Royal Ahold NV's $3.6 billion bid for U.S. Foodservice, the second biggest food distributor in the United States, came as a surprise yesterday to some who've followed the Dutch company's rapid growth into one of the world's largest supermarket operators.

Royal Ahold's grocery chains, such as Landover-based Giant Food Inc., sell to consumers, while U.S. Foodservice supplies food and equipment to restaurants and cafeterias.

"This represents a clear strategic shift from what they've been doing," said Neil Stern, a partner with McMillan Doolittle, a Chicago-based retail strategy firm. "It not only puts them into supply, but supply in a different channel."

But through such a radical departure in growth strategy, Ahold should become a more formidable competitor in the U.S. supermarket business, analysts said yesterday. Royal Ahold owns five East Coast chains, including Giant.

Plans announced yesterday for Ahold to acquire Columbia-based U.S. Foodservice for $26 per share plus $925 million in debt will help boost Ahold's buying power and expand its distribution network across the United States, the company said.

The proposed deal also would set Ahold apart from competitors, analysts said. The acquisition would let Ahold leap into the fastest-growing segment of the food industry, commercial food service, as Americans continue to eat out more often.

Officials of Royal Ahold, which runs 4,000 supermarkets, hypermarkets and other store formats in the United States, Europe, Latin America and Asia, said they view the marriage of the two companies as a way to boost U.S. sales in a cost-efficient way. Ahold would be adding almost $10 billion in food service sales to the $20.3 billion from U.S. supermarkets, with cost savings of at least $75 million by next year, the company said. In addition to Giant, Ahold owns Tops Markets, Stop & Shop, Giant of Carlisle, Pa., and BI-LO.

Ahold envisions reining in costs by consolidating functions such as information systems, distribution and buying. By sharing costs on increased volumes of private-label products, the companies could undercut competitors by offering lower prices to restaurant customers or grocery consumers, said Hans Gobes, a spokesman for Royal Ahold in the Netherlands.

"It's a new channel, really, for Ahold, and it is very important to have such a new channel because it is a very strong growth channel, and it is growing faster than the store business," Gobes said. "We know this business already very well, because we have food service business in the Netherlands," which accounts for about a quarter of Ahold's global business.

"People are eating out more and more at restaurants, at schools, many other places outside their homes," Gobes said. "We see there's a market that's really moving fast, and we felt it was a very good opportunity in the U.S. to get involved with that business."

Doing so will give Ahold much surer footing in taking on rival food retailers Wal-Mart Stores Inc., Kroger Co., Albertson's Inc. and Safeway Inc., ranked nationally in that order, said Burt Flickinger III, managing director of Reach Marketing in Westport, Conn.

"This gives Ahold the size and the scale to expand and ultimately challenge Safeway, Kroger and Albertson," Flickinger said. "This puts Ahold within striking distance of Safeway for fourth place.

"It allows them to get into a business where they're not getting pounded on in price by Wal-Mart and Costco every day, which is the case on the supermarket side. It's a perfect fit based on changes in consumer [dining] patterns."

Analysts said opportunities to buy regional supermarket chains have become more limited.

The Dutch food retailer discovered that in December, when it was forced to scuttle a planned $1.75 billion takeover of Pathmark Stores Inc. because of opposition from the Federal Trade Commission. The purchase had been viewed as a good fit and would have allowed Ahold to fill gaps in its weaker geographic areas. But according to Ahold, the FTC concluded that Ahold had too great a presence in areas where Pathmark operates. At issue was the Edwards chain of supermarkets that Ahold operates in New York and New Jersey, where most Pathmark stores are located.

"I can only assume that [after] the FTC in the U.S. blocked Pathmark in terms of an acquisition, then the next step is to go outside the traditional U.S. market, to something that has a different customer base and more national reach to it," said Mike Dennis, European food retail analyst with SG Securities in London. "At the end of the day, the issue for Ahold is how much bigger can they get in the U.S. in food retailing."

Another problem has been that food retailers have not been highly valued on Wall Street, so fewer, private regional chains are willing to sell, Dennis said.

"It has not been as good an investment," Stern said. "The retail grocery sector has not been strong from a stock market standpoint."

Ahold is committed to continuing to expand its retail business, Gobes said.

Whether competitors follow Ahold's lead and begin courting food service businesses remains to be seen, said Stern. He believes that the economic synergies have yet to be proven.

"It's intriguing for them to have done this," he said. "Anytime you're departing from a tried-and-true strategy, it is somewhat of a risk."

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