Ahold avoids altering control of U.S. supermarket chains

Dutch parent refrains from changes despite Foodservice imbroglio

March 20, 2003|By Lorraine Mirabella | Lorraine Mirabella,SUN STAFF

Dutch supermarket conglomerate Royal Ahold NV has taken no steps to tighten control over its U.S. grocery and food distribution businesses in the wake of a $500 million accounting scandal at its Columbia-based U.S. Foodservice subsidiary, company officials said yesterday.

William Grize, president and chief executive officer of Ahold USA, which operates Giant Food Inc. of Landover and five other East Coast supermarket chains, said yesterday that Royal Ahold is continuing to allow its U.S. managers to run the U.S. chains.

"We have an awful lot of flexibility in terms of how we run our operations," Grize said in his first interview since the accounting scandal was disclosed last month. "We have a lot of leeway, and that hasn't changed."

Similarly, Royal Ahold has not sent any of its executives from the Netherlands to oversee U.S. Foodservice, which is still being managed by Chief Executive Officer James L. Miller, a U.S. Foodservice official said yesterday.

Royal Ahold disclosed Feb. 24 that it had overstated profit by $500 million or more in 2001 and 2002, and blamed accounting irregularities at U.S. Foodservice. The food distributor to restaurants, schools and hospitals reports directly to Royal Ahold, the world's third-largest retailer, not to Ahold USA, which oversees the six U.S. retail chains.

The trouble at U.S. Foodservice and problems at other Royal Ahold subsidiaries around the world prompted the resignations last month of Royal Ahold's Chief Executive Officer Cees van der Hoeven and Chief Financial Officer A. Michiel Meurs.

U.S. Foodservice's books are being investigated by the Justice Department, the Securities and Exchange Commission, Dutch regulators and dozens of auditors from Royal Ahold. Two of the distributor's high-level executives have been suspended.

However, "Ahold USA retail is not part of these investigations," Grize said yesterday. "The events leading up to the announcement on Feb. 24 came at us fast and furious. Our folks were shocked. ... We went through a panoply of emotions - shock, concern, denial and anger."

Jeff Metzger, publisher of the Columbia-based trade journal Food World, said he expects Royal Ahold to continue its decentralized approach to running the U.S. supermarkets, which account for more than half of Royal Ahold's profits.

"They've been the biggest producer of all the units of the company," Metzger said. "USA retail is the straw that stirs the drink. Without USA retail continuing to be a key component, there is no Royal Ahold."

Royal Ahold has said that a year-end audit by Deloitte & Touche LLP uncovered irregularities that led the company to disclose the $500 million earnings overstatement.

Grize, a 37-year food retailing veteran and member of Royal Ahold's corporate executive board, said that auditors alerted the management of U.S. Foodservice, which brought the accounting problems to Royal Ahold's board.

A source close to U.S. Foodservice said yesterday that Deloitte & Touche uncovered "a couple of irregularities," but not the full extent of the financial problems that have been disclosed.

"As soon as the auditors made Jim Miller aware of the issues that they'd seen some irregularities, he had people inside U.S. Foodservice begin to look into this," the source said. "They were concerned that this was a problem in the hundreds of millions."

Miller then notified Royal Ahold's corporate executive board and flew to Zaandam, the Netherlands, where the company is based, to present the problem at an emergency meeting Feb. 14, the source said.

Probes reveal more

Investigations by Ahold, U.S. Foodservice and Deloitte & Touche revealed more of the problem, which was disclosed by Royal Ahold on Feb. 24. Since then, U.S. Foodservice has put into effect new controls on the company's use of promotional allowances, in which vendors pay the company fees for buying in high volumes, the company source said.

"We can't have all the controls changed and finalized until the findings in the investigation" are known, the source said. "There will be new controls for sure."

Federal investigators are looking into whether U.S. Foodservice improperly booked rebates or discounts from suppliers as income.

The investigators have not interviewed anyone at Ahold USA, nor have they asked the division to turn over any documents, Grize said. The parent company, however, has advised the U.S. retail subsidiary to retain certain records, he said.

Because of its financial troubles, Royal Ahold has had to pledge Giant, Stop & Shop Supermarket Co. in Quincy, Mass., and BI-LO LLC in Greenville, S.C. - all part of Ahold USA - as collateral to secure a critical $2.91 billion line of credit from bankers.

Doing so has not restricted Ahold USA financially, Grize said yesterday.

"It's there for the protection of the banks, the same as a mortgage," he said.

Metzger agreed that the company should not find itself restricted as long as it continues to produce at the same level.

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