Giant's parent seeks to improve

Ahold hopes bigger stores, lower prices will help its profit


Larger stores and lower prices are in the works for Giant Food as its Dutch parent company looks for ways to improve the performance of its U.S. supermarket chains.

Royal Ahold NV reported yesterday that its 2005 fourth-quarter profit fell 86 percent to $129.6 million, or 108 million euros, from $770.9 million, or 641 million euros. The company partly attributed the drop to one-time restructuring costs. The company also said it is lowering its financial projections for this year because of problems at its U.S. grocers, including Giant, the No. 1 supermarket chain in the Baltimore-Washington region.

Ahold's stores, which are mostly mid-tier supermarket chains, have been squeezed by discounters such as Wal-Mart Stores Inc. at one end and higher-end specialty grocers such as Whole Foods Markets Inc. at the other. Sales at the Stop & Shop/Giant Landover division fell 5.5 percent in the fourth quarter compared with the same quarter a year earlier.

During a meeting with analysts that was later made available on a Web cast, Ahold chief executive Anders C. Moberg laid out plans to improve performance at Stop & Shop/Giant that included building new stores and a focus on consistent low prices rather than promotional sales. Giant plans to open a larger, more upscale prototype in Delaware next month.

Stop & Shop/Giant Landover will also increase its private label brands, which are sold at a cheaper price than name brand items. The plan is similar to one that Ahold implemented at its Albert Heijn and ICA stores in Europe.

"The goal of the program will be on delivering greater value to the customers," Moberg said.

"This will mean a new approach to pricing," he said.

Ahold said that next week it plans to name a new chief executive of the Stop & Shop and Giant operations.

This month, Marc Smith, the chief executive who oversaw the grocery chains during two years of major reorganization, announced his retirement.

Moberg also said the company would a look at ways to cut costs that would include renegotiating leaner labor contracts in the coming years and creating more efficient in-store and information-technology operations. He wasn't specific on cost cutting plans.

Union view

A representative with the Baltimore office of the United Food and Commercial Workers said the union's contract doesn't expire until 2007. The union said Giant's financial problems have to do with the way the company is managed, not labor costs.

"If you've been in this area any amount of time, you can see it's the way the company is run," said Buddy Mays, president of UFCW's Local 27 office. "They went from a customer service-driven store to a bottom-line, price-driven store."

"If they concentrated their efforts at improving their image back to what it was at one time, their business would then increase, and they would get back their market share," Mays said.

Ahold merged the administrative functions of Stop & Shop, the dominant supermarket chain in New England, and Giant in 2004 to gain efficiency. Under the consolidation, Giant's headquarters moved to Quincy, Mass. from Landover. The grocer also shed businesses, including its dairy plant.

Though still the largest grocer in the Baltimore-Washington area, Giant has continued to encounter difficulties during its corporate overhaul of recent years. Customers have complained about poor service and out-of-stock items, problems that Giant acknowledged and said it has worked to improve.

"At Giant-Landover, it's more of a cost issue, an operating efficiency issue," said Stefaan Genoe, an analyst with the Petercam financial group in Belgium. "They have to reduce costs further and renew their store space."

Ahold CEO Moberg acknowledged yesterday that it has taken longer than expected to see a performance difference at the grocer. He said the culture at Giant was one of high prices, margins and costs and that management was resistant to change.

"It has taken a long time getting people on board and really understanding the necessity of moving ahead and repositioning the brand," Moberg said.

"It is very different the way we will manage our business in the future compared to the way we have done it up until now," Moberg said. "It's more than changing the prices. This is basically to change the company and run the company in a different way."

Ahold's supermarket sales are expected to rise about 2.5 percent this year, half the amount originally expected. Ahold also abandoned a goal it set in 2003 to reach a 5 percent annual operating margin in its retail unit by 2006.

The goal was lowered yesterday to 4 percent to 4.5 percent. The 5 percent goal was set as part of a recovery plan after a $1.1 billion accounting scandal involving Ahold's U.S. Foodservice unit in Columbia, the No. 2 U.S. food service distributor.

`We are disappointed'

"We are disappointed in our performance," Moberg said during the Webcast. "Looking at the markets we operate in, the competitive and operating pressures continue to be greater than we expected. It has taken longer than anticipated to improve our retail operations."

Analysts questioned yesterday whether Ahold would be able to lower costs and prices and still keep a healthy market share. But many said they think the company is moving in the right direction.

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