No upside to merger of large grocers

September 27, 2006|By JAY HANCOCK

Royal Ahold NV obviously needs to do something. But this?

European papers report that Ahold, owner of Giant Food and Columbia's U.S. Foodservice, is exploring a potential merger with Delhaize, owner of Food Lion. If consummated, the marriage would produce a Euro-grocery monster along the East Coast of the United States.

But it's hard to see how this is an improvement for shoppers or shareholders, even if the companies get clearance from U.S. antitrust cops.

Ahold, based in the Netherlands, and Delhaize, headquartered in Belgium, may resemble each other on the outside. But look inside the box, especially at the U.S. operations, and the companies are Trix and Grape-Nuts.

Food Lion has Southern roots, smaller stores, short inventory lists and a long history of hostility to unions. Ahold's chains, Giant of Landover, Giant of Carlisle, Pa., Tops of upstate New York and Stop & Shop of New England, are unionized. And while Giant and other Ahold stores are being out-yuppied by Wegmans and others, they are more likely than Food Lion to carry ch?vre as well as cheddar.

Of course, investment bankers can make nitro and glycerin look like a stable, winning combination. Presumably they're doing their darnedest to portray Delhaize and Ahold as soulmates.

The idea is to deliver Ahold from a mess that began when U.S. Foodservice cooked its books a few years ago. At the same time, Giant and other U.S. retail chains owned by Ahold have struggled against Wal-Mart, Costco and other discounters.

Things came to a head last month when two big hedge funds, Paulson & Co. and Centaurus Capital, which together own 6.4 percent of Ahold's stock, began publicly pressing the company to sell its U.S. operations.

Ahold also has numerous supermarkets in Europe.

Word of talks between Ahold and Delhaize surfaced last week in reports by Financieele Dagblad, the Dutch financial daily, and other papers.

Under one scenario, Ahold would sell U.S. Foodservice to a private equity player such as Kohlberg Kravis and dish Giant and other U.S. stores to Delhaize.

European commentators are buzzing about the "synergies" that could be created between Food Lion and the Ahold stores, especially in logistics and distribution. It's true that some sort of half-sensible deal could be sketched on a napkin.

Despite its heritage of everyday low prices, Food Lion has gone swanky with a budding chain called Bloom, vendor of sushi and fresh imported pasta. At the same time, it has launched Bottom Dollar, which aims to offer warehouse prices in a traditional grocery store format.

Perhaps Food Lion, with this promising strategy in place, could help Giant and other Ahold stores decide what they want to be when they grow up. While more upscale than Food Lion, Giant does not have the reputation of a Wegmans. It's stuck in the middle, not cheap enough to be Wal-Mart, not foodie enough to be Whole Foods.

Maybe Food Lion could roll the Bloom concept into appropriate Giant stores and convert others to Food Lion or Bottom Dollar.

But I can't imagine it would work. The antitrust people at the Justice Department might have something to say. But even if they don't, the cultural differences between Food Lion and the Ahold stores are too big.

Although Food Lion has made acquisitions in recent years, its history has been one of growing organically. It has succeeded with a cookie-cutter approach, with same-sized stores in carefully selected locations. Yes, the Bloom and Bottom Dollar concepts break new ground, but the company is still pretty standardized, with three cookie cutters now instead of one.

The size and layouts of Giant and other Ahold stores, on the other hand, are greatly varied. The "synergies" and cost saving from combining the operations (and probably closing some stores) would be disappointing. Energy consumed by melding the units might cause the Delhaize merchants to take their eyes off the customer, which is the real key to succeeding in this market.

The danger for shoppers is that a merger might transfer Ahold's drift and lack of focus to Delhaize rather than infuse Ahold with Delhaize's discipline.

Pundits have broached the possibility of selling U.S. Foodservice to a private equity group. The same thing, in a separate deal, might make sense for the Ahold stores. With no public stock trading and no U.S. Foodservice affiliate to distract, Giant and the other stores could get down to business and sell groceries.

So could Food Lion. The chains would have a better chance of fighting off Wal-Mart and the warehouse stores separately than they would together.

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