Woes may force Giant's parent to sell assets

To appease investors, Ahold may need to undertake a radical reorganization

November 02, 2006|By Andrea K. Walker | Andrea K. Walker,Sun reporter

Sluggish grocery sales and other financial problems are placing renewed pressure on Dutch conglomerate Royal Ahold NV - the parent of Giant Food supermarkets and U.S. Food Service in Columbia - to fix its continuing troubles.

Ahold is suffering from years of ill-fitted mergers, high labor costs, accounting scandals and management decisions that isolated shoppers from its neighborhood grocery stores.

A string of weak quarterly sales results convinced Ahold chief executive Anders C. Moberg in July to call for a review of assets to help drive growth.

The company plans to unveil its findings Monday. But the pending announcement has renewed talk that Ahold might sell its American grocery business or U.S. Foodservice. It comes after top shareholders in recent weeks also urged Ahold to sell its U.S. operations.

For Maryland consumers and analysts who follow the company, any changes would mark the latest effort to reinvigorate a grocery operation that has suffered a steady decline in market share after Giant was sold to Ahold in 1998.

Even with Giant's recent efforts to remodel stores and reduce prices, some believe that layoffs, poorly stocked shelves and deteriorating customer service have hurt the 70-year-old homegrown company.

"There's a lot of things they don't keep up anymore," said Denny Fisher, 67, a retired railroad conductor. "They're not shopper-friendly anymore. Every since that outfit [Ahold] bought them, they haven't been the same."

Although Giant is still the largest supermarket chain in the Baltimore-Washington region, it has lost market share for four straight years.

It claims to have 23.13 percent of the market today, down from 24.79 percent in 2005.

Giant Food executives acknowledge the missteps but they said the grocer is committed to making improvements. And they have vowed to win back customers.

That's the same kind of commitment Ahold has promised as it seeks to reverse its fortunes.

Analysts and those who follow the industry said that to appease shareholders, Ahold is likely to make drastic changes that will make it a much different company than it is today - even if those changes aren't announced Monday.

Hedge funds Paulson & Co. and Centaurus Capital Ltd., which together hold 6.4 percent of Ahold's shares, urged the company in August to sell its U.S. assets to unlock the value of its stock.

Representatives of the funds wouldn't comment for this article but said in a statement at the time that keeping "disparate retail and wholesale interests" under one corporate structure limits the potential of individual businesses.

International media reports have said the company was recently in negotiations to merge with competitor Delhaize Group, the Belgium company that owns the Food Lion supermarket chain. Besides Giant Food, Ahold also owns U.S. supermarket chains Stop & Shop in the Northeast and Tops in Ohio, Pennsylvania and New York.

`Going to be sold'

"Ahold is going to be sold or broken up, I'm very confident in saying that," said Jeffrey W. Metzger, publisher of Food World, a trade magazine. "They're going to have to find ways to maximize shareholder value."

Ahold has declined to confirm merger talks, nor would it comment on the future of the company.

Some analysts said that Ahold may not be ready yet to talk about a sale. Retail stores in the United States and U.S. Foodservice accounted for nearly 75 percent of Ahold's sales last year.

Sales have been sluggish recently at Giant and other stores that compete with discounters such as Wal-Mart Stores Inc. and supermarkets such as Wegmans Food Markets and Whole Foods Markets Inc.

Ahold has had a problem increasing sales in the highly competitive East Coast market. It's up against non-unionized grocery chains with lower labor costs and operating margins. Its workers are normally full-time as opposed to places such as Wal-Mart, which hires mostly part-time labor. Ahold also tends to have what one industry expert described as "Cadillac pension plans."

"Ahold has some of the highest-volume stores in the country but is still under real profit pressure because its operating costs tend to be at least 20 to 30 percent higher than most of your key, typically nonunion, competitors coming into the market," said Burt P. Flickinger III, managing director of Strategic Resource Group, a business strategy consulting firm in New York.

Some of Ahold's problems have been self-inflicted by bad business decisions and too many layers of management, analysts said.

At its Ohio Tops stores it was paying above market lease rates. It also replaced butchers with case-ready meat that was cheaper, but not as fresh, analysts said. Ahold announced in July it was selling 46 Tops stores in Ohio.

"Their expenses have just gotten out of control," said David J. Livingstone, who runs DJL Research, a supermarket consultant in Pewaukee, Wis. "When you're going up against private companies like Wegmans and stores like Wal-Mart, they're unable to keep up."

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