Giant's parent to sell unit

Ahold to keep grocery chain, drop Md. wholesaler

November 07, 2006|By Andrea K. Walker | Andrea K. Walker,Sun reporter

Dutch food company Royal Ahold NV said yesterday that it will sell Columbia-based U.S. Foodservice, the nation's second-largest food wholesaler, as part of a major restructuring but will keep the struggling Giant Food grocery chain and try to revive it with an "everyday low price" strategy.

Giant will have fewer sales, carry more private-label merchandise and limit its assortment, extending an experiment that began in its produce departments in September.

Ahold also said it will improve the freshness of its foods and develop "easy-to-stock store formats that will enhance the overall customer experience in our stores, making shopping more convenient."

Anders Moberg, Ahold's chief executive, said he would not elaborate for competitive reasons.

U.S. Foodservice, which was nearly ruined by an accounting scandal three years ago, is estimated by analysts to be worth about $5 billion. Ahold hopes that selling the unit now will let it focus on invigorating its U.S. supermarkets, whose sagging sales have contributed to a string of weak earnings reports.

Some analysts and industry experts were skeptical yesterday about whether Ahold's plan for Giant and its other U.S. supermarkets is drastic enough. Giant's share of the Washington-Baltimore market has fallen for four consecutive years, under pressure from Costco, Wal-Mart and Sam's Club on the low-price end, and from premium grocers such as Wegmans and Whole Foods.

"People have countless choices of where to shop," Moberg said during a webcast yesterday. "To set yourself apart, it's no longer enough to have a name that everyone knows. You have to have an emotional connection to consumers."

Ahold's U.S. strategy will be similar to one it used to turn around its Albert Heijn super- [Please see ahold, 9A]

market chain in Central Europe, said Lawrence Benjamin, who until yesterday's announcement was chief executive at U.S. Foodservice. He will now oversee Ahold's U.S. grocery operations.

Ahold began an aggressive price war in Central Europe with competitor Laurus. It also created a store format that emphasized space and customer service, according to international newspaper reports. Laurus eventually closed stores, according to those newspapers.

Benjamin said he has read descriptions of Ahold grocery stores that say they are squeezed between other formats but that he is not buying the idea that there is no place for them.

"I think that the U.S. supermarket business has tremendous opportunity," Benjamin said. "I think the most successful supermarket companies in the world have really used consumer insight, not just financials, as their guide."

U.S. Foodservice, which has about 500 employees at its headquarters, is being sold three years after the revelation of an accounting scandal that caused Ahold to restate earnings by nearly $1 billion.

At issue was the way the company booked rebates or discounts that vendors paid U.S. Foodservice in exchange for high-volume purchases. Investigators found that the company booked more rebates and discounts from vendors than it received and improperly recorded them as revenue.

Four former U.S. Foodservice executives and numerous vendors have been convicted of or charged with criminal offenses. Ahold eventually settled with the Securities and Exchange Commission and the Department of Justice without paying a fine, though it agreed to pay $1.1 billion to settle a lawsuit filed by shareholders.

Moberg has said in the past that he would hold on to U.S. Foodservice until it was on sound financial footing. The division is now one of the better-performing units of Ahold, which said last week that third-quarter sales at U.S. Foodservice increased 5 percent to $4.5 billion.

"We clearly saw a lot of value in U.S. Foodservice, and we made a commitment to recover a very broken company," Moberg said. "Many people in 2003 tried to get it for free or very little money. What we've decided now is we will be a food retailer. We see now as the right time to divest U.S. Foodservice."

Some analysts have questioned whether U.S. Foodservice fit into Ahold since the two companies combined in 2000.

"It was a distraction that wasn't adding synergy to the larger business, which is food retail in the United States," said Bill Bishop, founder of Williard Bishop, a food and retail consultancy.

During yesterday's Webcast, several analysts questioned whether Ahold could balance reducing prices and cutting operating costs to turn a profit. Ahold tends to have higher labor costs than its competitors, in part because its workers are unionized, analysts said.

Some also said the turnaround plan sounds similar to a plan Ahold unveiled for Giant three years ago. Giant struggled under that plan, which involved a new store protoype. The newest Giant stores sell Billboard Top Ten CDs and have expanded floral departments, among other things.

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