THE LIMITS TO ORGANIC GROWTH
A tall order. But Ahold has already demonstrated a willingness to make tough decisions to achieve those goals. This has meant, among other things, abandoning a range of joint ventures. Two years ago, for example, it sold its stakes in 40 stores in China to its local joint- venture partner, Zhonghui, and in 8 stores in Singapore to Hong Kong based Cold Storage and U.K.-based Guthries. And since last April, Ahold and Jeronimo Martins of Portugal have been in discussions to decide how or whether to break up their eight-year-old joint venture in JM's home market. The Dutch and Portuguese firms also recently nixed plans to move jointly into Poland.
But if Ahold is holding back on new supermarket acquisitions, the question is: "Where can we get the biggest bang for the buck?" says Meurs. "And the answer is: investing in our existing business." As he contends, "Our platform is large enough to create a lot of opportunities to grow on an organic basis."
But organic growth is inherently slower than growth through acquisitions. According to Simon Raggett, an analyst at Williams de Broe in London, unless Ahold makes "tremendous investments" in emerging markets, it will be "fairly difficult" to produce much more than 10 percent in annual earnings growth through expansion of its existing business. Ahold has been enjoying overall EPS growth of 15 percent to 20 percent in recent years, but managed only 13.6 percent in organic growth last year.
Given the paucity of other large acquisition candidates on the eastern seaboard of the United States, and the fact that much of the western half of the country is already consolidated, Ahold may be making something of a virtue of necessity. As Raggett observes, its new emphasis on organic growth reflects "a predicament rather than a policy."
In any case, Ahold's U.S. strategy is straightforward. "We will build more and more stores under the same brands," says Meurs, citing, for example, the changeover last year of 63 Edwards stores in the New York metropolitan area to Stop & Shop, a much stronger brand in much of the rest of the Northeast. The changeover provides savings in terms of purchasing and advertising, and customer counts have improved significantly as well, according to Ernie Smith, who as CFO of Ahold's U.S. retail operations until this year (when he moved to U.S. Foodservice) oversaw the company's U.S. supermarket activities.
Nowhere will this strategy be better tested than in Asia, a notoriously difficult market for global retailers like Wal-Mart to gain a foothold. Ahold's investments in Malaysia and Indonesia have yet to turn a profit. But the company has already addressed the situation by increasing the number of stores under the Tops brand from 40 to 80 over the past 18 months. Ahold's efforts in Thailand have just moved into the black. That's a good start, says Mark Wasilewski, an analyst at ABN Amro in London. "You need a certain amount of scale," he says. "So they're in a much better position now."
With that goal completed, Ahold won't make new acquisitions in Asia for at least another year. The thinking, says Meurs, is, "Let's make sure we can make a profit before we go further."
AT YOUR SERVICE
The food-service industry is estimated to be up to $200 billion in size. It is much less consolidated than the supermarket industry, with the top two companies, Sysco Corp. and U.S. Foodservice, together holding less than 20 percent of the $160 billion restaurant business, the industry's single largest segment. Ahold contends that it is at the same stage now that the supermarket industry was 10 years ago. "I jumped over to [food service], because I was so excited about the business," says Smith.
The main reason some consider the food-service business to be a potentially risky foray is the limited number of customers. While a single food-service customer can produce an exponentially larger return than a retail customer, the loss or unprofitability of a customer entails a correspondingly higher risk. "It's an intellectually challenging business," says Meurs, noting that a single restaurant chain, for example, could represent 3 percent of total food-service sales.
Despite the risks, Meurs is convinced the strategy makes sense. Seen in terms of distribution channels or other operating issues, Meurs concedes, "it sounds like we're adding complexity, but we're not." For one thing, the company already distributes food products to its supermarkets. What's more, it has been operating in the food-service industry, albeit in limited fashion, in Europe.
Meurs's confidence is shared by analysts. Although Wasilewski of ABN Amro insists that "the downgrades weren't a surprise" given the level of risk, he applauds Ahold's move. It's a case of the "strong getting stronger," says Wasilewski, allowing Ahold to leverage its greater size to negotiate better deals with suppliers.
DISCIPLINED DIVERSIFICATION
Indeed, it's clear that Ahold will apply the same philosophy to its diversification that it applies to its expansion. In particular, Meurs insists that Ahold "won't pay a strategic premium" for any purchase. Just take a look at a recent deal in the retail food industry by Delhaize America, a Brussels-based competitor, and the reason becomes abundantly clear. Delhaize's stock fell 30 percent on the day it announced that it had paid 12.5 times earnings before interest, taxes, depreciation, and amortization (EBITDA) for Hannaford Brothers, a U.S. supermarket chain, when the company was trading at around 10 times EBITDA.
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