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After years of empire building, Ahold learns the importance of focus.
Jason Karaian, CFO Europe Magazine
June 2, 2008
"We sell tomatoes. Let's keep it simple," is what Kimberly Ross often reminds colleagues at Ahold's office in Amsterdam. In 2001, she joined a sprawling, debt-laden global network of supermarket chains "with an uncanny ability to make things very complicated," the CFO recalls. The complications grew exponentially in 2003, when an accounting scandal brought the company to the brink of bankruptcy. Today, the €28 billion retailer is back on track — and, in many ways, thriving — thanks to major restructuring and rationalisation. Now operating mainly in the Netherlands and the northeast US, the company generates half the sales it did five years ago, but twice the profits. (See charts at the end of this article.) For a study in how to do more with less, there are few better examples.
Keeping the Boat Afloat
Reminiscing about how Ahold went from an acquisitive high-flyer to a scandal-ridden basket case to a lean, cash-making machine within a matter of years, Ross notes how rare it is for a finance executive to experience the "full cycle" at such a large company. When the 43-year-old American arrived at Ahold as assistant treasurer, the company was obsessed with continuous double-digit growth in earnings per share. She was charged with bolstering the treasury function to keep up with the rapid expansion across four continents. But as cracks in Ahold's business model began to emerge, "it went from trying to set up something for future growth to implosion," she says. Her priorities shifted quickly from coping with growth to "just keeping the boat afloat."
A new management team, featuring former Ikea CEO Anders Moberg and CFO Hannu Ryöppönen, steadied the boat, launching a top-to-bottom review of the company's portfolio. A raft of divestments, layoffs and asset sales followed. (See "Retail Therapy," April 2005.) Now Ross, promoted from chief treasury and tax officer to CFO last year, and John Rishton, who recently moved from CFO to the CEO's office, continue to pare the company's portfolio. Divestments last year — including the sale of wholesaler US Foodservice, where much of the accounting fraud was found — brought in €5.4 billion.
Shuffling the brands in Ahold's basket is now more a strategic, than desperate, exercise, Ross says. Consider the sale in April of Ahold's 73% stake in Schuitema, the second-largest food retailer in the Netherlands in terms of market share. (Ahold's Albert Heijn, with around 30% market share, is more than twice as large.) As part of the agreement with private equity house CVC, Ahold received €185m in cash and full control of 58 of Schuitema's 440 stores — worth around 2% of Dutch market share — which it will rebrand under its Albert Heijn brand. The "prune and grow" approach, as Ross explains, will guide Ahold over the next few years as it pursues small acquisitions while mainly focusing on organic growth.
Underpinned by the strength of Albert Heijn, Ahold as a group reached a number of milestones last year. These included regaining an investment-grade credit rating; paying a dividend for the first time in five years; cutting net debt by 70% over three years; and building up a €3.3 billion cash pile while managing to return €4 billion to shareholders through a reverse stock split and share buyback. Ahold's shares have outperformed the Dow Jones Stoxx Retail Index over the past year and a half, rising around 20% compared with the index's 20% drop. "We are delivering what we committed to the market," Ross says. "That makes life a lot easier."
But there is still work to do. In addition to significant investments to revamp stores across its transatlantic portfolio, Ahold pledged in 2006 to cut costs at its corporate centre by 50% by the end of this year and slash overall operating costs by €500m by the end of 2009. For Ross, the key to achieving these savings is "focus," a word she uses often and in a wide range of contexts, to explain the company's direction.
The corporate-centre shakeout is ahead of schedule, with costs falling from €189m in 2005 to €106m last year. Given that the bulk of the savings come from the functions under Ross's control, she is particularly pleased with the progress.
Ahold's accounting scandal, the switch to IFRS and compliance with Sarbanes-Oxley — because of a secondary listing in New York — all helped to increase staff numbers at its headquarters, as well as its audit, legal and consultancy bills. In pruning mode, Ross has trimmed group-level headcount, streamlined processes and introduced new ways of working that, she hopes, will prevent the bloat from returning.
Delisting from New York last year will save compliance costs and reduce complexity, while divestments have already narrowed the scope of Ahold's audit — the company spent €20m on audit and related fees in 2005, but only €8m last year. What's more, notes Ross, "we showed every consultant the door." In addition to "reducing the number of PowerPoint slides significantly," she jokes, "we are pushing the organisation from being data-driven to information-driven." Too often, she recalls, "you would ask a question and get a pile of data in return to sift through to find the answer." Now, Ross and other senior executives are "big fans of the one-pager" for project proposals and the like, she says. "It eliminates a lot of work and simplifies things. It forces people to focus on the point they're trying to make."
It also represents an important cultural shift at the company. With fewer staff, the CFO says, it is critical for those that remain to be able to summarise, synthesise and act on information quickly. To bolster the skills of its finance staff, for example, the company now sends employees from the operating companies on two or three week secondments in Amsterdam and other group locations to participate in quarterly and annual closing cycles, attend audit committee meetings, analyst calls and investor meetings. This is doubly beneficial, as the head office gets additional support during busy periods, while the teams from the field gain a better understanding of the key issues for the group as a whole. In a similar vein, group-level staff are also sent on short assignments to assist with projects at the operating companies. "The lines of communication between the centre and the operations are much more open than before," Ross says.
A visit to any Albert Heijn store shows that it's not just the head office that's changed. Often neglected during Ahold's empire-building days, Albert Heijn has been the biggest beneficiary of the company's new orientation.
At the cavernous Albert Heijn XL in Osdorp, on the western fringe of Amsterdam, manager Cantor Barten discusses how the store is now selling more high-margin fresh produce, readymade meals and own-label products. The latter category, for example, grew by 35% across the chain's stores last year. As lunch approaches, a chef at the "Grill & Steak" station prepares a demonstration at a counter that resembles a TV cooking show. The smells waft through the shop, enticing shoppers to pick up the individually wrapped cuts of meat, condiments and vegetables strategically stationed nearby. To pay for their purchases, around 40% of these customers use self-scan checkout lanes, which need only one person to supervise every five machines, Barten adds.
Meanwhile, on the Damrak, in the centre of the Dutch capital, an AH To Go is doing brisk business among the throng of locals and tourists. As small as 40 square metres — the largest XL store is as much as 4,000 square metres — these convenience stores are "easy to open and to manage," notes Ross. There's another reason why Ahold is accelerating the rollout of the format, according to Dick Boer, COO of Ahold's European unit: these stores "can ask for a bottle of water at €1.50 instead of 17 cents" at a traditional supermarket.
Finally, in IJburg, an affluent neighbourhood on recently reclaimed land east of the city, Edwin van de Nadort, an 18-year Albert Heijn veteran, praises the new, highly automated supply chain system, which allows him to spend more time on the shop floor with customers rather than in the stockroom, manually monitoring and replenishing inventories. According to Chris Dik, CFO of Ahold's European unit, the new order and replenishment system is saving the chain €42m a year.
With profits, sales and margins at the chain all falling as recently as 2003, Albert Heijn is now reaping the rewards of its repositioning. Last year, operating income grew 40%, on a 12% rise in sales. The business is "clearly flying," says Fernand de Boer, senior equity analyst at Petercam in Amsterdam. The ascent is continuing this year, with identical-store sales — a key indicator of organic growth — up 11% in the first quarter, compared with 9% over the same period last year.
Though most retail observers applaud Ahold for the deft turnaround of its Dutch business, some, like Richard Withagen, an analyst at SNS Securities in Amsterdam, note that a lack of meaningful competition also helped. When Albert Heijn tried to jumpstart sales by launching a price war in 2003 the number-two player was Laurus, with 20% market share. With its own problems of over-expansion and outdated stores, Laurus struggled to respond to the price cuts, leaving it a shadow of its former self today. For its part, Schuitema — despite Ahold's majority control — also struggled with sluggish sales and low profits. While CVC, the buyer of Ahold's controlling stake in Schuitema, is "not stupid," in the words of Petercam's de Boer, he is nonetheless "puzzled" by the structure of the deal, given the amount of work necessary to turn around the chain. As its weaker competition regroups, "there are hardly any clouds on the horizon" for Albert Heijn, he concludes.
Across the Pond
Can Ahold replicate its Dutch success in the US? To address slumping identical-store sales growth, Ahold launched a programme in 2006 called VIP — short for Value Improvement Programme — for its 600 Stop & Shop and Giant-Landover stores, essentially applying the same formula that worked for Albert Heijn: price cuts accompanied by a focus on produce, readymade meals and own-label products. Around 70% of the programme was complete at the end of 2007, according to Ahold's US COO Lawrence Benjamin. For example, the chain analysed the sales-and-profit prospects for some 35,000 of the products sold in its stores, discontinuing 25% of them in order to streamline the supply chain and help make shopping less overwhelming for customers.
Identical-store sales at Stop & Shop recently began to eke out small gains, though sales continue to fall at Giant-Landover, shrinking 1.1% in 2007. While Ross claims that the company's projects tend to have a three-year lag time — suggesting that, as at Albert Heijn, the full benefits of VIP have yet to come to fruition — not everyone agrees. De Boer of Petercam points out that in the US, "there are some big national and strong local competitors, reacting all the time to what Ahold is doing." Wal-Mart, for example, is unlikely to fold as quickly as Ahold's Dutch rivals did in the face of price competition. Around Giant-Landover's base in the Baltimore and Washington, DC areas, says de Boer, "competitors smelled blood and opened a lot of stores." Unprecedented food inflation will also work against Ahold's price-led American initiatives.
For these reasons the US, where so many of the problems that nearly bankrupted Ahold first surfaced, remains the sternest test for the company's leadership. If VIP delivers, "the underlying value of the assets is huge," notes de Boer. "In my view, the shares are undervalued, and the feedback I get is that Ahold is the most consensus 'buy' in the sector." Indeed, most analysts' price targets for Ahold's shares — trading between €9.50 and €10 throughout May — are above €11, with a recent note from Lehman Brothers stating that analysts at the bank "see long-term value beyond €12."
Back to Normal
For Ross, who has been restructuring, reshuffling and repositioning for nearly all of the seven years she has been at Ahold, "We're not where we want to be yet, but making good progress."
Should that progress include a successful turnaround of Ahold's US stores, the company will earn a place in consulting and business-school lore about the value of focus, or how to pursue smart, sustainable growth instead of a reckless, scattershot expansion at all costs.
Ross believes signs are emerging that this shift is taking hold. In the aftermath of the scandal, she and others got used to fielding calls about minor adjustments in the days before earnings presentations — including a frantic call once about an $18 adjustment. Late-night calls often required attention, leading to working through until the morning. In March, when her mobile buzzed past midnight on the night before the earnings release, she read the text with the usual trepidation. She needn't have worried. It was only from a colleague wishing her well for her first annual-results presentation as CFO.
Jason Karaian is deputy editor at CFO Europe.
Eye to Eye
As more finance chiefs make the leap to chief executive, will it affect the traditional CEO-CFO relationship?
Not as much as many think, according to Kimberly Ross, who was promoted from head of treasury and tax to CFO at Ahold last year after her predecessor, John Rishton, became CEO at the Dutch retailer. "Being CEO is a full-time job," she says. "He is not meddling in my daily activities."
What's more, she and Rishton come from "different angles of finance," she says. Her treasury background emphasised M&A, tax and capital structure issues, while Rishton, CFO of British Airways for four years before joining Ahold in 2006, rose to CFO after a career in finance that was more focused on operations. That she and the CEO "speak the same language" comes as no surprise, but they do "bang heads from time to time," Ross adds. "As all CFOs and CEOs do."
Outside the company, the finance-focused duo get the thumbs up. "I was impressed with John Rishton as CFO, and Kimberly Ross is doing more or less the same thing," says Richard Withagen, an analyst at SNS Securities in Amsterdam. "What's especially appealing is their focus on cash flow." With more than €1 billion in capital expenditure planned for this year, Withagen believes that "the way Rishton and Ross are acting, this will not be money thrown away."