Royal Ambition

With supermarkets on four continents, Royal Ahold offers lessons in cross-border acquisitions.
Ronald FinkApril 1, 2001

Royal Ahold isn’t exactly a household name, at least outside the Netherlands. But the Dutch food retailer, operating some 8,500 stores on its own or through joint ventures in 24 countries, happens to be a tough competitor in an industry whose low margins make it difficult to succeed even in one country.

Until 1999, the company had grown rapidly by acquiring super-markets in Europe, Asia, Latin America, and the United States, which delivers almost two-thirds of its operating profits. It picked up the giant Stop & Shop

chain in March 1996, making it the fifth-largest supermarket company here. Then the Federal Trade Commission blocked the company’s acquisition of the Pathmark chain in 1999, raising serious questions about Ahold’s ability to continue buying supermarkets in the United States. The company quickly shifted gears. Soon thereafter, it announced plans to diversify into the wholesale food-service industry, which provides services for restaurants, hotels, hospitals, and the like. It acquired U.S. Foodservice for $3.6 billion last winter and PYA/Monarch for $1.6 billion a few months later.

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Initially at least, investors were skeptical. The credit agencies, unhappy because Ahold had borrowed heavily to finance the PYA/Monarch deal, cut Ahold’s debt ratings two notches, to barely investment grade. But for Ahold’s executives, the virtues of its new food-service strategy are abundantly clear. “Everyone in this building is convinced that we have reduced [our exposure to the cyclicality of retail consumer demand],” says CFO Michiel Meurs, in an interview at the company’s headquarters near Amsterdam.

Fortunately for Ahold, it wasn’t long before equity investors began to warm to the move, helping the stock rebound sharply in the months following the deals.

But the jury is still out. If Ahold can’t grow rapidly without increasing its debt load, it may find itself in that awkward middle ground, needing to buy or be bought.


Ahold’s experience is particularly instructive given that it is, of course, not the only company facing a more-challenging global environment. Some companies are retrenching. Others are retooling their business models. Still others are abandoning global initiatives entirely. Whatever the response, it’s clear that CFOs have reason to rethink the strategies that worked so well just a few years, or even months, ago.

In Meurs’s case, rethinking global strategy will take all of his traditional prudence and discipline. For one thing, he needs to help Ahold prove it can do as well in food service in the United States as it has in retailing. He must also find a way to improve the company’s operations in Asia, the only region where it has been losing money. Finally, Meurs’s finance team needs to reduce Ahold’s debt level.

And along the way, admits Meurs, he must also demonstrate that Ahold’s actions remain directly aligned with its most important constituency: the customer. For companies with global ambitions, this has proved difficult. Witness the recent woes of such giants as DaimlerChrysler, Wal-Mart, and Enron.

To understand Ahold’s ability to focus on its customers, it’s important to look back at the company’s disciplined approach to acquiring supermarkets and integrating them, a strategy it has honed over the years. Indeed, Ahold’s acquisition strategy began long before Meurs’s arrival as vice president of finance in 1992 (he became CFO in 1997), after a 16-year career with Dutch bank ABN Amro. Ahold’s cross- border ambitions took off in 1977 when it acquired Bi-Lo, a South Carolina­based chain. Since then, the E34 billion (around $31 billion) Dutch firm has never looked back. But it wasn’t until then­board member Cees van der Hoeven’s appointment as CEO in 1992 that Ahold’s global business really accelerated.

Its approach to global operations emphasizes local controls. With all its acquisitions in foreign markets, Ahold makes sure it maximizes the know-how of local management, relying on local managers to determine their own product assortment, pricing policies, and store formats, while also having them take responsibility for human resources and real estate. On a global basis, meanwhile, its supermarkets jointly procure, source, and deliver products, and work from standardized IT networks.

Today, the firm derives less than a third of its sales and operating profits from Europe–primarily from the Netherlands, Scandinavia, and Spain–and can count itself among the top five food-retail firms in the world. Granted, it’s still dwarfed by the likes of America’s Wal-Mart and France’s Carrefour, the number one and number two retailers in the world, respectively, but what it lacks in relative size it makes up for in agility. “They don’t take a cookie-cutter approach,” says Ira Kalish, a retail industry consultant with PricewaterhouseCoopers in Los Angeles. And while to date Ahold has managed to avoid direct competition with such hypermarket companies in its key areas, it’s gaining experience in that sector in Eastern Europe.

To ensure that Ahold remains among the global retail giants, Meurs and his colleagues are ready to take the company in a new direction, focusing on two important areas. The first is organic growth. After buying a total of 5,900 supermarkets worldwide over the past nine years, Ahold now wants to hold off on making any new purchases in Asia, and will slow down new purchases in the United States. Second, of course, is Ahold’s move into the food-service industry so that the company can, as Meurs puts it, “follow whatever our customers do.” So investors can expect Ahold to do more deals like U.S. Foodservice and PYA/Monarch.


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.”


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.


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.

Such a move would have been unthinkable at Ahold, insists Meurs. “A shareholder never has to worry about being diluted in an Ahold acquisition,” he sniffs. And given Ahold’s parsimonious approach to acquisitions, it’s no surprise that analysts believe him. “Ahold’s acquisition record is second to none in the industry,” says David Shriver, an analyst at Credit Suisse First Boston in London.

In this respect, “we need to be very precise in our assumptions for years one, two, and three,” says Meurs. And, he adds, “We err on the side of caution.” Further out, the company is even more cautious. But, he notes, “it’s not a black-and-white process.”

In fact, the company doesn’t have merger-and-acquisition teams scouring the landscape for targets. As Meurs puts it, “We don’t want to buy companies that are for sale. We want to buy what we want to buy.” To that end, the board committee responsible for acquisitions, on which Meurs and van der Hoeven sit, maintains what Meurs calls a list of companies that it considers “best of breed” based on six criteria. He notes that while the list is subject to change, several companies Ahold has acquired, including Giant Food and Stop & Shop, were on it for years before the deals were done.

Ahold’s approach to making acquisitions has earned it much praise among investors, but recently the company’s rising debt level has come into question. Meurs downplays the significance of the downgrades. “Alan Greenspan has a much bigger effect on our cost of capital than the ratings agencies do,” he asserts.

Granted, the spreads on a seven-year note Ahold issued in May 2000, which tend to be wider than those on comparable debt issues by its peers, recently narrowed, from 240 basis points over similar Treasury debt to about 180 basis points. However, Ahold can expect higher interest payments on any new debt it takes on.

To help address this issue, Meurs has been beefing up its investor- relations efforts with fixed-income investors, particularly in Japan, where the extremely low interest-rate environment offers Ahold opportunities to reduce its cost of capital. Two years ago, for instance, no bond analysts attended Ahold’s annual investor conference in New York. Thanks to its courting of that group since then, Ahold managed to attract a handful to its most recent meeting in March.

“We’re making an extra effort” in the bond markets, says Meurs, “because we’re absolutely convinced that full, reliable information will help” sell Ahold’s bonds at the lowest possible cost.


To be sure, exposure to the yen would introduce Ahold to currency risk, which, analysts say, the company has done a very good job avoiding thus far. But Meurs responds that Ahold would hedge any exposure to the yen.

Meanwhile, Meurs says he wants to improve Ahold’s interest coverage ratio of EBIT to net interest. Now at around 3.15 times, he would like to see it closer to the 3.9 level at which it stood at the end of 1999. Meurs says he plans to do that by returning to Ahold’s traditional mix of 50 percent debt and 50 percent equity to finance new acquisitions, a practice it departed from in the PYA/Monarch deal.

The challenges facing Ahold help explain recent speculation that the company needs to either make a blockbuster acquisition or sell itself to an even bigger player. Meurs dismisses any immediate need for the former, and says the latter is unlikely, simply because only Wal-Mart is in a strong enough financial position to afford Ahold. What’s more, Wal-Mart and Ahold are a poor fit in terms of business model, and antitrust regulators would be sure to bristle at the mention of such a move. Given Meurs’s observation about the need for a financially muscular suitor, however, investors can be assured of one thing: they can safely count on him to demand a sizable premium should a serious suitor appear on Ahold’s doorstep.

Ronald Fink a deputy editor at CFO.


Royal Ahold clearly has not played its best hand in Asia. Granted, the region represents only 1 percent of its annual revenue. Yet its efforts in the region are significant, because they demonstrate Ahold’s difficulty in moving beyond its traditional model of buying large, established supermarket chains.

It had 40 stores in China, amounting to a mere 1 percent of the nation’s supermarket business. “It would have taken us more than five years to reach break-even, which was too long from our perspective,” says Eppo Boot, the Bangkok-based CFO of CRC Tops (a wholly owned subsidiary of Ahold). In Singapore, Ahold’s 13 stores neared break- even, but it discovered that the market was too small to allow for profitable expansion. At the moment, new acquisitions in Asia are on hold, and the company recently jettisoned its joint ventures with supermarket chains in China and Singapore. Last year, the company also discontinued the post of regional CFO, which was based in Singapore.

A major reason for Ahold’s disappointment is the nature of the competition in the Asian retail foods market. On the one hand, there are Asia’s highly popular “wet markets”–local street stalls that Boot refers to as “unorganized competition.” On the other hand, there are hypermarkets developed by Ahold’s competitors, Carrefour and Casino, both based in France, and Tesco of the United Kingdom. These megastores have been a hit with consumers, offering them a one-stop shopping experience that lets them buy everything from televisions to bananas, all within one air-conditioned store, while providing Tesco and the like with greater economies of scale than Ahold’s food-store chains.

With the benefit of hindsight, Ahold CFO Michiel Meurs concedes that it might have been better to devote capital to building hypermarkets. Still, Boot insists Ahold’s fortunes in Asia are changing. “We’ve made a lot of progress,” he asserts. “Sales are up, gross margin is up, and expenses are under control. More customers are in the store every week.” — Tom Leander


To make it onto Ahold’s list of desirable acquisition candidates, a company must meet each of the following six criteria:

  1. It must be either No. 1 or 2 in regional market share, or have the potential to become No. 1.
  2. It must have an excellent customer reputation, as reflected in focus groups.
  3. Management must be very qualified and willing to work for Ahold.
  4. The company must be profitable and have the potential to increase profits.
  5. It must offer potential synergies.
  6. Its marketing must emphasize food quality, nutrition, and safety.

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