May 28, 2015
Ahold’s market share gains come at a cost
While there are no current updates on the merger talks between Ahold and Delhaize, there was plenty of talk yesterday about Ahold’s first quarter earning report, which showed the company’s profits fell 0.2 percent in the first quarter even as it claimed to have achieved a slight improvement in market share.
Much lower gas prices, a brutal winter and competitive factors were all given as reasons for a 0.4 percent drop in the company’s same-store sales in the U.S.. Ahold, which includes the Giant Food chains, Martin’s Food Markets and Stop & Shop chains as well as the Peapod online grocery service, has cut prices and increased promotions to remain competitive with competitors ranging from AmazonFresh to Walmart.
Ahold CEO Dick Boer, on an earnings conference call, said the company needed to improve its pricing image with consumers. "These things are taking time," he was quoted by Reuters. "You have to win back the customer’s heart in a way."
Photo: Peapod
According to a Wall Street Journal report, operating margins on food delivery have trended downward every year since 2011. Peapod’s sales ($590 million) account for less than five percent of Ahold’s total in the U.S.
Most of the talk around Ahold of late has been about its discussions with Delhaize. While commentators in a recent RetailWire discussion were negative about a merger of the two companies, a corresponding poll was mixed. Thirty-five percent said a merger would create a somewhat or much stronger company, while 24 percent thought the combination of Ahold and Delhaize would make for a weaker business overall.
According to a Financial Times piece, analysts at Jefferies seemed convinced that Ahold will see a further decline in profit margins if it does not complete a deal with Delhaize.
- Ahold earnings miss forecasts as margins take a hit – Reuters
- Ahold Emptying Till To Defend Market Share – The Wall Street Journal (sub. required)
- Ahold earnings hits by US price war with Walmart – Financial Times (tiered sub.)
- Would an Ahold/Delhaize merger create a stronger grocery company? – RetailWire
BrainTrust
Recent Discussions
Discussion Questions
Is Ahold on the right path with its current strategy for gaining market share? Do you think a merger with Delhaize is the answer to reversing declining profit margins at Ahold?
Poll
A lower-price image is certainly not earned overnight. My experience tells me that lowering prices, even on popular items, is often seen initially as a gimmick from longstanding shoppers who will look for prices to go up on other items or for promotions to weaken to offset the investment.
If Ahold’s research tells them they are more than 10 percent higher than the price leader in their markets, they have work to do. Most retailers don’t have the financial fortitude to stay the course with lower prices and margins long enough to see the sales and customer count benefits. They do not happen immediately.
As far as merging with Delhaize, any time you have a chance to re-invent yourself as such a merger could yield, you do have an opportunity to make another “first impression.” However, if the two companies combine forces only to reap the harvest of the cost-side savings and don’t plan to reinvest in price, promotion and amenities, any profit gains will be very short lived.
Raking in cash and customers to improve profits and market share by way of merger and acquisition is a very old-fashioned finance decision that will in no way solve the business’s management problems that dominate the corporate failure to grow. Demonstrating the company’s mismanagement is seen in discovery and announcements identifying the weather or the economy as the reasons behind sliding efforts. What will come of this merger is large layoffs and in 24 to 36 months the continuing loss of business. Change is very much needed for the company. The change needed is in the hands of ownership and not leadership.
Pricing and promotion as tactics in the grocery channel only work if customer count and related purchases increase as a result. This is very difficult in today’s environment with the wide assortment of competitive formats and a pricing monster in the space. Ahold must combine the latest approach with improved perishables and better customer service to increase profits.
The potential merger with Delhaize could, over time, result in efficiency increases in backroom operations but the need to market locally can be more problematic, as many past mergers or acquisitions have proved.
It appears to me the plan is for survival. Both Ahold and Delhaize are old school plain vanilla middle-of-the-road conventional stores. There are a few exceptions but for the most part stores at both companies perform well below market average in sales per square foot. They are getting murdered by the extreme operators like Wegmans, Walmart, Whole Foods and Trader Joe’s. Ahold was crushed and forced to sell off Tops and Bi-Lo. Delhaize was slapped out of Florida and forced to close stores by the bushel like Bloom, Sweet Bay and Bottom Dollar. These failing companies need to merge in order to survive, similar to Albertsons and Safeway. Maybe they will get a little bonus when the SEC says they need to sell off a few stores. Perhaps find a patsy like Haggen to buy the “don’t wanters.”
The only way the Delhaize merger works is if they unify a strategy and execute it via an integrated retail marketing approach leveraging their individual marketplace scale!
They should be able to wrangle a little better pricing out of suppliers if they merge, but I would consider coming up with a new banner, reformatting the stores, and focusing on fresh, customer service, and in-store experience. They need to be competitive on price but they cannot win the low price battle.
I’m scratching my head wondering how lower gas prices contribute to lower same-store sales. When gas prices are high, they are seen as an impediment to economic growth due to bite they take from consumer pockets.
Lower gas prices would seem to be a stimulant to consumer spending, but much of what I’ve read in the press seems to conclude just the opposite.
The mention early in this article caught my attention and was almost more interesting to me than speculating about the impact of the potential merger.
But, on the question, IMHO I think Ahold has room to gain ground by fixing some of its own issues and the path to success through internal improvements is much less complex than a blockbuster merger between two large competitors.
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A lower-price image is certainly not earned overnight. My experience tells me that lowering prices, even on popular items, is often seen initially as a gimmick from longstanding shoppers who will look for prices to go up on other items or for promotions to weaken to offset the investment.
If Ahold’s research tells them they are more than 10 percent higher than the price leader in their markets, they have work to do. Most retailers don’t have the financial fortitude to stay the course with lower prices and margins long enough to see the sales and customer count benefits. They do not happen immediately.
As far as merging with Delhaize, any time you have a chance to re-invent yourself as such a merger could yield, you do have an opportunity to make another “first impression.” However, if the two companies combine forces only to reap the harvest of the cost-side savings and don’t plan to reinvest in price, promotion and amenities, any profit gains will be very short lived.
Raking in cash and customers to improve profits and market share by way of merger and acquisition is a very old-fashioned finance decision that will in no way solve the business’s management problems that dominate the corporate failure to grow. Demonstrating the company’s mismanagement is seen in discovery and announcements identifying the weather or the economy as the reasons behind sliding efforts. What will come of this merger is large layoffs and in 24 to 36 months the continuing loss of business. Change is very much needed for the company. The change needed is in the hands of ownership and not leadership.
Pricing and promotion as tactics in the grocery channel only work if customer count and related purchases increase as a result. This is very difficult in today’s environment with the wide assortment of competitive formats and a pricing monster in the space. Ahold must combine the latest approach with improved perishables and better customer service to increase profits.
The potential merger with Delhaize could, over time, result in efficiency increases in backroom operations but the need to market locally can be more problematic, as many past mergers or acquisitions have proved.
It appears to me the plan is for survival. Both Ahold and Delhaize are old school plain vanilla middle-of-the-road conventional stores. There are a few exceptions but for the most part stores at both companies perform well below market average in sales per square foot. They are getting murdered by the extreme operators like Wegmans, Walmart, Whole Foods and Trader Joe’s. Ahold was crushed and forced to sell off Tops and Bi-Lo. Delhaize was slapped out of Florida and forced to close stores by the bushel like Bloom, Sweet Bay and Bottom Dollar. These failing companies need to merge in order to survive, similar to Albertsons and Safeway. Maybe they will get a little bonus when the SEC says they need to sell off a few stores. Perhaps find a patsy like Haggen to buy the “don’t wanters.”
The only way the Delhaize merger works is if they unify a strategy and execute it via an integrated retail marketing approach leveraging their individual marketplace scale!
They should be able to wrangle a little better pricing out of suppliers if they merge, but I would consider coming up with a new banner, reformatting the stores, and focusing on fresh, customer service, and in-store experience. They need to be competitive on price but they cannot win the low price battle.
I’m scratching my head wondering how lower gas prices contribute to lower same-store sales. When gas prices are high, they are seen as an impediment to economic growth due to bite they take from consumer pockets.
Lower gas prices would seem to be a stimulant to consumer spending, but much of what I’ve read in the press seems to conclude just the opposite.
The mention early in this article caught my attention and was almost more interesting to me than speculating about the impact of the potential merger.
But, on the question, IMHO I think Ahold has room to gain ground by fixing some of its own issues and the path to success through internal improvements is much less complex than a blockbuster merger between two large competitors.