Retailing Industry

Food for thoughtThomas Barnwell, Victor Beliakov. Asian Business. Hong Kong:Jun 2001. Vol.37, Iss. 6, p. 66-67 (2 pp.) Abstract (Summary) Apart from recent weeks, the past 12 months have been cruel to technologystocks, especially to dotcom stocks engaged in online retailing. But whether ornot technology shares are making a real comeback or just experiencing the"dead-cat bounce," one group of stocks has enjoyed a very good year. Thecurrent valuations of the top grocery retailers are now comparable tovaluations of technology bellwethers such as Microsoft and Dell. Moreover,these valuations imply significant long-term growth at rates that seemextraordinary. Take, for example, Ahold. This retailer managed to increasesales by 56% last year to nearly US$50 billion. The Dutch grocery retailer isnow the second largest food retailer in the world after France's Carrefour. Full Text (1190 words) Copyright Far East Trade Press Ltd. Jun 2001 [Headnote] Bricks-and-mortar grocer could be a bargain buy Apart from recent weeks, the past 12 months have been cruel to technologystocks, especially to dotcom stocks engaged in online retailing. But whether ornot technology shares are making a real comeback or just experiencing the"deadcat bounce", one group of stocks has enjoyed a very good year - groceryretailers. In fact, many of these oldeconomy, "bricks-and-mortar" firms havereached lofty levels. The current valuations of the top grocery retailers, including France'sCarrefour (PIE of 43), Britain's Tesco (PIE of 24) and Holland's Royal Ahold(PlE of 27) are now comparable to valuations of technology bellwethers such asMicrosoft (PB of 39) and Dell (PIE of 32). Moreover, these valuations implysignificant long-term growth at rates that seem extraordinary. According tomanagement consultancy McKinsey, the market values of grocery retailers such asCarrefour show that current performance accounts for only one-third of theircapitalisation and investor's growth expectations for the rest. While technology analysts and the investing public expected phenomenal growthin flashy new economy firms, many boring, old grocers have grown remarkably,and have expanded their businesses in many parts of the world. Take, forexample, Ahold (NYSE: AHO). This 114-year-old Dutch retailer managed toincrease sales by 56% last year to nearly US$ 50 billion. Sales at Aholdactually rose during each of the previous five years by a total of 291%. True,acquisitions played an important role in Ahold's growth, but many tech firms,such as Cisco Systems, have been on a shopping spree as well. The Dutch grocery retailer is now the second largest food retailer in the worldafter France's Carrefour, which increased sales by 73% in 2000, to roughlyUS$60 billion. Not far behind is the United States supermarket giant Kroger,with US$49 billion in 2000 sales. But unlike Kroger and the majority of otherAmerican food retailers, Ahold and Carrefour derive the bulk of their salesfrom outside their home countries. Ahold operates about 8,500 supermarkets in25 countries, including the US, where it had more than 1,300 stores at year-end2000, and throughout several European countries, where it operates more than6,600 stores.
Ahold is unique among European grocery retailers, in that it has managed tobecome the dominant player in the US market. The US is now the largest singlemarket for the company (60% of sales), where it generates about two-thirds ofits operating profits. Ahold's US operating margins are 4.9% - very high forthe US grocery industry, which had an industry average of 1.6% in 1999. Andsales per square metre at Ahold's US stores are by far the highest in thecountry. With a total of just 80 stores in Asia, Ahold has operations in Thailand,Malaysia and Indonesia. Asia represents only 1% of the company's sales, and itis the only region where Ahold has been losing money. It had joint ventureswith supermarket chains in China (40 stores) and in Singapore (13 stores) butretreated from those markets when it realised it could not meet itsprofitability targets there. Generally, Ahold's approach to crossborder acquisitions and global operationshas been successful in other regions. The company emphasises local controls andmaximises the know-how of local managers. Normally, Ahold buys onlywellestablished local retailers and retains their names. It also relies onlocal expertise in product assortment, pricing policies and store formats. But Ahold unites its supermarkets globally by joint purchasing and deliverysystems, and standardised information systems. The result is, food suppliersrecognise Ahold as a unified global buyer, while customers still see the namesthey know well. With its experience of buying and integrating a total of 5,900 supermarketsworldwide over the past nine years, Ahold's lack of success in Asia may beexplained, in part, by the current foodretailing environment in Asia. Ahold must compete with both the popular local street stalls on the one hand,and with the established hypermarkets of its European rivals, Carrefour andTesco, on the other. In the US and other places where Ahold has bought aconcentrated market share, it is doing well. In Asia, where Ahold's presence isquite limited, economies of scale and efficiencies of operations are muchharder to achieve. The challenge now facing Ahold is to turn its Asian operations into aprofitable business, without relying on its traditional acquisition strategy.Ahold's debt level has risen significantly, because of heavy borrowing. Instead, the company has announced it will emphasise organic growth. Althoughorganic growth is inherently slower than growth through acquisition, Aholdbelieves that its business is large enough to provide opportunities to grow onan organic basis. Management has highlighted four areas for organic growth: 1)increased sales per square metre in existing stores; 2) increased gross margin;3) reduced costs; 4) improved capital efficiency. Can the organic-growth strategy succeed? The company has already proved itsability to generate higher sales per square metre than its competitors in theUS. It certainly has room for improvement in other countries. And it seems possible to increase gross margin. Ahold now claims to be thebiggest food provider in the world (in addition to food retailing, it also haslarge food service operations in the US) and it is looking to leverage thisposition. The company expects to gain the most from secondary brands and private labels.Additionally, increases in non-food sales and services will improve grossmargins. The company also believes there is significant scope to reduce coststhrough the use of technology. Ahold expects sales in 2001 to grow by 24% and net earnings by 15%. Someanalysts think the 15% target is conservative. Others argue that unless Aholdmakes sizeable investments in emerging markets, it will be difficult to producemore than 10% growth in earnings through organic growth. Ahold firmly believes the company has the right "multi" strategy -multichannel, multi-region and multi-format a strategy it is steadily pursuing.And without the hype that accompanied retailers of the "new economy", the oldDutch grocer is going online. Last year, when valuations of Peapod, astruggling web grocer, adjusted to reasonable levels, Ahold bought acontrolling stake in the internet venture and gradually adapted it to servecustomers of its grocery chains. This strategy is now showing promise: Peapodannounced an operating profit in its Chicago operation. As for the parent's own online efforts, Ahold says its internet operations inHolland have been profitable for two years, where they account for about 1% oftotal sales. Online or offline, grocery retailing remains a highly local business, whichmust be close to the customer. The recent drive for global consolidation in anindustry where low margins make it difficult to succeed even in one country,raises the question: who will lead the race as the global food retailer? We believe Ahold is one of the strongest contenders. While that does not meanyou should rush to buy shares of Ahold at current valuations, you should, likeall smart shoppers, keep an eye out for quality and a good sale price. In theend, you may find a bargain with the old Dutch grocer. Indexing (document details) Subjects: Grocery stores, Financial performance, Corporateprofiles, Strategic planning, Stockprices, International markets Classification Codes 9175, 9110, 3400, 8390, 2310, 9179 Locations: Netherlands, Asia Companies: Royal Ahold NV (NAICS: 445110 ) Author(s): Thomas Barnwell, Victor Beliakov Document types: Feature Publication title: Asian Business. Hong Kong: Jun 2001. Vol. 37, Iss. 6; pg. 66, 2 pgs Source type: Periodical ISSN: 02543729 ProQuest document 73698939ID: Text Word Count 1190 Document URL: http://proquest.umi.com/pqdweb?did=73698939&Fmt=4&clientId=66959&RQT=309&VName=PQD