Ahold stronger, Delhaize under pressure
The new partners emphasize innovation, but another important advantage for both is that they will obtain a stronger negotiation position in purchasing. This is of primordial importance for both Delhaize and Ahold, especially in their most important market: the United States.
Ahold will provide the new CEO, Dick Boer, while Delhaize CEO Frans Muller will become the Deputy CEO and Chief Integration Officer to guide the integration of both companies. Ahold will get 61 % of shares, while Delhaize will get 39 % – which reflects Ahold’s stronger current stock exchange position, at twice Delhaize’s value.
These areas do seem to reflect a merger among equals, but the starting point of the merger talks was not exactly a position of equality. Apparently, Delhaize was the first to engage in renewed talks with Ahold as previous talks, in 2006, fell through in the end.
Ahold only became stronger since then, while Delhaize experienced intensified competition in its Belgian home market and was even forced to reorganize. That is also why Rabobank mentioned, in a July report, that a merger would be beneficial for both, but that Delhaize would stand to benefit most.
Ahold USA for urban areas, Food Lion for rural areas
One of Delhaize’s strong points is its position in the United States. According to American analysts in a recent edition of Het Financieele Dagblad, Delhaize USA has a lower cost structure and a more efficient logistics operation, which it controls itself, while Ahold depends on a logistics service supplier. Ahold USA could benefit from Delhaize’s logistics capabilities, although both store networks barely have a geographical overlap on America’s East Coast.
Ahold USA is mostly active in urban areas, where income is higher. While it has fewer stores than Delhaize in the United States, they are more profitable on average. Delhaize USA’s Food Lion chain is mostly active in rural areas, where customers have a lower income. As both chains have little geographical overlap, both in the United States and in Europe, these areas won’t necessarily need to be integrated after the merger.
Exchange store formulas
That means that Ahold-Delhaize can focus on stores that require change, with the added advantage that the merger company has more options to remodel stores. Rabobank feels this opens a lot of opportunities: underperforming Stop & Shop stores (part of Ahold USA) could be transformed into Hannaford stores (parf of Delhaize), which the bank says has a higher growth rate and has higher profitability than Stop & Shop. Weaker Food Lion stores, with plenty of floor space, can also be turned into a “every day low price” Gaint/Martins store, which Rabobank deems to be successful.
“The combination has plenty of potential in areas like New England, as Stop & Shop has the volume that Hannaford lacks, while Hannaford has the expertise in fresh food that Stop & Shop hasn’t”, Jon Springer (retail editor for American Supermarket News magazine) said. “Giant-Landover could benefit from specific Food Lion locations if it decides to move to Washington DC or Virginia, areas that Kroger/Harris Teeter has also earmarked as growth markets.”
Harris-Teeter is a strong regional retailer that Ahold wanted to acquire several years ago, but unfortunately for Ahold (and Delhaize), American Kroger bought the company from right under its nose. The result is that Kroger/Harris Teeter is now a strong competitor for both Giant and Lion Food as the American market consolidated even more over the past few years. Alberton’s acquired Shaw’s, Acme and Safeway, which has also forced Ahold and Delhaize to combine their American efforts to increase their appeal and lower prices and improve discounts.
“AH buys 10 % more cheaply than Delhaize”
The new combination, Ahold-Delhaize, can also benefit from store formula exchange in Europe, with possibly an increased organic growth for Albert Heijn in Belgium. Where Delhaize may struggle, Albert Heijn may thrive. Albert Heijn has an attractive price image in Belgium, because it has better purchasing deals, which means that it can fight off Colruyt and even Lidl in competitive markets.
Albert Heijn even has a remedy for Delhaize Belgium’s recovery, namely to obtain better purchasing conditions. According to Rabobank, Albert Heijn buys 10 % cheaper than Delhaize and if the Belgian retailer can drop the difference to 7 or 8 %, it could stand to gain 120 million euro and even double its EBIT.
Synergy in IT, private labels and online
When it comes to its private labels, both retailers can cut considerable costs, according to Rabobank. Combined, they sell 21 billion euros’ worth of private label products on a yearly basis and synergy in this regard would be have a double advantage: aligning product ranges would increase quality, while it would also result in lower purchasing prices.
There are many other options for the newly-formed company to cut costs thanks to increased synergy: IT, discounts and marketing, logistics and not in the least in its online branch. Ahold is undoubtedly one of the world’s best when it comes to building an efficient online supply chain, a necessity especially because of the increased competition in the United States from non-traditional retailers like Instacart and Amazon.
Ahold already has a fully automated e-fulfilment center in New Jersey, designed to quickly, efficiently and cheaply pick and send online orders. Delhaize could benefit from this type of online know-how once the merger is complete. On the other hand, Ahold could take advantage of Delhaize’s knowledge in convenience retail. Those two areas, convenience retail and online, are the two growth areas for supermarket retailers in a saturated market where they have to compete with fast-growing discounters.
Those discounters are the new force to which Ahold-Delhaize will have to react, both in the US and in Europe where it will become the fifth and fourth largest group respectively. Aside from all other possible synergies between Ahold and Delhaize, it is on a discounter-level they will have to fight if they wish to survive and continue experiencing growth.
