AHOLD/DELHAIZE Exploit Complementarity

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AHOLD/DELHAIZE Exploit Complementarity

By Pan Demetrakakes - 09/01/2015

When Royal Ahold and Delhaize announced plans to mergein the early summer of 2015, it was the latest in a series of mergers and acquisitions that have changed the landscape of grocery retailing.

The merger of Holland-based Ahold and Belgium-based Delhaize, which was still awaiting approval by regulators at press time, would create the fourth-largest grocer in the U.S., with more than 2,000 stores in the U.S. and more than 6,500 stores worldwide. Technically, the deal involves Ahold acquiring Delhaize by acquiring $10.4 billion worth of Delhaize stock. The combined company would have a market capitalization of about $29.5 billion and have annual global sales of about $60.9 billion.

In terms of geography, Ahold and Delhaize are a great fit, and not just because of their origin in neighboring Benelux countries. When the merger is complete, the combined company will have U.S. geographic coverage to the extent that more than a third of the population will live within an average of 15 miles of one of their stores.

Both companies have their U.S. operations on the East Coast, but in complementary geographic areas. Ahold, whose banners include Stop & Shop and Giant, is active mostly in Pennsylvania, Connecticut and Massachusetts. Delhaize, whose banners include Food Lion and Hannaford, operates on either side of Ahold on the East Coast: Maine, eastern New York, Virginia and the Carolinas. The companies also complement each other demographically, with Ahold stores more often located in urban areas with a higher household income, while Delhaize stores tend to be in sites with a lower population density and a lower income.

The big question going forward will be how the new company makes this complementarity work. James Tenser, principal at VSN Strategies, warns: "Large-scale supermarket mergers seldom live up to their purported scale economies or market power advantages." Attention to store performance or shopper experience, he says, can take a back seat to corporate issues like aligning practices and resolving cultural differences.

Ahold Delhaize "has some strong regional brands that should continue to perform well, but others are plain vanilla with little room to sharpen prices," Tenser says. The new company's best chance to distinguish itself, he says, is to follow the lead of Kroger and allow their strongest banners–Stop & Shop, Hannaford, Giant–a certain degree of autonomy.

Ahold brings something else to the table that's important: A strong online presence. It owns Peapod, the longest-established online grocery delivery service still active.

"It is difficult to imagine Peapod losing strategic relevance post-merger," says Keith Anderson, vice president of strategy and insights for retail consultancy Profitero. "There is deep expertise and operational excellence within Peapod that could certainly be leveraged further."

Tenser agrees, calling Peapod "the little gem of the Ahold organization" and saying, "No online grocery ordering and delivery operation has longer experience in this business. Its ability to sustain loyalty among best shoppers should not be overlooked."

But that's not to say the brick-and-mortar operations are standing still. Ahold, in particular, has tapped into the urban-format trend with a new concept: Everything Fresh, a small-box store that emphasizes organic and other natural foods at lower-than-average prices. A test store of 3,000 square feet opened early this year in downtown Philadelphia. It proved so successful that Ahold reportedly is planning seven more such stores in the Philadelphia area, as well as possibly expanding to Boston and other locations.