Ahold Delhaize’s transition to a decentralized U.S. operating model over the first half of the year was a bumpy ride for its new marketing and merchandising teams and negatively affected sales volumes, officials said, particularly at Stop & Shop, its largest U.S. banner.
Those factors, along with the shift of sales related to the Easter holiday and slow market growth in the Northeast, contributed a slight decline in nonfuel comparable-store sales for the company’s U.S. brands in the fiscal second quarter.
Officials insisted, however, that the transition period is now over and that trends improved late in the second quarter, and have continued through the first five weeks of the current third quarter.
The transition to what officials call a “brand-centric” strategy was especially difficult at Stop & Shop and its sister legacy Ahold brands Giant-Carlisle and Giant-Landover, which formerly had their merchandising and marketing strategies centrally managed by Ahold USA. Volumes at legacy Delhaize brands Hannaford and Food Lion grew in the second quarter. Officials maintain the decentralized structure will ultimately lead to volume gains by getting brands closer to the consumer, allowing for local marketing and merchandising decisions.
“We should see the first half of the year as a transitionary period where volumes were lower than we would have liked,” CFO Jeff Carr said in a conference call. “We’re not trying to pretend this was a good first half of the year for the AUSA brands.”
The call early Thursday was the first to be led by new CEO Frans Muller, who officially took over last month for Dick Boer. Muller characterized the move as the start of a new phase of growth for the company as it puts the integration of the brands behind it. Much of that activity will take place at Stop & Shop, which is in the process of expanding a new program of “checkout-free” shopping and will debut a new format later this year, Muller said. More details will be revealed when Ahold Delhaize hosts its annual capital markets event in November, he said.
“In the last couple of years, together with Dick, we managed a very good integration and merger process; it was very successful for the company,” Muller said. “After two years, I think there is an opportunity for the company to take the next step and the next phase of growth. We’ll continue to drive innovation in stores and online.”
Carr noted that Northeast competitors of Stop & Shop – Wakefern Food Corp.’s ShopRite brand in particular – was able to take advantage of what was a relatively less intensive period for Stop & Shop on the promotional front. Carr estimated that ShopRite generates about 60% of its sales on promotion, vs. about 40% for Stop & Shop.
As a result, Carr said, “You really have to get it spot-on on what you put on the front of the [sales flyer] and the price points you’re at. We hadn’t hit on all cylinders in the first half of this year.”
Other competitors have had less impact, Carr said, describing a benign competitive environment in the slow-growing Northeast.
“There’s been a lot of talk about it but we haven’t seen any impact from Whole Foods,” Carr said. Lidl, which has slowed its rollout considerably from a year ago, has also not been a factor. Aldi, he said, “has done a good job but it's relatively small.”
For the period, Ahold Delhaize posted worldwide sales of about $18 billion, a 0.9% increase at constant exchange rates and an increase of 2.4% when adjusted for the effects of Easter sales falling in the first quarter of the year and for stores that were sold in the merger. That was within its expected range. Underlying operating income was up by 2.3% and income from continuing operations increased by 20%.
In the U.S., sales were about $11.6 billion, a dip of 0.3%, but they were positive by 0.3% when adjusted for the holiday and store sales. Comps excluding gas decreased by 0.1% but were positive by 1% excluding the Easter effect.
U.S. brands experienced price inflation of 1.6% in the quarter, reflecting lower promotional activity compared to last year. Underlying operating margin was up 10 basis points, driven by synergies and other cost savings, partly offset by inflation on wages and transportation, officials said.