The launch of Delhaize’s “new game plan” has been widely welcomed by the market and the Belgium-based retailer’s share price has responded accordingly. The plan aims to drive sales growth by investing in pricing and expanding in new markets and low-cost formats, a strategy that is to be funded through the company’s ambitious cost cutting programme. Katy Humphries reports.
Addressing analysts in Athens today (3 December), Delhaize chief executive Pierre-Oliver Beckers (pictured) unveiled the company’s “new game plan”, which has been formulated to drive future sales and profit growth.
The three-pronged approach focuses on cost-cutting efforts, speeding up expansion in new markets and formats, as well as increased investment in lowering prices.
Last month, Delhaize posted strong third-quarter earnings growth and raised its full-year outlook. However, top-line growth at the company’s US business – which generates about 70% of sales – has been sluggish.
In the US, like-for-like sales in the July-September quarter were dented by food deflation and lower consumer spending, decreasing by 1.3%. By contrast, in Belgium, same-store sales were up 4.6%, the company revealed.
“We have been able to produce quite resilient numbers…. Quarter after quarter we have improved our volume growth,” Beckers said.
However, he added: “The numbers by any means have not been the best and the highest we have seen in the food retail industry. Our top-line growth numbers have not been as buoyant as some of our best-in-class competitors and we believe that is something we need and should address.”
Indeed, analysts at KBC Securities agree that Delhaize should focus on improving its top-line performance.
“We welcome the new game plan that aims to accelerate top-line growth,” KBC analysts wrote in a note today. “Delhaize’s margins are already at a satisfactory level but some of its peers perform better in terms of top line growth.”
Until now, Delhaize has followed a strategy that has focused on its supermarket format, particularly in the US, where it has looked to strengthen its brand and develop its own-label lines.
“We think that this has helped us reach leading positions within most of our markets,” Beckers insisted today.
However, Delhaize admitted in November that own-label growth has slowed as branded competitors increased their promotional activity.
And while Delhaize has – like many of its peers – already invested in lowering prices in order to woo consumers during the economic downturn, the group revealed that it plans to step-up these efforts.
Delhaize said that each of its banners is planning a new and “more aggressive” pricing strategy, that will kick in next month. The company will benchmark itself against the leading price competitor with the aim of narrowing the pricing gap.
The company is also increasing its focus on its discount formats – Bottom Dollar Food in the US and Red Market in Europe.
Delhaize launched its Red Market format in the back-half of this year in Belgium and, the company claims, the pilot has met with “incredible success”.
“We are extremely happy with the sales performance [at Red Market] and this is a key driver with our decision to speed the roll-out of the format,” a spokesperson for the group told just-food.
According to Barclays Capital analysts James Anstead and Amy Crofton, the increased focus on these discount formats could be bad news for Delhaize’s competitors.
“This Red Market format is a discount supermarket model that even Colruyt admitted was very impressive, focusing on high convenience (with long opening hours and entirely self-scanning stores) and low price, both of which play directly into current consumer trends,” they said.
Additionally, Delhaize said that it would triple its expansion efforts in the “high growth” markets of Greece, Romania and Indonesia.
Anstead and Crofton insisted that, despite a potential down-side in terms of free cash flow yield, the increased rate of store openings was “good news” that should go some way to “pep up its historically fairly low sales growth”.
The group also said that it hoped to fuel expansion through bolt-on acquisitions, such as its recently completed acquisition of 11 stores and a distribution centre operated under the Koryfi banner in Greece.
Beckers revealed that Delhaize remained hopeful that it would successfully complete the proposed acquisition of bankrupt Bi-Lo ‘s assets in the US, having made a US$425m bid in October.
“We’re still excited about the possibilities there,” he said.
Delhaize said that it plans to fund these investments through a cost-cutting plan that is expected to generate EUR300m (US$452.5m) of additional cost savings annually by 2012.
The company has already taken a number of steps to strip costs out of the business. In fiscal 2008, Delhaize generated annual savings of EUR60m and the company has indicated that it remains on-track to deliver cost cuts of EUR100m this year.
Its latest set of targets mean that the group intends to continue to incrementally improve its cost base at roughly the same pace as in fiscal 2009 into 2012.
A number of measures that Delhaize has already initiated could fall within these targets, including the reorganisation of its US distribution network and the opening of a new distribution centre in Belgium. The company said that the remainder will be achieved by eliminating dual functions in the central office and improving operations at the chain level.
While cost savings are generally warmly received by the market, analysts at US brokerage Morningstar warned that these measures may go “too far”.
“This comes on the heels of EUR160m in cost savings over the past two years, so we wonder if the company may end up cutting too much and starving the business,” the analysts wrote in a note.
Nevertheless, such concerns aside, Delhaize’s plan to reinvigorate the top line has been generally well received and its share price had risen 2.10% at 3.30pm today, climbing to EUR52.62.
While the company has done much to strengthen its brand and build loyalty in recent years, by investing in new formats, lower prices and expansion into new markets Delhaize hopes it will improve its top line performance over the next two years.
Certainly, with the current importance of price driving consumer spending and the highly competitive nature of its major markets in the US and Europe, investing in price has become a prerequisite for improved sales.