Shares in Belgian retailer Delhaize Group slid in morning trade today (4 September) as investors responded to the appointment of former Metro Group executive Frans Muller as CEO. While Muller has extensive retail experience, he comes to Delhaize from Metro’s cash-and-carry arm and, significantly, has no experience of operating in Delhaize’s largest market, the US. Katy Askew reports.
Frans Muller has been named the chief executive of Belgian retailer Delhaize. Muller will take the helm on 8 November, replacing Pierre-Olivier Beckers, who announced his intention to step down from the post in May.
In order to ensure a “smooth transition” Beckers will remain available in an advisory role until the end of the year, Delhaize said. He will continue to sit on the Delhaize board in a non-executive capacity.
Unveiling the appointment this morning, Delhiaze emphasised the international scope of Muller’s experience and his competency in areas such as supply chain management.
Muller most recently served as chief executive of Metro Group’s wholesale business, with responsibility for 740 stores in 29 markets. However, he left Metro earlier this year when group CEO Olaf Koch took operational responsibility for the unit as part of a drive to streamline decision making.
Under Muller’s stewardship, Metro’s cash-and-carry business grew in markets like China but also fared well in Germany, while its loss-making UK business was sold last year to Booker Group.
According to Fabienne Caron, an analyst with Kepler Cheuvreux, Muller’s experience of running Metro Cash & Carry is “close” to that required of a consumer-facing retailer but no cigar.
“He has a wholesale background, not a retail one. While close, these businesses remain very different, with different customer profiles. Food retail is a much more competitive business we believe,” Caron said.
Additionally, while Muller has broad international experience, it does not stretch to the US, a market where Delhaize generates around 65% of group sales.
Adding to concerns over Muller’s rawness in American retailing, the chief executive of Delhaize’s US business Roland Smith plans to exit the business. While no reason has been given for Smith’s departure, it is not a great leap of imagination to conclude he was dissatisfied with being overlooked for the role as group CEO.
The shake-up at the top for Delhaize’s US business comes at a crucial time for the unit. The company is grappling with a number of challenges in the country, where it has faced a period of tough trading conditions as consumers tightened their belts amid rising unemployment and economic uncertainty.
Last year, Delhaize responded to sales and market share pressure by stepping up its investment levels in the US market. Price cuts were implemented across Delhaize’s network of stores and the group revamped 500 outlets to try attract shoppers with an improved shopping experience. The company simultaneously invested in the development of a discount banner, Bottom Dollar, to extend its appeal to value conscious consumers.
Success in rejuvenating the top line has been modest but steady. During 2012 US same-store sales were down 0.8%, with sequential improvements throughout the year. The company has seen these improvements continue in 2013, and during the first half comparable-store US sales were up 1.1%.
However, improved sales have come at a cost: investment in strengthening the group’s offer and broadening its appeal in the US have placed Delhaize’s operating margin in the market under sustained pressure.
The group is therefore simultaneously working to offset the drag investments are having on operating margins by stripping costs out of its US operations, through job cuts and store closures.
Earlier this year, Delhaize also entered into an agreement to sell its Sweetbay, Harveys and Reid’s chains. Through the deal, the group will offloaded its loss-making Sweetbay banner in Florida, where it has already closed a number of its worst performing stores.
While the company is expected to generate a small book loss on the US$265m transaction, it represents a significant move to reduce overheads (cutting a cool $30m annually in lease costs alone) and cut loose under-performing and loss-making stores. Delhaize has also used proceeds from the sale to speed its efforts to pay down debt.
In addition to the financial rationale, by further streamlining its US business, Delhaize management could be better placed to focus on driving growth at its key banners: Food Lion, Hannaford and Bottom Dollar.
Therefore, the departure of US boss Smith comes at a difficult time for Delhaize – and has raised concerns the company will lose the momentum it has slowly been building in what remains a fragile US market.
Smith’s resignation has also raised anxiety over whether some other key players in Delhaize’s management team will remain on board. In particular, speculation has centred on whether CFO Pierre Bouchut, who had been tipped as a front-runner to replace Beckers, could also opt to move on having been overlooked for number one spot.
Bouchut is widely credited with Delhaize’s move to clean up its balance sheet and improve free cash flow and his loss would undoubtedly come as a further blow to the supermarket operator.
Given these challenges, it should perhaps come as little surprise the market responded poorly to the news. Delhaize’s share price was down 7.05% at 10.30 (BST).
With fears that the leadership shake-up could derail Delhaize’s still fragile turnaround around, at the very least the appointment has brought something of an uncertain quantity to the head table. And there is little investors dislike as much as uncertainty.