Ahold Delhaize will have scale in the US - but will this lead to consumer engagement and innovation?

Ahold Delhaize will have scale in the US - but will this lead to consumer engagement and innovation?

The merger between European retailers Ahold and Delhaize is significant because it will allow the group's to scale up in the key US market, where the majority of revenue is generated. Announcing the deal, the companies said EUR500m (US$560m) in annual synergies are on the table. But these, as and of themselves, will do little to raise the combined group's lacklustre US growth trajectory. Katy Askew looks at the impact the merger will have in the US – and whether Ahold Delhaize will deliver on their promise to drive consumer-led innovation.

Dutch supermarket operator Ahold and Belgium-based retailer Delhaize announced this week (24 June) that a long-awaited merger deal has been finalised in a move that these two European retail giants hope will improve their competitiveness across the pond.

The combination will create the fifth-largest retailer in the US – a market where Ahold operates under the Stop & Shop and Giant banners and Delhaize runs the Food Lion and Hannaford supermarket chains. Together, the combined company will generate annual sales of EUR54.2bn, EUR32.9bn of which will be generated in the US.

Management are banking on the likelihood that the merger will enable the combined company – Ahold Delhaize - to operate more effectively in the highly competitive US market.

The companies have been squeezed by grocery price deflation as well as growing competition from the likes of Wal-Mart, club stores such as Costco, and the encroachment of the German discounters Aldi and Lidl.

In its most recent financial update, for the first quarter, Ahold said US sales declined 2.1% in the period. Delhaize, which is lapping a period that saw significant decline in the US and reaping the rewards of a turnaround initiative in the market, faired a little better. For the first quarter, Delhaize's US sales grew by 3.2%.

Sales have been driven by price investment, however, and this has had a detrimental impact on margin at both companies. Ahold reported that first-quarter underlying income fell by 7.7% while Delhaize – whose comps again benefited from a weak prior performance – saw underlying operating profit increase by 2.4% in the US.

Both companies have operations on the east coast and their store portfolio and company cultures are certainly highly complementary. For these reasons, Ahold Delhaize expects to generate the majority of its EUR500m run rate synergy target in the US, Delhiaze CEO Frans Muller revealed during a conference call.

"We identified synergies in three areas: direct sourcing, indirect sourcing and general & administrative plus other expenses. The bulk of synergies will come from sourcing and we believe that most of the synergies will come from the US," Muller commented. The group's separate retail banners will be maintained, he added.

"Direct sourcing synergies can be realised by combining volume, by comparing terms, and by having our procurement further centralised. In indirect sourcing – goods not for resale – it will be our job to combine expertise in this area and it will also be a matter of scale in a number of cases. Finally, we will also look at efficiencies in the support structure to extract savings."

Muller, who is overseeing the integration process, added: "We are taking the synergy and integration process very seriously and we are fully committed to creating the value that is available here."

Ahold Delhaize said it expects to realise 40% of run rate synergies in year one, 80% in year two and 100% by year three, with EUR350m in one-off costs expected.

A more efficient US business should help Ahold Delhaize pick up its performance in the market – mitigating some of the impact that price investment has had on the bottom line - Conlumino CEO Neil Saunders suggests. "In terms of US operations, a bigger company is a defensive necessity in a grocery environment that has become more price focused and in which deep discounters, like Aldi, and now Lidl, are set to grow. Although both Delhaize and Ahold have had some success in growing their sales lines in the U.S., their bottom lines have been affected by discounting and price cuts; something that this merger will help to mitigate, although not completely remedy."

Ahold CEO Dick Boer also insisted that the combined company will deliver a better offer to customers, which should, if accurate, feed through to an improved sales outlook. "We will have an increased capacity to find ways to innovate together," he insisted during the conference call.

"We believe that Ahold Delhaize as a combined company will deliver a better shopping experience for our customers. The customer is first and foremost the reason we exist and the key to a successful future. We see tremendous opportunities to leverage the resources and expertise of both companies and accelerate innovation to meet and exceed the expectations of customers – delivering better value, choice, service and ways to shop," Boer argued.

US retail observer Bill Bishop, chief architect of Brick Meets Click, remains unconvinced. "Neither company was particularly inspired before this and it’s my guess that the same will be true of the combined organisation, so it’s hard to imagine what unique/special impact will come from it," he argues.

"I think most retailers are further from the consumer today than is safe to be and the Ahold/Delhaize group is no exception. The companies that are achieving proximity to customer are ones that have a very clear understanding of who they are in the marketplace and who they serve, including Whole Foods and Wegman’s on the one end and Aldi on the other."

Even though the combined might of Aldi and Delhaize in the US will enable the group's to improve their margin structure, a key question going forward will be whether they can deliver on their promise to drive consumer-led innovation. Without this connection to the consumer, it seems that the companies will struggle to fend off competition in what remains a cut-throat grocery market.