Revelations at Ahold have sent shockwaves through the industry. Sentiment in what had hitherto been a respected business plummeted overnight. Now it appears the very future of the world’s third-largest grocer is on the line, as Andrew Don reports.
The biggest food retail names enjoy a cache that evades many global businesses. Consumers, by and large, trust them to provide choice and safe food at competitive prices; stock markets perceive them as honest and above board; and suppliers, subject to the usual relationship dynamics, feel safe in investing resources.
The sector has not been without its own blips: More recently, US food distributor Fleming has been investigated by the Securities and Exchange Commission with reference to issues such as supplier trading practices and the calculation of earnings. The Great Atlantic & Pacific Tea Co. and Nash Finch Co. have also had to re-audit or restate earnings and two former K-Mart executives were indicted on criminal charges of fraud last week, relating to false accounting of vendor allowances.
Now Ahold, the Zaandam, Netherlands-based business, with revenues of €72bn (US$78.4bn), has admitted to overstating operating earnings by at least $500m , or 17% of the division’s operating profits over the last two years at Foodservice, one of the largest food distributors in the US.
The main cause was the overstatement of income related to promotional allowances. It also admitted that some of its transactions at its Disco Argentine subsidiary were “questionable”. Credit downgrades, damaged credibility and falling confidence among suppliers have all contributed to the destruction of trust.
Consequences of the scandal
Nestlé and other suppliers, already pouring over their books to see how much credit they have extended to the business, will also be looking at other accounts in a new light.
Other issues in the Ahold equation are:
- A possible bid for the whole group or parts thereof. The week kicked off with speculation that Tesco was mulling a US$10bn bid. J Sainsbury, Carrefour Wal-Mart and Kohlberg, Kravis Roberts have also been named as potentially interested.
- An ambitious expansion programme that has left it with €13bn of debt, albeit temporarily softened by an €2.65bn credit facility granted by its bankers.
- The resignation of group president and chief executive Cees van der Hoeven and chief financial officer Michael Meurs and the departure of the entire board of Disco after a forensic investigation.
- Payments to retailers by suppliers for stocking their goods.
- Regulatory probes and legal suits.
Whether there was deliberate fraud at corporate level or not is a moot point and will be unearthed in the course of time. At best, one could argue Van der Hoeven and Meurs were naive.
A shake-up in the retail world
It is becoming clear that food retailers, the world over, will have to become more transparent, especially when it comes to payments made by manufacturers, whatever the outcome of the probes in Europe, South America and the US.
Ahold’s rivals will not be thanking it for bringing the issue of such payments into the limelight. While these are an open secret in the trade they are hardly discussed in the public arena.
Bryan Roberts, analyst with M&M Planet Retail, said: “There is going to be a bad smell around big retailers once the public understands manufacturers are being persuaded, if not forced, to pay large fees to get in-store.”
The more this gets out into the public arena, the greater the potential for shifts in the balance of power between retailers and suppliers because “there is increasing sentiment that retailers are getting too big for their boots,” said Roberts.
James Ensor, managing director, of management consultancy Strategic Vision, is sceptical that more scandals could erupt among food retailers in Europe. “I don‘t think there is the motivation or the opportunity. While it would be foolish to say something would never happen, I think it is more likely to crop up again in the US and it could easily be in another industry.”
Other major chains, such as the UK’s Tesco and Sainsbury’s are more tightly controlled. Ahold’s US Foodservice was an American subsidiary of a Dutch company with different types of accounting law involved and with the parent company, perhaps not keeping a close eye on what was going on, delegating too much and letting the wrong people get away with more than they would in stricter regimes.
Ensor said: “Americans seem to be driven to try to break the rules and make things look better but, you have to say that perhaps Ahold, sitting in the Netherlands, did not know what was going on in all the businesses it has all over the world.”
Van der Hoeven was the man behind Ahold’s phenomenal expansion since 1993. It now boasts 9,000 stores in more than 27 countries, with brands such as Albert Heijn, Giant, Stop & Shop and Peapod.
But there are suggestions that Van der Hoeven believed mistakenly he could translate his previous experience at petrochemicals company Shell into food retailing. Shell could expand pretty much anywhere it wished with a product that was well known and accepted worldwide without adaptation. Retail is a much more difficult environment because people eat different things in different countries. Products that sell in one market will not necessarily sell in another.
Fighting for survival?
Paul Smiddy, food retail analyst at Baird Securities, said whether Ahold could carry on in its present form depended on the attitudes of its bankers and how much further management change would have to take place.
Richard Perks, analyst at Mintel Retail Intelligence, believes it will be more a case of regaining stock market trust and supplier trust than consumer trust.
However, Richard Hyman, chairman of Verdict Research, said: “The fact that Ahold is a corporate name and not a trading name is rather helpful in this instance from the company’s point of view.”
Whatever happens in the future, there will be many questioning Ahold’s assertion in its mission statement that it is “committed to shareholders and to providing a consistent return on their investment” and to maintaining “long-term mutually beneficial relationships with suppliers as an honest and challenging business partner”.