Dutch retailer Ahold has announced a long term strategy the continued profitable growth of its US Foodservice subsidiary, which is to split into two operating companies.
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US Foodservice is the second largest distributor in the foodservice industry with 2004 net sales of USD18.8bn, the company said.
“US Foodservice represents a significant part of Ahold’s business and value,” said Ahold CEO Anders Moberg. “Our management team has accomplished a major organizational overhaul at US Foodservice during the past two years, integrating the past acquisitions, strengthening the operations, improving internal controls, enhancing corporate governance and restoring employee pride. US Foodservice’s financial performance is recovering, and the plan we are presenting today details the strong opportunities for pursuing profitable growth and creating a more valuable and transparent business for Ahold shareholders.”
US Foodservice will reorganize itself into two operating companies, each focused on a specific customer segment (“Broadline” and “Multi-Unit”). Ahold provided unaudited pro forma financial information for the Broadline and Multi-Unit businesses and announced an administrative cost reduction plan and targets for each business through 2008. These targets include driving top and bottom-line growth of the Broadline business and bringing the Multi-Unit business to profitability.
The Broadline operating company represents more than 85% of US Foodservice’s net sales and has been its main engine of profitable growth. It provides a broad line of food and related products and services to independent restaurants, healthcare providers, hospitality customers, governmental entities, educational institutions and other foodservice customers. US Foodservice’s plans include four initiatives to drive top-line and bottom-line growth of its Broadline business: Accelerating private brands penetration, investing in the sales organization, strengthening targeted local geographies and rolling out a comprehensive operational excellence program. Through the first three quarters of 2005, net sales of the Broadline operating company were USD 12.4bn and the operating margin was 1.1%. The company is targeting compound annual Broadline net sales growth of at least 5% (compound annual growth) over the next three years and a Broadline operating margin of at least 3% for 2008.
US Foodservice’s Multi-Unit operating company, which will be given its own brand identity, provides food and related products to large chain restaurants with multiple units, primarily in the “quick-service” and “casual theme” restaurant segments. Through the first three quarters of 2005, net sales of the Multi-Unit operating company were USD1.9 billion and the operating margin was negative 0.9%.
The company announced its objective to bring this unit to profitability within the next two years.
Following a significant investment in systems and infrastructure improvements during 2005, US Foodservice also announced a plan to reduce total US Foodservice administrative costs by USD100m, with more than half of these savings to be realized in 2006 and the balance in 2007 and 2008. The company expects to record a restructuring charge related to these administrative cost reductions as well as to the planned consolidation of one of its Chicago-area distribution centres in the fourth quarter of 2005. The Company also disclosed that approximately USD42m of annual amortization expenses, currently charged against Broadline operating income, will expire in 2009, which will have a positive effect on this business’ operating income in 2009 and subsequent years.
“We are making the shift from integrating US Foodservice’s acquired operations to building a strategic competitive advantage,” said US Foodservice CEO Lawrence Benjamin. “Our strategic plan tackles the structural issues needed to drive a balance of top-line growth, profitability and operational excellence. Our Broadline business has led the profit recovery of US Foodservice, and we see opportunities here for driving significant additional margin and volume growth. The establishment of our integrated Multi-Unit operating company will provide an effective structure for achieving our goal for making this business profitable. We also expect that cost reduction will be a more significant driver of our future profit improvement, starting with an aggressive right-sizing of our administrative costs in 2006.”
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