Ahold to sell off non-core business as profits fall
Dutch retail group Ahold, with the weakness of the economies in the
Americas taking a particularly heavy toll on profits. With third
quarter results falling heavily compared to the previous year, the
group is now preparing a major restructuring, including the sale of
all non-core businesses.
All in all, 2002 has not been a good year for Ahold, Europe's second largest food retail group. In the summer, the company reported its first quarterly loss in many years as a result of difficulties in Latin America, and market observers feared more bad news when the company announced yesterday it would announce its latest quarterly figures a month early.
The observers were, sadly, not disappointed, with Ahold today announcing a further slide in profits and a humiliating downwards revision of its earnings for the year as a whole.
Sales for the third quarter, which Ahold had already announced, were up 5.8 per cent to €16.4 billion, but would have been some 14.5 per cent higher if not for the adverse currency affect which took its toll on the group's results in Latin America.
And it was these operations which were responsible for the decline in net profits to €257.6 million from €304.2 million in 2001, although the Dutch company added that the downturn in the US economy had not helped either, with sales growth there only achieved by the consolidation of newly acquired stores and the Alliant foodservice business.
As a result of these tough trading conditions, coupled with increased financial expenses, Ahold has been forced to revise its earnings per share estimates for the year. While it had predicted growth of around 5 to 8 per cent at the start of the year, the sharp fall in profits in the second and third quarters has now led it to predict a decline of 6 to 8 per cent in earnings per share - a humiliating comedown for a company which has long been one of the major international performers.
In a bid to reverse the decline in the next few years, and in order to regain some of its lost glory, Ahold said in a statement that it had launched an aggressive company-wide initiative focused on organic growth, cost reduction, capital efficiency and portfolio review for the 2003-2005 period, which it hoped would improve competitiveness and financial performance.
The portfolio review will involve the disposal of all non-core businesses, allowing Ahold to strengthen its positions in leading markets. While there was no confirmation of which units will be sold, the company said that it would be looking long and hard at consistently under-performing core businesses.
But it will not all be divestment. Ahold has a long history of strategic investments -although some of them are of course at the root of its current problems - and this will continue, with the company looking for smaller investments to strengthen its core businesses and improve returns.
Cees van der Hoeven, Ahold's president and CEO, said: "In many ways, 2002 has not been our lucky year. We have had several disappointments coming from different directions, most particularly South America. Adding to the impact of the extremely difficult trading conditions, the huge impact of currency devaluations, the severe effect of the default of our former Argentine partner, Velox, the impact on financial expenses and the average tax rate, one can say that South America explains most of it."
He continued: "Ahold's performance in almost all key markets is very solid in the current environment. It is therefore extra painful that we have had to announce a second revision to the 2002 outlook. We feel invigorated by the new strategic plan that will focus the company on the growth of its core businesses and lead to significant debt reduction."
Ahold is just one of many leading global retailers to have suffered this year from exposure to markets in Latin America and the softness of the US economy, but it is perhaps the one which has suffered the most.
It will be interesting to see which of its businesses it considers non-core - although the Latin American units will certainly be a prime contender - and in particular whether it will look to reduce its exposure to the US market (unlikely, even given the size of its market share there) or in Eastern Europe, where trading conditions are currently tough but which has significant potential.
