Retail pack sniffing round ailing Ahold

Related tags Ahold Hypermarket Retailing Supermarket

There are numerous potential candidates to acquire the South
American operations of the troubled Ahold group, but as market
analysts Euromonitor point out, such an acquisition would not be
without considerable risks. The debate is also now increasingly
centred on whether Ahold as a whole would make a better target for
the major retail groups.

The large grocery retailing market could see significant movement over the coming few months, as Dutch group Ahold downsizes and a handful of others fight for dominance, according to an analysis of the market by Euromonitor​.

In an attempt to reduce its considerable debt, the Dutch retailer has announced its intentions to sell off its South American assets in Argentina, Brazil, Paraguay and Peru. The potential sale of Ahold subsidiaries in the context of the recent scandals and irregularities in the group may tempt any of these retailers into bidding for the supermarkets as they analyse the synergies, and contemplate a step towards greater global coverage, Euromonitor said.

The buyers that would stand to gain most are Wal-Mart, Tesco, Metro, Carrefour and Cia Brasileira de Distribuição (CBD).

Ahold, meanwhile, is still trying to defy the pack of suitors. In an effort to fund debts of €13 billion net, it has announced its intentions to sell all South American operations. The company is at present in talks with the Chilean retailer Cencosud regarding the sale of its Chilean subsidiary for $150 million. Cencosud has started trying to raise the finance for the potential purchase which may be the first indication that negotiations are progressing well. Ahold has not set a time as to when the other South American operations will be offered to the market, as it claims that its priority is to receive maximum value for these assets.

However, in a turbulent economic climate, and amid further accountancy concerns, it is not evident that Ahold will find a buyer prepared to pay even a proportion of what it may perceive the assets to be worth, with sales of €2.5 billion for all of its South American operations, excluding Chile.

If Ahold does not succeed in turning itself around within a year, when a bank loan provision extended to the company last month reaches maturity, the company may be forced to sell more assets than it would wish to at a fraction of their value, inviting interest in the wider group as a whole and therefore from a wider audience of competitors, Euromonitor claims. Should this scenario occur it is conceivable that a domestic and/or regional firm might be keen to purchase Ahold’s assets to organically expand its business.

Wal-Mart top of the list

One prospective buyer is the world’s leading retailer, Wal-Mart. Present in nine countries, apart from the United States, it is always a contender for acquisition opportunities that will widen its global coverage. Wal-Mart is focused on maintaining its dominant world position with aggressive expansion and plans to open 120 to 130 new retail outlets internationally in 2003. Outside the US, Wal-Mart operates nearly 1,300 outlets across North America, South America, Europe and Asia. It is expected that Wal-Mart will expend much of its energy on growing its business in both China and Germany in the coming year, but it could also look to Russia and other Eastern European nations for new areas of development in the future.

The Chinese appeal is clear, as it has not only one of the fastest growing retail markets in the world, but it also offers the room for development that Wal-Mart is looking for, with a mass population to feed and an under-exploited large grocery retailing sector. But one of the major obstacles to growth in the Chinese market remains the government, which is determined to maintain some form of competition against the likes of Wal-Mart and other global companies.

However, not all Asian markets are as promising as China. Like Carrefour and other multinational retailers, Wal-Mart has struggled elsewhere in Asia due to weakening economies and sluggish consumer demand. The US group entered the Korean and Japanese markets through acquisitions of local retailers in 1998 and 2002 respectively.

In the Japanese market, Wal-Mart operates through an alliance with Seiyu, one of Japan’s leading supermarket chains, and currently holds over one-third of Seiyu’s interest. But it posted losses of $704 million there in 2002, due to a drop in sales in the department store group. Accordingly, it would not be entirely unfounded for Wal-Mart to look towards South America, in light of the Ahold’s plans to divest, Euromonitor suggests.

In contrast, the German retail market is a mature one. Competition is strong and acquisition is a popular means by which the key players strive to increase market power. Wal-Mart could thrive in Germany, where retailers live on slim margins, by differentiating itself through high quality and a wide range of products, according to Euromonitor.

Wal-Mart’s longer-term plan is to operate 160 stores in Germany, a notable increase from its present total of 93. The company will achieve this either through acquisition or by investing in new sites, but given that there are few remaining ‘good’ sites for hypermarkets and supermarkets in the country – as well as delays in gaining state approval for construction - the former option presents itself as the more appealing.

Metro keen to boost global presence

But Germany’s own Metro group is another company likely to be interested in any Ahold stores, Euromonitor said. If Metro is able to stabilise its businesses in Poland and Germany, the group’s principal markets, then it could be keen to expand via a purchase of Ahold’s assets in South America.

One of the major difficulties facing Metro in Germany is its heavy cost structure and low profit margins. As a result of these marketplace conditions, Metro has restructured its business and made significant efforts to integrate its operations over the past two years. But while Metro may possess the financial means and motivation to acquire Ahold’s assets in South America, it could be a very risky acquisition as it runs the risk of spreading itself too thin and thus being shut out of its home market due to its highly competitive nature.

Carrefour a more likely candidate

France’s Carrefour, however, could certainly add a twist to the whole picture, Euromonitor suggests. While it has not seen overwhelming success in Latin America, it could be tempted to grab the opportunity to build a strong position there by taking Ahold’s assets.

But with a poor year in prospect based on a weakening home market, the danger of doubling its exposure to a weak regional market is also abundantly clear. Although the longer-term benefits of weathering the storm are unquestionably attractive, it would have to look very closely at its cash position if it were to contemplate such a large acquisition.

While Italy and Spain are proving reasonable prospects in the short and medium term, Carrefour has recently suffered a downturn in fortunes in Taiwan and South Korea. A hint of more organic growth in the home market of France would reassure investors before seeking funds for expansion, particularly if investors are looking to learn from Ahold’s mistakes.

Carrefour’s strategy is different to that of Ahold, geared more towards increasing profitability rather than store expansion. Carrefour is increasing its portfolio, but its main focus has been on lowering prices to attract more customers – a response to the poor market conditions in many countries where it operates. If Carrefour were to acquire Ahold’s property at a cost-effective value and apply this low-margin, high volume cost structure across the region, it could be highly successful, particularly once macroeconomic conditions improve, Euromonitor said.

Local buyer to emerge?

But Ahold’s stores could also be attractive to a local buyer, such as Cia Brasileira de Distribuição (CBD), the Brazilian retail giant. Brazil seems to be a fertile environment for large powerful groups to emerge: CBD overtook Carrefour as Brazil’s leading retailer in 2000, following an aggressive strategy to grow by acquisition. Consequently, the company saw sales rise in 2002 by 17 per cent.

That said, a bid from CBD is only likely if Ahold is forced to unload its assets at a lower value. CBD operates extensive chains of retail stores in the hypermarket, discounter and electrical retail sectors, but its flagship store is Pão de Açúcar, a supermarket chain. CBD has expanded its Extra hypermarket business alongside its supermarket activities in Brazil and managed to maintain a near 50-50 split of sales between the two formats.

Britain’s number one also interested

Tesco, the leading UK retailer, is one of the strongest candidates to buy the Ahold business, but it may be more interested in waiting to snap up the entire Ahold group rather than just the South American unit. Tesco has already been reported as showing an interest in Ahold’s 170 supermarkets stores in Poland, where the British group already owns 46 hypermarkets and supermarkets, and with few suitable hypermarket locations remaining, the company could significantly strengthen its position against its foreign competitors, including Metro.

However, Tesco would be unlikely to consider Ahold purely for its Polish assets, and Poland is not the battle ground that defines the leadership of the world for the large retail conglomerates. Competitors like Carrefour have greater global aspirations and in comparison to Tesco have been more aggressive in matching Wal-Mart’s pace for international investment. This could signal a new beginning for Tesco’s pursuit of international growth after being conspicuous by its ambivalence towards the frenzy in the UK over the sale of Safeway, Euromonitor suggests.

The debate is now gaining pace as to whether the Ahold group will finally be broken up or not. There is likely to be a middle ground where some of the Latin American interests are sold but the reduced Ahold group will still be a target for the buyer with the right capital - and the courage to take on such a large investment in the current economic climate. Ultimately it is not a question of whether there is over-capacity in large grocery retailing, though retailers would always like to see less competition, but rather of whether Ahold can find its place within a larger parent portfolio.

For details of Euromonitor's retail research, click here​.

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