Delhaize struggles with US downturn

Nearly three quarters of group sales came from the North American arm in 2003 - €13.7 billion out of a total of €18.8 billion - and in local currency terms the Kash n' Karry, Food Lion and Hannafords operations posted a modest 3.5 per cent improvement.

But with Delhaize's figures listed in euros, the weakness of the dollar played a major part, shaving over €2.7 million off total turnover and turning a 4.2 per cent underlying improvement into a 9 per cent decline.

Delhaize​ is one of several European retailers with operations in the US - Casino, Ahold, Sainsbury, Marks & Spencer all have a presence there - but none of the others generate the lion's share of their revenues from the US, or have had to take quite such a large hit in terms of currency exchange rates.

The impact of currency movements would have been less of a cause for concern if Delhaize had a good track record of managing its US business, but that has not been the case in recent years. In fact, of the 3.5 per cent growth in the US, just 0.6 per cent was from existing stores, the rest coming from new store openings and acquisitions - to say nothing of the fact that 2003 also included an extra week's sales compared to the previous period - and the group has been forced to overhaul its Kash n' Karry and Food Lion business there after a succession of poor results.

The sale of 42 of the worst-performing Food Lion stores also had an impact on sales during the year, while all 68 outlets in North Carolina have been completely overhauled, a reflection of the parlous state of the business. Not only did the stores suffer from a decidedly downmarket image, they were also not particularly competitive when it came to prices, an issue addressed in the latter part of the year with substantial investments.

While this inevitably affected gross margins, this was partially offset by further improvements in inventory management and cost control, and indeed the second half performance across the US store portfolio gave some cause for hope that 2004 would see further improvements.

But this is by no means a given, with little sign of the US economy improving in the near future and the market likely to remain extremely competitive. Further productivity gains and tighter cost control are likely to be the best that Delhaize can hope for, although a steady expansion programme should at least help push up sales.

What is really needed, however, is a major upturn in the sales-per-store performance, and while this is the purpose of the store refit programme, it is likely to take some time to filter through to the balance sheet - time which Delhaize does not necessarily have.

Outside the US, the company continued to improve in its home market, due to a combination of expansion and better management, but its southern and central European unit is still loss-making - a poor performance at a time when many western retail groups are increasing the profitability of their operations there as conditions improve prior to EU accession.

But the big question mark must lie over Delhaize's Asian unit, which saw a sharp fall in both sales and profits in 2003. The sale of the group's stake in Singapore-based Stop N Save in October inevitably reduced sales there, while currency movements continued to bite, and the possibility of Delhaize following fellow European Ahold and quitting the Asian market altogether is becoming ever more likely.

Ahold's businesses in Asia were all acquired by local players - who clearly do not have the same currency-related concerns - and with such a large part of Delhaize's business coming from non-euro markets, the group may decide to cut its losses and sell the remaining operations in Thailand and Indonesia.

Neither of these have the critical mass to far well in their respective markets, and with Delhaize having to focus its investments on the US market, Asia is inevitably moving ever lower down its list of priorities. There would certainly be no shortage of potential buyers for the business, and the cash could be used to help pay down debt - a perennial problem for the Belgian firm and exacerbated further this year with the Harveys deal, which included the assumption of a further $18 million.

Delhaize is facing some tough decisions in 2004, and is playing down its growth expectations for the year. Even excluding the impact of further currency movements in 2004, sales growth is likely to be a modest 3.5 per cent at best, while like-for-like sales growth will continue to hover around the 1.5 per cent mark. Until the company can improve this latter figure in particular - by means of comparison, UK market leader Tesco has like-for-like sales growth of around 16 per cent - Delhaize will continue to feel the impact of its overdependence on the US market.