The group has responded to tough markets in the US and Europe by engaging in price wars with its competitors and by introducing more of its own private label brands. While sales have increasedthrough acquisitions in both markets, margins and operating profit have plunged, putting pressure on the group's food suppliers to reduce their prices.
IGD research indicates that western and southern European grocery markets are becoming increasingly saturated, while central and eastern Europe are emerging as new growth opportunities. Pricepressure, the increasing demand for convenience foods and consolidation of the market are the hottest trends in European retailing, IGD stated.
Overall the group reported sales growth of 3.1 per cent at identical exchange rates during the second quarter to 30 June, while operating profit plunged 10.3 per cent compared to a year ago.Operating margin fell to 4.5 per cent during the quarter compared to 4.6 per cent for the half year and from 5.2 per cent in 2004.
First quarter results indicate the group operating profit decline is accelerating due to cuts in margins as the group battles to maintain market share by slashing retail prices. In the firstquarter this year the company had sales growth of 3.1 per cent and a fall in operating profit of 3.8 per cent.
However most of the sales growth is due to acquisitions in the US and Europe. Net sales and other revenues from US operations rose 3.2 per cent in US dollar terms during the second quarter butoperating profit fell by 4.6 per cent.
In Belgium sales and other revenues rose by 2.6 per cent but operating profit fell by 21.3 per cent in the second quarter. In Greece sales rose by three per cent while operating profit plunged by15 per cent. Emerging markets posted a 5.8 per cent gain in sales and an 88.7 per cent fall in operating profit.
Delhaize's US operations make up about 70 per cent of the group's sales. The group was heavily impacted by a 4.3 per cent weakening of the dollar versus the euro during the quarter. Belgium andGreece contributing another 26 per cent in sales. The group also has "emerging market" operations in the Czech Republic, Slovakia, Romania and Indonesia.
In Belgium the group said the sales increase of was mainly due to the first month of contribution of Cash Fresh, an acquisition, and two additional selling days due to an accounting change.Comparable store sales, which are adjusted for calendar effects, actually decreased by 2.9 per cent.
The group blamed the fall in sales and operating profits on soft consumer spending, the opening of a large number of competitive stores and the shortterm impact of adjustments to its non-food offerings. Delhaize Belgium's market share declined during the second quarter, the group reported.
Operating margin of Delhaize Belgium decreased to 4.6 per cent due to weak sales, the statutory increase in labour rates. The Belgium unit had a six per cent operating margin in the second quarterof 2004.
On 31 May this year, Delhaize completed the acquisition of Cash Fresh, a chain of 43 supermarkets located in northeastern Belgium.
In the second quarter of 2005, sales in Greece grew three per cent to €222.6m, helped by the conversion to international accounting standards. Alfa-Beta, Delhaize's Greek subsidiary, continuedto cut prices. It decreased prices on 2,300 products in 2004 and on 1,000 in the first quarter of 2005.
The operating margin of Alfa-Beta decreased due to higher advertising expenses and expenses associated with stores to be opened in the second half of 2005, the company stated.
In its guidance note the company expects sales growth to be between 3.5 per cent and 4.5 per cent. with operating profit growth in "mid-single digits". Net profit growth is expectedto be between 15 per cent to 20 per cent.
Delhaize said sales will be driven by an addition of 102 stores to a total of 2,667 stores (including the acquisition of Cash Fresh and the disposal of 11 Delvita stores in Slovakia).
The earnings outlook is based on the expectation that second half of 2005 results will be supported by improving sales trends in the U.S., the additional market renewal at Food Lion, the completionof the integration of Victory and the acquisition of Cash Fresh. The results of the second half of 2005 will also benefit from a lower base of comparison with the same period last year.
As economic stagnation and low price inflation sets in, western Europe's share of the total grocery market will fall to 45 per cent from the current 53 per cent whilst eastern Europe and theBalkans will increase from to 23 per cent from 14 per cent, IGD Services stated in a report last month.
In 2004 Europeans in 39 countries spent a combined total of €1,363bn on food and groceries in 2004, with Germany as the largest market, to be overtaken by Russia in 2020. Germany currently hasthe largest food and grocery market, worth €202bn in 2004 but by the end of the decade France will claim the crown in Europe. But the growth will be driven by the non-food market.