Ahold Increases U.S. Market Share - Update

By Archie Van Riemsdijk 

AMSTERDAM--Dutch food retailer Royal Ahold NV remained tight-lipped about its merger talks with Belgian grocer Delhaize, flagging, instead, its improved market share trend in the U.S. as profit margins dropped.

Negotiations on a potential merger, confirmed by both European companies two weeks ago, could create the third-largest grocer in the U.S. behind Wal-Mart Stores Inc. and Kroger Co. Ahold currently earns two-thirds of its revenue in the U.S.

Ahold last week confirmed it was in talks with its smaller Belgian peer, stressing that talks were still at a preliminary stage and may not result in a deal.

"And I am afraid we cannot share anything more with you today on this", Chief Executive Dick Boer said Wednesday. He added the company will update its comment on the matter only if there are material developments, in accordance with regulatory requirements in the Netherlands.

A merger of the two grocers could help them address structural challenges in the U.S., analysts said, where Ahold's Stop & Shop and Giant supermarkets are getting squeezed between discount and quality food retailers. At the same time, some analysts have doubts about the potential synergies of combining the retailers, and the regulatory hurdles that could stand in the way of a deal. "Dividing the spoils between Ahold and Delhaize shareholders will be difficult," analysts at UBS said earlier this week.

Ahold on Wednesday reported a sharp rise in net profit to EUR213 million ($232 million) in the first quarter, from EUR50 million a year earlier, as high litigation costs in 2014 weren't repeated. Nevertheless, analysts had expected a higher net profit of EUR257 million, according to forecasts compiled by FactSet.

The company's market share in the U.S. grew in terms of volume for the third quarter in a row, although it decreased slightly when measured in dollars. According to a Morgan Stanley report, Ahold is the sixth-largest food retailer in the U.S., with a market share of around 2.5%, compared with 29.9% for Wal-Mart and 10% for Kroger.

At the same time, Ahold's underlying operating margin declined to 3.7% from 3.9% in the fourth quarter of last year. The retailer is trying to improve customer perception of its price levels, by not fully passing on higher costs of products at its supermarket chains Stop & Shop and Giant.

In the Netherlands, net sales were up 5.7%, supported by investments in promotions, opening of new stores and a 20% sales increase in online shopping. Here too, the cost of a promotion campaign weighed on its underlying operating margin.

Ahold is clearly prepared to accept a lower profit margin, to increase market share, analyst Joost van Beek of Theodoor Gilissen Bankiers said.

Same-store sales growth of the company remained subdued in the U.S. at 0.1%, whereas the Netherlands showed a healthy 2.5% growth rate. The U.S. number is corrected for the stronger dollar and excludes volatile gasoline sales.

Write to Archie Van Riemsdijk at [e-mail]

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