Rebuilding Ahold
Elsevier Food International Vol.7, No.2, May 2004Pascal Kuipers
On 24 February 2003 the growth engine of Ahold suddenly stopped and since then the breakdown of its reputation has progressed at a much faster pace than the building of its reputation over the years. In this extremely difficult business environment, Ahold’s new president and CEO Anders Moberg started restoring confidence, based on the principles of integrity, corporate governance and shareholders’ power.
When Anders Moberg decided on 29 April 2003 to accept the job of chief executive of Ahold, he knew that he was facing a tough job. Only two months after the news of fraud and mismanagement ruined Ahold’s reputation, this was surely a courageous career move. The full extent of Ahold’s troubles was still unknown. Investors were angry and demanded an explanation. Moberg was criticised for being greedy, due to his hefty paycheque (courage comes at a price) and customers decided to boycott Ahold’s subsidiary Albert Heijn. Executive and non-executive directors who were involved in Ahold’s scandal first retained their position but later decided to step down. Shareholders’ meetings were far from pleasant occasions as opposition was resilient.
Moberg’s first year at the helm of Ahold was not easy, with a fair share of negative media attention. Naturally, this could be expected and is unlikely to be over yet, as many questions still remain unanswered. However, answers will come, Moberg says confidently. And so will the restoration of the good reputation of Ahold, the fallen retail icon.
Before your appointment as CEO of Ahold on 5 May 2003 you worked for renowned non-food chains like Home Depot (three years) and before that for IKEA (almost 30 years). How do you adapt to a food-driven environment?
“In retail, basically there are a lot of similarities - in operations, store management. I have quite a good idea of the production of furniture but I am no specialist in food production. The main difference is the food safety issue, but also here in general it’s true that you are responsible for the quality of the product, be it food or non food. IKEA is essentially lifestyle driven and so is Home Depot, though to a lesser extent. In selling fresh food Ahold refers to lifestyle as well. It’s a quality driven people’s business.”
And you are a people’s manager?
“Yes. Motivation is important. You must take good care of your people if you want them to treat the customers well. I know it can be a stressful situation, working at the checkout for hours.”
Do you have personal experience of working in the stores?
“Not at Ahold, but at IKEA I worked in the stores and in the warehouse. I know what it takes to work in the store with the customers. When I walk through the stores I look through the eyes of the customers and imagine the shopping experience they encounter. Are the categories understandable? Do they offer the right value? In the Netherlands, Albert Heijn was criticised for being too expensive, which illustrates the relationship between Albert Heijn and its customers. When we do something wrong they tell us straight. We repositioned Albert Heijn with lower prices and that includes possible lower margins. The customers reward us by coming back.”
Before you joined Ahold, the company was essentially financially driven. Did you manage to change that culture?
“Financials are of course important, but behind these numbers it’s even more important to look how we produce these figures in our different operations. For me it’s difficult to comment on the past as I was not involved and not responsible. What I can say is that Ahold was fast growing and gave priority to grow the top line. No or insufficient attention was given to implement and harmonise the acquired companies into the organisation. There were as many solutions and systems as there were Ahold subsidiaries and looking at the increasing size of Ahold this was no good situation. We will improve our operations and lower our cost structure by reducing supply chain costs and improving purchasing conditions. If you look at the competition, be it Wal-Mart, Carrefour or Tesco, they all have one dominant brand name and harmonised systems all through their companies. Ahold is working on such harmonisation, which we will combine with strong local brand names. At the end of 2005 we aim to have this all put in place.”
How does all this affect Ahold’s relations with its suppliers?
“We can improve quite a lot in working with our suppliers. They tell us that we don’t have one overall behaviour which can be too costly for our suppliers. All this is a result of our myriad of solutions and systems, but we will solve this problem. In the supply chain we also haven’t taken enough advantage of our size and acted very locally. We are going to leverage our purchasing clout and we will align our conditions all over the field. The same holds true for private label. We aim for two to three private label brands where we now have several. And we will source private label centrally to drive down cost. Also in non food we haven’t had a coordinated approach and sourced very locally. It is important to understand the specific supply chain for non food and here is a potential upside for us.”
You have been Ahold’s chief executive since May 2003. When you accepted the job, did you understand the full extent of the problems Ahold was facing? Or was it more or less a leap in the dark?
“I accepted the job on 29 April and before that I did my homework. I knew it was a stressed company and you never know exactly what you will encounter. Yes, there have been surprises. For instance, I did not know that it would be so difficult to close the 2002 books, due to the outcome of the forensic investigation.”
Were you surprised by the resilience of shareholders’ opposition?
“I did not know how shareholders respond in the Netherlands, but I quickly found that out! Up to now we have had four meetings and currently we have a balanced relation with shareholders. Of course I understand the many shareholders who lost money. I can’t repair this, nor can I take responsibility for the past. I understand that they want to have the answers to all questions that are left open and over time the answers will come when the external investigators are ready.”
Do you expect new surprises from the outcome of the investigation?
“We have been through a lot of things. The investigators are interviewing a lot of people. I can’t exclude anything that I don’t know now, but I don’t foresee surprises. And about the consequences of the investigations for individuals is not for me to judge.”
Corporate Governance is key to Ahold’s recovery strategy. One of the implications you outlined during the shareholders’ meeting is a far-reaching increase in the power of Ahold’s shareholders who have the right to approve key divestment and investment decisions. Does this not this clash with your executive mandate?
“I work on behalf of the shareholders and I listen to them. Ahold is at the forefront of good corporate governance, which is extremely important as we invest in regaining the reputation we lost. It’s not in every investment that we must ask shareholders’ approval. Decisions impacting one third of our equity need such approval. For instance, a decision on the future of US Foodservice requires shareholders approval. They want more responsibility and more rights and we maintain an open dialogue with them.”
Will US Foodservice remain a core business to Ahold?
“In September 2005 you will get the answer. We currently recreate as much value as possible at US Foodservice. We are moving in the right direction with a new management team. I am confident about this.”
Another issue is the pending decision of ICA’s shareholders who can exercise their rights with regard to Ahold’s obligation to acquire a majority share in ICA. Would you welcome consolidating the healthy ICA business at this stage?
“There are stipulated rules between the three ICA shareholders. We own 50 per cent of ICA and potentially we have the obligation to acquire the other 50 per cent. The other two shareholders could offer their shares of 30 and 20 per cent, respectively. I can’t read other people’s minds and intentions and I don’t want to speculate on this. We are prepared and we reserved €1.8 billion for this acquisition. I don’t believe that ICA Forbundet will sell all of its shares. The ICA store-owners always want to retain this link to their company. As far as Stein Erik Hagen is concerned, I really don’t know. He ownes a 20 per cent share and one day he says he wants to sell his shares but another day he says he intends to buy new shares. What can I say?”
How does Ahold’s Road to Recovery impact its supplier relationships? Do collaborative ECR strategies work in times of trouble?
“Basically, our suppliers have been supportive of Ahold during the difficult year 2003. They helped us a lot and we are thankful for this cooperation with suppliers. They see us as an important partner. As I indicated before, there are still areas where we can do better and this does not relate to conditions only. We need to better understand our suppliers and vice versa. This will drive down supply chain costs, which is in the interest of all. At US Foodservice for instance, we significantly reduced our payment conditions.”
Outlining Ahold’s recovery strategy on 7 November 2003 you said that for its food retail business after disposals, Ahold targets from 2005 and onwards a minimum of five per cent net sales growth per year, five per cent EBITA margin and 14 per cent return on net operating assets. During the shareholders meeting of 3 March 2004, however, chairman of the supervisory board Karel Vuursteen said that in the past Ahold suffered from a commitment to growth targets (which were already expressed in the share price) that appeared too optimistic when market conditions changed. Is quantifying growth targets a necessity for listed companies?
“What Karel Vuursteen said was a reflection, putting in perspective Ahold and the business climate during the 1990s. He said that in those years, when he still was executive chairman of Heineken, he was seen as old-fashioned for not leveraging Heineken’s balance sheet. His remarks should not be mixed up with what I said on how Ahold intends to deliver to the market. I expressed indeed a five per cent organic growth target, a five per cent EBITDA margin and a 14 per cent RONA and I am still comfortable that Ahold will deliver these figures from 2005 onwards. Shareholders want to know our expectations and in this specific situation we quantify our expectations. But in general we will be very cautious in expressing our future expectations.”
In a consolidating sector, how vulnerable is Ahold for a takeover? Can it easily be acquired or are there enough precautions taken for any (hostile) takeover?
“We are protected to a certain extent. But a hostile takeover of this kind of company is in my view very unusual. There is no risk, I think. We saved our company and settled its financing. We disinvested our underperforming assets and now we have strong local brands with a number one or number two position in the market. Ahold is well positioned for the future and we are going to operate this company to give Ahold’s shareholders a return. Now we have it in our own hands.”
Profile
Anders Moberg was appointed president and CEO of Royal Ahold on 5 May 2003.
Before joining Ahold he served as Division President-International, at Home Depot in the United States where he drove the company’s international expansion for a period of three years. Before that Anders Moberg worked almost 30 years for IKEA, a Swedish home-furnishings retailer. In 1986, at the age of 36, Moberg became president of IKEA and, in the course of the next 13 years, guided the company through a six-fold growth in sales. Anders Moberg is member of supervisory boards of the Danish-based companies LEGO A/S, VELUX A/S and DFDS A/S, and of Clas Ohlson in Sweden.
Road to Recovery
On 7 November 2003, Ahold announced the details of its new financing plan and strategy. The 'Road to Recovery' programme sets out Ahold's objectives for rebuilding the value of the company over the next three years.
• Strategic objectives set for food retail and US Foodservice through 2006.
• Deleveraging and enhanced liquidity through proposed €2.5 billion rights issue and contemplated €300 million and US$1.45 billion back-up credit facility, both fully underwritten by a syndicate of banks.
• Commitment to at least €2.5 billion in proceeds from disposals by 2005.
• Intention to divest Spanish operations.
• Return to investment grade profile by end of 2005.
Ahold has committed to delivering results in four key areas:
- Re-engineering food retail.
- Recovering the value of US. Foodservice.
- Reinforcing accountability, controls and corporate governance.
- Restoring Ahold´s financial health.
Source: Ahold
Royal Ahold - Sales & Profits (€mn)
| 2001 | 2002 | 2003 | |
| Net sales | 54,213 | 62,683 | 56,068 |
| Operating income | 1,911 | 239 | 718 |
| Net earnings | 750 | -1,208 | -1 |
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