Differentiating Delhaize

Belgian retailer Delhaize is a prime example of a retailer that successfully defends its position against price competition in developed markets. With its innovative strategy and keen execution, it has built strong positions along the US East coast, in Belgium and Luxembourg. In emerging markets, however, Delhaize’s track record is less impressive. Its Indonesian business is isolated from the rest and after recent divestments of its operations in Slovakia and Czechia, Delhaize’s European operations are limited to Greece and Romania.

Pascal Kuipers

“A man sitting on a block of ice with his hair on fire is on average OK,” said Mike Haaf, Food Lion’s senior vice president Sales, Marketing and Business Strategy to the audience during last year’s ECR Europe conference in Stockholm. ‘Average’ is the word to avoid at Food Lion in the US and at any subsidiary of parent company Delhaize Group. Delhaize wants to be different.

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Haaf’s presentation is relevant to most retailers who – especially in developed markets – find themselves trapped in the market middle. Having nothing special to offer shoppers while being beaten on price by discounters at the one end, and quality by specialist retailers at the other end.
Food Lion was such a brand that was stuck in the middle. It no longer connected to its changing customer base. Therefore management decided to create differentiated brands, products and services to better meet customer needs. First of all, intensive research led to eight customer segments, e.g. young families (dubbed ‘babies & bills’), working couples without kids (‘DINKS with dollars’), families on a tight budget (‘getting by’) or retired people on a fixed income (‘golden years’). Then Food Lion stores were clustered based on look-alike stores catering to similar customer segments. Thus 13 unique store clusters were created with specific, local customer needs to which Food Lion could tailor its shopping experience.
Based on the conviction that retail occurs geographically and a store’s customer base and trade area consists of different customer segments, Food Lion intelligently created a differentiating approach within Food Lion’s brand personality. Between the extremes of price and quality/service, Food Lion now has a broad brand scope and it has developed additional flanking concepts to serve customers at both ends: price conscious people can opt to shop at Bottom Dollar, a pragmatic concept offering everyday best prices. Shoppers that are mostly sensitive to quality and service can shop at Bloom, a concept that aims to provide an accommodating, hassle-free shopping experience.

Constant innovation
This approach characterises Belgian retailer Delhaize Group, parent company of Delhaize USA to which Food Lion belongs. Differentiation and innovation is the name of the game in all of Delhaize’s operating companies and regions of operation.
According to chief executive Pierre-Olivier Beckers, Delhaize Group is focused on its two key strategic objectives: generating profitable top-line growth and pursuing best-in-class execution. “Key levers for top-line growth are the further differentiation of our store concepts, the sustained focus on our price competitiveness, our continued investments in store and market renewals and network expansion,” Becker said in mid-March at the presentation of the retailer’s 2006 figures. “Both top-line growth and executional excellence are enabled by one underlying driving force, supporting both objectives: constant innovation at all levels of our business: assortment, store concepts, systems and processes and people development. This allows us to move further away from the competition, it reinforces customer loyalty and enables cost savings,” Beckers said.
Food Lion is currently rolling out its customer segmentation and following its success Delhaize USA will also apply this know-how at Sweetbay. This is a superstore concept with a fresh food focus mostly located in Florida. A more or less similar store concept of Delhaize USA is Hannaford, stores of which are located in the north of the US East Coast (in New York and the states of New England).
Last year Hannaford launched ‘Guiding Stars’, a nutrition navigation system to help customers make the best nutritional choices. Guiding Stars has been designed in collaboration with an independent scientific advisory committee. “Customers reacted enthusiastically to this system and already approximately a quarter of them indicate that they have increased their shopping at and loyalty to Hannaford,” Beckers said. “Other operating companies of the group are planning the implementation of this innovative system as well.”

Knowledge exchange
Where Wal-Mart’s operations are geared to its so called ‘productivity loop’ (low cost gains invested in lower prices to attract more customers which increases sales and buying clout which in turn leads to lower purchasing costs, etc.), Delhaize’s management is convinced that innovation is the key. Figure 1 shows Delhaize’s ‘innovation loop’ and Figures 2 and 3 show that this strategy is paying off in the competitive US retail market, which accounts for some 72 per cent of Delhaize Group’s total business.
“Key levers for executional excellence are the development of best-in-class tools, systems and processes, rigorous cost management, Group synergies and the exchange of best practices,” explains Beckers. Examples of knowledge exchange are joint training of management and staff, Food Lion, Hannaford and Sweetbay leveraging each other’s capabilities with regard to energy and waste management, sharing of sales expertise (e.g. Hannaford’s wine category is based on expertise of Delhaize Belgium), organisational knowledge exchange (Alfa-Beta in Greece is building a franchise operation for independent retailers and its managers are consulted by advisors from Delhaize Belgium with specific experience) and private label development. In Belgium, Delhaize is a frontrunner, especially in own label prepared meals. Such knowledge is shared within the Group. Subsidiaries of Delhaize USA have an integrated private label strategy which includes sharing own brands (e.g. Hannaford’s own label ‘Inspirations’ is also sold via Sweetbay) and building a three tier offer with premium, standard and value lines. Delhaize Belgium has private label expertise, with a quality regular private label, an organic private label line called Bio, and a value label named ‘365’. The latter is used in Delhaize’s operations in Europe. However, this European value line ‘365’ would have to be rebranded for use in the US in order to prevent trouble with Wholefoods’ private label namesake.

Figure 1

Figure 2

Figure 3

The main example of systems exchange is ACIS. This is a system for inventory and margin management which has been developed by Hannaford. ACIS allows for real time information on inventory and margin per item and this gives managers valuable insights to support their decision making to reduce out-of-stocks and cost levels and optimise sales and profitability. In 2003, ACIS was rolled out to Food Lion and Sweetbay and since early 2006 Delhaize has implemented ACIS in Belgium.
Other innovative tools and systems that are being rolled out at Delhaize’s operations include a computer-assisted ordering system at Hannaford, new planogram software allowing design of store-specific layouts for Hannaford, Food Lion and Delhaize Belgium and new pricing software enabling the creation of price zones, which supports Food Lion’s regional pricing policy.

Emerging markets
Where its multinational retail peers often look at expansion to emerging markets to secure future sources of growth, Delhaize proved successful at retaining its position in developed markets. Like others, Delhaize also set up shop in the emerging regions of central and eastern Europe and Asia. Contrary to what Delhaize achieved in developed markets, however, the retailer’s track record in emerging markets looks less impressive with market exits from Slovakia (1998-2005) and the Czech Republic (1991-2007) in eastern Europe and Singapore (1999-2003) and Thailand (1997-2004) in Asia.
Outside its domestic and main markets in Belgium (including operations in Luxembourg and Germany) and the US, Delhaize is now represented in Greece (since 1992) and Romania (since 2000) in south-eastern Europe and in the Asian region in Indonesia (since 1997). This is clearly not a position in emerging markets that the retailer’s management envisaged when it decided to venture to the emerging regions of eastern Europe and Asia in the 1990s. “Indeed the largest share of our business is in developed markets but that doesn’t mean that there is no growth potential in these markets,” says Delhaize’s spokesperson Hans Michiels. “Our operations in Romania and Indonesia add to our bottom line and allow for future growth. We have an investment strategy designed for these emerging regions.”
Still, the geographically remote Super Indo operation in Indonesia looks more like a relic from the past when Delhaize had plans to build an integrated multinational operation in Asia. Despite Super Indo’s profitability, the question remains whether investment in Indonesia is not of less importance than investing Delhaize’s operations in south-eastern Europe or in its core markets. “In Singapore we didn’t consider a market exit, but we received an offer we simply couldn’t refuse,” explains Michiels. “We sold that operation at a premium price which we think was unattainable in the saturated Singaporean market for years to come. Thailand is a difficult market where we had a bad position. The required investments to turn things around there were much too high. Indonesia, however, is a different story. Super Indo is performing well and is set to grow further. We don’t consider selling that operation.”

Ahold
With regard to M&A activities, chief executive Beckers stated that he never rules out larger acquisitions, but that such activity is not a short-term priority. In recent years, Delhaize did several medium sized and smaller “fill in” acquisitions, like 43 Cash Fresh supermarkets acquired in Belgium in May 2005 and in September 2004 Hannaford acquired the 19 store chain Victory Supermarkets. In the meantime Food Lion and Hannaford expanded their networks with small acquisitions, mostly from family run four or five store operations.
The main news on Delhaize in 2006 was no news in the end: the merger with Ahold, which has been rumoured about since September last year. Delhaize always denied that it had been in talks with Ahold, and its management is unwilling to comment. With such a merger and other large acquisitions off the radar screen, there is no need for cash-generating property activity which is currently fashionable among leading international retailers. “We don’t see it as a priority as we don’t need the money to invest in our business,” Beckers commented last March to analysts, after presenting the 2006 results.
“We own fewer than 350 stores of the 2700 stores we currently operate,” Delhaize Group’s chief financial officer Craig Owens told the analysts. “Most of the owned stores are from Delhaize Belgium or Hannaford. We don’t have a market valuation of these stores but they represent a retail and real estate value.” “The north-east of the US is a stable environment where it is better to own stores, like in Belgium,” Beckers added. “The US’ south-east is more volatile so there it’s better to lease. This makes us more flexible.”
Still, the tie up with Ahold could become a reality this year, if Ahold succeeds in selling its US Foodservice subsidiary. During the presentation of Ahold´s 2006 annual figures on 22 March last, Ahold’s board appeared very optimistic about the bidding process for US Foodservice and stated that it expected to complete its divestment this year.
One week earlier, Delhaize’s CFO Craig Owens said that Ahold would become “more complementary” to Delhaize once US Foodservice would be sold. He denied any comment on alleged talks with Ahold but he admitted that Ahold was a good geographic fit despite some overlap in US key markets.
From Ahold’s perspective, the board admitted that its US operation is in dire need of renovation because all Ahold’s US subsidiaries – with the exception of Giant/Carlisle – recorded a negative identical sales result in 2006. And as it turns out, such a reorganisation in a developed market – in the US in particular – just happens to be Delhaize´s speciality. Therefore speculation on a Delhaize/Ahold merger is likely to continue.