November 28, 2019

CEO Frans Muller talks Ahold Delhaize

Ahold Delhaize CEO Frans Muller (photo: Philipp von Bruchhausen)
(photo: Philipp von Bruchhausen)
Frans Muller: "What you kill is what you eat"
Frans Muller may be a mild-mannered gentleman with a pleasing dash of humour, but he's a frustrating CEO to interview. He won't tell you whom Ahold Delhaize wants to buy next or if the Dutch retail giant intends to do a spin-off! As a matter of honour, he won't even talk about one of his former employers, Metro Group.

But as disappointing as these silences are to the journalist, the more one is grudgingly obliged to respect the man's loyalty to shareholders and corporate governance.

Before we praise this 58-year-old Dutchman to death for not delivering the crown jewels free-of-charge to our doorstep via the company's online services Peapod or, why should you, dear reader, peruse these lines further?

Perhaps to compensate for not being able to field share price-sensitive questions, Muller was prepared to talk generically about the strategic issues he faces at the helm of this €63bn-odd behemoth...

"We've gained a lot of credibility"

Ahold Delhaize CEO Frans Muller (photo: Philipp von Bruchhausen)
(photo: Philipp von Bruchhausen)
Ahold Delhaize CEO Frans Muller
Mr Muller, how near are you to successfully completing the July 2016 merger of Ahold and Delhaize?
Any merger has several dimensions. The most difficult challenge is to bring people together and to get two different teams pulling in the same direction. I think we've done a very good job here.

If you look at the integration of the two corporate cultures, we're 90 per cent through, which is a considerable achievement in such a relatively short time.

If you look at the gross synergies of €750m, of which we have reinvested €250 million in our business, we have achieved 100 per cent. As regards leaving the underlying operational business unaffected, I'd also give us a 100-per-cent score.

Around half of all mergers fail due to the difference in corporate cultures. How did you manage to get both teams on board so quickly?
There is a nice American expression: 'What you kill is what you eat'. In other words, the synergies saved on the US East Coast were reinvested there and not in another part of our international business in, say, Romania. I think that our adherence to this simple principle really helped to motivate the local teams.

Are there still future challenges connected with the merger?
We must continue to hone the efficiency of our US supply chains, including our IT back-office systems. We operate in a number of countries where we already run first-class SAP systems, but we inherited some systems in the US which have to be synchronised.

This is actually an opportunity because you can transform two legacy systems into a new IT solution that is the best of breeds.

These are things that one obviously can't do on Day One because they’re too complex, and one doesn't want to have all the balls up in the air at the same time when one is conducting a big merger.

What are your top-line growth plans for next year, 2 to 4 per cent?
I don't know where you've got those figures from because we haven't issued any guidance on sales.

But there are two things which are obviously very important when one talks about growth. Firstly, the most impressive form of growth is same-store sales growth. This is what I personally like to see most as it is a clear indicator of our competitive strength.

Secondly, when one states a percentage, one should be clear that one isn't just talking about nominal growth. This doesn't tell me anything, if I don’t factor inflation levels into the equation. So I far prefer to talk about volume growth, which has been corrected for inflation.

Obviously I then want to see positive volume growth, but we haven't defined future levels for the outside world.

How about growth via acquisitions?
We have a very strong balance sheet and financial base. We would always use these advantages, if we were convinced that an acquisition would be a strong accelerator of growth. So we look at the markets where we are operating to see if we can deepen our footprint and gain market share via fill-in acquisitions.

Presumably these will be in the region of around €250m to €300m per annum?
I don't see any limitation. That doesn't mean, however, that the sky is the limit. We operate within our financial metrics.

Obviously buying a packet of just, say, ten stores in a geography where we are already active clearly makes integration far easier because we can then use existing supply chains. This doesn't, however, preclude larger acquisitions in existing or adjacent markets, where these make strategic sense.

So presumably the €2bn annual capex figure you have announced recently for the next three years is exclusive of M&A?
Correct, and free cash flow over the same period will be €1.8bn per annum.

You steered Delhaize into the merger with Ahold in 2016. Now that both companies have been integrated, wouldn't you be exactly the right person to execute another merger through a second US integration with, for instance, Kroger?
Obviously, as a large international group we regularly conduct general strategic portfolio work in both the US and Europe looking to see if there are any viable options for external growth. But we don't share our insights with outsiders or allow ourselves to get involved in any speculation.

But one of the main driving forces behind the Ahold Delhaize merger was the opportunity to glean €750m in gross synergies. Why not go for a deal with Kroger that could potentially release as much as €1.8bn in gross synergies?
We don't speculate about this type of thing. What I can say, however, is that the efficiency with which our teams integrated Ahold and Delhaize has given our company a lot of credibility.

In addition, all our retail brands in the U.S. are locally organised in terms of pricing, category management, marketing, and go-to-market mandates. Our other services, such as IT, real estate, supply chain etc., are centrally structured. So this structure, which we put in place in a very short time, is very fit to grow via acquisitions.

Synergies are obviously important to you, but there would seem to be relatively few between your European and US businesses. Would it therefore not be in the interest of your shareholders to spin one of these off?
So far we've felt no reason to entertain any such idea because we believe that we can create value ourselves and that we have done so with the merger. It's our job to create value for all our stakeholders. We look at return on capital, growth,  earnings per share etc. in order to participate in the consolidation of the US market.

Your question has often been put to both Ahold and Delhaize individually over the last ten years, but more so in the past because the multiples at our two European and US businesses were so different. They are now pretty close. So when I now do the rounds with capital markets during our roadshows after each set of quarterly results, I don't hear this question very often anymore. I think our good results are the best reason for this.

Does the same apply to your businesses in central & south-eastern Europe?
We're growing very nicely in the region and have a very positive, double-digit ROCE (return on capital employed) there. So, when I ask analysts whether they would like to give me an example of where we could earn more money, there is now usually silence.

Of course it's the role of management to come up with such alternative scenarios, but we feel comfortable with our current portfolio.

E-commerce is one of your strategic growth areas. Is it correct that around half of your online sales growth will come from the integration of more click & collect points within your stores and half from extending your home delivery service?
The Dutch market is 95 per cent home delivery. In this respect it's very similar to the UK. In the US with our online subsidiary Peapod we have a history of next-day home delivery. But the market is growing in a different way to how we were originally set up.

Almost all the grocers there are now growing more with click & collect, which is why we currently have over 600 facilities on the East Coast.

We were nearly 100-per-cent next-day home delivery via Peapod, but have seen the market shift quite fast towards click & collect. This is because a lot of grocers have neither the capability nor the proprietary competence to offer next-day delivery.

Also there are third-party companies which organise a front-end for the grocer where customers can order online and pick up from the store.

So now that such third-party GIG companies have come into the game, they have boosted the ticket dramatically and educated customers. This has helped us grow our business much faster through click & collect as there is more appetite and acceptance from the market.

For a lot of customers click & collect is still a perfect solution because it saves time. It is, of course, also more economical for us.

Why then do you still charge your customers a basic online fee?
In my opinion, there is no grocer who makes money with e-commerce in food. Don’t believe them, if they tell you to the contrary!

So why are you planning to increase your annual e-commerce growth rate in the US from 20 per cent this year to 30 per cent in 2020?
We believe that if you offer customers an omni-channel proposition they will become more loyal because that’s what they want. Therefore, if you don’t deliver online components, you might risk losing your bricks & mortar business with these customers too.

So how do you make e-commerce more profitable?
Through a better mix between click & collect and home delivery; higher productivity via robotized picking centres; and getting your fees structure right. Also, if you have the whole package under one brand, then you'll get much more value out of the customer and your share of wallet will grow.

Could you reveal more about the micro-fulfilment centre technology you are testing? And why has there been a delay in its rollout?
I admit that it has taken longer than we expected. This is because we have to better understand and to make some adjustments to the interface between the software of this machine and our proprietary warehouse management systems.

The other issue is the overall productivity of the machine which picks in both a chilled and ambient environment. We obviously have to make sure that productivity levels are met before we roll out anything.

So it's still in the test phase, but we are making good progress now. And I think that in the first quarter of next year we will know where we are on this.

Given your vast international store base and the dynamic increase in the number of online shoppers, do you intend to gradually reduce the average size of your shops as their leases expire?
What you see everywhere in the US is that certain elements of the center store viz. dry grocery space, such as pet food, diapers etc., are moving online. Preferably, customers will use our online service when they do so.

When we remodel our stores, we therefore slightly reduce the space we allocate to our center store areas by one or two aisles and increase the area of our fresh produce offer on the store perimeter.

This has also allowed us to enhance our fresh theatre by introducing new attractive elements such as kitchen and a bakery as well as cheese, deli and floral departments.

What are your growth assumptions for online in the US?
Market researchers generally agree that the e-commerce share of the US food market is around 3 per cent, but it is obviously higher in certain metropolitan areas such as Boston or New York.

Online could eventually double in the US, but it is not going to triple in two or three years.

Why are levels so low in the land of the 'FANG' companies, when online penetration of the UK food market is already around 6 or 7 per cent?
Urban population densities in the US are very different to those in the North-West of Europe. Also, the Americans love choice. And to run an e-commerce proposition with 40,000 food lines is a very different story, especially as their product maturities and life-cycles are very different to non-food.

So the underlying value is much lower and the complexity of temperature much higher. Thus the profitability one can play with is very much smaller.

That's why I believe Americans will continue to love their stores, even though they’ll seek a slightly different proposition, including e-commerce services, when they shop there.

So how do you intend to capture this demand?
We'll have to be more creative as regards what we make of our stores and use more space for kitchen purposes. The US out-of-home market is growing quite fast, so why not take your breakfast or a meal in one of our stores?

We'll therefore act more vertically and use the store more as a restaurant by increasing our gastronomic out-of-home offer, including convenience meals and meal solutions etc.

Also our stores will change in character. We must create an attractive proposition, where we forge a link between the store and the community, health and nutrition. 

Ahold Delhaize is a member of European buying groups AMS Sourcing for own label and Coopernic for A-brands. These and other alliances have escalated conflicts with manufacturers recently…
I don't know what suppliers you've been talking to. Coopernic offers great opportunities for suppliers via enhanced European distribution.

But some suppliers complain that they're being confronted with demands for better terms & conditions beyond those which have already been negotiated on a national basis. How do you react to this criticism as the current president of Coopernic?
Our own buying teams in the Netherlands, Belgium or Romania etc. don't even know what the agenda of Coopernic is. They don't know the targets or even the outcome of any negotiations until everything has been concluded. They certainly don't mix this up with national negotiations because there are Chinese walls within our organisation.

At Coopernic one of our senior managers assists me on the negotiating team so that we can set the targets. He is not involved in any national negotiations and isn't even allowed to talk.

But don't such European buying alliances just add another level of complexity?
Negotiations at Coopernic are simpler than some people think because they wrongly assume that we negotiate trade terms. In fact, we don't negotiate pricing or vendor allowances. We only negotiate an overrider or an on-top amount for our total European distribution relationship.

Coopernic is not a buying organisation. We are a very compact group of only four retailers, so it's quite a simple process. We're currently preparing a board meeting for the end of November and negotiations are running well. We're farther with our total negotiation results than last year and with less conflict.

I think, however, that we could be much more creative. In the US, for example, we have a programme called East Coast Events where we can support vendors to do a rollout of new product introductions in 2,000 stores in one go.

If what you say is true, why do suppliers complain about the way they are treated by such buying alliances?
If I come home at night with tears in my eyes and my wife asks what's making me sad, I say 'Suppliers claim they can't make any money!' Do you know, we make a 4 per cent margin above-the-line, which is very good for a European retailer, but large manufacturers make 10 per cent or more! That's a very big difference.

Consumers should be aware that branded goods of large manufacturers are often only made in three factories. So why do we have different pricing on each of its 27 national markets? Why aren't we seeing a faster move towards European-wide prices? After all, if we could simplify things, then it would make all our lives easier.

Huge national price differences for standard branded commoditised products undermine all the advantages of a single European market. They also make supply chains unnecessarily complex and don't make for more transparency as to where the money is made.

This isn't our fault as retailers because we are more than open to more price transparency. It's also unfair that suppliers seem perfectly happy when large discounters buy centrally although they are much bigger than we are.

I'd like to get more efficiency into the supply chain and for there to be more price transparency for our customers. It's very difficult for them to understand why someone in France should cross only one border to the south and find that a can of soda is 25 per cent cheaper.

So let's have more price consistency and transparency in Europe, please.

Our thanks to Management Forum for their help with organising this interview after Frans Muller's speech at this year's German Retail Congress (Deutscher Handelskongress) in Berlin.

Lebensmittel Zeitung with its online sisters (photo: LZ)
photo: LZ
Our German retail B2B newspaper, Lebensmittel Zeitung, in print & digital
Read in German: 'Frans Muller fordert Europapreise' and 'Wir schaffen echtes Retail-Theater' by international editor Mike Dawson on pages 4 viz. 28 & 29 of Lebensmittel Zeitung, no. 48, 29.11.2019

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