Ahold has a weather eye open for retail thoroughbreds in northern Europe, so the nature of the successful partnership with Sweden's ICA is one which retailers here should watch. Julian Hunt reports
The way in which Ahold is spreading its tentacles around the world as it strives to become the first truly global food retailer is hugely impressive. And the way in which its has managed to build a significant presence in the Nordic region through a partnership with ICA is equally impressive. But more importantly, that partnership provides a valuable insight into the way that the Dutch group likes to do business.
The deal with ICA shows that Ahold is quick to spot opportunities; clever enough to exploit them, and flexible enough to make them work.
It's a great corporate yarn and the reason for recounting it here is simple: Ahold's boss Cees van der Hoeven has made no secret of his desire to move into the UK, and the ICA story provides plenty of clues to how he will go about that task and make any deal work.
The story of how ICA and Ahold got together starts in late 1998 when the Swedish food retailer announced it planned to float on the country's stock market. That news surprised many in Sweden where ICA which is a retailer owned group is something of an institution.
However, chairman and president Roland Fahlin says ICA retailers had come to realise that a flotation was vital if future expansion was not to be stymied by a lack of liquidity in the share base.
"Going public makes it easier to expand, because if you only have an internal market for your shares you don't really have a place to use them for making acquisitions or anything," Fahlin explains.
When The Grocer met Fahlin in Stockholm last month, ICA's suave and sophisticated chairman was in reflective mood having just announced plans to retire.
And, as the self confessed founding father of the Ahold deal, he was eager to talk about how events took such an unexpected turn in 1999.
"About a year after we announced we were thinking of going public, Ahold's Cees van der Hoeven asked us if we would be interested in talks," Fahlin recalls. "We very quickly realised that we could either go on the stock market and wait for a bid or, instead of doing the IPO, we could sell that share direct to Ahold. We decided it was a much better idea to go with a competent retail partner and in December 1999 we announced our partnership."
The deal was good news for Ahold, because it allowed the ambitious Dutch group to secure a strategically important base in the far north of Europe. And it made strategic sense for ICA, which was already looking nervously at the way Europe's food retail sector was consolidating.
ICA bosses clearly figured it was only a matter of time before somebody tried to move aggressively into the Nordic region so why not link up with Ahold?
Fahlin says ICA had no problem selling the deal to its retailers: "Our retailers understood immediately that this was much better than going onto the stock market.
"During the 18 months or so when we put together the IPO, some retailers became worried about how the shares would perform on the stock market. The Ahold deal also meant they got a good price for their shares," he says.
However, ICA was keen its retailers had a stake in the new partnership. "This is a very special type of organisation. It's a federated structure that is very integrated. The retailers own the company, we wanted them to stay as stakeholders albeit indirectly. They own the investment company that in turns own 50% of ICA Ahold."
Even after putting about a third of what they got from Ahold in the ICA investment company, Fahlin says retailers still had a substantial amount of money between SKr8bn and SKr9bn to invest in their businesses. Another significant plus point of the deal.
Okay, that's the history, and it demonstrates two important things. First, that Ahold had the nouse to spot an opportunity in the Nordic region. Second, that it was flexible enough to strike a deal that would maintain some of the unique characteristics of the original business, namely its federal structure.
"I believe it's important for entrepreneurial retailers to have a stake in the company. They need to create value in the company because that's where they have their shares. That means they will be happy if we increase our retail operations, and they understand we need profit," says Fahlin.
And it looks as if the unusual ownership structure will remain in place. After all, if Ahold had wanted the whole company it probably would have tried to buy it outright from the start.
Those who follow Ahold will not be surprised that it is happy with such an unusual and complex arrangement. Ahold's van der Hoeven believes it is important to let companies maintain a degree of independence albeit operating under the Ahold umbrella. He says this is possible only because Ahold has built up a "stable of retail thoroughbreds" all of them with similar cultures to its own.
Fahlin agrees this kind of thinking helped bring the two together: "When I listened to Cees speak a few years ago explaining Ahold's global policy I could hear my own words because he was saying the same things I had been saying in ICA although on a much smaller scale. You need to understand that the local business is the most solid. If you can capture these businesses, and integrate them, you get the synergies. That's a very strong formula."
He adds: "The cultures of Ahold and ICA are very similar and based on the fact we need to adapt to different markets. That approach is practical and realistic because food retailing is so fragmented. A top down approach where everything is decided in Zaandam is neither practical nor profitable. Ahold knows that and that's why it is so good at integrating mergers."
You don't have to look too far to find examples of Ahold's devolved management style. Take ICA's foodservice business. It's big, but lossmaking. And ICA is trying to turn it around. At the same time, foodservice forms a major part of Ahold's strategy to become a global food provider. But there doesn't seem to be pressure on Fahlin and his colleagues to hold on to their operation at all costs. "The approach and attitude of Ahold is, It needs to be profitable'. They don't say, We are in foodservice, keep it'. They want us to make it profitable and we will then see what to do next," he says.
The Swedish group probably enjoys greater freedom than most Ahold companies because it is not a fully owned subsidiary. But despite the company's status as a 50:50 joint venture, Fahlin says it is trying to act like any subsidiary in terms of its financial performance and the way it links into Ahold's support network and European Competence Centre to share knowledge
Ahold is big on the idea of sharing knowledge and best practice. Such talk inevitably sounds a bit soft and cuddly, but Fahlin insists there are tangible benefits to working closely with the Dutch group and its subsidiaries.
"It's not easy to give precise examples of how much we save or earn in specific fields, because it's such a complicated network. But when it comes to sharing best practice that's where the Ahold networking group comes in so useful. You are in a group of 6,000 people linked by the same experience. Whether it's store development or real estate, you can report what you are doing and get access to everybody else's achievements. I have high hopes of this type of networking and the most important synergies apply to this. Retailing is about knowledge and you have to get this from somewhere."
Fahlin says he is looking forward to having Ahold "rather deeply involved" in various logistics projects particularly in the area of fresh foods. He explains: "We are very good at dry goods distribution in Sweden but we need to develop our fresh food systems and can benefit from Ahold. That work is in progress."
This aside, the most tangible benefit of the partnership to ICA Ahold's shareholders and customers will come through the buying synergies that can be generated by sourcing through a single point.
This, after all, is one of the holy grails of retail globalisation. And Fahlin says the company is in the process of establishing buying on a European level within Ahold. He points out that the company took part in Ahold's recent global promotional programme, has long been active in the retailer marketing alliance AMS, and says it is, in any case, developing joint negotiations for the Swedish and Norwegian markets.
Fahlin admits multinationals don't particularly like the idea of regional buying, particularly as product mix and individual products vary from country to country, even when they come from the same suppliers.
"You have to prove the suppliers get something out of it, otherwise it is just showing power, which is not enough. You have to show it's worthwhile and has consumer advantages so suppliers will also benefit. Otherwise we can never make this happen."
He adds: "When you come to multinational suppliers there is a limit to what you can do as an independent company. You have to be an integrated company making decisions at one point.
"That's the idea of purchasing within Ahold Europe. Nobody can say exactly how far this will go. We intend to go quite far to buy on a Europan level."
For consumers the way goods are sourced is irrelevant, as long as they are able to buy what they want, when and where they want it. ICA knows this, which is why it has long operated different brands and formats in different countries. And Fahlin says that's other neat thing about the way Ahold works.
"Ahold's approach is to share as much as possible in the background in buying, distribution and marketing while meeting consumer needs in different ways. That suits us perfectly.
Everybody understands that food retailing is very local. You can run the same formats globally but that will give you a very small slice of the market. You need to be varied in terms of formats and be willing to adjust your formats to the markets in which you operate."
It's clear that Fahlin is chuffed to bits with the way the Ahold deal has gone. And if there's another important point to glean from ICA's story, it is this: Ahold does not make changes that mess up successful retail formats, strategies or management teams in local markets.
It devolves responsibility while trying to generate real synergies in other areas, notably buying and knowledge sharing. That the formula works both for Ahold and partners like ICA is not in doubt. Just look at the financial results of both companies and then think about how the Ahold formula could work in the UK.
Worried? You should be. If your company isn't in the frame for acquisition because it's not considered to be a "retail thoroughbred" then you are going to find life gets even harder when Ahold eventually arrives on these shores.
How Ahold makes mergers work
- It buys only retail thoroughbreds
- It doesn't mess with successful retail strategies in local markets
- It devolves management as far as possible
- It encourages knowledge sharing between member companies
- It generate synergies in areas where they really can be found, such as buying
ICA - a brief history
- ICA was founded in 1917 originally to support stores that were owned and operated by individual retailers
- Today, it is the Nordic region's largest grocery retail group with 4,600 stores in Norway, Sweden, Estonia, Latvia, Lithuania plus a joint venture in Denmark
- ICA also has a 50% stake in a joint venture with Statoil to develop 1,500 forecourt stores in Sweden, Norway and Denmark
- The group continues to run retailer-owned stores in Sweden, but is flexible enough to operate company owned and franchised supermarkets in other countries
- It runs different formats and brands across the region. ICA is the overall brand (with different sub formats) for its 2,000 or so Swedish stores. Rimi is a discount format that dominates in Norway, with some stores in Sweden. The brand name is also used in the Baltic States but for a more fresh food oriented offer
- ICA's vision is to become northern Europe's leading food retailer by offering the best value for money and service in stores adapted for local markets
- Its turnover rose 1.7% to SKr59,092m in 2000 having been adversely affected by lower sales in its foodservice division. Pretax profit was up 32% to SKr1,738m during the year
- In April 2000, ICA Ahold was formed. It is owned 50% by Ahold, 30% by ICA's Swedish retailers and 20% by Canica (the investment company of retailer Stein Erik Hagen and his family, which merged their Norwegian business with ICA in 1999)
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