Delhaize America paid a high price for Hannaford and is constantly being battered by Wal-Mart. Just how rough a ride is it in for asks Dave McCarthy Delhaize America recently acquired Hannaford Brothers for US$3.6bn and is now the number two player on the US eastern seaboard. However, Delhaize was forced to close all of Hannaford's south-eastern stores in order to gain Federal Trade Commission approval, and the benefits remain unproven. The chain is facing increasingly tough price competition from Wal-Mart and high-low price operators like Kroger. Delhaize America's dilemma is whether to protect margin or sales. It cannot protect both. The Delhaize Group owns 53% of Delhaize America. Any decision on the group buying a larger share will depend on management's confidence in its future. Prospects in the US hinge on Delhaize America's management and its ability to deal with a changing competitive environment as well as the successful integration of Hannaford Brothers. Delhaize America has been hit by the expansion of Wal-Mart in its markets. Approximately 26 Wal-Mart Supercenters were due to open in the first half of this year. The march of Wal-Mart is relentless and each year 30 or 40 Food Lion stores (the main Delhaize America banner in the south east) are being hit by a new Supercenter. This attrition has been compounded by other retailers fighting back, using high-low pricing similar to Safeway's strategy in the UK. In the first quarter of this year, Delhaize America refused to get drawn into the fight and tried to hold on to its margin. Unsurprisingly, the company's top line suffered, with like for like sales falling by almost 2%. Management finally recognised the problems and changed tack in quarter two. Price strategy was reviewed, with 100 key lines priced to match the lowest price in the market, and advertising was changed to push a strong price image. This was supported by local flyers. In sales terms, the strategy worked, with a near 2% like for like deficit turned into a 1% gain. Not the world's most spectacular recovery, but a move in the right direction. However, this was not without cost, and earnings per share fell 13% compared to second quarter 1999, as the pricing strategy bit into gross margin. Management is unrepentant and has stated that it will continue to take an aggressive stance on margin to grow sales. This is the right decision as experience has shown it is better to defend sales than to hold on to margin. The acquisition of Hannaford was completed at the end of July 2000, following Federal Trade Commission approval. The purchase is undoubtedly the right strategic move as Hannaford is a good business in its own right ­ but the debate centres on the high cost. The $3.6bn in cash, stock and assumed debt paid by Delhaize America for Hannaford shocked the market at the time and resulted in a 23% fall in Delhaize America's share price on the day the deal was announced. The onus is now on Delhaize America to deliver the synergy benefits promised ­ $40m in year one, $75m by year three. These are the original synergies and have not yet been adjusted for the sale/closure of the entire south eastern Hannaford Brothers business. The benefits will be driven by cost cutting, transfer of best practice, increased scale/buying power, and the sale or closure of the loss-making stores in the south-east. Delhaize America is at a crossroads. It has to run hard to make progress in a consolidating sector. The benefits of the Hannaford acquisition may be swallowed up by the increasingly competitive nature of US retailing. Certainly Delhaize America is searching for other ways to mitigate competitive pressures. Productivity gains, more non-food sales and management of the price architecture are all being used to protect operating margins and promote sales. The problem is that the competition is also pursuing its own growth plans. It is hard to see how Delhaize America can improve its competitive position vis-à-vis Wal-Mart by adding more non-food lines into existing stores. In the US, Wal-Mart is organically growing a business the size of Delhaize America every eight months. Where does this leave the Delhaize Group? It is the majority shareholder in Delhaize America and continually monitors the situation. So far it has not taken the plunge and bought out the minority. Whether it will do so depends on how Delhaize America is viewed. If Delhaize Europe decides the business has a strong long-term future, it makes sense to buy out the minority. If management privately share the bearish view, then why buy a bigger share of the problem? Dave McCarthy is an analyst with Schroder Salomon Smith Barney. {{FEATURES }}