EUR 850.00 For Business Accounts Only

Morningstar | ADRNY Updated Forecasts and Estimates from 29 Apr 2019

Post-merger, Ahold Delhaize Group is the fourth-largest grocer in the United States with more than $40 billion in sales, and it holds the number-one or number-two position in most of the markets in which it operates, with Albert Heijn in the Netherlands the group's most successful business unit, commanding dominant market share (35%). The company sports best-in-class free cash flow generation and has generally managed its expansion and operations prudently, with low levels of financial leverage and a strategy of financing its dividend and share buybacks using its ample free cash flow.Management has taken a conservative approach to integration, which lowers execution risk but leaves untapped potential benefits that a more aggressive approach would have yielded. We surmise that the merged firm will not be able to fully garner the benefits of scale to such a degree as to warrant a cost advantage. Heterogeneous business functions such as disparate distribution systems and a lack of direct control over quality and costs of own brands (outsourced production to third parties) do not allow the company to exploit its potential scale and brand strength in full; as such, we ascribe no economic moat to the firm's underlying business.We believe that the firm’s strategy going forward will primarily involve investments in expanding its online capabilities (click and collect, warehouses to increase order-handling capacity, and marketing) and selective price reductions, along with store remodeling investment programs in regions with intensifying competition (particularly the Southeastern U.S.).We expect cost savings (0.5%-1% of sales) that run in the background across the group to partially offset this more intense competitive environment. In the online retail market, although we believe the firm is well equipped to participate in the channel's growth in both food (Peapod, ah.nl) and nonfood (bol.com), we see an eventual partial cannibalisation of in-store volumes and a challenging environment (for both the company and peers) to drive in-store traffic in areas (U.S. Northeast and Netherlands) where online penetration gains momentum.