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Giant's Merger Hurt Morale, Executive Says

Analysts Told of Plans To Improve Company

By Michael Barbaro
Washington Post Staff Writer
Tuesday, November 30, 2004; Page E01

PHILADELPHIA, Nov. 29 -- The merger of Giant Food with its corporate sibling hurt employee morale at the Washington area's largest supermarket chain, the chief executive of the combined operation said Monday.

"We need to win our people back," Marc E. Smith said in a presentation here to stock analysts who cover Royal Ahold NV, the Dutch conglomerate that last year combined its 200-store Giant chain with Stop & Shop, a 348-store operation based in the Boston area.

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Smith said Giant's 25,000 employees were jolted by the decision to lay off 600 workers at the chain's Landover headquarters. "When you let 600 people go, that sends a shock wave through an organization," Smith said.

Now, he said, management needs to win over Giant workers by improving the chain's operations and providing "a long-term plan that clearly signals we will invest in the market and that their career aspirations will be met."

Smith said the merger of the two chains will result in substantial cost savings, which the stores will pass on to consumers. But he acknowledged that the transition, which began in February 2003, has been bumpy.

At Giant, the integration of computer and distribution systems interrupted the movement of products to stores, temporarily increasing the number of products out of stock, Smith said in an interview .

Giant's information technology, from payroll processing to cash registers in stores, was replaced with systems from Stop & Shop. "Employees had to learn how to use entirely new systems," Smith said, and there was "angst" as Stop & Shop employees were brought in to train them.

Giant employees complained about the changes to managers and to shoppers, Smith said. "We have disappointed some people with what we have been able to accomplish," Smith said.

Smith said each chain contributes strengths the other could emulate. Giant's strengths are its pharmacy, seafood, bakery and community service operations, he said, while Stop & Shop has strong produce, meat and flower departments.

Discussing the merger, William J. Grize, the head of U.S. retail operations for Ahold, told the analysts the company is "not totally pleased with the results to date," adding, "We will make it better."

During his presentation, Smith said Giant and Stop & Shop must offer more competitive prices and renovate aging stores to compete against an influx of new food retailers in both the Washington and Boston regions.

Giant, in particular, he said, will require a major investment in store renovation and replacement. Smith said the average Giant stores is 8.7 years old, compared with an average age of 6.4 years for Stop & Shop's stores. "The Giant number calls out for a significant amount of investment over the next few years," Smith said.

At the same time, consumers perceive prices to be high at Giant and Stop & Shop. "We need to do better on this measure," Smith said during his presentation. He did not elaborate.

Giant, a Washington retail institution, was co-founded in 1936 by Nehemiah Myer "N.M." Cohen and Samuel Lehrman and was long run by Cohen's son Israel "Izzy" Cohen, who died in 1995. Ahold bought the company in 1998. Last year, in an effort to cut costs, the Dutch company decided to merge Giant's operations with those of Stop & Shop. But the process of merging the two grocery chains has distracted managers and store employees, resulting in disappointing performance in 2003 and the beginning of 2004, Ahold executives have said.

Giant's revenue in 2003 was $5.94 billion, up 0.9 percent from the year before. Stop & Shop's revenue for the year was $11.17 billion, up 6.1 percent.

Smith said contract negotiations with local unions representing Giant and Stop & Shop, both completed earlier this year, did not result in the kind of health care savings Ahold had hoped for, with existing employees still contributing little toward their benefits. Smith said the two chains would push the issue in future contract negotiations.

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