Giant Food Inc. and five other U.S. supermarket chains owned by Royal Ahold NV went into "triage mode," turned "a bit more frugal" and pulled back on plans to remodel some stores in the weeks after Ahold got enmeshed in a major accounting scandal, one of the company's top executives said yesterday.
The first order of business was to reassure the supermarkets' workers about the company's health and to hand out bulletins to help them address customer concerns -- which have been minuscule at this area's 150 Giant stores, according a survey by Giant. Next the supermarket's suppliers got letters guaranteeing business as usual.
Since then, only two of the 40,000 suppliers have asked for "modest adjustments" in payment terms, said William J. Grize, president and chief executive of Chantilly-based Ahold USA Inc., which oversees the supermarket chains. All suppliers have been paid on time, he said.
"We went through this wide range of emotions, anywhere from shock and concern to denial and anger and ultimate resignation and acceptance, like you do when faced with death or a severe illness," Grize said in a telephone interview.
Royal Ahold's troubles were triggered after problems were discovered during an audit of Columbia-based U.S. Foodservice Inc., a subsidiary that distributes food to restaurants and other institutions. Auditors discovered letters indicating U.S. Foodservice had not received the level of rebates it listed in its financial books, according to sources. The discovery prompted Royal Ahold to announce it had overstated profits by at least $500 million in 2001 and 2002.
The Feb. 24 announcement sparked probes by the Securities and Exchange Commission and the U.S. attorney in Manhattan.
Grize declined to comment on the investigation or the scandal's effect on James L. Miller, U.S. Foodservice's chief executive. But he said he personally supports Miller. "He's proven to be a good ally," Grize said. "I have good feelings for Jim, and I really hope this thing works out quite well for everybody, as he does."
Grize said Ahold's retail arm is independent of Miller's business and has not been implicated in the scandal. "They are two totally separate businesses in the way they are run," he said.
That's not what Royal Ahold envisioned when it purchased U.S. Foodservice in 2000. Back then, officials said that sharing suppliers and administrative tasks with U.S. Foodservice would help the parent company save at least $75 million by 2001.
"We have not gained the synergies we had originally anticipated," Grize said yesterday. He said Royal Ahold got "roughly one-fourth to one-third of what we had originally talked to" the financial community about and "we got those almost by accident, without a great deal of effort."
Ronald W. Cotterill, director of the University of Connecticut's Food Marketing Policy Center, said the failure to recognize the cost savings anticipated when U.S. Foodservice was purchased may be one reason food prices at Ahold stores are high in certain regions. "Their thrust for earnings growth and their inability to capture savings from synergies has led to higher prices in areas where they are dominant," said Cotterill.
Some analysts have suggested that Ahold might raise prices because it is under pressure. But Grize said he "absolutely and unequivocally" denies it. In fact, he said, Ahold is cutting prices to stay ahead of rivals.
Ahold USA operates Stop & Shop, Bi-Lo, Tops, Bruno's, Giant of Carlisle, Internet grocer Peapod, and Giant Food of Landover, the Washington area's dominant supermarket chain.
Royal Ahold obtained a vital new bank loan but had to pledge as collateral its highly prized chains, including Giant Food.
The loan means the supermarkets have access to cash, Grize said. Plans to open one Giant store a month this year are still on track, as is a program to open or replace 60 stores in the chain, according to Barry F. Scher, Ahold USA's vice president of public affairs. A distribution center in Jessup is still slated to open in July.
But store remodeling, including at some Giant stores, may be delayed as the company studies its cash flow, according to Ahold officials, who declined to say which stores might be affected.
Seafax Inc., a credit reporting service, said yesterday that a major company that insures "accounts receivables" has reduced coverage to a few suppliers who do business with Ahold chains. That means some suppliers could be left in the lurch if the supermarkets fail to pay their bills, said Beth Gideon, head of Seafax's special investigations.
Robert D. Burris, president and chief executive of Burris Logistics Inc. in Milford, Del., said he will continue to supply meat and poultry to Giant of Landover. "If anyone has a right to be nervous, we have a right to be nervous," Burris said. "We're not. We're even bidding on additional business with them."
Grize said he thinks Ahold will be struggling with this uncertainty for some time. "I wish I could tell you that by this summer everything will go away. I believe that's highly unlikely. It's just a very, very complicated situation."