Operating and Financial Review and Prospects
38
Ahold Annual Report 2003
Operating and Financial Review and Prospects
leading food retailer of choice in those markets in which
we choose to operate. We will continue to own and
operate retail companies that we believe can achieve a
sustainable first or second position in their markets
within three to five years, while also meeting defined
profitability and return criteria over time. We intend to
concentrate on fewer store formats, in particular,
supermarket formats. We are implementing a similar
strategy for our joint ventures to the extent possible. We
intend to divest companies and entities that are not
capable of meeting these objectives.
We are in the process of defining the best
organizational structure to take us forward. An important
step in streamlining our food retail businesses is our
harmonization process. As a first step, we are re
organizing our food retail business into regional
marketplaces with similar characteristics, which we call
arenas. The creation of arenas will allow us to maintain
the separate brands of each of our operating
companies, including pricing and product assortment,
while combining administrative control, information
technology, sourcing, finance and human resources
functions into a few, large integrated support service
organizations.
We are creating an arena in the U.S. which will
consist of Stop Shop and Giant-Landover. As part of
this, we are integrating the administrative and managerial
functions of Stop Shop and Giant-Landover, which
we expect will be effective by the end of the third quarter
of 2004. As part of this arena strategy, the corporate
headquarters for our U.S. retail trade business, currently
located in Chantilly, Virginia, will be closed and the
administrative functions currently performed there will
be integrated with those of the new business arena
being created, based in the Boston, Massachusetts area.
In the last half of fiscal 2003, Giant-Carlisle and Tops
completed the implementation of a shared services
arrangement. Under this arrangement, most of the back
office functions, including accounting, merchandising
and management oversight, now are performed at the
headquarters of Giant-Carlisle.
In mid-2003, we announced that the Dutch retail
arena would combine our Albert Heijn, Etos and Gall
Gall operations. By year-end 2003, we had already
established an arena for our food retail businesses in
Central Europe, with a central service center supporting
our businesses in the Czech Republic, Poland and
Slovakia. We have closed the European Competence
Center (the "ECC") which had supported the retail and
foodservice operations of our four European arenas: The
Netherlands, Nordic countries, Central Europe and
Iberia. Effective March 2004, services provided by the
ECC are being provided by the Ahold corporate
headquarters and The Netherlands arena, which is
expected to lead to harmonization and more effective
business process management, as well as improved and
more efficient infrastructure and control activities.
With this new organizational framework, we are
launching several strategic initiatives to improve
competitiveness and, ultimately, sales and profitability.
The areas being focused on include store operations,
product mix and offerings, information technology,
sourcing and supply chain infrastructure. We estimate
that these initiatives will achieve annual cost savings of
approximately EUR 600 million from 2006. A significant
portion of these savings will be reinvested in strengthening
our value and customer offering. This will require an
investment and a non-recurring expense incurrence of
approximately EUR 285 million from 2004 through 2006.
Recovering the value of USF
We are implementing a three-step program to restore
the value of USF.
Step 1 - Improving internal controls
and corporate governance
In mid-2003, USF initiated the first step in its value
restoration program: establishing a rigorous internal
control environment and strong corporate governance.
With respect to internal controls, USF will implement a
centralized supplier information system ("SIS") intended
to track corporate-based vendor allowance programs for
its broadline and chain divisions and provide greater
transparency of corporate-based vendor allowances to
its divisions. USF plans to complete development of its
internal controls and procedures relating to corporate-
based vendor allowance tracking in mid-2004. For a
description of the procedures implemented to improve
internal controls at USF, including those relating to
vendor allowances, please see "Corporate Governance -
Part III. Corporate Governance: Controls and
Procedures." Until the SIS corporate-level vendor
allowance tracking system is implemented, vendor
allowance tracking is being handled through an interim
spreadsheet vendor allowance tracking system.
With respect to corporate governance, USF has
taken a number of additional steps to strengthen its
governance structure. First, USF created a separate
advisory board to help implement stronger corporate
governance and accountability within the company. As of
April 15, 2004, the board was comprised of six
members, all of whom were Ahold employees or
members of our Supervisory Board. USF expects to add
two external members to the board in the near future.
The board had its first meeting in December 2003.
Second, USF has established a disclosure committee
consisting of senior members of the USF management
team. This committee is responsible for reviewing and
evaluating the business of USF to support management's
efforts to ensure the accuracy and completeness of the
company's disclosures and financial statements. Third,
USF has established and filled a new executive
leadership position to oversee the implementation of
improved governance processes throughout USF. Fourth,
USF has implemented supplemental reporting
relationships directly to our senior executives for several
members of the USF executive team.
Step 2 - Restoring profitability and cash flow
In late 2003, USF embarked on the second step in its
