RISKS RELATING TO OUR INDUSTRY AND
BUSINESS
may adversely affect our effective tax rate which could have
a material adverse effect on our financial position, results
of operations and liquidity. In addition, any examination by
the tax authorities could cause us to incur significant legal
expenses and divert our management's attention from the
operation of our business.
We are a low margin business and our operating income
is sensitive to price fluctuations.
Our retail and foodservice businesses are characterized by
relatively high inventory turnover with relatively low profit
margins. We make a significant portion of our sales at prices
that are based on the cost of products we sell plus a
percentage markup. As a result, our absolute levels of profit
will go down during periods of food price deflation,
particularly in our foodservice business, even though our
gross profit percentage may remain relatively constant.
Additionally, our foodservice business profit levels may go
down in periods of food price inflation if we are not able to
pass along to our customers in a timely manner cost
increases from our vendors. In addition, our retail and
foodservice businesses could be adversely affected by other
factors, including inventory control, competitive price
pressures, severe weather conditions, unexpected increases
in fuel or other transportation related costs, volatility in food
commodity prices and difficulties in collecting accounts
receivable. Any of these factors may adversely affect our
financial position, results of operations and liquidity.
We are subject to intense and increasing competition and
industry consolidation. If we are unable to compete
successfully, our financial position, results of operations
and liquidity will be adversely affected.
We continue to experience intense competition in our retail
trade business from other grocery retailers, discount retailers
such as Wal-Mart in the U.S., and other competitors such as
supercenters and club, warehouse and drug stores. Our
foodservice business in the U.S. similarly faces intense
competition from competitors including Sysco, regional
distributors, specialty distributors and local market
distribution companies. Consolidation in the food retail and
foodservice industries due to increasing competition from
larger companies is likely to continue. Our ability to
maintain our current position is dependent upon our ability
to compete in these industries through various means such
as price promotions, continued reduction of operating
expenses where the cost savings are reinvested in our value
and customer offerings and, in the case of our food retail
business, store expansions. A number of our retail
operations have started price repositioning programs
designed to halt or prevent market share loss, increase
market share and/or to increase the ultimate levels of profit.
A successful price repositioning program requires careful
and well-timed management of a number of complex
factors, including efficient inventory management,
negotiations with vendors of national and private label
products to reduce prices without reducing quality, cutting
staffing costs without compromising the quality of service
and effective communication of new prices to shoppers. We
cannot assure you that these programs will be successful or
that our competitors will not counteract and engage in price
competition against us. Any of these factors, or any
combination of them, could have a material adverse effect
on our financial position, results of operations and liquidity.
In addition, our reduced capital expenditure program could
restrict our ability to compete and could lead to a loss of
market share in our key markets in the U.S. and the
Netherlands. The food retail and foodservice industries are
also highly sensitive to changes in customer behavior. As
discussed above, our significant level of debt limits our
flexibility to react to changes.
While we believe there are opportunities for sustained and
profitable growth, unanticipated actions of competitors and
increasing competition in the food retail and foodservice
industries could continue to negatively affect our financial
position, results of operations and liquidity.
We face risks relating to our IT outsourcing initiatives.
In November 2005, we signed several major IT outsourcing
agreements relating to various IT services in the U.S. and
the Netherlands. In connection with these IT outsourcing
initiatives, it is possible that we may encounter unforeseen
technical complexities that we may be unable to resolve, or
that the resolution of such complexities may lead to delays
in the implementation of these initiatives. Our management
may be required to devote more attention than anticipated
to matters related to these outsourcing initiatives, including
matters related to internal controls and financial reporting.
Any of these risks may cause us to incur unanticipated costs
and may prevent us from obtaining the expected benefits
and cost savings of the IT outsourcing initiatives, or from
obtaining such benefits and savings as soon as we expect.
Our failure to implement these IT outsourcing initiatives in
a timely and cost efficient manner could have a material
adverse effect on our financial position, results of operations
and liquidity.
AHOLD ANNUAL REPORT 2005 43
