Management's discussion analysis
125.8%^
OVERVIEW
This section provides a discussion of matters we consider important for an
understanding of our results of operations, financial position and liquidity as
of and for our two most recent financial years.
In this section we will discuss in particular the following:
significant factors affecting our results of operations
and financial position;
our results of operations on a consolidated basis and then
on a business segment basis;
our liquidity and capital resources;
our contractual obligations;
our off-balance sheet arrangements;
our critical accounting policies and estimates;
future accounting changes; and
our risk management and use of financial instruments and
derivatives.
We are an international group of food retail and foodservice
companies that operate in the U.S. and Europe.
The following charts set forth information regarding our
consolidated net sales by business area and by geographical
area for 2005:
33.4%
66.6%
Food Retail I
Foodservice
74.2%
European Operations
U.S. Operations
The following market factors and trends affect us and our
competitors in the markets where we operate:
Increased labor expense. The rate of increase for health
care, pension and insurance costs in the U.S. is outpacing
the rate of growth of food retail and foodservice industry
sales.
Competition. The food retail industry in the U.S. and
Europe remained extremely competitive in 2005.
Promotional activity by traditional supermarket
competitors remained at high levels throughout the year
while competition with alternative retail formats continued
to intensify in our markets. The food retail industry has
relatively low profit margins in general. Increased price
competition is putting additional pressure on already low
profit margins. Conventional supermarkets are
experiencing erosion of their markets because of
customers shifting to alternative retail formats, natural
and organic food, "food-away-from-home" and, in the
U.S., fewer customer visits per year and lower average
sales per transaction. The foodservice industry in the U.S.
is also competitive, as competitors continue to make
significant investments in improving operating
efficiencies. We expect that these markets will continue
to be competitive.
Foodservice industry growth. The foodservice market in
the U.S. continues to experience a positive growth trend
as consumer food purchases continue to shift toward
"food-away-from-home." Foodservice industry growth,
however, is skewed toward growth in the less profitable
multi-unit customer segment.
Pressure on foodservice profit margins. The rapid
fluctuation of costs for foodservice resale products
impacts profit margins when those fluctuations cannot be
passed along to customers on a timely basis. In addition,
increased pressure on pricing will continue from large
customers and cooperative buying groups based upon
their purchasing volume.
Transportation cost increases. Profit margins and
operating expenses are being pressured by increases in
transportation costs, reflecting high fuel prices and
increases in energy costs that exceed the rate of food
price inflation. The increase in fuel costs has also eroded
AHOLD ANNUAL REPORT 2005 53
