Risks relating to tax liabilities
Ahold may face tax liabilities in the future, including
as a result of audits of its tax returns.
Because Ahold operates in a number of countries, its
income is subject to taxation in differing jurisdictions and
at differing tax rates. Significant judgment is required
in determining the consolidated income tax position.
Ahold seeks to organize its affairs in a tax efficient and
balanced manner, taking into account the applicable
regulations of the jurisdictions in which it operates. As a
result of Ahold's multi-jurisdictional operations, it is exposed
to a number of different tax risks including, but not limited
to, changes in tax laws or interpretations of such tax laws.
The tax authorities in the jurisdictions in which Ahold
operates may audit the Company's tax returns and may
disagree with the positions taken in those returns.
An adverse outcome resulting from any settlement or future
examination of the Company's tax returns may subject it to
additional tax liabilities and may adversely affect its effective
tax rate which could have a material adverse effect on
Ahold's financial statements. In addition, any examination
by the tax authorities could cause Ahold to incur significant
legal expenses and divert management's attention from
the operation of its business.
Competition is intensifying across all Ahold's markets.
Ahold continues to experience intense competition in its
retail trade business and its foodservice business, as well
as industry consolidation. A number of its retail operations
have started value repositioning programs. A successful
value 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. These programs
might not be successful or competitors might respond and
engage in price competition against the Company. Any of
these factors, or any combination of them, could have a
material adverse effect on Ahold's financial position, results
of operations and liquidity.
While Ahold believes 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 its financial
position, results of operations and liquidity. For additional
information regarding competition, see "Management's
discussion and analysis - Overview" in this Annual Report.
Risks relating to the industry and business
Ahold is a low margin business and its operating income
is sensitive to price fluctuations.
Ahold's retail and foodservice businesses are characterized
by relatively high inventory turnover with relatively low
profit margins. The Company makes a significant portion
of its sales at prices that are based on the delivered price
of products it sells plus a percentage markup. As a result,
Ahold's absolute levels of profit will go down during periods
of food price deflation, particularly in the foodservice
business, even though the gross profit percentage may
remain relatively constant. Additionally, Ahold's foodservice
business profit levels may go down in periods of food price
inflation if the Company is not able to pass along cost
increases from its vendors to customers in a timely manner.
In addition, Ahold's 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, labor expense and difficulties in collecting accounts
receivable. Any of these factors may have a material adverse
effect on the Company's financial position, results of
operations and liquidity.
Ahold faces risks relating to its IT outsourcing.
Ahold has outsourced various IT services in the
United States and the Netherlands. In connection with this
outsourcing, the Company may encounter unforeseen
technical complexities that it may be unable to resolve or the
resolution of such complexities may lead to cost increases
and the distraction of management. Although the Company
has a right to conduct audits to determine the functionality
of the IT outsourcing, the Company may face disruptions in
its IT applications and infrastructure if such IT functions
fail to perform as specified or if the parties on whom the
Company relies in relation to these outsourcings do not fulfill
their obligations. The IT outsourcing might not achieve the
expected benefits and cost savings or such benefits and
savings might not be achieved as quickly as expected.
Ahold's failure to implement these IT outsourcing initiatives
in a timely and cost efficient manner could have a material
adverse effect on the Company's financial position, results
of operations and liquidity.
Ahold Annual Report 2006 33
