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Cess van Der Hoeven, Ahold’s CEO, set ambitious expansion targets for the company in 1994. Sales were expected to double every five years. A similar target was set for net profit. This plan would ensure a 15% compound growth in both sales and net profits per annum. Such an expansion called for investment funds. 66.7% of the expansion was to be funded by the company’s cash-flow. The remaining 33.3% was to be funded by external creditors. The earnings Per Share was to grow at 10% annually. Ahold managed to acquire the Stop and Shop chain thus rising to be the 5th largest food retailer in the world. Van Der Hoeven set a target for the company to be the 2nd largest food retailer. This meant overtaking Carrefour, to rank after Wal-Mart.
Ahold expanded rapidly between 1994 and 1999 through the acquisition of several supermarkets globally. Initially, the company focused on purchasing regional supermarket chains that were family-owned. They also acquired a few hypermarkets located in Portugal. The rest were in southern Europe. In the US, Ahold bought Giant Food Inc. while in Argentina; they set up a joint venture with Velox Retail Holdings. Disco, the joint venture, operated in Argentina, Chile, and Peru. This company entered the Scandinavian market by purchasing 50% of the ICA Group. Ahold was attempting to acquire supermarkets in different parts of the world to spread their risks.
The company planned to exploit economies of scale by conducting its purchases centrally. The company also tried to improve the operations of the supermarkets acquired by transferring IT and other technology from head office to them. They also issued loyalty cards to customers. The management of the stores was left in the hands of the existing management. The rationale behind this was that the old managers knew their territories best, and could manage the stores better than new managers.
Ahold’s share prices dropped in 1999. This was caused by the recession and its inferior expansion methods. The company’s competitors built hypermarkets which proved to be more of a hit with the consumers than Ahold’s supermarkets. Thus, the company divested its operations in China and Singapore to cut losses.
In 1999, Ahold planned to take over a leading supermarket chain in New York, Pathmark. However, this deal did not go through. The company then took over US Food Services. This marked Ahold’s entry into the food services industry. However, the company had no previous experience in this industry. USF’s core business was supplying foodstuff to institutions and restaurants.
USF was an attractive acquisition target since it was top in its industry. The food services industry was also growing at a faster rate than the supermarket industry that Ahold was operating in. The changing lifestyles created a huge market for the fast-food industry. This guaranteed 5% annual growth for the food industry sector. This was double the growth rate of the grocery sector. Ahold also planned to exploit its increased purchasing power after the acquisition to reduce costs. This was the major justification for the purchase.
The acquisition of USF increased the risk profile of Ahold considerably. First, the company had no experience whatsoever in the sector. Thus everything they did was majorly speculative and not out of the experience. However, this was reduced by having a manager in place that had experience in the industry. The company relied a lot on Jim Miller to steer the new business to success. This reliance on an individual also increased the risk Ahold took on. It is also against good corporate governance practice to have an individual wielding so much power in an organization. The reliance on synergies that were yet to be proven also increased the risk profile of Ahold. All these factors could be what caused investors to be skeptical about the new acquisition.
Strategy and Associated Risks
Ahold pursued growth by acquisition strategy. This strategy is appropriate for companies with a sufficient capital base and reliable sources of finance. In the beginning, Ahold met both these requirements. However, it was too aggressive in pursuing this expansion. It is said to have been negotiating more than ten acquisition contracts in three continents simultaneously in 1999. One has to admit that this was too much for one firm. It could even be classified as overtrading (Micklethwait,10). This posed the risk of bankruptcy. The company was also exposing itself to the risk of poor liquidity. The funds required for expansion could eat up into the working capital needed for daily operations. The loans are taken to fund the expansion also increased the company’s leverage.
Ahold attempted a worldwide expansion within the seven years between 1994 and 2001. The expansion can be seen as a personal competition for Van der Hoeven. He was obsessed with becoming the second-largest retailer in the world and was willing to do anything to accomplish his goal. The entry into the US food services industry was the last straw. The growth rates in the industry were quite tempting to Ahold. Thus, the company purchased five other food services companies within the next 18 months after acquiring USF. These acquisitions built the company a good reputation but the profits told a different story. The food services companies proved quite expensive to run. This could have been a result of the lack of experience in the industry.
Poor internal controls create a suitable environment for fraud. The purchasing department at USF and the other food services companies had no regulation. The fact that suppliers determined the volume allowances created room for manipulation. There was no standard measure for these allowances which constituted a huge part of the profits for these firms. Company auditors tried to point out these internal control failures but they were ignored. Tracking of the allowances was not done with an automated system, but rather by estimates made by the marketing and purchasing departments. These allowances were so important to USF that the managers started engaging in unethical negotiations. They demanded the highest possible allowances from suppliers. Business profits ceased to be important as the allowances became more prominent.
The roles and experience of Van der Hoeven and Meurs
The CEO ran the company as a personal game. There is no evidence of sufficient consultation in making the acquisitions. They all seem to be the fulfillment of one man’s ambitions. Meurs also had his ambitions of ruling the food services industry. He once organized a management buyout in an attempt to do this. Thus, there was no goal congruence between these two executives’ goals and shareholder’s goals. Meurs supported the takeover of USF because he stood to gain a tidy sum of $32 million if he sold his stake. He also saw the acquisition as a means to an end.
There were no checks on the actions of these two executives. They designed remuneration packages for themselves that were not linked to company performance. This shows how little they cared about how well or badly the company performed. Their remuneration packages should have been designed by remuneration committees (Micklethwait,5).
Ahold had poor portfolio management strategies. The company claimed to be a synergy manager but failed in creating the said synergy between the supermarkets in its portfolio. It is said to have failed in turning around the First National Supermarkets chain. The corporate parent added little or no value to its subsidiaries.
The company’s fraudulent financial reporting issues contributed greatly to its downfall. The audit reports showed subsidiaries that had been consolidated without meeting the consolidation criteria. This creative accounting misled the shareholders to believe that Ahold was larger than it was. It also consolidated profits from these subsidiaries when it should have consolidated only a part of the profits (Micklethwait,14)
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The cause of Ahold’s downfall can be traced to poor leadership and corporate governance issues. The creative accounting could easily have been prevented by putting good internal control systems in place as soon as the auditors pointed out the deficiency. Good corporate governance practice would have stripped the CEO and Meurs of the power they misused. Therefore, companies should learn not to place their destinies in the hands of few individuals since no leader is invincible. Checks and balances are necessary for accountability.
Micklethwait, Alicia. “Ahold:A Royal Dutch Disaster.” International Institute for Management Development (2006): 1-17.