Speech of Cees Van der Hoeven

Friday, October 29, 1999

Accessing this new source of capital increased the level of ambition, boost discipline and strengthened the company's focus. Today, we are not only the company where (we hope) most of you do your shopping, but Ahold's shares make up roughly half of the Dutch private share portfolios. Over the years in the Netherlands, we have become a household name, as the Americans would say, and we are proud of it. True, our share price has come under some pressure lately. While many factors affect our share price at any given moment, the precise reasons for the current pressure are unclear to us. In any case, Ahold has been able to deliver significant shareholder value over the last few years. During the last 5 years, our turnover has risen on average 20% per year, with growth in net profits of 32% per year and a market capitalization increase of 50% per annum since 1994. During this period, we have generated returns to our investors of, on average, 35% per year. We are determined to show considerable growth in the years to come as well, and I shall return to this point in a moment. First I would like to make a few brief comments on the business itself.

The primary objective of our organization is to give the best possible service to our customers. This means that wherever we are, we offer high-quality products in an attractive store environment at reasonable prices; at the same time, we also provide a high level of service and our innovation distinguishes us from the competition. In brief, in the eyes of our customers, we want to be the best supermarket in their area. It is also important that our associates are happily employed and are motivated to provide our customers with friendly service. There's another dimension to it all: our stores form an integral part of society, and we have the explicit objective that we want to do business in a socially responsible manner. This means that in terms of corporate citizenship, we are highly involved in the development of environment friendly products, in strengthening employee participation, in the integration of new members of local communities, in contributing to underprivileged areas and all sorts of other initiatives. I am strongly convinced that those companies that make great efforts to attend to all stakeholders create optimal shareholder value. In that sense, maximization of shareholder value as the only objective is too limited a view.

Now something about developments in the food retailing industry on a global scale. I'll begin with the customer. There is no doubt that in the time to come, food safety and food quality will be at the top of our customers' agenda. Ahold's companies are doing everything in their power to address these issues. During the past few years, much has been invested in bringing about improvements in the supply chain, in which we as a company have clearly gained a lead over most of the competition. Convenience foods have undergone further developments as well. The assortment of fresh, ready-to-eat meals has expanded considerably. In general, I expect increasingly higher demands from our customers on these aspects, as well as on the level of service and atmosphere in the store. People are more likely to look at the depth of the assortment than the width, while price will always be an important but certainly not the all-determining factor. As a result of these developments, we expect that the very large hypermarkets and the smaller discount stores in mature markets have reached their peak. Now, new forms of shopping, including e-commerce and convenience and speciality stores, will continue to grow. Innovative supermarkets that keep up with the times will remain the most important outlets in the near term. In this regard, I would like to clarify that I am not sceptical about e-commerce. There is no disputing the fact that the increasing demand for it should not be underestimated, but meeting this demand for food items in an efficient and profitable manner is still a big challenge. The Ahold companies in the Netherlands and the United States are far ahead of practically all our competitors, and we will continue to meet the growing demand for home delivery. We anticipate extended services, with our stores clearly as the base from which to operate. There are still important possibilities for adding value in this area.

Then, ladies and gentlemen, as in other sectors, there is a significant wave of consolidation in food retailing. I believe this will lead to regional businesses becoming a part of a larger entity, and that there will ultimately be a very limited number of large, global companies. We are determined to be one of the global players and our strategy is totally focused on that endeavor. I shall return to this in a moment.

First, I would like to say something about the reasons underlying this consolidation process, especially as there are so many erroneous opinions on this subject. Many people think that increasing purchasing power vis--vis the most important suppliers is the driving force. We have, however, adopted a different vision. For purchasing, it is definitely so that the benefits of a larger scale are at least partially passed on to the consumer. Naturally, this applies to a large degree to the so-called "non-food" segment. In this area, Ahold has concluded a strategic alliance with the largest non-food buyers' group in the Far East, Li & Fung in Hong Kong. With this move, we are able to develop important advantages for our company. As for the worldwide purchase of refrigerated displays, cash register equipment, computer systems and so on, we have already achieved discounts of up to 30%. Buying products is also becoming more and more streamlined. This has the added advantage that we can improve quality control throughout the entire chain. With our five chains in the United States, we have succeeded in getting the specifications of our own brand products in line in such a way that we can now source collectively. With the B- and C-brand manufacturers, we are increasingly arriving at regional and international agreements, which can also result in considerable discounts.

The subject of discussion in this context, however, is always the relationship with the A-brand manufacturers, because they have the highest profile. Our view is that it is essential to have A-brand products on the shelves. So we can speak of a relationship in which both parties need each other. Consequently, we strive for long-term cooperation, with the emphasis on improving efficiency, optimal assortment composition and collective promotional campaigns. We do not look for confrontation, but try always to add value for our customers. As you can see, the scale of an organization is indeed a very important factor. But there's one factor we haven't spoken about yet that is always grossly underestimated. I am talking about knowledge. In our company, developing knowledge is considered a core activity with top priority. Progress in technology and the right attitude towards learning and sharing make it possible to realize enormous improvements in operational management through the effective exchange of knowledge. Within Ahold we have a worldwide project which is essentially combining and exchanging practically all of our knowledge via an intranet. Virtual team rooms are set up for just about all parts of our company. This makes it possible for thousands of people in the world to exchange experiences, successes and mistakes, but mostly, ideas. This all takes place behind the scenes. At the same time, we try to have our stores tune in to local needs more clearly and sharply. With new technology we are able to approach our customers on a more individual level and to give our stores a local identity. This dichotomy in managing our company and its operations is indeed a great challenge, but we have taken major steps forward. The success of the integration of newly acquired companies also depends on it. Now we can implement improvements very quickly and add value to acquisitions and joint ventures. A perfect example of this is our most recent acquisition of Giant Food in the United States, where we see profits practically double within a period of 1 years, while turnover is growing strongly and prices have been reduced. Virtually all management details of Giant Food have been examined and measured together, forming the basis of hundreds of improvements that have been implemented. Our great strength is that we make optimal use of the advantages of scale, exchange knowledge effectively and still manage to appreciate and improve the local identity. That makes us the preferred party in the consolidation changing the face of the market. For the rest, this consideration of the forces that play a part in the consolidation process also indicates that success is not guaranteed for everyone. Only working with the idea "Big is Beautiful" is doomed to fail. This is why we have been busy for years establishing a structure with which we can benefit from the advantages of growth, while sharing them with the consumer as well.

How do we think we can realize growth in the future? In the first place, through strong autonomous growth. While in most countries the total market growth is not more than 1 or 2%, for years we have attained an autonomous growth in sales of 7% and an autonomous growth in net earnings of almost 15%. In practically all places where we are active, we are gaining market share and constantly improving our margins. We realize this not only by consistently reinvesting the generated cash flow, but also by making optimal use of the advantages from our scale and exchange of knowledge I mentioned. In this regard, it is probably a good idea to mention that the temporary pressure on Albert Heijn's market share has no bearing on our growth in results. This year Albert Heijn will also show 10% growth in earnings and, I expect for next year, maintain a steady market share at the least.

As a second course of growth, we regularly add small takeovers to existing store chains. This year, for example, we announced a number of acquisitions in Spain, Poland, Argentina and Brazil. In general, these are very profitable acquisitions, whereby the stores are quickly converted to our well-known brand name in that region.

The third course of growth is our trademark, known worldwide. Partly because of that, Ahold was recently acclaimed by Global Finance Magazine as the best supermarket organization in the world. This is the area of acquisitions and joint ventures with absolutely top regional companies that vary in turnover from NLG 2 to 10 billion (US$ 1 to 5 billion). Companies with a tremendous brand name, well managed, innovative and highly quality-oriented. In these cases, we refer to our stable of thoroughbreds, to which we periodically add a new racehorse. Recent examples include Stop & Shop and Giant Food in the United States, Bompreo in Brazil and Disco in Argentina. In all these cases, we have been able to add knowledge and a great deal of value. We have carefully mapped out this third course of growth worldwide. At this time we see about ten potential candidates for acquisition or a joint venture. The total sales of these 10 candidates is roughly equal to the present sales of Ahold ? some USD 35 billion. Three companies on this list are in the United States, three in South America and four in Europe. What is significant is that eight of the ten are family businesses, which, with their culture and structure, will fit very well with us. From the viewpoint of families who have built up such a top organization over a span of one or more generations, it is almost essential that the name, identity and culture be preserved while at the same time realizing the advantages of scale. As I said earlier, this is exactly where our great strength lies. The owners of these companies see the consolidation process continue. True, they sometimes look on with sorrow, but they also realize that they cannot remain on the sidelines. There have already been discussions with most of these candidates, some of which have reached a serious phase. We will be very surprised if we don't realize at least one such transaction next year.

Meanwhile, there is still one racehorse that is warming up on the sidelines before stepping onto the field ? Pathmark. We still hope to get the green light from the American FTC before the end of the year.

On the basis of the first three elements of our growth strategy, Ahold is expected once again to see sales double over the next five years, while increasing margin at the same time. This also indicates that the fourth element is not absolutely necessary to occupy a position among the top 3-5 world players. But this fourth element attracts the most publicity: THE big acquisition, or THE merger. What are the opportunities and possibilities? We are talking about companies with turnover in excess of US$ 15 billion, which definitely limits the choices. Absolutely essential is that the cultures seamlessly connect with each other and that both parties, for the benefit of all stakeholders and particularly the consumer, can increase each other's value. Our aim is not necessarily to be the biggest: the business case for such a merger or acquisition must be a better proposition for the customers of the companies involved, and for the shareholders a more profitable enterprise. Let there be no mistake about it: we know all the potential candidates and are conducting an in-depth study. No one can allow himself to make a mistake in this course of action. At this time, I estimate the chance of having something come out of this fourth part of our strategy within the next three years, at about 50%. Once again, I want to emphasize that this element is not absolutely essential, but it would help us become a world player.

All in all, and without taking into account the fourth element of growth, Ahold is on the road toward doubling its sales in the next 5 years and realizing at least 15% earnings-per-share growth, excluding currency fluctuations. This year the earnings-per-share growth, as mentioned earlier, will be around 20%, excluding currency fluctuations.

Regarding financing our growth, you know that we generally finance acquisitions with external capital, 50% with equity and 50% with debt. This year there will not be a public offering of shares. It is possible, however, that particularly as a result of our success with the third element of our growth strategy, an appeal will be made next year to the capital markets. You have our explicit promise that this will never be the case for an acquisition which, including its financing, would dilute our earnings-per-share. In other words, fears of negative effects of an offering are totally groundless.

Ladies and Gentlemen,

Ahold is right on course and is moving steadily forward to realize its mission to become "the best and most successful supermarket organization in the world".

Thank you for your attention.