Delhaize Group S.A. (NYSE:DEG) is a Belgian food retailing company. Founded in 1867, the firm expanded its footprint across 10 countries in North America, Southeastern Europe and Asia. It operates 1,500 locations in the U.S. under different brand stores, namely Food Lion, Bottom Dollar Food and Hannaford, which are tailored to meet regional demands. Apart from supermarkets, its sales network includes other store formats like proximity, and specialty stores. In addition to is grocery retailing business, which represents 96% of sales, the firm in engaged in food wholesaling and the retailing of other products such as prescription drugs and pet articles.
Delhaize’s extensive network has an established presence in the markets where it operates, and the defensive nature of grocery purchases shields demand in times of economic downturns. However, switching costs are practically non-existent in this business category, which leads to heavy competition on price. This scenario makes it difficult for the company to defend its market share, since it lacks the scale boasted by larger rivals such as Wal-Mart Stores Inc. (NYSE:WMT) and Costco Wholesale Corporation (NASDAQ:COST), which benefit from great buying power, thus making purchases at lower per-unit costs. Moreover, these companies are able to offer very convenient prices, at the expense of low or negative margins on food products, in order to drive traffic for the selling of higher-margin non-food items.
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Competing among giants, it has become quite difficult for Delhaize to drive same-store-sales growth while supporting historic margins. Given the competitive difficulties it faces, the company has been making major price investments at its Food Lion chain, in order to defend market share and enhance traffic. In addition, the firm has launched new assortment optimization platforms to drive sales of higher-margin products, which is expected to offset its investments on price. Thus far, these initiatives have helped the company to support its top line at the expense of margins. Admittedly, segment gross margins decreased from 27.9% in 2009 to 26.2% in 2012.
On the other hand, the company has initiated the rolling out of discount stores, which should boost sales years ahead.
A Harsh Economic Background
Delhaize operates more than 800 stores in Belgium and Luxemburg, where the firm boasts roughly a 25% market share. Furthermore, over 20% of its sales and operating profits derive from its Belgian operations. Consequently, volatile commodity prices and persistent economic headwinds in the region pose a threat for the company’s profits, since it will be difficult for the firm to pass through higher input costs to consumers increasingly focused on value, without losing market share.
As explained before, Delhaize is facing multiple challenges that hold up its growth possibilities. Therefore, its return on equity delivered a discouraging -1.7% compared to the 18.5% average boasted by its industry peers. Its net income growth, in turn, showcased a dismal -41-1% against its rivals’ 36.8% average. The growth of its earnings per share also follows a negative trend, with -41.1% compared to the industry median of 5.10%. Consequently, although investment guru David Dreman (Trades, Portfolio) increased his holdings in the company by 25.99%, I feel bearish about Delhaize’s growth potential.
Disclosure: Vanina Egea holds no position in any stocks mentioned.