Peapod’s Ill-Timed Digital Hiccup

Grocery used to be the definition of ho-hum routine business in retail. They are one of the few goods that everyone pretty much has to buy — on the logic that everyone has to eat sometime, and almost no one can feasibly eat all of their meals out — which meant, until somewhat recently, they weren’t something many people thought all that much about. What consumers bought and how often they shopped might vary, but the fact that customers would all be going to the local store to grab their groceries — that was as reliable as the tides coming in and out.

But the last 15 years have seen grocery evolved into a much more specialized and competitive place. Retailers like Whole Foods and Trader Joe’s went hard after the idea of changing the contents of the store. Whole Foods even changed the interior design. Most grocery stores are set up to have consumers walk through counter-clockwise; Whole Foods has consumers walking the opposite direction. In the age of mobile, all kinds of players have been dispensing with the idea that “going to the store” is a necessary part of getting groceries at all. Instacart and Amazon Prime Fresh exist so that consumers pick items on a computer screen, and the actual picking off goods on the shelf is left to the “professionals.”

The rapidly emerging spirit of competition has been great news for consumers, since increased competition among grocery vendors, combined with low food prices and low fuel prices, have dropped food prices to 10-year lows that are widely expected to continue through the end of 2016 and likely through the first half of 2017.

But the consumer’s gain, in some cases, has been the retailer’s pain, as already-thin margins in the newly competitive grocery arena are now being stretched even thinner and grocery retailers are feeling the strain.

And while it has often been said that, when the going gets tough, the tough get going, in the case of Ahold Delhaize, it seems the tough are looking for a trekking partner as they continue their attempt on grocery mountain here in the U.S.

The deal was first announced a little over a year ago in June 2015 and was completed a little over a month ago. Delhaize, the current owner of Food Lion (among other grocery chains), and Ahold, current owner of Stop & Shop, completed the $29 billion merger shortly after receiving regulatory clearance by the FTC.

And the merger is big business for the combined entity — estimates place it on track to run up 61 percent of its revenue in the U.S. with 6,500 stores under a variety of names.

“Today marks the successful completion of this cross-border merger, bringing together two great food retail companies,” said Jan Hommen, Ahold supervisory board chairman at the time of the merger. “Ahold Delhaize is ready for a strong start, building on its strong foundation, heritage and complementary businesses.”

So, how strong is the foundation looking?

Strong Earnings

Both Ahold and Delhaize in their last separate quarterly reports — reported jointly — managed to beat pre-earnings estimates. Ahold’s underlying second quarter operating profit rose 8 percent to €355 million ($400.1 million), well above the €336 million predicted by analysts polled by Bloomberg. Revenue at the Dutch firm was up 3.6 percent to just under €9 billion ($10.1 billion)

Delhaize saw profit increase 12.1 percent to €247 million ($277.37 million).

The results pleased The Street, both for being strong and for what they indicate. Jefferies analysts noted that, insofar as both firms are showing solid growth, there is at least some reason to believe the great deflation in grocery prices isn’t going to be a section killer.

“We have started our new chapter as Ahold Delhaize with good momentum, with these two strong sets of pre-merger results. Building on our solid financial foundation, common values and great local brands, we are driving ahead with full energy to deliver even more for customers and communities, associates and shareholders,” noted Ahold Delhaize CEO Dick Boer.

Peapod Slowdown

One chilly spot in the earnings results — though, one perhaps of note due to how heavy digital competition in grocery has gotten in the U.S. — is the relative slowing of growth in Peapod, Ahold Delhaize’s U.S. online grocery business.

While sales were still growing, they dropped into the single digits at around 9 percent, instead of the double-digit growth that has been the norm of late. The grocery delivery platform has also spent much of the last year-and-a-half fending off customer service complaints related to its app.

Nonetheless, the brand maintains that the Peapod sales hiccup is not related to customer interest but to operational issues.

“There’s a strong demand for the U.S. on online sales. It’s clear,” noted Boer.

Specifically, Boer told investors that issues stemmed from logistical troubles in the Chicago warehouse combined with trouble getting a new facility in New York up and running on time. He further noted that those issues are either fully resolved or well on their way to being and that it is the firm’s full expectation to return to double-digit growth — hopefully, more comparable to what the Dutch version of the program is seeing.

“If we’re expressing some disappointment, it’s because we see the potential. For example, at ah.nl, where we’re growing around 30 percent. So, it’s a frustration that we can’t fully meet the demand, but I’m sure the team is working on it and will turn that around, and we’ll be reporting a better number shortly,” said Jeff Carr, CFO and EVP.

While the confidence is admirable, it faces stronger competition than it ever has. Peapod has operated as pretty much the only name in the online game since the first wave of online grocers went bust with the first tech boom at the turn of the century. Now, Peapod faces down Instacart, Amazon Fresh and (coming soon) Kroger’s online delivery efforts. Even with its operation issues solved, there are a lot of players competing for that double-digit growth.

Boer remained confident, noting that Peapod, on the whole, remains a better value for consumers and one that is far more accessible. Instacart, on the other had, Boer doesn’t see as a competitor so much as a smaller supplemental service that makes sense as an extension to grocery delivery in some markets.

As for the host of other competitors getting into digital grocery? Boer believes that, other than Amazon, most of those competitors aren’t really competing in the same race.

“[Amazon] is clearly a main competitor in that area,” said Boer, however, “don’t underestimate all other retailers. They also have their online propositions, often not with home deliveries. So, we are unique with our home delivery system, where, in most cases here, the supermarkets are pickup points.”

Ahold Delhaize has a tough hill to climb in a market that has been unforgiving of late. Costco reported losses, analysts are expecting Kroger to miss on earnings and Target saw its Q2 report anchored to the ground by its anemic grocery sales.

And a logistical hiccup in digital delivery is not the out-of-the-gate move the newly merged company is looking for, considering its main competitor in the grocery delivery race (by its own estimation) is so very good at logistics.

But Peapod is much more widespread than Amazon Fresh, and on the other side of the pond, the firm has proven it knows how to grow the business — and fast.

Which means when you’re watching the U.S. grocery rodeo, don’t count out the European entrants. They’ve been pushing digital the longest and are confident they’re ready to push it to the next level.