Prof. Ian Giddy, New York University
It is late 1998. You work in the Finance department of the Dutch supermarket company, Royal Ahold. The company is considering an expansion of its operations in Brazil, and your task is to evaluate the merits of the investment.
Ahold is the largest food retailer in the Netherlands, one of the largest in the United States (it ranks fourth among supermarkets) and is active in the Iberian peninsula and in Eastern Europe. The company has a reputation for good management, particularly in the area of consolidation. In a fragmented industry where price and cost are becoming paramount, Ahold has refined the centralization of purchasing and distribution, particularly in the U.S. where it is in the process of extending the leading-edge techniques of its Stop & Shop subsidiary to the other food retailing operations in that country. Recently it has expanded in Latin America, notably in Brazil, Argentina and Chile.
In Latin America, following economic stabilization in Chile, Argentina, Mexico and Brazil have experienced a sharp increase in living standards and a changing pattern of consumption. This, along with the decline in real interest rates, has motivated local as well as international food retailers to step up their investments. Ahold is one of several international newcomers -- the others include Carrefour and Promodés -- entering the market to benefit from elevated consumption standards and the shift from local grocers to supermarket-type outlets. Although the penetration by large, modern food stores is lower than that of North America and Europe (about 50% market share), this is changing rapidly particularly in the urban centers such as Buenos Aires, Sao Paulo and Rio.
late 1998 the parent company in the Netherlands was considering
the expansion of their Brazilian subsidiary, Bompreço. The unit
was already very successful in Brazil's notheast, with 14 hypermarkets
producing numbers like those below:
plan was to open 12 more hypermarkets over the next three years
at a cost of 378 million Reals, not accounting for inflation. Based on
anticipated sales matching the existing outlets, and projecting an
growth rate of 13% for the next five years and 5% thereafter, Ahold had
worked out projected revenues and costs as follows:
Please work out the free cash flows to the firm, and calculate the payback period and the net present value of this investment. You may assume the firm's weighted average cost of capital is 9.75%, and that this investment is similar in risk to Ahold's existing business.
Prof Ian Giddy
Stern School of Business
New York University
44 West 4th Street
New York, NY 10024