Risk factors

Any of the following risks could have a material adverse effect on our financial position, results of operations, liquidity and the actual outcome of matters that the forward-looking statements contained in this annual report refer to. The risks described below are not the only ones we are facing. There may be additional risks we are currently unaware of, and these may be common to most companies. There may also be risks that we now believe are immaterial, but which may ultimately have a material adverse effect on our financial position, results of operations, liquidity and the actual outcome of matters that the forward-looking statements contained in this annual report refer to. For additional information regarding forward-looking statements, see "Forward-looking statements notice" included in this annual report.

Risks relating to pending investigations and legal proceedings

Due to the events announced on February 24, 2003, our 2002 annual report included a restatement of our financial position and results for 2001 and 2000 in part because of accounting irregularities at one of our operating subsidiaries, U.S. Foodservice, and because certain of our joint ventures had been improperly consolidated. These events led to a number of investigations and legal proceedings. For a further discussion of these investigations and legal proceedings, see Note 35 to our consolidated financial statements included in this annual report.

In November 2005 we entered into an agreement to settle the securities class action entitled "In re Royal Ahold N.V. Securities & ERISA Litigation," which arose out of the events announced on February 24, 2003. Under the terms of the settlement agreement, the lead plaintiffs agree to settle all claims against Ahold for the sum of USD 1.1 billon (EUR 937 million, including EUR 8 million as compensation to the Dutch Shareholders' Association Vereniging van Effectenbezitters (the "VEB") for facilitating the global settlement). The settlement covers Ahold, our subsidiaries and affiliates, the individual defendants and the underwriters. The settlement agreement has been preliminarily approved and is subject to final court approval. If the court will not give its final approval of the settlement and if we are not able to defend ourselves successfully in any subsequent legal proceedings, it is possible that we will be required to pay a settlement amount or other payment which is higher than anticipated by the settlement agreement described above. Such events could have a material adverse effect on our financial position, results of operations, liquidity and the prices of our common shares and ADSs.

In November 2005 we also entered into an agreement to settle litigation with the VEB. Under the terms of this settlement agreement, the VEB has terminated certain legal proceedings relating to our annual accounts and has agreed not to pursue any further legal action in the inquiry proceedings before the Enterprise Chamber of the Amsterdam Court of Appeals.

For a further discussion of these settlements, see Note 35 to our consolidated financial statements included in this annual report.

We cannot predict when the remaining investigations or legal proceedings will be completed. It is possible that they could lead to criminal charges, civil enforcement proceedings, additional civil lawsuits, settlements, judgments and/or consent decrees either against us, our subsidiaries or both, and that, as a result, we will be required to pay substantial fines or damages, or to make other payments, consent to injunctions on future conduct, lose the ability to conduct business with government entities and with customers in the casino and gaming industries or suffer other penalties, each of which could have a material adverse effect on our financial position, results of operations, liquidity and the prices of our common shares and ADSs.

We are also involved in legal proceedings as a result of our divestments in 2003, 2004 and 2005 that, if decided unfavorably, in the aggregate could have a material adverse effect on our financial position, results of operations and liquidity. For a further discussion of these legal proceedings, see Note 35 to our consolidated financial statements included in this annual report.

We have indemnified various current and former directors, officers and employees, as well as those of some of our subsidiaries, for expenses they have incurred as a result of the pending and possible future investigations and legal proceedings discussed above and we expect to incur further expenses for indemnification of expenses and any possible fines, liabilities or fees that they may face, and to advance to or reimburse such persons for defense costs, including attorneys' fees. Such indemnification obligations could ultimately have a material adverse effect on our financial position, results of operations and liquidity.

Risks relating to our internal controls

In 2005, we continued the project initiated in 2004 to prepare for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act, including documenting, reviewing and, in certain required aspects, improving our internal controls over financial reporting.
The status of Sarbanes-Oxley Act activities by the end of 2005 varies per arena and certain required aspects for the evaluation pursuant to Section 404 of the Sarbanes-Oxley Act have yet to be completed. We have taken and are taking steps to strengthen our internal controls. The process of ensuring compliance with Section 404 of the Sarbanes-Oxley Act may require significant costs and time to complete. For a further discussion regarding our internal controls, see "Internal control" in this annual report. Any failure to strengthen our internal controls could result in accounting errors or misstatements in our financial statements and could harm the reliability of our financial statements, which could in turn adversely affect investor confidence and the prices of our common shares and ADSs.

Risks relating to currency exchange and interest rate fluctuations

Currency translation risk. We are exposed to foreign currency exchange translation risk because we operate businesses in a variety of countries in Europe and the United States. A substantial portion of our net sales, assets, liabilities and results of operations are denominated in foreign currencies, primarily the U.S. dollar. As a result, we are subject to foreign currency exchange risks due to exchange rate movements in connection with the translation of the operating income and the assets and liabilities of our foreign subsidiaries into euros for inclusion in our consolidated financial statements.

Currency transaction risk. We are exposed to foreign currency exchange transaction risk, including lease payment obligations and firm purchase commitments denominated in foreign currencies. We attempt to manage our foreign currency exchange exposure by borrowing in local currency and entering into currency swaps, but we cannot eliminate such exposure and, therefore currency exchange rate movements can affect our transaction costs. Furthermore, if a particular currency becomes highly volatile, that could have a material adverse impact on our financial position, results of operations and liquidity.

Interest rate risk. We are also exposed to fluctuations in interest rates. As of January 1, 2006, approximately EUR 1.0 billion, or 22%, of our long-term borrowings (excluding our finance lease liabilities, financing obligations, and cumulative preferred financing shares, but including interest rate swaps) bear interest on a floating rate basis. Accordingly, changes in interest rates can affect the cost of these interest-bearing borrowings. As a result, our financial position, results of operations and liquidity could be materially adversely affected by interest rate fluctuations. It is our policy to attempt to mitigate interest rate risk by financing a targeted percentage of our borrowings in fixed interest rate instruments and by the use of derivative financial instruments, such as interest rate swaps. Our attempts to manage our risk could result in our failure to realize savings, if interest rates fall.

For additional discussion of our risk management, see "Management's discussion & analysis-Risk management and use of financial instruments and derivatives" and Note 34 to our consolidated financial statements included in this annual report.

Risks relating to our strategy

For 2006 and onward, we have defined a growth strategy based on core values that our operating companies share and core capabilities that we are improving. In 2005, competitive and operating cost pressures in our retail markets were greater than expected and the turnaround at certain of our businesses was slower than planned. The financial targets we originally set for retail in 2003 have become increasingly challenging. Based on the retail trends we have seen so far in 2006, we expect our retail net sales growth in 2006 to be between 2.5% and 3.0% (assuming constant currency exchange rates and excluding divestments made in 2005). In addition, we expect that our retail operating margin will be between 4.0% and 4.5% in 2006. Our overall priority remains to drive net sales growth and achieve a retail operating margin of 5%. We may encounter difficulties or delays in implementing our strategic initiatives and we may not be able to achieve the expected retail net sales growth and retail operating margin. We may also incur unanticipated costs in implementing our strategy. We have planned certain levels of capital expenditures and launched several strategic initiatives for our food retail business. These include initiatives that we expect will allow us to realize gross cost savings aggregating approximately EUR 650 million by the end of 2006. However, we may not be able to reach the targeted levels or receive the expected benefits of these cost savings and capital expenditures. If we do not successfully carry out our strategy with respect to our food retail business, this could have a material adverse effect on our financial position, results of operations and liquidity.

U.S. Foodservice accounts for a substantial portion of our net sales. Although we are in the process of reorganizing U.S. Foodservice into two operating companies to restore its value and improve its profitability, our plan may not be successful. For further information about our plans and steps to reorganize U.S. Foodservice, see "Management's discussion & analysis -Road to Recovery 2003-2005." We cannot assure you that we will be able to successfully complete these plans or that when they are complete U.S. Foodservice will satisfactorily improve its profitability. We may be unable to complete successfully all or many of U.S. Foodservice's initiatives, including its reorganization, its implementation of a centralized supplier information system intended to track corporate-based vendor allowance programs, and its improvement of internal controls and its information systems, which could have a material adverse effect on our overall financial position, results of operations and liquidity. Moreover, based upon the charges already brought against former officers of U.S. Foodservice and in the event of any adverse developments in the pending investigations of U.S. Foodservice or its current or former officers, U.S. Foodservice could suffer a sudden and material loss of business among its customers or be restricted from pursuing new business from certain customers, particularly those customers that are governmental entities or in the casino and gaming industries.

Risks relating to our liquidity

We have significantly reduced our debt as part of our Road to Recovery strategy. However, we continue to have substantial indebtedness and our total gross debt at the end of 2005 was approximately EUR 7.7 billion. In addition to the obligations recorded on our balance sheet, we also have various commitments and contingent liabilities that may result in significant future cash requirements. Although some of our debt instruments and other arrangements place conditions on our incurring further debt, we are not barred from doing so. To the extent we incur incremental debt, our leverage risk will increase. Our significant level of debt could adversely affect our business in a number of ways, including but not limited to, the following:

• because we must dedicate a substantial portion of our cash flow from operations to the payment of interest and principal on our debt, we have less cash available for other purposes;
• our ability to obtain additional debt financing may be limited and the terms on which such financing is obtained may be negatively affected; or
• we may be placed at a competitive disadvantage by our limited flexibility to react to changes in the industry and economic conditions and our financial resources may be diverted away from the expansion and improvement of our business. As a result, we could lose market share and experience lower sales, which may have a material adverse effect on our financial position, results of operations and liquidity.

For additional information on our liquidity and leverage risk, see "Management's discussion & analysis - Liquidity and capital resources" and Note 26 to our consolidated financial statements included in this annual report.

Relating to the events in early 2003, Moody's Investors Services ("Moody's") and Standard & Poor's Ratings Services ("S&P") downgraded our credit ratings to below investment grade ratings. As part of our strategy to restore our financial health, we are focused on working towards meeting the applicable investment grade ratings criteria. During 2004 and 2005, both Moody's and S&P upgraded our credit ratings, but such credit ratings remain below investment grade. While none of our material credit facilities or other debt instruments contain direct events of default that are triggered by credit rating downgrades, a downgrade of our long-term debt rating by either Moody's or S&P could raise liquidity concerns, reduce our flexibility in accessing a broad array of funding sources and increase our costs of borrowing, which could result in our inability to secure new financing or affect our ability to make payments on outstanding debt instruments and comply with other existing obligations, any of which could have a material adverse effect on our financial position, results of operations and liquidity. In addition, we cannot assure you that we will be able to meet the applicable investment grade rating criteria, particularly if our operating strategy and objectives are not successful. For a further discussion of our credit ratings, see "Management's discussion & analysis-Liquidity and capital resources" and Note 26 to our consolidated financial statements included in this annual report.

Our current insurance coverage may not be adequate, and insurance premiums and letters of credit and cash collateral requirements for third-party coverage may increase, and we may not be able to obtain insurance or maintain our existing insurance at acceptable rates, or at all.

The third-party insurance companies that provide the fronting insurance that is part of our self-insurance programs as described later in this annual report require us to provide cash collateral or letters of credit. In some circumstances, we are required to replace our self-insurance programs with high deductible programs from third-party insurers at a high cost. Although we currently are able to provide sufficient letters of credit for our insurance requirements, our future letter of credit requirements for our insurance and other cash collateral needs may increase significantly. In this event, we will need to obtain additional financing sources and any cash collateral we provide will not be available to fund our liquidity needs. It is possible that we may not be able to maintain adequate insurance coverage against liabilities that we incur in our business through our self-insurance and high deductible programs or, if necessary, purchase commercial insurance to replace these programs. Our insurance premiums to third-party insurers may also increase in the future and we may not be able to obtain similar levels of insurance on reasonable terms or at all. The inadequacy or loss of our insurance coverage, or the continued payment of higher premiums, could have a material adverse effect on our financial position, results of operations and liquidity.

For additional information regarding our self-insurance coverage, see "Management's discussion & analysis - Off-balance sheet arrangements - Contingent liabilities" and Note 25 to our consolidated financial statements included in this annual report.

Risks relating to tax liabilities

Because we operate in a number of countries in Europe and in the U.S., our operating income is subject to taxation in differing jurisdictions and at differing tax rates. We seek to organize our affairs in a tax efficient and balanced manner, taking into account the applicable regulations of the jurisdictions in which we operate. As a result of our multi-jurisdictional operations, we are exposed to a number of different tax risks, including tax risks related to: income tax, value added tax, payroll tax, social security tax, customs and excise duties, sales and use tax, franchise tax, ad valorem tax, U.S. state tax, withholding tax requirements, tax treaty interpretation, tax credits, permanent establishments, transfer pricing on internal deliveries of goods and services (including benefit tests and requirements to prove the arm's length character of internal transactions), loss carryforwards, multi-jurisdictional double taxation, acquisitions, dispositions, reorganizations, internal restructurings, and real and personal property transfer taxes.

The tax authorities in the jurisdictions in which we operate may audit our tax returns and may disagree with the positions taken in those returns. An adverse outcome resulting from any settlement or future examination of our tax returns may subject us to additional tax liabilities and may adversely affect our effective tax rate which could have a material adverse effect on our financial position, results of operations and liquidity. In addition, any examination by the tax authorities could cause us to incur significant legal expenses and divert our management's attention from the operation of our business.

Risks relating to our industry and business

Our retail and foodservice businesses are characterized by relatively high inventory turnover with relatively low profit margins. We make a significant portion of our sales at prices that are based on the cost of products we sell plus a percentage markup. As a result, our absolute levels of profit will go down during periods of food price deflation, particularly in our foodservice business, even though our gross profit percentage may remain relatively constant. Additionally, our foodservice business profit levels may go down in periods of food price inflation if we are not able to pass along to our customers in a timely manner cost increases from our vendors. In addition, our retail and foodservice businesses could be adversely affected by other factors, including inventory control, competitive price pressures, severe weather conditions, unexpected increases in fuel or other transportation related costs, volatility in food commodity prices and difficulties in collecting accounts receivable. Any of these factors may adversely affect our financial position, results of operations and liquidity.

We are subject to intense and increasing competition and industry consolidation. If we are unable to compete successfully, our financial position, results of operations and liquidity will be adversely affected.

We continue to experience intense competition in our retail trade business from other grocery retailers, discount retailers such as Wal-Mart in the U.S., and other competitors such as supercenters and club, warehouse and drug stores. Our foodservice business in the U.S. similarly faces intense competition from competitors including Sysco, regional distributors, specialty distributors and local market distribution companies. Consolidation in the food retail and foodservice industries due to increasing competition from larger companies is likely to continue. Our ability to maintain our current position is dependent upon our ability to compete in these industries through various means such as price promotions, continued reduction of operating expenses where the cost savings are reinvested in our value and customer offerings and, in the case of our food retail business, store expansions. A number of our retail operations have started price repositioning programs designed to halt or prevent market share loss, increase market share and/or to increase the ultimate levels of profit. A successful price repositioning program requires careful and well-timed management of a number of complex factors, including efficient inventory management, negotiations with vendors of national and private label products to reduce prices without reducing quality, cutting staffing costs without compromising the quality of service and effective communication of new prices to shoppers. We cannot assure you that these programs will be successful or that our competitors will not counteract and engage in price competition against us. Any of these factors, or any combination of them, could have a material adverse effect on our financial position, results of operations and liquidity.

In addition, our reduced capital expenditure program could restrict our ability to compete and could lead to a loss of market share in our key markets in the U.S. and the Netherlands. The food retail and foodservice industries are also highly sensitive to changes in customer behavior. As discussed above, our significant level of debt limits our flexibility to react to changes.

While we believe there are opportunities for sustained and profitable growth, unanticipated actions of competitors and increasing competition in the food retail and foodservice industries could continue to negatively affect our financial position, results of operations and liquidity.

In November 2005, we signed several major IT outsourcing agreements relating to various IT services in the U.S. and the Netherlands. In connection with these IT outsourcing initiatives, it is possible that we may encounter unforeseen technical complexities that we may be unable to resolve, or that the resolution of such complexities may lead to delays in the implementation of these initiatives. Our management may be required to devote more attention than anticipated to matters related to these outsourcing initiatives, including matters related to internal controls and financial reporting. Any of these risks may cause us to incur unanticipated costs and may prevent us from obtaining the expected benefits and cost savings of the IT outsourcing initiatives, or from obtaining such benefits and savings as soon as we expect.

Our failure to implement these IT outsourcing initiatives in a timely and cost efficient manner could have a material adverse effect on our financial position, results of operations and liquidity.

As of January 1, 2006, approximately 94,000 employees in our U.S. retail operating companies and approximately 5,000 employees in our U.S. Foodservice operating companies were represented by unions. Collective bargaining agreements covering approximately 11% of our total U.S. retail employees either expired in September 2005 or will expire at various dates during 2006. We are continuing to honor the terms of one expired agreement on a week-to-week basis and are simultaneously negotiating one or several replacement agreements. Collective bargaining agreements covering approximately 6% of our total U.S. Foodservice employees either have expired in 2005 or will expire at various dates during 2006. A number of these expired agreements have already been replaced, while a majority are still being negotiated.

During 2005 most of our relevant collective bargaining agreements relating to our Dutch operations were renewed without industrial actions. Most of our collective bargaining agreements for our employees in the Netherlands expire in April 2007. The collective bargaining agreement covering the majority of our distribution employees will expire in April 2006 and will have to be renewed. We expect to commence the negotiation process with the relevant trade unions in April 2006.

Furthermore, although only a minority of our employees in the Czech Republic are union members, all of our employees in the Czech Republic are covered by a collective bargaining agreement that expires at the end of 2007. A very small minority of our employees in Slovakia are union members.

For additional information, see "Additional information - Labor relations - Union relations and works council."

Although we consider our relations with the relevant trade unions stable, failure of our operating companies to effectively renegotiate these agreements could result in work stoppages. We may not be able to resolve any issues in a timely manner and our contingency plans may not be sufficient to avoid an impact on our business. A work stoppage due to failure of one or more of our operating companies to renegotiate a collective bargaining agreement, or otherwise, could have a material adverse effect on our financial position, results of operations and liquidity.

Decreasing interest rates, poor performance of the stock markets and rising cost of health care benefits may cause us to record significant charges related to our existing pension plans and benefit plans.

Adverse stock market developments may negatively affect the assets of our pension funds and decreasing interest rates may cause lower discount rates and increase our pension liabilities. This will lead to higher pension charges, pension premiums and contributions payable. We have a number of defined benefit pension plans, covering a substantial number of our employees in the Netherlands and in the U.S. Pension expenses for defined benefit plans in 2005 were EUR 17 million lower than in 2004. Our contributions to our Dutch defined benefit plans in 2005 were EUR 14 million lower than in 2004 and our contributions to our U.S. defined benefit plans in 2005 were EUR 212 million higher than in 2004. In 2005 a one-time contribution of USD 288 million (EUR 236 million) was made to decrease the unfunded status of several U.S. pension plans. While our contributions for our U.S. defined benefit plans are expected to decrease from EUR 289 million in 2005 to EUR 40 million in 2006, our contributions for our Dutch defined benefit plans are expected to increase from EUR 118 million in 2005 to EUR 157 million in 2006.

Certain of our employees in the U.S. are covered by multi-employer plans, which have a total unfunded liability of EUR 22,409 million as of January 1, 2004 (the latest year for which information is available). We estimate our proportionate share of the total unfunded liability of these plans at EUR 637 million. These unfunded liabilities are not recognized on our consolidated balance sheets because sufficient information is generally not available and the financial statements of these plans are not based on the same accounting standards according to which our consolidated financial statements are prepared. The unfunded liabilities of these plans may result in increased future payments by us and the other participating employers. Our risk of such increased contributions may be greater if any of the participating employers in an underfunded multi-employer plan withdraws from the plan due to insolvency and is not able to contribute an amount sufficient to fund the unfunded liabilities associated with the participants of the plan.

For additional information, see Note 24 to our consolidated financial statements included in this annual report.

If we are unable at any time to meet any required funding obligations for some of our U.S. pension plans, or if the Pension Benefit Guaranty Corporation (the "PBGC") concludes that, as the insurer of certain U.S. plan benefits, its risk may increase unreasonably if the plans continue, under the U.S. Employee Retirement Income Security Act of 1974 ("ERISA") the PBGC could terminate the plans and place liens on material amounts of our assets. Our pension plans that cover our Dutch retail operations are governed by the Dutch Central Bank (De Nederlandsche Bank or "DNB"). DNB may require us to make additional contributions to our pension plans to meet the minimum funding requirements as applied by DNB.

In addition, health care costs have risen significantly in recent years and this trend is expected to continue. We may be required to expend significantly higher amounts to fund employee health care plans in the future. Significant increases in health care and pension funding requirements could have a material adverse effect on our financial position, results of operations and liquidity.

We face many challenges and risks, including the possibility that we might not successfully implement our operating strategy and objectives, as a result of which there is a risk that personnel who are integral to the success of our business will leave, disrupting our ability to achieve short- and long-term goals. Although we have an equity-based compensation plan and have retention agreements with key employees and directors, we cannot assure you that these measures will be effective to retain or attract key employees and directors, which could materially hinder our ability to successfully execute our operating strategy and objectives and thus have a material adverse effect on our financial position, results of operations and liquidity.

The supply chain of growing, packaging and transporting food from producers to retailers requires sourcing from different suppliers worldwide. Although our food safety policy covers the complete supply chain, from farm and production level to our own operations, we may still face food safety problems, including disruptions to our supply chain caused by food-borne illnesses, or injuries caused by food tampering or poor sanitary conditions. Instances of food safety problems, real or perceived, whether at our food retail stores or our foodservice facilities or those of our competitors, could adversely affect the price and availability of the affected food product and cause customers to shift their preferences and may also result in product liability claims and negative publicity about us or the food industry in general, which could adversely affect our sales and our results of operations.

Our businesses are governed by environmental laws and regulations in all the countries where we do business. These laws and regulations also govern the discharge, storage, handling and disposal of hazardous or toxic substances. If stricter laws are passed or applicable environmental laws are more strictly enforced, we may incur additional expenditures. Our failure to comply with any environmental, health or safety requirements, or any increase in the cost of such compliance, could have a material adverse effect on our financial position, results of operations and liquidity.

As a consequence of our incorporation in the Netherlands, our corporate affairs are governed by Dutch corporate law. Principles of Dutch law relating to certain matters, including the fiduciary duties of management and the rights of shareholders, may differ from those that would apply if we were incorporated in a jurisdiction within the U.S. As a foreign private issuer, although we are subject to the periodic reporting requirements under the Exchange Act, the disclosure required of foreign private issuers under the Exchange Act is more limited than disclosure required of U.S. domestic issuers. As a result, there may be less publicly available information about us than is regularly published by or about other public companies in the U.S. and such information may be made available later than that of U.S. domestic issuers. As a foreign private issuer, we are also exempt from some of the corporate governance requirements of the NYSE that are applicable to U.S. domestic companies listed on the NYSE. For more information related to the corporate governance requirements that apply to Ahold, see "Corporate governance" in this annual report. In addition, certain of the SEC's rules implementing the Sarbanes-Oxley Act provide foreign private issuers with longer compliance transition periods.