Our strategy

Restoring our financial health

Since November 2003, we have taken numerous steps to strengthen our financial position and flexibility. We raised approximately EUR 2.9 billion in net equity proceeds, reduced gross debt by approximately EUR 5.8 billion, negotiated a new, unsecured syndicated EUR 2 billion credit facility with more favorable terms and conditions than the prior facility, and completed divestments for cash consideration and assumed debt totaling EUR 3.1 billion. As a result of our efforts, we have improved our liquidity, strengthened our balance sheet and better positioned ourselves for the future by divesting non-core and under-performing assets.

Our overall financial recovery is on track. We closed 2005 with EUR 2.2 billion total cash balances and we reduced gross debt by 22.7% (EUR 2.3 billion) during 2005. The lower average outstanding debt balances, lower average cost of debt and lower banking fees contributed to lower net interest expense in 2005. Our financial health is steadily improving and we remain committed to meeting what we understand to be the criteria for investment grade rating from the two applicable rating agencies.

Re-engineering our retail business

We have reorganized our food retail companies into arenas to integrate back office functions. In this way, we can achieve economies of scale while continuing to operate using local brands, pricing and product assortment. We have also reinvested in many of our stores to maintain and improve our market position.

Our objective for our companies is for them to have or be capable of achieving a sustainable and profitable number one or number two position in their respective markets within three to five years.

Recovering the value of U.S. Foodservice

The three key steps we are taking to recover the value of U.S. Foodservice are: improving internal controls and corporate governance; restoring profitability and cash flow; and pursuing profitable sales growth. We have made significant progress and implemented a number of initiatives and changes at U.S. Foodservice to clarify accountability, improve our internal controls and strengthen our corporate governance. In 2004, we implemented a plan focusing on organizational, operational and system improvements as well as procurement enhancements at U.S. Foodservice in order to restore profitability and cash flow. In 2005, we continued executing this plan, resulting in improved operating income at U.S. Foodservice, and in November of the same year announced a new long-term strategy.

Reinforcing accountability, controls and corporate governance

As part of our Road to Recovery strategy we have implemented many initiatives and changes to clarify accountability, improve internal controls and strengthen corporate governance. We have concluded that as of the end of the period covered by this Annual Report, the two material weaknesses reported in our 2004 Annual Report no longer exist. For additional information, see "Corporate governance" and "Internal control".

2006 and onward

We have defined a growth strategy for 2006 and onward based on core values that our operating companies share and core capabilities that we are improving. Our core values are rooted in Ahold's heritage and reflect our ambitions for the future. Increasing the focus on our core capabilities will help us build upon what we do best and differentiate us from the competition.

We have launched a company-wide initiative to become a 'learning organization.' This will support the improvement of our core capabilities and help us to work together as one team. Our goal is not only to develop our skills, but also to ensure we have the best processes, tools and innovative solutions in place to run our business in the simplest and most efficient manner possible.

Our values

Act customer. Customers are our lifeblood. We make every day easier for them, bringing innovative and interesting shopping experiences.

Engaged associates. We value our diversity and are committed to developing our people and giving them opportunities to grow (internally, we refer to our employees as 'associates' reflecting their role as partners in achieving our objectives and serving our customers).

Integrity always. We act openly and honestly. We say what we mean and we do what we say.

One team. We are greater than the sum of our parts. We cooperate to leverage our capabilities, scale, strengths and knowledge.

Innovative mindset. We constantly challenge ourselves to find better ways and better results.

Passion for our business. We love being in the food business. We set high standards and are never satisfied in our search for excellence.

Developing our core capabilities

Applied customer insight. We work to understand consumer needs better and faster than our competitors.

Superior category management. We strive to be the best at maximizing sales growth and shelf profitability because we provide customers with the right balance of value, choice and quality within any given product category.

Strategic sourcing. We want to enhance our influence over the value chain as a product moves from producer to customer.

End-to-end supply chain. We are working to leverage our scale and to maximize efficiency in the delivery of products from the time they leave the supplier to the moment they reach our shelves.

Excellent store operations. We strive to provide an easy, convenient and appealing shopping experience through continuous customer focus and best-in-class operational efficiency.

Our business model

The strategies of our companies are based on one shared business model. It is designed to enable our group of companies to apply relentless efficiency and simplicity to everything we do. By working as one team we benefit from group synergies and innovation that serve to further reduce costs. Improving our efficiencies and lowering our cost base enable us to invest in providing our customers better value for money and an easier shopping experience.

The intention is to drive our volume of sales to generate cash that can be invested in new stores, new services and innovation. Cash generated can also be used for acquisitions in both the supermarket and foodservice businesses to build our position in certain markets. The overall goal is to make our offering more appealing to customers, improve our bottom line, and create value for shareholders.

Our value repositioning programs at Albert Heijn and ICA - and soon to be launched at Stop & Shop/Giant-Landover - are based on this business model and have succeeded in further enhancing our market share and growth.

Overview of our retail strategy

Our customers' needs define what we do. We make it easy for them to make the best choices for themselves and those they care about.

Our common set of values and core capabilities will help us act as one company and capitalize on our scale, scope and expertise. At the same time, our businesses maintain strong individual identities to best serve customers at a local level.

We are looking for consolidation opportunities in our operations and are increasingly streamlining processes. Being highly skilled in category management and understanding our customers enables us to provide a more targeted range and assortment of products and services in a cost-efficient and convenient way.

We have several group-wide initiatives in place, some of which involve both our retail and U.S. Foodservice businesses.

Through next generation sourcing we take a more global approach to sourcing and more closely link it to category management. We are reinventing the value chain to eliminate inefficiencies and lower cost of goods. This entails a detailed, critical look at costs in the chain that runs from raw materials to the finished products on our store shelves.

Our group-wide initiative in general merchandise is designed to build our sales through an integrated approach and make us more competitive in this category.

In addition, we are building a standard set of retail systems to streamline infrastructure and reduce overall IT costs. We have started by implementing a global IT outsourcing program and realigning our IT structure internally. These changes will help integrate the function globally, leverage our resources and improve support to our operating companies.

Our retail strategy is supported by our company-wide ambition to build a learning organization that encourages knowledge exchange to leverage our expertise wherever possible.

Initiatives like value repositioning, optimizing the supply chain, developing new store formats and improving private label penetration are supporting the execution of our business model in our retail arenas.

In 2005, competitive and operating cost pressures in our retail markets were greater than expected and the turnaround at some 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 this year to be between 2.5% and 3.0% (at constant 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 top line growth and achieve a 5% retail operating margin.

Overview of our U.S. Foodservice strategy

In November 2005, we announced a new long-term strategy for U.S. Foodservice. The strategy divides our U.S. Foodservice business into two customer-focused operating companies starting in 2006 to meet the needs of different types of customers.

The Broadline company is the growth engine and generates the bulk of sales turnover. It provides a wide range of food and related products and services to customers such as independent restaurants, healthcare providers, and the hospitality industry. We are focusing on geographical areas that offer superior potential for profitable growth and increasing the penetration of our private brands. We have set up a 'company within a company,' Monarch Foods, to consolidate and manage our strongest brands. We also plan to make acquisitions to build scale in areas where we are not a leading competitor and to enhance our position in areas where we are.

The Multi-Unit company provides food and related products to large chain restaurants. Its primary focus is on efficient distribution rather than on value-added services. Creating a specialized multi-unit company gives us a clear opportunity to make this part of the business profitable.

We are also taking a close look at sourcing to reduce overall supply chain costs by optimizing distribution logistics and reducing working capital requirements. As part of efforts to improve competitive positioning, U.S. Foodservice has reduced overhead expenses and launched the 'Quality, Service, Trust' marketing campaign.

We expect that U.S. Foodservice's operating margin in U.S. dollars before impairment of goodwill will exceed 1.7% no later than 2006.