Buried deep within the Q3 2016 earnings conference call of <a href="https://www.aholddelhaize.com/" alt="Ahold Delhaize">Ahold Delhaize</a>, a subtle but seismic shift in power dynamics reveals itself. It's a change that, if proven true, could have far-reaching implications for the company's future, and one that seems to have slipped past the radar of analysts focused on the headline figures.

The change concerns the balance of power between the online and offline segments of the business, particularly within the Netherlands. While analysts peppered CEO Dick Boer and CFO Jeff Carr with questions about the margin dilution caused by bol.com, the company's fast-growing online retailer, a more profound transformation was taking place: a quiet but decisive shift in leverage from brick-and-mortar stores to the online realm.

The key lies in two seemingly innocuous statements made by Carr. First, he emphasizes the need to assess online performance not just on margins, but also on return on capital. He points out that online businesses, requiring significantly less capital investment, can operate profitably at lower margins. Second, he reveals that the online segment's contribution to overall like-for-like sales in the Netherlands was approximately 1.5 percentage points.

These statements, taken together, suggest a crucial point: bol.com, while currently diluting margins, is already generating a substantial portion of sales growth in the Netherlands <em>while operating on a leaner, more capital-efficient model</em>. This creates a potent lever for the company moving forward.

Consider the following hypothetical scenario. Assume that the Netherlands segment is targeting a 4% overall like-for-like sales growth. If bol.com, with its 30% growth rate and lower capital intensity, already contributes 1.5 percentage points, it means the remaining brick-and-mortar Albert Heijn stores need to contribute only 2.5 percentage points to reach the target.

This presents Ahold Delhaize with a strategic choice. They could choose to prioritize the profitability of Albert Heijn, accepting a slower overall growth rate in the Netherlands. Alternatively, they could double down on bol.com, further accelerating its growth, and potentially capture a larger share of the rapidly expanding online market – even at the expense of short-term margin pressure.

The company's answer to this dilemma will reveal much about its long-term vision. Are they content to be a traditional grocery retailer, with robust margins but potentially facing slower growth in a changing consumer landscape? Or are they willing to embrace the disruption of e-commerce, accepting lower margins in exchange for the potential to dominate the online grocery market?

While the December Capital Markets Day promises more detailed insights into the company's strategic framework, the clues are already present in the Q3 transcript. The hidden tsunami of online growth is gathering force, and Ahold Delhaize's response will determine whether they ride the wave or are swept away by it.

Projected Impact of Online Growth

To illustrate the potential impact of this dynamic, let's delve into a simple numerical example. Assume the following for the Netherlands segment in 2016:

This results in:

Now, let's project these figures forward, assuming a 4% overall like-for-like sales growth for the Netherlands and a 30% growth rate for bol.com. We will keep operating margins constant for simplicity.

By 2020, we would have:

As you can see, even with bol.com operating at a lower margin, its rapid growth significantly contributes to overall profitability. By 2020, it would account for over 10% of the segment's operating profit, despite a lower starting point.

This simple model highlights the power dynamic shift. Ahold Delhaize can potentially achieve its growth ambitions by leaning on the capital-efficient, high-growth engine of bol.com. This could fundamentally alter the company's profit structure, creating a lower-margin but potentially higher-growth and more valuable business in the long run.

The coming years will be crucial for Ahold Delhaize. The choices they make will determine whether they become a leader in the future of grocery retail, or are left behind by a wave of online disruption.

"Fun Fact: bol.com was originally founded as an online bookstore in 1999, before expanding to become a general online retailer, similar to Amazon."