Calculation of the financial value of potential (food) waste reductions in the supply chain of AGF Albert Heijn within Royal Ahold Delhaize

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Calculation of the financial value of potential (food) waste reductions

in the supply chain of AGF Albert Heijn within Royal Ahold Delhaize

Ties Leeksma Student number: s2229382 MSc Finance Supervisor: Dr. W. Westerman January 2017 ABSTRACT

The goal of this thesis is to calculate the financial value of potential waste reductions in the supply chain of potatoes, vegetables and fruits (AGF) of Albert Heijn within Royal Ahold Delhaize. The topic of food waste was analyzed from a financial perspective. A case study together with a design study was executed. As part of the case study important variables that have an influence on the value of waste reductions were identified. Then a valuation framework was designed. Furthermore, the amount of (food) waste in the chain of AGF was addressed by using red paprika as an example. Finally, the net present value (NPV) and payback period were calculated of a potential investment in the reduction of wasted red paprika in the supply chain of AGF.

Key Words: Food Retail Industry; (Food) Waste; Supply Chain; Valuation; Design Study;

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Preface

This thesis was written as part of the completion of the requirements for the degree of Master of Science in Finance at the Faculty of Economics and Business of the University of Groningen.

By finishing this thesis my unforgettable student-time in Groningen will come to an end. Writing this thesis was an interesting period for me. It was both challenging and fun. Actively co-working at an AGF department of an Albert Heijn shop, interviewing a variety of professionals with valuable knowledge about food waste and having the freedom to develop my own research plan was an incredible experience. During my internship I learned a lot about the supply chain and products of AGF.

I would like to thank Royal Ahold Delhaize and especially the department of AGF within Albert Heijn for their support and the possibility to write my thesis in Zaandam. Gratitude goes to Frank Loos, who helped me by introducing me to a number of people within the Royal Ahold Delhaize organization. Finally, I would like to thank my supervisor Wim Westerman for the valuable feedback he gave me during the writing process.

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1. Introduction

The environmental impact of food waste is enormous, weighing 1.3 billion tons per year globally (Gustavsson et al., 2011). Fruits and vegetables account for the biggest group of lost and wasted food by weight (Lipinski et al. 2013). The retail sector is responsible for five percent of all food waste in developed countries (Gustavsson et al. 2011). This is a small amount compared to the remaining amount of food wasted by consumers and producers. However, retailers do have an influent position in the chain. On the third of February 2016, a law was accepted in France that forbids supermarkets to waste food that was not sold. Supermarkets starting from 400 square meters of floor area have to sign a contract with respect to the donation of otherwise wasted food to charities or they will face a fine of €3,750. People involved in the campaign, now attempt to convince the European Union to implement such a law in all member states.

Food waste is food intentionally reserved for consumption by humans being discarded onwards the food supply chain (UN FAO1_{, 2016). Gustavsson (2011) remarks that the}

term food waste is regularly used for food losses appearing at the end of the food value chain (retail and consumption). The literature uses the terms food waste and food loss interchangeably. In this paper, the term food waste is used in line with the definition of the UN FAO for all waste along the food supply chain excluding the consumption stage.

The profit margins in the retail industry are considered small. Reducing waste in an effective way can cut down costs for companies, increase their share-price, lower their pollution and provide an increased security of resources (King and Lenox, 2001, King and Lenox, 2002, and Jacobs et al., 2010). The increasing prices of resources, increasing waste control, increasing number of disposal laws and growing disposal costs have made the search for opportunities to diminish food waste a priority for firms. Particularly at the commercial side of the supply chain, firms increasingly confront suppliers with their responsibility in achieving waste reduction goals (Simpson, 2012). According to McKinsey (2009), nowadays more firms create real value by their social, environmental and governance activities, which increase sales, lower costs or reduce risks. Firms are becoming more capable of measuring the indirect value of their social,

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5 environmental and governance programs even at the long run. The most successful programs create value in the market through growth, risk management, return on capital and management quality (see appendix A).

1.1 Food Loss and Waste Accounting Standard

June 2016 Copenhagen/Washington, a collaboration of leading international organizations launched the Food Loss and Waste Accounting and Reporting Standard (FLW Standard) at the Global Green Growth Forum 2016 Summit. The FLW Standard is considered a valuable development by creating a set of universal definitions and reporting requirements for companies and other institutions to be able to manage, measure and report on food loss and waste in a consistent and reliable manner. “This standard is a real breakthrough. For the first time, armed with the standard, countries and companies will be able to quantify how much food is lost and wasted, where it occurs, and report on it in a highly credible and consistent manner,” said Andrew Steer, President and CEO, World Resources Institute. “There’s simply no reason that so much food should be lost and wasted. Now, we have a powerful new tool that will help governments and businesses save money, protect resources and ensure more people get the food they need” (www.wri.org, 2016).

1.2 Royal Ahold Delhaize

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6 insecurity in the communities that we serve’’ (www.aholddelhaize.com, 2016). Ahold Delhaize entered the Dow Jones Sustainability World Index (DJSI World) with a total score of 79 out of 100, which is significantly higher than the average score of 44 for the Food and Staples Retailing Industry.

1.3 Albert Heijn

The local brand Albert Heijn is the largest food retailer in the Netherlands, which also holds stores in Belgium and Germany. ‘’The company’s mission is to offer all the ingredients for a better life. Every day it brings good, safe, sustainable and healthy food to millions of customers. Stores offer a wide range of high quality items and friendly, helpful service. Long opening hours and online ordering enable customers to shop for groceries around the clock. Albert Heijn is committed to offering the best for its customers and associates and to being a better neighbor to the communities it serves’’ (www.aholddelhaize.com, 2016). At Albert Heijn, three commercial departments are responsible for the store assortment of their store formats. These are: Non-Food, Dry Groceries and Fresh. In the last department the category team AGF (Potatoes, Vegetables and Fruits) operates. At Albert Heijn the ladder of Moerman is used when handling food waste. This ladder arose from the ladder of Lansink, which was proposed by the former Dutch minister Ad Lansink in 1979. The Ladder of Moerman (Fig. 1) ranks waste prevention methods based on their favorability. However, the hierarchy in this ladder is not based on potential financial value added to a firm.

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1.4 Hartman A.C.

Albert Heijn has built a network of dedicated growers world-wide. In order to reconcile the wishes of both the grower and Albert Heijn, a closed chain is created. A delivery guarantee from the grower to Albert Heijn insures that Albert Heijn can get the products it needs. At the same time, growers are assured of selling the products they grow. Hence, growers are able to adjust their production in line with Albert Heijn. This stimulates efficient growing and minimizes the amount of inventory needed.

One of these dedicated growers is Hartman A.C., the leading producer of both cucumber and paprika in The Netherlands and supplier of Albert Heijn for more than 40 years. Hartman A.C. is located in Klazienaveen, Oosterbierum and Sexbierum. Each year over 7.6 million kilo of paprika is produced, including 2.2 million kilo of red paprika. During the high season, products are harvested and processed seven days a week.

1.5 Bakker Barendrecht

The Dutch company Bakker Barendrecht is the largest supplier of Albert Heijn in quantity and is leading in processing fresh produce. The specific relationship between Albert Heijn and Bakker Barendrecht is called a strategic partnership and is defined in the following way: “A Strategic Partner supplies Ahold with mostly strategic products or services; these have a relative high supply risk and high business impact. Such a partner sees Ahold as an attractive customer that represents a large share, sometimes even 100%, of its turnover. Both parties have a long-term and fully transparent relationship and their strategies are completely aligned. On top of this, the mutual dependency creates a playing field where both the Supplier and Ahold are willing to invest in their relationship and performance” (Royal Ahold Delhaize, 2016).

Bakker’s locations are based in the Netherlands. Sourcing is the primary activity at Bakker including procurement and contract growing. Furthermore, Bakker is involved in logistic services and research and development. ‘’The company’s mission is to contribute to the success of their customers and to enjoy doing that” (www.bakkerbarendrecht.nl, 2016). Everyday Bakker is managing over 2,000 tons of fresh produce, which adds up to 70 million crates of fruits and vegetables per year.

1.6 The supply chain of AGF

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8 perishable, and therefore expected to be significant contributors to food waste. Furthermore, it is assumed that the recorded data in this subgroup are subject to a great amount of uncertainty. In this research the potential financial value of reducing food waste in the entire supply chain of AGF Albert Heijn (the biggest supermarket chain in the Netherlands) is addressed by developing a valuation framework. In-store and pre-store waste is taken into account in this study. However, food waste by consumers is not included in the scope of this research. A unique approach is used, since this study combines the quantification of food waste with a valuation of waste reductions in the supply chain over the full year of 2015. The supply chain of AGF is investigated by focusing at four parts (see Fig. 2): grower Hartman A.C., strategic partner Bakker Barendrecht, Albert Heijn distribution center and Albert Heijn shop. Considering the literature regarding food waste, there is very little research available on the potential financial value of food waste reduction.

Fig. 2Food supply chain AGF via Bakker Barendrecht 1.7 Research questions

In order to be able to compute the potential financial value of waste reductions, a model needs to be developed. A design study in combination with a case study is executed. The main goal of this research is stated in the following way:

The calculation of the financial value of potential (food) waste reductions in the chain of AGF Albert Heijn within the Royal Ahold Delhaize Group.

The following question needs to be answered in order to develop a valuation framework:

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9 Literature regarding food waste and value creation is reviewed to develop an overview of the relevant cost and benefit drivers, resulting in the variables that directly or indirectly influence the potential financial value of (food) waste reductions. Moreover, the following sub-question is addressed to provide an example of food waste quantification in the chain of AGF:

What is the NPV of an investment in the supply chain of AGF in order to reduce the amount of wasted red paprika?

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2. Literature review

Royal Ahold Delhaize is interested in the percentage of food wasted and the potential financial value of an investment in the reduction of (food) waste in the supply chain of AGF. To create an overview of all influencing variables involved in the valuation process, the literature regarding (food) waste and value creation will be discussed. Furthermore, studies with respect to quantification of food waste and best practices to prevent food waste are discussed.

2.1 Value creation in the supply chain

A well-known principle in finance is the fact that companies are able to create value by the investment of capital now in order to generate cash flows in the future at rates of return that are higher than their cost of capital. Both the return on capital invested (ROIC) and the revenue growth of a company determine how revenues are transformed into cash flows. The value a company creates is determined by its ROIC, revenue growth and the capability to sustain it. The competitive advantage of a firm drives the ROIC, since this provides the firm with the possibility to set premium prices and to create capital and cost efficiencies. Koller et al. (2010) state that by mergers and acquisitions, increasing market share and growing markets, revenue growth can be obtained.

Ketchen et al. (2008) point out that Supply Chain Management (SCM) plays a key role in the creation of business success, were SCM is defined as, ‘‘an integrating function with primary responsibility for linking major business functions and business processes within and across companies into a cohesive and high-performing business model’’ (www.cscmp.org, 2016). In this respect, SCM is important in establishing (or ruining) shareholder value by contributing to the three main drivers of the financial performance of a firm: revenue, working capital and operating costs.

2.2 (Food) waste studies

Literature regarding (food) waste is reviewed to derive an overview of the costs and benefits associated with (food) waste reductions and to provide insights into the quantification of (food) waste in the retail-industry.

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11 reduction. Pressures from institutions are a significant driver for the choices of management regarding the environment (Bansal and Roth, 2000, Delmas and Toffel, 2008 and Sarkis et al. 2010). Despite increasing institutional pressure, firms are often not capable to alter this pressure into solutions regarding waste reduction that contribute to their performance (French and LaForge, 2006 and Gonzalez-Torre et al., 2010). Firms that are able to cope with the waste requirements of institutions and are able to forecast requirements in the future, are expected to obtain an advantage over competitors (Toffel, 2003).

Diminishing waste in an effective way can reduce both costs and pollution for firms. Furthermore, it can create greater resource security and increase the firm’s share-price (King and Lenox, 2001, King and Lenox, 2002 and Jacobs et al., 2010). Sarkis et al. (2010) state that firms have to develop and invest in competences to handle complicated tasks such as process redesign and waste reuse. The pressure caused by customers and stakeholders is studied and addressed as a significant driver of investments related to the prevention of pollution (Kocabasoglu et al., 2007, Chung and Wee, 2008 and Delmas and Montiel, 2009).

However, Lenox and King (2004) and Begum et al. (2009) note that several firms do not perceive value in the reduction of waste and consider it as a complex alternative to the removal of waste and other non-reducing alternatives as landfill disposal or treatment. Landfill disposal generates disposal and transport fees for the firm. Next to that, the opportunity cost of loss of material, which has a possible reuse value, has to be taken into account (Simpson, 2012). Doonan et al. (2005) found that reduction of processing waste or reusing materials of waste in the production process can lower the cost associated with raw materials for firms. The conservation of energy, stock reduction and scrap prevention have been linked with increased firm performance (King and Lenox, 2001, Pil and Rothenberg, 2003, Rachionitis and Papis, 2008).

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12 2007; Simpson, 2010). Given the fact that in general firms communicate on a regular basis with their partners in the supply chain, there is significant room for knowledge sharing or the development of incentives for the reduction of waste. Mainly the pressure exerted by customers is associated with a financial incentive to change, hence the need for customers for firms to survive (Delmas and Montiel, 2009).

Eriksson et al. (2016) executed a case study and used three years of data of supermarkets in Sweden on cheese, dairy, deli and meat product waste. They conclude that food waste can be reduced by lowering the storage temperature for all products tested. The costs of lowering the storage temperature exceeded the possible savings. Despite that, a net benefit was accomplished for products with a relatively large amount of waste, a small turnover and a high value per unit mass.

2.3 Quantification studies

Food waste has been quantified in an international context (Parfitt et al., 2010; Gustavsson et al., 2011) and in a national context (Eriksson et al., 2012, 2016;Beretta et al., 2013;Nahman and de Lange, 2013; Betz et al., 2015).

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13 Betz et al. (2015) focused at the Swiss service industry and studied the waste from two companies in the education and business sector. Their scope included storage losses, preparation losses, serving losses, and plate waste. They conclude that the companies in the education and business sector were responsible for a loss of 10.73% and 7.69% of the mass of food delivered within the process chain, respectively.

2.3.1 Tesco and food waste

In the retail-industry the British retailer Tesco, the world’s third largest retailer estimated in profits, initiated the process of food waste quantification. In the beginning of 2014 they became the first UK retailer to disclose the amount of food they wasted in their operations including shops and distribution centers. Sustainability consultant Anthesis helped Tesco to develop a way to measure where food waste occurs. These measurements are done in conformance to the FLW Accounting Standard. For the financial year 2015/2016 the amount of food waste was calculated to be 59,400 tons. Twenty-one percent of the total waste included fruits and vegetables, which implies that 12,474 tons of fruits and vegetables was wasted (annual report Tesco, 2016). Fortunately, they are now working to reduce these significant numbers by creating a food waste foodprint for every product and in addition they are developing action plans to reduce waste. Recently, Tesco is building better relations with his suppliers to be more effective in the prevention of waste.

2.3.2 Eriksson’s quantification of food waste in the Axfood AB group

Eriksson et al. (2012) analyzed the flows of fruits and vegetables in collaboration with the Swedish University of Agricultural Sciences between 2010 and 2011 at six supermarkets of Willys, the national leading discount chain in Sweden, which is part of the Axfood AB group. They found that the average fruit and vegetable waste from the investigated stores was 4.3% of the total mass delivered. Additionally, pre-store waste (goods refused at delivery) was the largest source of waste (3.01%) and recorded in-store waste was 0.99%. Lastly, unrecorded in-in-store waste was the smallest source of waste (0.3%). Eriksson et al. (2012) suggest concentrating on pre-store-waste of fresh fruits and vegetables in order to be effective in waste management.

2.3.3 Variety in measurement

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14 amount of calories wasted. Additionally, another study calculated a relative percentage of the total amount of products produced that was wasted. Moreover, a few studies computed the total cost to society of food waste. Finally, several studies take a different perspective by focusing at various parts of the supply chain, for example by focusing at the consumption stage, or by making a distinction between sectors as education and business.

2.4 Best practices Albert Heijn

Albert Heijn is actively searching for new opportunities to prevent food waste. Among existing activities are Instock, Buitenbeentjes and supporting local food banks.

2.4.1 Instock

On the 21st_{of June in 2014, restaurant Instock was created by four employees of Albert}

Heijn by means of a pop-up location in Amsterdam with the goal of reducing food waste. The dishes of Instock are produced from food that otherwise would be thrown away by the grocery department of local stores of Albert Heijn. Instock already opened restaurants at three different locations and thereby managed to save 200,000 kilo of food. Furthermore, Instock brews its own rescued potato beer and published their first book with tips and recipes for consumers to prevent food waste: Instock cooking.

2.4.2 Misfits

In 2014 Albert Heijn started to sell a misfits range called ‘Buitenbeentjes’. This range comprises fruit and vegetables that initially did not fit the standard specifications of the supermarket. First, it was exclusively introduced online in a cardboard box including a combination of a few fruits and vegetables, but now a variety of misfits of fruits and vegetables are separately available in the shop as well.

2.4.3 Food bank support

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15 the food bank the upcoming years in order to provide fresh and healthy products for food bank consumers.

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3. Research method

This research is composed of a design study together with a case study. Design studies comprise three different stages: diagnosis, design and implementation. These stages intend to provide a solution to a current problem (Van der Zwaan, 1990). During the diagnosis stage the problem is acknowledged and analyzed and the data are collected. A case study will be used for that purpose. A case study is defined as an empirical investigation that studies a current phenomenon within an actual context, which is especially convenient when there is not a clear boundary between phenomenon and context (Yin, 1994). The reduction of (food) waste at Royal Ahold Delhaize is a broad and challenging problem in practice with a variety of influencing variables. To cope with these variables, a case study is required, since it provides an in-depth investigation of this complex problem. Case study research in the diagnosis phase of the design study gains the possibility of adopting several different data sources (Baxter and Jack, 2008). In the design phase of the design study, a solution to the problem is created, leading to a suitable valuation framework. This final framework results in an overview of the different value drivers regarding the reduction of (food) waste in the chain of AGF Albert Heijn within Royal Ahold Delhaize. Finally, this framework is used to calculate the financial outcome of a potential investment with respect to the reduction of food waste. The next paragraphs are organized in the following way. First, the different techniques used in this study: triangulation, snowball sampling and unstructured interviews are explained. Thereafter, the diagnose stage, design stage and implementation stage are discussed. Note that in this research, the names of the interviewees are not provided for privacy reasons, however their function titles are mentioned in Appendix E.

3.1 Triangulation

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17 research a holistic approach is used, hence the information should not be considered separately. According to Baxter and Jack (2008), the goal is to combine all data to provide more comprehensive understanding of the entire case instead of focusing on all individual factors separately. Consequently, literature, unstructured interviews, internal documentation of waste treatment and waste numbers in the chain of AGF within Royal Ahold Delhaize will be incorporated.

3.2 Snowball sampling

Together with person M, senior category manager vegetables, a variety of names of employees and people who are involved in the supply chain were discussed, eventually creating a list of employees and stakeholders relevant for this research topic. During the interview sessions this list was extended by means of snowball sampling. According to Waldorf and Biernacki (1981), pp 141: “the method yields a study sample through referrals made among people who share or know of others who possess some characteristics that are of research interest. The method is well suited for a number of research purposes and is particularly applicable when the focus of study is on a sensitive issue, possibly concerning a relatively private matter, and thus requires the knowledge of insiders to locate people for study”. Since food waste is considered a sensitive topic, snowball sampling is a suitable approach to address different opinions in the organization and in the chain of AGF. This method is followed until the end of the study, because of the need for information through the entire process. During the interviews, it became evident that particular people had very valuable information. Those were interviewed more than once and their feedback has been an important contribution to this study. Informants have all been interviewed about the topic of food waste in the chain of AGF. The questions, which were intended to gather information about the subject, were the same for all interviewees to a certain extent. This is done in order to accomplish triangulation, hence to provide a double-check of the collected information. The questions were linked to both the literature on value creation and (food) waste. Throughout the interview process these initial questions were increasingly conceptualized. Two of the paraphrased interviews are provided in Appendix E.

3.3 Unstructured interviews

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18 including employees of the strategic partner Bakker Barendrecht as well as the director of the growing company Hartman A.C.. The interviewees originated from different specializations and were interviewed in an unstructured way. Since all these people had another background, a standard interview in a structured way would not have been suitable. Unstructured interviewing has both disadvantages and advantages. It costs significant amount of time and interviewer bias can occur (Van der Zwaan, 1990). However, time is not considered a constraint in this specific research. Moreover, Newell and Rice (1999) found that interviewer bias can be induced by personality and interpersonal perception. To avoid this, answers are registered and eventually summarized. To check for misunderstandings during the interview process, answers are discussed following the process of member checking by Baxter and Jack (2008). This provides the possibility to clarify the interpretation of the interviewer.

The advantage of unstructured interviews is that it provides the opportunity to collect all kinds of thoughts and ideas, which come into the mind of the informant during the interview. By asking open questions the overall situation can be mapped more easily. Moreover, additional questions can be asked when answers are not satisfactory, increasing the chance of receiving the relevant information.

3.4 Diagnosis stage

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19 situation, the research area is delimited. Eisenhardt (1989) advises to deductively create a conceptual framework. This secures that topics and cases, that are essential are not unnoticed and that an initial design can be framed. Besides that, a framework can help the researcher to stay focused through the research process. Baxter and Jack (2008) state that by means of a conceptual framework important relations can be addressed and topics that should be included or excluded can be determined. Accordingly, an overview of exogenous variables (drivers) was established by analyzing literature regarding food waste. Those drivers were further determined by examining documents of Royal Ahold Delhaize and by interviewing participants within the supply chain of AGF Albert Heijn. Eventually, an overview was created including important exogenous variables and the relation of these variables to each other.

3.5 Design stage

In the second phase of the design study, a valuation framework was developed using the existing cost and benefit drivers. Schlosser (2002) stated that next to the determination of endogenous and exogenous variables, an appropriate time period is important to be able to model the cash generating process. By considering benefit and cost drivers, the exogenous variables were determined, which eventually have an effect on the endogenous variables, the outcomes of the actual valuation framework. In order to decide which endogenous variables should be used, outcomes of interviews and literature were analyzed. Furthermore, financial data were needed that were collected at all different parts of the supply chain of AGF.

3.6 Implementation stage

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4. Cost and benefit drivers

To answer the question, ‘Which cost and benefit drivers are important when executing a valuation of waste reduction? , an overview was created including all internal and external variables that have an influence on the financial value of waste reductions in the chain of AGF. In chapter two, a variety of papers regarding food waste were discussed which provided a starting point for capturing the influencing internal and external variables. As already mentioned, the ROIC and the revenue growth of a company are the two major value drivers in general. The unstructured interviews and the information from Royal Ahold Delhaize contributed to an extension and specification of the literature-list. The complete set of direct and indirect variables was addressed. Koller et al. (2010) state that when executing business cases, generally traditional financial statements are applied. However, to be able to develop an appropriate valuation of waste reductions, a structure that is compatible to Royal Ahold Delhaize has to be used. Indirect savings are excluded in the valuation, since these are hard to measure and could lead to financial outcomes that are too optimistic. To account for external variables that have an influence on the value of waste reduction, depreciation, market demand, tax and weighted average cost of capital (WACC) were included in the valuation framework.

4.1 Waste reduction cost and benefit drivers

The final outcome of the valuation framework will be judged in terms of NPV and payback period. An overview of the different cost and benefit drivers was developed by the use of literature, interviews and documentation of Royal Ahold Delhaize. These results are depicted in Fig. 3.

Albert Heijn Savings (direct)

 Waste treatment costs (reduction)

 Personnel costs (reduction labor, for example less labor time needed for removing and checking expiration date of products)

 Logistic costs (less transportation and warehouse space)  Raw materials (less raw materials)

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21  Packing material costs (reduction)

 Working capital level (reduction inventory)  Capacity utilization (reduction)

Savings (indirect)

 Customer satisfaction (less consumers disappointed about the fact that products are wasted)

 Customer loyalty (increased through brand loyalty)

 Sustainability (lower emission through smaller need for production, food safety)  Synergy (increased collaboration in supply chain/knowledge sharing)

Expenses (direct)

 Personnel costs (labor hours)

 Working capital (product increase Q)  R&D costs (supply chain research)

Expenses (indirect)

 Cannibalization

Fig. 3 Waste reduction cost and benefit drivers (Albert Heijn)

Waste reduction gains (€)

Expenses (direct) - Personnel costs - Working capital - R&D costs Savings (indirect) - Customer satisfaction - Customer loyalty - Sustainability (lower

emission, food safety) - Increased collaboration in supplychain/ knowledge sharing Expenses (indirect) - Cannibalization NPV & Payback period Depreciation, Tax, WACC

Market demand

Savings (direct)

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5. Transformation from cost and benefit drivers to valuation

framework

This chapter comprises the conversion of the cost and benefit drivers to a valuation framework. An overview is provided of the pre-conditions per topic required for the valuation framework. In order to report the cost and benefit drivers of Albert Heijn, which are required to compute free cash flows, the drivers were reorganized to a more general format. Eventually, the NPV and the payback period were calculated.

5.1 Pre-conditions valuation framework Time period

In line with the recommendation of persons C and M, a timeframe of ten year was used. In Royal Ahold Delhaize a ten year period is associated with CAPEX (capital expenditure) investments. Following general financial rules, a depreciation period of seven years of equipment was exercised. Persons B, N, O, P, and T emphasized that investments within Albert Heijn are assumed to generate a payback within a three years period. Gains are preferred to be evident on the short term. Furthermore, long-term periods comprise greater uncertainty, since markets are considered volatile.

Personnel costs

Waste reductions are potentially accompanied by a decrease in labor. However, as stated by person C and S costs of labor are not equally divided throughout the organization. Person C advised to use internal documentation regarding loan scales and potential costs associated with severance to make an appropriate calculation of the possible cost reductions with respect to labor allocation.

Working capital

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Tax rate and WACC

The department of AGF within Albert Heijn uses a fixed WACC when calculating business cases. The tax department provides the country specific tax as fixed input for business case calculations.

Logistic costs

The costs regarding logistics consist of storage and transportation costs. Both logistic costs and storage cost could be split up in different costs when needed to assess specific cost drivers regarding transport.

Waste treatment costs

Costs associated with waste treatment. Person X recommended to bundle all costs associated with waste treatment and to calculate it per kilogram waste.

Labor, maintenance, packaging, raw materials

Cost prices in AGF at Albert Heijn consist of raw materials, packaging costs and processing costs. However, several products of the department of fruits and vegetables do not have a packing and therefore packaging costs do not have to be considered for all these products. Various people working at shops of Albert Heijn in the Netherlands have a temporary contract, hence labor costs are assumed to vary over time. According to person K, supermarket managers are able to actively adjust their amount of labor needed for each specific task in their shop on a relatively short term. The most important reason for maintenance is preserving the quality of products and services. Keeping this in mind, products will be checked regularly and therefore part of the maintenance costs is assumed to be fixed. On the other hand, maintenance costs could be decreased by a reduction of the amount of time needed to maintain a good shelf condition, since in case of waste reduction, less products need to be checked and potentially need to be thrown away. Considering the situation where less products need to be thrown away, less raw materials are wasted, since less raw materials are required to fulfill the same market demand.

Framework

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6. Quantification of food waste at AGF

In this chapter the following sub-question was addressed: ‘What is the NPV of an investment in the supply chain of AGF in order to reduce the amount of red paprika wasted?’. To answer this question the amount of red paprika wasted in the chain of AGF needs to be quantified. This was measured in coherence with the earlier discussed FLW Standard. Lastly, a potential investment with respect to waste reduction using the valuation framework is illustrated.

6.1 Scope

In order to quantify the amount of waste in this study, a scope needs to be defined. The research scope consists of four components shown in figure 4: timeframe, material type, destination and boundary.

1. Timeframe (time period inventory results being reported) 2. Material type (materials included in inventory)

3. Destination (where food waste goes when removed from food supply chain) 4. Boundary (food category, lifecycle stage, geography and organization)

Fig. 4. Inventory scope adapted from the FLW (for definitions see Appendix C) 1. Timeframe

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25 January till the 31st_{of December).}

2. Material type

The inventory covers food and associated inedible parts. The FLW Standard states the definition of food and inedible parts.

“Food: Any substance—whether processed, semi-processed, or raw—that is intended for human consumption. “Food” includes drink, and any substance that has been used in the manufacture, preparation, or treatment of food. “Food” also includes material that has spoiled and is therefore no longer fit for human consumption. It does not include cosmetics, tobacco, or substances used only as drugs. It does not include processing agents used along the food supply chain, for example, water to clean or cook raw materials in factories or at home.” Adapted from Codex Alimentarius

Commission (2013).

“Inedible parts: Components associated with a food that, in a particular food supply chain, are not intended to be consumed by humans. Examples of inedible parts associated with food could include bones, rinds, and pits/stones. “Inedible parts” do not include packaging. What is considered inedible varies among users (e.g., chicken feet are consumed in some food supply chains but not others), changes over time, and is influenced by a range of variables including culture, socio-economic factors, availability, price, technological advances, international trade, and geography.” Adapted

from Codex Alimentarius Commission (2013).

3. Destination

To define food waste the UN FAO (2016) definition is used: food intentionally reserved for consumption by humans being discarded onward the food supply chain. Food waste caused by consumers is not included in this study.

4. Boundary (AGF chain)

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6.2 Quantification

First, all the data regarding food waste in the supply chain of vegetables at the department of AGF were considered in this research. For reasons of confidentiality, the numbers may not represent the actual data. This has no impact on the validity of the quantification methodology. Person H working at Bakker Barendrecht advised to look at the growers in the Netherlands for Albert Heijn, since it is too difficult and time consuming to collect the data of producers outside the Netherlands. Thereafter, a list was created of the biggest growers of vegetables per crop in the Netherlands for Albert Heijn. Eventually, red paprika from grower Hartman A.C. was selected to provide an example of waste at the chain of AGF. Red paprika is representative for the average amount of waste per product in the department of vegetables within Albert Heijn and therefore an appropriate example.

Furthermore, Hartman A.C. the main producer of cucumber and paprika for Royal Ahold Delhaize in The Netherlands was chosen, because of their innovativeness and transparency in their production process. Hartman A.C. delivers via Bakker Barendrecht to Albert Heijn. The waste data of red paprika including the red paprika bio is analyzed in the four different parts of the supply chain: grower, strategic partner, distribution center and shop for the full year of 2015. This is done to account for the entire grow season in this study.

6.2.1 Quantification results Grower Hartman A.C.

Grower Hartman A.C. is the main grower of red paprika and biological (bio) red paprika of Albert Heijn. The total cost price values of red paprika and red paprika bio at grower Hartman A.C. in 2015 were estimated. In addition, the financial cost price value of all wasted red paprika at Hartman A.C was computed. Finally, based on these numbers it was calculated that 0.34% of the total cost price value of produced red paprika was wasted in 2015.

Strategic partner Bakker Barendrecht

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27 in 2015 at Bakker Barendrecht was calculated. In addition, the total financial value of wasted red paprika and red paprika bio at strategic partner Bakker Barendrecht in 2015 was computed. Calculations showed that 0.16% of the total cost price value of processed red paprika was wasted.

Distribution center Albert Heijn

The six distribution centers, which are located in Geldermalsen, Nieuwegein, Pijnacker, Tilburg, Zaandam and Zwolle, receive red paprika and red paprika bio from Bakker Barendrecht. At the distribution centers, all orders are picked and eventually the red paprika and red paprika bio are transported to Albert Heijn shops in the Netherlands, Belgium and Germany. Bakker Barendrecht and the distribution centers of Albert Heijn have an arrangement that all products, which are considerably close to their expiration date, are collected by Bakker Barendrecht. Part of these products are sold to other parties in the industry or delivered to the food bank. In this study, the remainder of these paprika’s was incorporated in the financial value of waste of red paprika at Bakker Barendrecht. Consequently, no waste of paprika was recorded at the distribution centers.

Department of vegetables AGF Albert Heijn

At the AGF department in the shops of Albert Heijn, customers can buy the red paprika’s. The total cost price value of red paprika was calculated. Subsequently, the financial value of wasted red paprika at all Albert Heijn shops in the Netherlands, Belgium and Germany was computed in cost price value. Hereafter, one could state that 1.18% of the total cost price value of both types of red paprika was wasted.

6.2.2 Uncertainty in recorded data

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28 insignificant for the department of AGF. Bakker Barendrecht has a tracking system, which could also have small deviations given the human beings involved in the system.

6.3 Calculation example investment waste reduction

The amount of red paprika wasted in the Albert Heijn shops, could be lowered by investing in a machine at the AGF department to produce fresh red paprika soup in-store. In case there is a surplus of red paprika’s or red paprika’s are partly damaged, the green grocer can pick these paprika’s to utilize them for this self-service machine. The basic soup includes: red paprika, water, stock cube, salt and pepper. The soup can be created by the customer by using the red paprika’s selected by the green grocer. The other ingredients are automatically added. This concept is inspired by the automatic orange juice maker, called Zumex, that is already available in several Albert Heijn shops in the Netherlands. Given the equalities between the soup and orange juice machines, the Zumex is used as a benchmark. The valuation framework was applied in order to compute the potential financial value regarding the waste reduction associated with an investment in a soup machine. First, a one-time investment in equipment per shop (soup maker machine) is needed: €10,000 CAPEX. This machine has a depreciation time period of seven years.

In addition, costs are incurred to install the machine in the shop. Operating the machine will use electricity and water with its associated costs. Furthermore, there are variable costs associated with the plastic bags for the soups. All these costs fall into the general maintenance account other store expenses (OSE).

This in-store soup maker creates soup of a surplus of red paprika’s that are close to their expiration date or of red paprika’s that are partly damaged. In general, these kind of paprika’s are hard to sell. By using these paprika’s, waste is reduced. Waste treatment cost per kilogram will decrease and the total cost price value of wasted paprika’s will be lowered.

Table 1 shows the NPV and payback period2_{, calculated based on the valuation}

framework while incorporating benefits and expenses. The NPV of this project is positive and the payback period is four years. Consequently, this potential investment is profitable.

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Table 1; outcomes valuation framework for a potential investment in a soup machine

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30

7 Conclusion and discussion

Food waste is a topic, which is gaining increasingly more attention by firms, institutions and consumers. Every year 1.3 billion tons of food are wasted. A world-wide supported view is that the enormous amount of food waste should be reduced. In order to accomplish this, retailers are important, since they have an influent position in the food value chain. By critically analyzing their own product stream and helping their customers to decrease their amount of food waste, a positive impact on the environment as well as on social welfare can be attained. To be able to effectively reduce waste, clear incentives are needed. Naturally, a financial incentive is one which is widely appreciated by firms, since their urge for financial value to survive.

Royal Ahold Delhaize is an example of a firm that is interested in food waste reduction and its associated potential financial value. This study provides insights into the main research goal ‘The calculation of the financial value of potential (food) waste reductions in the chain of AGF Albert Heijn within the Royal Ahold Delhaize Group’. In order to answer this question, a design study with an integrated case study was executed. In the diagnosis stage, the first part of the design study, the research goal was examined by performing a case study. In this stage, the existing literature regarding food waste and value creation, unstructured interviews and documentation within Royal Ahold Delhaize were analyzed. By using these sources, an overview was created of the existing cost and benefit drivers required for developing a valuation of (food) waste reduction in the chain of AGF. This provided a clear sight on the variables that directly or indirectly influence the potential financial value of (food) waste reduction in the chain of AGF within Albert Heijn. Finally, in the design stage a valuation framework was developed, based on the composed overview of variables.

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31 price wasted relative to the cost price of produced red paprika. In addition, by using the total cost price of wasted red paprika at one Albert Heijn shop, the net present value and payback period of a potential investment to reduce food waste was calculated for one shop of Albert Heijn.

Besides supporting Albert Heijn by calculating the amount of waste and the NPV of a potential investment in the chain of AGF, this paper contributes to the existing literature by addressing a topic of major public interest from a financial perspective. In addition, a quite unique approach was followed by analyzing the entire closed supply chain from grower to shop in contrast to earlier studies that tend to focus on a specific stage in the supply chain. The overview created in this study addresses important cost and benefit drivers that have an impact on the value of waste reduction, which provides a starting point for studies with respect to waste reduction in the future.

As a result of this study, several ideas and questions for further research emerge. Presently, as an extension to the current research, the amount of waste of all main growers per crop for Albert Heijn in the Netherlands is investigated by the author of this study. The outcomes of this follow-up research could provide opportunities for Royal Ahold Delhaize to further develop their misfit range. Additionally, actions are planned to lower waste in the chain of AGF. Albert Heijn is currently increasing the number of products that can be marked down by discount stickers of 35% when they approach their ultimate expiration date. Inspired by this concept, another idea to reduce waste could be the opening of a so-called ‘Consume today’ shop. Herein products, which are close to their expiration date, could be sold for discount prices. This concept is ideally suited for consumers which are price sensitive and environmentally conscious. To make this format a success, an efficient logistic chain should be developed from and to the ‘Consume today’ shop. In addition, one needs to invest in proper communication to consumers with respect to the competitive price and good quality of the products. This idea could be further explored internally by Royal Ahold Delhaize.

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32 reduction in a model that computes the potential financial value of waste reductions. However, the model was successfully executed for the specific case considering red paprika’s. On the other hand, the question is whether the model is also applicable to other situations. The valuation framework could be generalized after making some adjustments. After implementation of these adjustments, further research is required to investigate whether this model can indeed be applied more broadly.

From the literature, it followed that a variety of methods exist for the quantification of food waste. In order to make a reasonable comparison between different studies, universal quantification studies are needed. In the future, the FLW accounting standard might help stakeholders to make an effective and reliable quantification of food waste. The question which remains for Royal Ahold Delhaize is whether the calculation of the amount of food waste should be publicly available for stakeholders in line with Tesco. It could be interesting to investigate, whether stock prices rise when companies disclose their quantified amount of food waste.

Also the use of the Ladder of Moerman could be further investigated. Is this ladder still up to date? Most importantly, what is the relation between waste treatment methods at different positions on the ladder and their potential regarding financial value creation? Such a ladder based on financial benefit could provide an incentive for firms to lower food waste.

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9 Appendices

9.1 Appendix A

‘The best environmental, social, and governance (ESG) programs create financial value for a company in ways that the market already assesses”. (www.mckinsey.com, 2015)

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9.2 Appendix B

Capital budgeting Net Present Value

A well-known and widely used rule in the process of financial decision-making is the Net Present Value (NPV) rule (Berk, DeMarz and Harford, 2012). It provides a clear view of the project’s value. The NPV is calculated by subtracting the present value (PV) of the costs with the present value of the benefits:

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states the investment at t=0, CF is cash-flow at time=t and r is the used discount rate. A project is profitable and should be accepted when NPV>0, hence the benefits are greater than the expenses. If an investment has the highest NPV compared to other potential investments, it generates the most profit. If a project has a NPV<0, it should be rejected. If these rules are correctly followed by a firm shareholder wealth is maximized. Moreover, a suitable cost of capital should be applied to compute the present value of benefits and expenses. The weighted average cost of capital (WACC) is often used. An advantage of the NPV method is that its results can immediately be added to the value of the firm. It has a disadvantage though in that a lot of underlying assumptions are used. For example, estimations from the WACC and cost and benefits are needed. Mistakes are easily made when computing these values. Furthermore, the calculations cost a significant amount of time and increase the chance of having unreliable results (Berk, DeMarzo, and Harford, 2012).

Payback period

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40 that it ignores the time value of money and hence it may not show the real picture when the cash flows of a project are evaluated. Moreover, the cash flows after the payback are not taken into account and consequently it ignores the overall return that a project can generate. This could lead to a rejection of a long-term project that has the possibility of being profitable in the future. Berk et al (2012) state that the payback method is a frequently used approach especially for small investments, because of its clarity and its priority given to liquidity.

9.3 Appendix C

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9.4 Appendix D Research model

9.5 Appendix E

Interviews respondents

Replenishment and Distribution Center Albert Heijn:  A: Consultant Strategic Sourcing & Sourcing support  B: Flow Manager Replenishment Fresh AGF

 C: Manager Strategic Sourcing Fresh Hartman Grower:

 D: Director

Bakker Barendrecht Strategic Partner:

Potential financial value reduction food waste in the chain of AGF Albert Heijn within Ahold Delhaize

Replenishment Albert Heijn

Corporate Social Responsibility Albert Heijn within Ahold Delhaize

Waste Albert Heijn shops

Waste Albert Heijn Distribution Center

Best practices: food waste reduction Instock (responsible _{restaurant from Albert Heijn)}

Annual report Tesco waste figures Misfits (‘Buitenbeentjes ‘) Albert Heijn Food bank Distribution waste Ladder of Moerman Waste grower Hartman

Calculation of the financial value of potential (food) waste reductions in the supply chain of AGF Albert Heijn within Royal Ahold Delhaize