The CEO of the 12th largest U.S. retailer thinks self-checkout is worth it despite theft: ‘Savings on labor costs are higher than the potential downsides’

In late 2020, the grocery behemoth Ahold Delhaize announced it would buy online food retailer FreshDirect. At the time, the Netherlands-based owner of large U.S. supermarket chains such as Stop & Shop and Food Lion said the deal would help build its e-commerce muscle and give it an inroad into New York City's fast-growing online food-shopping market.

Alas, that boost to its business was not to be. Ahold Delhaize, the 12th largest U.S. retailer with $60 billion in sales in 2023, announced last month that it was selling FreshDirect to grocery delivery service Getir after less than three years, bowing to the cutthroat grocery e-commerce market. Ahold Delhaize is No. 25 on the Fortune 500 Europe list.

That's not to say CEO Frans Muller is giving up on building the company's digital business. Rather, he believes the FreshDirect misfire demonstrates that e-commerce can better succeed, and make a profit, if fully integrated into Ahold Delhaize's physical stores business as more shoppers gravitate toward online pickup or grocery delivery services like Instacart.

"Customers like to combine two kinds of shopping experiences in one brand, in-store and online. The FreshDirect experience tells us that if we use our existing staff in stores to take care of online orders, that is a more profitable route," Muller told Fortune after a media tour in late November of a Giant food store in downtown Philadelphia showcasing its store remodels. It's a strategy already successfully deployed by Walmart, whose grocery e-commerce business, aided by a fleet of thousands of stores equipped for curbside pickup, was already 35% larger than Amazon's in 2023, according to a recent report by Insider Intelligence. That lead should grow to about 50% next year.

Pursuing profitable growth is key at a time when inflation and trading down are hurting grocers, which have notoriously small profit margins compared to other retailers. (Muller is still a big fan of self-checkout despite the rise in shoplifting.) That the FreshDirect deal was a dud has not dampened his appetite for dealmaking but has clarified what kinds of deals to pursue, says the Dutchman. "We have to be very focused on what we truly believe in and what we can do well."

This article has been edited and condensed for clarity.

Fortune: You announced strong results last month but also FreshDirect's selloff after barely three years. Does that reversal mean e-commerce can't be profitable for grocers?

This was an opportunity to buy a very strong brand and get stronger in a market like Manhattan. But we learned that our type of consumer finds the omnichannel proposition of stores-plus-online easier. Also, we saw a big shift in the time element of fresh food e-commerce. FreshDirect is mainly in the next-day delivery space, whereas in our business, most “click-and-collect” online orders are for the same day, usually within two hours. That tells us that the winning formula, and the more profitable one, is to use our stores to help with that. Our goal is to have e-commerce be profitable by 2025.

Does the FreshDirect disappointment change your M&A philosophy, or do you just tell yourself, “You win some, you lose some”?

That sounds like a light attitude because, of course, FreshDirect came at quite an expense. (Reports suggest Ahold Delhaize paid $300 million.) It tells us that we have to be very focused on what we truly believe in and what we can do well. It's unfortunate to buy something in 2021 and then sell it in 2023.

E-commerce is about 8% of your U.S. business. But at non-grocery retailers like Macy's and Gap, digital sales easily exceed the 25% range. Could grocery e-commerce ever hit 25% of sales for you?

Consumers love the ultimate shopping experience that combines online and in-store. We are seeing double-digit growth in e-commerce in the U.S., so there is a nice future. In the U.K., online penetration in grocery spending is about 15%, and that's a good proxy for where we could be, but I just don't see it getting to 25% or 30%.

Let's talk about U.S. consumers. How are they reacting to macro factors such as inflation and student debt relief ending? Are they trading down?

Our U.S. business goes up and down the East Coast. There has been quite some extra strain on households, and it's our job to make sure that we serve those communities to make sure they can afford to buy healthy and sustainable food. The consumer was very strong coming out of COVID with a lot of government support. Now we see customers confronted with high interest rates and lower incomes. Some households are also challenged by the government taking away emergency SNAP. It means customers are more interested in private-label store brands and less in national brands, giving us an opportunity. And in this high inflation period, most of us in this industry are selling lower volumes.

Why is it a bad thing if consumers buy fewer items?

There is a lot in our system that is based on item and volume growth, and that's why, economically, it's not a good thing for a retailer. Some 3% to 4% inflation is good and healthy, but at 8% to 10%, it's disruptive.

You just gave a tour of a newly remodeled store here in Philadelphia. Given the jump in shoplifting, how do you balance the need to protect against theft with investing in stores to make them nice shopping destinations?

We have always had some shrink—inventory loss—in our stores. With more challenging economic conditions, we're seeing more of that now. Margins in retail are rather small compared to other industries, so we don't have all that much wiggle room and have to protect our assets. That can mean locking up some items or automatically blocking carts that have not gone through the checkout lane from exiting the store.

The CEO of Target recently claimed that shoppers thanked him for locking up store items as an anti-shoplifting measure. Have your customers told you the same?

I wouldn't go that far, but I think people are understanding when you tell them why there are measures to increase security.

Self-checkout has been blamed for helping shoplifting. Yet you are a proponent of it. Why?

There are two main arguments to offer self-checkout. Some shoppers have smaller baskets, so they don't have to wait in line, and it's convenient. A lot of elderly shoppers find it fun, and they have time for it. For us, from a cost perspective, the savings on labor costs are higher than the potential downsides.

Ahold Delhaize is a Netherlands-based company with its market-leading Albert Heijn chain. Are there opportunities for your chains in the U.S. and Europe to share best practices?

We have quite some learnings between the two continents—digital data analytics, cybersecurity, automation in warehouses, and so on. There is also more sharing of private brands like organic food brand Nature's Promise, which we have at Giant and other U.S. chains, and in some of our European chains.

This story was originally featured on Fortune.com