In 1996, sunglasses chain store Erroca (founded by Anthony Corre) was taken over by brothers Michael and Yosef Wolf, who also owned Einit, an importer of optical lenses and glasses. As the Wolf brothers prepare once again to take Erroca public on the TASE, Michael Wolf talked to "Globes" about what it takes to run a successful fashion accessories chain in Israel, and the chain's plans for future expansion in the Mediterranean Basin.
Michael Wolf, how do you, a religiously observant Jerusalemite and a modest Anglo-Saxon accountant, work with Zarmon-Goldman, an ad agency that's become the byword for provocation?
Erroca owner Michael Wolf: “True, I’m an accountant by profession, a South African-born religiously observant Anglo-Saxon who resides in Jerusalem; the total opposite of men like Ayalon Zarmon and Hadar Goldman, but to tell the truth? I feel fine with them. At the personal level, I fit with them like a hand in a glove. They often visit my home. It goes far beyond business; I get along with them. I don’t always like their comments or style, but they are fundamentally good people who understand our business.
“If I were to hire an ad agency that was like me, what good would it do? They understand urban life, which I don’t. They bring the street to us, reveal it to us; the world of television and entertainment. We held a party at Dom (a fashionable Tel Aviv nightclub), which was one of the outstanding fashion events of the year. People came in droves.”
Do Zarmon and Goldman respect you?
“Not always. They sometimes laugh at me a little. Hadar’s tongue is especially sharp, but I go with the flow. It doesn’t bother me; I’m the one who ultimately signs the checks.”
You’re going to float Erroca on the Tel Aviv Stock Exchange (TASE) this week, after withdrawing an IPO six months ago. Why?
“We withdrew the IPO in May because the market plummeted. Many companies were in the pipeline to go public, but we couldn’t get the price we wanted under those conditions. We said we wouldn’t sell at any price. Within a week, we’ll issue 25% of shares, in the hope of raising NIS 50-60 million.”
You’ll pay a heavy price in terms of transparency. How does that serve your interests?
“We want to set up a chain of stores throughout the Mediterranean Basin at an investment of NIS 20 million. This plan cannot be realized from our own resources.”
You could have gone with the franchise model, and expand like the Matim Li fashion chain, which has already entered for overseas markets by awarding franchises for its label and products.
“I’m an accountant. I don’t like strategic partners, collaborators, or franchisees. I like keeping it ‘simple and stupid’. I have no franchises in Israel either. We own all our 42 stores. Many companies offered us store-in-store deals, including Super Pharm, but I prefer using the tried and true method of stores we own outright.”
So that’s it? You’ve expanded Erroca in Israel as much as possible?
“Yes. This market is saturated. We control a quarter of this NIS 300 million market, and we’re now considering new directions in Israel.”
Will you enter the optical products market?
“We’re considering acquiring a competing optical products chain. Two chains are currently up for sale; it’s just a question of price. We’ll decide on that when we have the money.”
Why don’t you develop the optical products sector yourselves? After all, you sell optical products and have a strong retail platform.
“Ten of our stores now have sales points for optical products, but we don’t want to lose our main asset, which is fashion. Optometry is medical: white coats, opticians, and optometrists. We’re not in that business. That’s we use top models Dudi Balsar and Sandy Bar, assets that we cannot lose under any circumstances. We wouldn’t be a veteran player like Opticana - The First Optistore Ltd.; we’d be new in that field.”
Are your development plans only in retail?
“We’re negotiating with Shamir Optical Industries Ltd. (Nasdaq: SHMR; TASE: SHMR). They decided to become a partner in Einit Ltd., our store for contact lenses and solutions. Shamir Optical has developed super-advanced lenses, which they’re launching through Einit. Shamir Optical competes against Johnson & Johnson (NYSE:JNJ) in the world. As far as we’re concerned, it’s a certificate of respect that a company like Shamir Optical considers us a partner. The heart of the business is lenses.”
What about you plan to penetrate Cyprus and Greece? What will your comparative advantage be based on?
“I’ll look for a triple-A location (the best location in a mall). That’s what I learned from my teacher and spiritual advisor, (Fox CEO) Harel Weizel. He’s a genius; a bulldozer. We’ll hear a lot more about him later.”
He taught you not to compromise on location.
“Never compromise. Five meters one way or the other makes all the difference. Location can be more important than merchandise. Nothing would work if we didn’t have triple-A locations. That’s Erroca’s most important asset. We rely on three things: a training manual, locations, and the Erroca private label, which now competes directly with designer labels.”
There’s been a huge upgrade in your private label collection this year. It’s as if you’ve cloned Ralph Lauren and Armani.
“We now make Erroca frames at factories that also make designer labels. We have exclusive franchises to sell 14 labels. 55% of our sales are of super-labels, and 45% are Erroca label. That’s a lot for a private label. In quantitative terms, Erroca is number one in glasses sales in Israel. It’s stronger than all the other brands combined.”
Why are Italian factories that make Armani glasses frames also willing to make Erroca private label frames?
“We have a contract with Safilo, a maker a super-label glasses frames. We also have contracts with their designers, who know exactly where the market will go next season.”
It’s surprising that you continue to manufacture in expensive Italy, when most of the strongest labels have already moved production to the Far East.
“Some easily manufactured designs have already moved east, but only Italy can make sophisticated designs. There are three main factories there that make super-labels, and we work with all three.”
That must anger the designers, since under their noses, you make frames at factories that make their own authorized designs.
“We’re now too strong for them. We have ties with Safilo, and we control their link to the Israeli market. They won’t market here directly, because we’re here. They give us respect; we’re now at Italy’s level. Sometimes, when I bring a good idea to the manufacturers, they even sell it to someone else.”
Nonetheless, Europe is not a target for you.
“Europe doesn’t have a long summer, so we want to focus on the Mediterranean Basin. We were approached to open a chain in Hungary. That’s suicide. Even Italy has a long winter. Sunglasses there are mostly sold by optometrists.”
As a man who claims to have learned all he knows from Harel Weizel, the founder of Fox Weizel Ltd. (TASE:FOX), do you sell Fox label sunglasses in your stores?
“No. Harel Weizel asked me to sell Fox sunglasses. But we won’t do it because we only sell products over which we control. We’re not a bazaar; we’re fashion. If you have Gucci and Armani in your store, you won’t put Fox next to them.”
Nonetheless, on your sales floors there is a contradiction between high-end brands that declare prestige, and a storefront that is fairly simple, standard, and doesn’t provide a real shopping experience.
“If we made something over-designed and heavy, young people would flee.”
On the other hand, the customers of Ralph Lauren, Burberry, or Yves St. Laurent want to buy glasses in a suitably elegant atmosphere. You target two polarized clienteles, and walk a thin line in an effort to please everyone. That carries a price.
“I don’t want people to say that Erroca’s expensive. That’s why we’re careful not to focus on expensive brands. We’re everything. For the first time, we launched a new line for the Erroca private label this year called Designer Collection Erroca. This will come at the expense of more basic products. This was the right thing for us to do now - design very sophisticated glasses that are as good as the super-labels, and charge more money. Instead of NIS 300 for a pair of glasses, the new line costs NIS 599. After investing so much in the Erroca label, this is a mega-brand.
“We have no problem in raising the price and bringing higher quality. We take care of every detail in this series. We invested $3,000 just in the logo setting, which will be stamped on the earpiece, rather than externally. Israeli manufacturers see something good overseas and copy it. It looks that way, too. You need a name in order to achieve quality, and you have to invest in every detail.”
If that’s the case, hasn’t the time come to change your logo, which is identified with the old Erroca design?
“We’re doing that. We’ll use the letter “E”, set in rhinestones. We will distinguish between the regular line and the high-end designer line.”
How do you maneuver in the big battle between the two global sunglasses giants Luxottica and Safilo, which you represent?
“Luxottica has 5,500 stores worldwide. It is ahead of Safilo throughout the world. Only in Israel is Safilo stronger, because it has our retail. If Safilo didn’t have our retail infrastructure, it would have opened a subsidiary long ago, like Luxottica did. That was why we pushed strongly to open a chain of stores.”
Why is Armani relatively weak in Israel, compared with its dominance in Europe?
“It made a great step up last year. Until now, Safilo was the designer for all labels. Armani decided to spin off and now has a separate designer. Armani will win this year.”
How do you manage the Erroca chain from centers in Jerusalem and Eilat?
“Last week, we signed a 20-year lease on 2,500 sq.m. in Neve Ilan, of which 1,000 sq.m. is for sales, and 1,500 sq.m. for a sophisticated logistics warehouse. Our Eilat headquarters has 80 employees, and I should have notified them that we’re moving. It was so hard for me to notify people who’ve worked with us for ten years, people whom I love, that we were closing our Eilat headquarters. It’s not easy for them. There’s no work in Eilat, except for tourism. We’ll also close our Jerusalem offices when we move to Neve Ilan.”
Why move?
“If you want to move up a grade, it’s only overseas. What can we do here? We can only grow overseas. We could grow 10%. But to bring the company from NIS 120 million to NIS 300 million can only be done overseas. It won’t happen here. We have a message to bring overseas. Not only do we know how to buy goods, we know how to sell them. We have strong advertising, so why shouldn’t we exploit it overseas?”
The US sunglasses market leans strongly on optometrists. It’s very thin and undeveloped. Isn’t that relevant for you, since you want to grow fast?
“I prefer not to comment on that.”
What if the IPO fails?
“We’ll be stuck in Israel. We’ll have solid growth, and maybe that’s good. If the IPO is a success, we’ll become a NIS 500 million company within three years.”
Are you worried by developments at Israeli drugstore chains? They’re trying to find the next growth engine, and have decided on eyeglasses, sunglasses, and contact lenses.
“I don’t see them succeeding. It’s a complex sector. Optical products are a difficult operation. It’s not sunglasses. You need opticians and optometrists.”
Optical products are one thing. But sunglasses aren’t bad impulse buys. What’s so complicated about sunglasses?
“That’s what they think. If you sell sunglasses like aspirin, they’ll look like that, too. If I want to be fashionable, it’s impossible to sell sunglasses at Super Pharm. They’ve been trying and failing for years, because they lack a buyer’s perspective. If you lose a screw in your glasses, will you go back to Super Pharm? Do you know how much we invest in service? It’s a whole world in which a lot of money and manpower is invested. We have six employees working from dawn to dusk only in service. Glasses melt, expand, and get scratched. It’s a whole world unto itself. Sunglasses are a problematic product in terms of service, and people complain a lot. I believe that things will depend service.”
Published by Globes [online], Israel business news - www.globes.co.il - on November 21, 2005