Azrieli Group Ltd. (TASE: AZRG) is opening a new front against the retail chains, which are tenants in its shopping malls. Israel's largest income producing company is beginning these operations in competition with local fashion chains, including bringing prestigious international brands to Israel as the local franchise holder for the brands, sources inform "Globes."
In recent months, Azrieli has begun staff work, including meetings with representatives of prestigious international brands that are not active in Israel aimed at bringing those brands to the country. This means that Azrieli will be competing with its local and international fashion chain tenants. Sources inform "Globes" that Azrieli has set up a separate activity arm subordinate to Azrieli Malls CEO Arnon Toren.
As far as is known, Toren and Adi Molcho, who heads the special department, have held a series of meetings with potential retail chains in recent months clearly aimed at obtaining exclusive franchises for the brands and exercising these franchises in Israel.
A model in which a shopping malls group established activity aimed at bringing fashion chains to Israel has been unknown in the local market and is globally uncommon. In certain cases, shopping malls led negotiations, signed cooperation agreements, or supported such efforts, but such activity for the declared purpose of competing with retailers has never been seen before.
Melisron, Azrieli's competitor in commercial real estate, previously brought Turkish fashion chain Waikiki to Israel, but did it through an external franchise holder, not directly. Azrieli is now planning to take the model a step further by becoming a franchise holder itself.
Most retail chains are operated by an Israeli franchise holder
Most of the international fashion chains currently operating in Israel do so through an Israeli franchise holder. For example, Joey Schwebel is the franchise holder of the Zara (Gottex) group, the Horesh family holds an exclusive franchise for the H&M chain, and Shalom Moliov holds a franchise to operate a chain of Adidas stores. In recent years, local fashion players have recruited international brands for their portfolios through an exclusive franchise agreement with the overseas chains.
The Castro group obtained the Yves Rocher personal care brand, and will soon also benefit from its most recent agreement to bring cosmetics chain Kiko Milano to Israel. Its competitor, the Fox group, brought international brands to Israel, such as Urban Outfitters, and also owns what is currently the only franchise for operating Nike stores, although this is not an exclusive franchise.
At the same time, there are other models of activity in Israel on a more limited scale, such as fashion retailer Forever 21, managed by its parent company without a local franchise (the company subsequently closed down its activity in Israel) and French sports retailer Decathlon, which has local management in Israel.
"Azrieli's measures can change the market"
Azrieli is probably seeking more control by targeting leading international brands in Israel that are popular in the Israeli market. There are currently several prominent retailers that do not operate in Israel, but which Israelis especially like, such as Primark, Uniqlo, and Victoria's Secret in fashion, (the official) Apple in technology, and cosmetics chain Sephora. Any shopping mall in Israel would probably be delighted to get them as tenants, because they stand out among the existing brands, and consumers will go especially to a mall to see them, even from geographically more remote areas.
Another advantage for Azrieli, and a disadvantage for its tenants, is competition over locations and the question of rent. Azrieli will probably not want to charge itself rent, and will settle for management fees.
In any case, some of the challenges for Azrieli will be operating a retail chain's sales floor - something in which it has no previous experience.
"It's a good and practical idea that creates differentiation, together with a clear understanding that the strategy is the shopping center before the chain," Czamanski & Ben Shahar CEO Tamir Ben Shahar told "Globes." "It appears that Azrieli realizes that it is tough to recruit new tenants now in the local market, so it is only natural for them to do something like this. The hard part will be to assemble the team to do it, grab a strong CEO away from one of the chains, and establish a logistics center."
"Globes": What about competition from the local tenants?
Ben Shahar: "The chains have so many threats; that's their problem right now. Azrieli's measures can change the market."
A delicate balance between commercial real estate companies and the retail chains
For many years, there has been a delicate balance between the leasing concerns - the commercial real estate companies - and the tenants - the retail chains. The shopping malls bring visitors to the site and work on visibility, the shopping experience, marketing, and preserving and maintaining the site. The chains have to pay management fees for these services, in addition to rent on the property.
Last year was a tough one for the fashion industry and the shopping malls. Sales at shopping malls have declined in recent months as a result of the increase in online sales, in which many orders are VAT-exempt; increased overseas travel by Israelis; and excess commercial space in certain cities. Even veteran chains have suffered cash flow problems, and some of them had to close down.
This is not the first time that Azrieli is gambling on a policy liable to set its retailers' teeth on edge and create competition with them. It has been two and half years since the group's ecommerce website went on the air. In a groundbreaking move, Azrieli entered what was terra incognita in Israel - an online marketplace operated by a group of shopping malls. Azrieli.com is an online shopping platform that offers the same retailers now paying rent to Azrieli the chance to sell their merchandise in a complementary way, but also in competition with the chains' independent websites.
Azrieli's two biggest competitors, Melisron and BIG Shopping Centers, did not take this option. BIG withdrew and shelved its ecommerce venture after investing millions in it, while Melisron announced that it saw no justification for beginning online activity that was still unprofitable and competed with its tenants.
Azrieli said on response, "Azrieli Group is diversifying the mix and expanding the supply of stores in its malls, including through the introduction of international retails chains. The company considers business opportunities in these areas from time to time, among other things, following offers from a variety of leading international brands."
Published by Globes, Israel business news - en.globes.co.il - on March 19, 2019
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