Carrefour to bring French revolution to Israeli retail

Carrefour Credit: Shutterstock
Carrefour Credit: Shutterstock

Carrefour's entry will rock the secure ground on which Shufersal has stood for many years and challenge other supermarket chains like Victory, Rami Levy and Yochananof.

In recent years, Israeli consumers have tended to compromise on everything related to the food shopping experience. A visit to a supermarket in Israel is generally inferior to what many Israelis experience when travelling abroad. This situation make sense because the market only has one really powerful chain: Shufersal. A second chain, Mega, spent years fighting for its life until its owners had no choice but to put the brand down.

Towards the end of 2022, Israelis will, for the first time, walk into local branches of France’s Carrefour, Europe’s leading food retail chain. Electra Consumer Products, the controlling owner of Yeinot Bitan- the previous owner of the Mega chain - signed a franchise agreement with Carrefour, and announced it would convert 90% of Mega-Bitan stores to branches of the French chain within three years.

If Electra's plans fully materialize, and even if it will make changes along the way, it is definitely good news. This is the first time that an international food chain has overcome Israel’s many restrictions to enter the local market.

Carrefour's entry will rock the secure ground on which Shufersal has stood for many years. It will shake the dust off the Victory Supermarket Chain, Rami Levy HaShikma and Yochananof (M. Yochananof & Sons Ltd.) brands. It will inconvenience suppliers, and generate interest in a sector that has been faltering for a long time. Even if prices remain the same, at least the shopping, variety, and competition will be more enjoyable.

The question is whether this round will revive, revitalize, and succeed in creating a strong, stable food retail chain to compete against Shufersal, or whether in a few years, we will find ourselves, once again, witnessing another collapse.

So, what challenges does the French chain face? Together with Gali Berger, a professional consultant to the Globes index of Israel's leading brands, we review the history of food retailing in Israel to outline the main challenges and questions regarding the most intriguing move that has taken place here in recent years.

1. An unfamiliar brand

Mega was not among the top 150 in the Globes ranking, nor was Yeinot Bitan. Shufersal, the leading chain, ranked 38th, Rami Levy - 95th. This means there is definitely room to launch a new retail brand that Israeli customers can appreciate and trust. The question is whether Carrefour is that brand.

It is highly doubtful whether Israelis even know about Carrefour. The name is certainly not top of mind. In this respect, it will be necessary to invest in launching the brand from scratch, as if launching a new one devised by some strategic branding agency. Electra will face very high advertising expenses in the first year after launch. Even if it receives backing from the international concern, this will still be a significant investment.

2. The question of location

Over the years, Mega has parted with some of its leading locations. 13 of them, including the large, central branch at the Ayalon Mall in Ramat Gan, were purchased by Victory. In retail, as with many other sectors, the prime directive is a central location. Without one, even an innovative marvel from France will not be able to attract customers. However, Mega still has excellent locations, especially in city centers.

The problem is, about 60 of these locations historically belong to a Blue Square. The owner of Blue Square (and of AM:PM) is businessman Moti Ben-Moshe, who has warned he intends to terminate the lease of 19 Mega-Bitan branches in the coming years.

These branches operate in properties that Ben-Moshe owns and has targeted as having potential for improvement. It can be assumed that rents will spike, even for those properties that will not be upgraded. Make note that even now, rental expenses as a percentage of turnover for Israeli retail chains is among the world's highest.

3. Dealing with suppliers

Electra Consumer Products notified the TASE that the cost of converting the branches would be approximately NIS 3 million per store. However, industry insiders believe this estimate is modest, and that a much higher investment will be needed for the shabby Mega-Bitan branches to meet Carrefour's standards. Here, questions arise as to whether, and to what extent, suppliers will participate in these conversion costs.

The relationship with suppliers is an interesting issue. Each time the possibility of taking Shufersal down a peg arose, suppliers got their hopes up, prepared to invest and improve trade conditions. In the end, however, each time they had to deal with bad debts from a collapsing chain.

In the case of Carrefour, for the first time there is a chance to shift the balance of power significantly. The international suppliers - Procter & Gamble, Unilever, Osem-Nestle, Strauss, Kimberly Clark, L'Oréal, etc. - will not really be pleased about adding Israel to their global trade agreement relationships. But, even if not stated explicitly, there is no doubt that the French retailer's international relationships loom large, motivating the suppliers to help the chain succeed, and improve Electra's gross profit.

4. Introducing new concepts

According to market sources, representatives of the French management are very involved, supporting the construction, and the launch. They even visited the Knesset to discuss kosher products - a matter that had forever been claimed to be the main barrier blocking international chains from entering Israel. To his credit, this is what Electra Consumer Products CEO Zvika Schwimmer has been doing for several years: traveling around the world and bringing international brands to Israel.

Carrefour has several retail concepts. It recently launched several Carrefour Bio branches around the world (urban supermarkets carrying ecologically farmed products), and it can introduce its ready-to-eat and ready-to-cook solutions, for which the Israeli market seems to be ripe and ready.

5. Kilstein's burden of proof

Successful companies are usually those with stable management. At a time when Shufersal had two CEOs - Ephraim (Effie) Rosenhaus followed by Itzhak Abercohen - management at Mega and Yeinot Bitan was changing at a rapid pace.

Every CEO usually brings their own management team, and each takes time to adjust. Every CEO wants to make some kind of mark, quickly, if possible, in the form of a huge campaign or a newly devised format - preferably both.

Retail, like many businesses, is a long-distance run. It is a Sisyphean business, with low profitability, dependent on suppliers and property owners, and with a constant need to convince consumers to choose you, time after time. The strongest chains in Israel, like Super-Pharm and Shufersal, have proven this can be done without zigzagging or frequent format changes.

Another challenge to the Carrefour launch worth noting is the hostile mood of the Israeli consumer since the social protests of 2011, and the cost of living that, these days, is hitting new highs.

Amit Zeev resigned as CEO of Electra Food after less than a year. He was replaced by Uri Kilstein, who made his career at Shufersal as Deputy CEO and Chief Marketing & Merchandising Officer. But being Number Two is not the same as being Number One. Kilstein's role as CEO Azrieli Malls ended after a year, so he definitely has something to prove and somewhere to grow.

6. The reality of the numbers

In its notification to the stock exchange about the agreement with Carrefour, Electra stated that "The agreement includes, among other things, the payment of a fixed initial amount, at an amount that is not material to the company, distributed over several years, plus payments that will be paid as a percentage of the revenue cycle (the net effect of which is not expected to materially affect the company's results in the future)".

The question arises, what is meant by "immaterial". In food retailing, where gross profit is around 25-33% and operating profit around 5%, every expense is substantial.

In addition, the investor presentation stated that Electra would invest NIS 400 million over three years. A simple calculation of 151 branches that will converted at a cost of NIS 3 million each, already results in an expenditure of approximately NIS 450 million. However, at these amounts, the deviation is probably within reasonable limits.

The 40 new branches will surely cost more than 3 million each, and several good years pass before any new supermarket branch increases its sales and stabilizes. The property owners, who share in Electra's investment, must also be taken into account.

Electra forecasts that each branch will grow by 74% in sales per meter. True, Eyal Ravid, CEO of Victory Supermarket Chain, stated in his financial reports that this was the case with the Mega stores he acquired, but it is difficult to see the same thing happening at 151 branches - shabby though they may currently be. In addition, it is difficult to comprehend how a chain can manage to double its sales in a country where population growth is less than 2%, and annual food market rate of growth is also in the single digits.

7. Synergy within the group

Is it possible to operate in many areas, combine them and succeed in all of them? Electra Consumer Products’ press release announcing the purchase of Yeinot Bitan stated that its strategy was to "expand the company's business model to additional areas in the retail world, combining the company's core capabilities with Yeinot Bitan’s assets, and creating opportunities for additional growth engines for the company." But reality proves, once again, that the retail companies which have succeeded are precisely those that have concentrated on what they know how to do best.

A food retail chain wants consumers to come in once a week, and is considered a place where the consumer does not spend a large amount, relative to other sectors. It is not like the electrical appliance chain owned by Electra, or a sporting goods or outdoor apparel chain. It is a different business in many respects: inventory management, sales floor, quantity and quality of workforce, scope and unpredictability of sales promotions, and more. People buy a refrigerator once every few years - they buy milk once a week.

The only retail group in Israel that has proven it knows how to work synergistically is Harel Wizel's Fox-Wizel Group, but it also focuses mainly on fashion brands. A good example of this synergy is power Fox’s customer club has with consumers, alongside its enormous power vis-à-vis the malls, and its partnership with online clothing store Terminal X, which gives an additional distribution pipeline.

As far as Electra is concerned, it seems that the acquisition of grocery delivery service Quik can provide it with a good infrastructure for Carrefour’s and Electra’s online activities, but this is based on the assumption that couriers will pick up orders from branches. An agreement with Hapoalim and CAL (Israel Credit Cards) to establish a customer club will also help it catch up with other retailers.

The lesson to be learned from Mega’s collapse

Looking back on the history of brands in Israel, only the most well-meaning would mourn the demise of Mega. It's hard to remember, but in the early 2000s Mega was the leading chain - a beloved, innovative brand that provided an experience similar to shopping abroad. Blue Square, the parent company, was the darling of the capital market.

But Mega was paralyzed by a shareholder conflict, smaller competitors that were getting stronger, and the launch of Shufersal's exacting retail strategy, budgets, and good management skills. All of which bit Mega aggressively.

What enhanced Shufersal's power and market share more than anything else was its acquisition of Clubmarket Marketing Chains - a third retailer that collapsed suddenly. To this day, many believe that approval of this purchase by the Antitrust Commissioner played a significant role in the rising cost of living in Israel.

Over the years, the Mega brand has made several attempts to revive itself. In 2008, the Mega-Bool format, which was supposed to compete with Shufersal’s discount format Shufersal Deal, was merged with Mega Ba-Ir, the urban supermarket format launched by then-CEO Gil Unger, right before he left the company.

Zeev Vurembrand held the position of CEO for about five years, and was succeeded in 2013 by Motti Keren, who came from Unilever. Instead of investing in infrastructure and profitability, Keren launched a new format called You; he resigned in June 2015. Along the way, Blue Square had to sell branches just to sustain itself, which further strengthened the competition.

In January 2016, Mega was issued a stay of proceedings. Nahum Bitan, owner of Yeinot Bitan, had aspirations to be the Number Two player in the food market when he purchased Mega for NIS 495 million. The purchase made it highly leveraged, financially unstable, and with large debts to the banks. After selling off many branches to competitors, Bitan was eventually forced to sell control of the company to Electra Consumer Products.

The Mega brand has suffered from years of neglect, and has gone from bad to worse. During the period when Bitan controlled the unified Mega-Bitan company, almost nothing happened in terms of marketing. Even since Electra has acquired control, no significant measures have been taken to restore the brands or the branches. The sales floor is neglected, and the shopping experience is far from attractive. And why is reviewing this history so essential? Because, in order to lead restoration efforts, a strong enough infrastructure is needed from which to grow. This is what will determine whether Electra’s predictions are anchored in reality.

Published by Globes, Israel business news - - on July 24 2022.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.

Carrefour Credit: Shutterstock
Carrefour Credit: Shutterstock
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