The quiet locale surrounding the Rami Levy logistics center, on the outskirts of Modi’in, is deceptive. "Globes" interviews the eponymous founder and CEO of the discount supermarket chain, which trades at a value of almost NIS 3 billion on the Tel Aviv Stock Exchange (TASE), a few days before Passover, in his office, after a particularly turbulent year for food retailers. He explains the company's strong financial results, downplays the significance of the entry of foreign supermarkets, and discusses his opinion about the judicial overhaul
This was a year in which profit margins for most companies in the sector were cut due to price hikes in inputs and transport, inflation that has led to higher prices, and managerial and organizational upheavals experienced by two of its major players, Shufersal (TASE: SAE) and Yeinot Bitan, whose results were severely affected.
Rami Levy Hashikma Marketing (TASE: RMLI) last month published strong financial results for 2022, in comparison to its rivals. The discount supermarket chain saw a 9% jump in revenue to NIS 7 billion, and annual operating profit of NIS 320 million. The bottom line was a net profit of NIS 173 million, a decrease of 15%.
Rami Levy says, "The reports are excellent, relative to the situation, of course. What makes me especially happy is that we have grown in terms of same-store sales. This figure is especially interesting and important during a period like this, when others are experiencing attrition. We saw that same-store sales for our main rivals fell in 2022."
Your net profit decreased compared to 2021. What was the reason?
"This was mainly because we gave bigger discounts to our customers. The result was a decrease in gross profit, which led to a decrease in net profit, but what’s important to us is that the number of customers increased."
What do you expect in terms of performance in 2023?
"We believe that in 2023 we will see a rise in our sales, maybe even in the double-digits. People have less money, and we see them flocking to our chain. Our private label is also getting stronger."
The relatively good results were also reflected in the performance of the company's share, which fell 12% last year, significantly less than competitors traded on the TASE. Anyone who purchased the share when it began trading in June 2007, and held it until today, has enjoyed a return of nearly 1000%, with quite a few fat dividends distributed to shareholders - and Levy - along the way.
"More customers are voting with their feet and coming to our chain because they want to keep buying at a discount, and know that with us price does not come at the expense of quality and service," emphasizes Levy.
"Our private label grew stronger when customers realized that its quality is as good as the ‘leaders’ (the leading products), and is tens of percent cheaper in price. We urge consumers to shop smart, and those who do so at my chain can save considerable amounts.
"If they choose, for example, my brand of tea, they can save up to 40%. Consumers hold enormous power; if they use it and don’t buy at any price, they can help lower the cost of living. Our quality is just as good, sometimes much more. If consumers were once embarrassed about buying private label, today they take pride in it, as if helping to fight the cost of living."
Today, the chain’s private label makes up 25% of sales, and includes a range of more than 5,500 products (not including deli products), including pastas, rice, cereals, poultry and meat products, spreads, spices, oils, snacks and sweets, frozen foods, toiletries and cleaning products.
Where else will the private label go?
"This year we introduced almost a thousand new products, and we will enter all categories, except for baby formula. We will not do this under any circumstances. We were the first to try launching a private label baby formula, ten years ago. We lost almost a million dollars in this attempt. Mothers today are still afraid after what happened with Remedia (in 2004, the lack of vitamin B1 in Remedia’s vegetarian baby formula led to the deaths of three infants and severe injury of more than 20). So, they don't take risks, and I understand them. But we will launch purees (e.g. Gerber), because that isn’t in a space that could endanger a child. In fact, we will enter any space that the regulation permits, and bring it to Israel under our private label."
Record profits for Israir
Levy currently controls more than 55 branches of the Rami Levy Hashikma Marketing discount chain. This retail powerhouse has long since gone beyond supermarkets, and also controls more than 50 branches of drugstore chain Good Pharm, and about 400 branches of cafe chain Cofix in Israel and abroad.
In recent years, Levy also took over Israir Airlines, when it was experiencing difficulties. That investment paid off in 2022, which was also an excellent year from a business point of view. Israir posted record sales, and ended the year with a record profit of $20 million.
Add to these Levy's private real estate business, with an estimated value in the hundreds of millions of shekels, (a large portion of which is leased to the chain he controls)), holdings cellular communications, packing houses, and as of last week a chain of gyms called Sher Fitness, which had run into difficulties, and was acquired by Good Pharm.
Within the Israeli business sector, Levy ranks among those with the most liquid assets. The value of his shares in the supermarket chain alone (40%) currently stands at NIS 1.1 billion. Add to that his income on dividends, share sales, and yearly salaries since going public, and the amount more than doubles.
On the other hand, more and more families in Israel are finding it hard to fill their pantries, in light of decreased disposable income due to increased interest rates and higher prices at the food chains.
What changes do you think will help lower prices?
"The government is responsible for the cost of living. My gross profit margin is lower than that of major discount chains outside Israel. So where does the cost of living come in? In operational costs - regulations, tariffs, taxes - all of these have a bearing on these costs. If they would decide, for example, to lower VAT to 10%-12% on basic products, the price for the consumer would drop by 10%."
French retailer Carrefour will enter Israel soon through Yeinot Bitan, with its major international private label. How are you going to deal with that?
"Our chain will always offer the lowest-priced shopping basket. You can see it in all the surveys, even the Ministry of Economy’s. Competition is a good thing and we generate it. Anything that can reduce prices for the consumer is good. I wish them the best of luck."
Why do international chains even want to come to Israel?
"They’re not in any rush to come here."
We discussed Carrefour. SPAR is also coming.
"Did they themselves enter? No, they licensed a franchise. It sells merchandise to the franchisee, and makes money on it. There is a difference between a chain coming, investing money, and entering Israel. Everywhere else in the world they enter as themselves."
"You can’t take a stance"
Levy has told the story many times of how he got started, more than 45 years ago, in a small store in Jerusalem’s Mahane Yehuda market that he inherited from his father. "I went to the wholesalers and bought products from them in bulk, and I put up a big sign 'Wholesale prices for the consumer.' I began to sell at cost at first, because that’s what I promised. After that, I began to chase after the agents who sold goods to the wholesalers. Slowly, I got to where I am today. That’s the whole business plan. How does it happen? When you benefit those you serve."
Recently, many businesspeople have spoken out strongly against the current government's promotion of judicial reform and its impact on the economy. What is your position?
"Ask and you’ll see that even those who are protesting against it, want reform, but through negotiation. And I think so, too. Differences of opinion should not lead us into harming our country. I oppose the calls against investing or opening businesses here.
"The damage this causes is a serious problem, from my point of view, and I wouldn't do it. I wouldn't bring the army into politics either, because that’s a military coup. An army is an army. It will work out in the end. Look, they halted the reform. But when you issue a call not to invest, or bring the army in it causes damage and will be hard to sort out later."
Was the general strike after the dismissal of Minister of Defense Yoav Galant justified?
"No. Completely unjustified. You cannot link your business with politics, and the companies that did it were wrong. You have customers of all kinds. You may hold a certain position, but there are customers who have a different position. You cannot take a stance as a public company with shareholders, ‘I didn’t invest with you for this, why do you involve me in your private affairs?’".
"Wherever I go, prices go down"
The turmoil of last year centered around price increases and the conflict between the retail chains and the suppliers, importers and manufacturers who made their products more expensive. Levy tells about the behind-the-scenes talks with suppliers, insisting that this is not an unusual event, and also refuses to term any empty shelves as part of a unilateral boycott or embargo.
What did you do when suppliers demanded that you raise prices at the end of last year?
"We didn't go to extremes or say we didn't want to work with them anymore. We negotiated, we met once every week or two. When you approach a company and say, 'That price rise doesn’t work for me,' they will try to convince you of the opposite. Then I convince them as to why they shouldn't raise the price. We’ve been working this way for 20 years. There are always differences of opinion when negotiating with a supplier. But we didn’t go to extremes."
Isn’t putting signs on your shelves going to extremes?
"No. I put up signs that explained to the consumer we were not buying [a particular product] at the moment because of the price increases. In the end, you’re serving the consumer, you have to explain to them why there is no product on the shelf."
And in the end did you get a cheaper price? From Tnuva, for example?
"We lower prices. Those who wanted a 10% hike got 3% in the end. This is how it goes all the time. There used to be two big chains, Shufersal and Mega. We hadn’t yet come out with our ‘1-shekel per kilo chicken’ deal yet. We were small, and the big chains and the suppliers divided everything up between them; the chains would come and tell the supplier 'Give us another 2% discount', and the supplier would say 'No problem. I’ll put out a price list, add 4% to the price and you take a 2% off', and that's how they would share.
"That ended when we started to stir up competition. Little by little. Also, the social protests happened - and the media did the Lord’s work in that respect - and things started to change.
Everywhere we went, we lowered prices by dozens of percentage points."
"More new customers"
During the battle against rising prices, everyone was talking about private labels. But private label prices have also gone up.
"What’s the difference between private label and the other products? If you have an international company produce your private label product, they can also raise your price. We absorb some of that, but we do not increase gross profit margins of the product. Even if a price has increased, the private label is still cheaper by dozens of percent compared to the leaders. But if you’re not a manufacturer, you have to buy from a manufacturer."
It is expected that there will be more price increases this year.
"I'm actually anticipating a drop in prices over the next six months. Transport prices have dropped, inputs are starting to drop. We'll start to see it now."
What you’re saying is news. What will go down?
"In the past year, corn prices have risen, and everything related to breakfast cereals and oils has become more expensive. Part of this is due to the Russia-Ukraine war [both are large wheat producers]. If the war stops or we import from other countries, we will see a drop in prices."
How was Passover shopping this year compared to previous years?
"More new customers. People have less money and want to buy at low cost. Our shopping basket has hardly increased in price, compared to last year."
The economic world is changing. Have you thought about entering new areas that you hadn't considered before?
"Anywhere I can create synergy and benefit my customers - that's where we’ll be. Israir had a hard time during Covid-19, but I buy long-term businesses. This idea was excellent precisely because we wanted to create synergy and a joint club card. Profitability was excellent this year, higher than in 2019, before the Covid. Israir is not only in aviation but also in tourism; we also create synergy by buying hotels, and in the end, we’ll be able to offer cheaper prices to our consumers in this space as well."
Published by Globes, Israel business news - en.globes.co.il - on April 10, 2023.
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