Rami Levy Chain Stores Hashikma Marketing 2006 Ltd. (TASE:RMLI) is likely to open its first location in central Tel Aviv on Ben Yehuda Street in the coming days, sources inform "Globes." If the chain's plans go through, two branches with 400-450 square meters each will be opened in the first quarter of 2018. The stores are on the format of smaller stores within city centers and slightly higher prices. Rami Levy says that the difference in prices between the municipal stories and the discount stories is likely to be 6%.
The first Rami Levy branch on the new format, with 350 square meters, was opened last June in the Ramot neighborhood of Jerusalem, and Levy has been considering another located in the Haifa area in recent months. The chain stated last year that it intended to set up 10-20 branches a year, with a target of 80 municipal branches. According to the company's presentations to the Tel Aviv Stock Exchange (TASE), the original plan was 6-8 branches in 2017 with 300-700 square meters each, but the plan was delayed.
Levy previously tried to buy Mega and take over the Mega B'Ir chain of municipal supermarkets, but the Antitrust Authority prevented it, claiming that it would detract from competition.
In order to deal with the delay, Levy recently turned to another possibility - an investment in Cofix Group Ltd. (TASE:CFX), a deal that is still waiting for approval from the Antitrust Authority. At the very end of 2017, sources reported that Rami Levy was acquiring 20% of Cofix, with an option to buy up to 50.1%. At the same time, Cofix and Levy contracted an agreement with Green Lantern, controlled by Richard Hunter, which owns 50% of Super Cofix, in a deal under which Cofix will be given an 18-month option to buy back Green Lantern's holdings in the subsidiary in exchange for the return of an owners' loan and capital invested in Super Cofix at 12% interest. It was also agreed that Rami Levy would utilize its power to help Super Cofix to improve its trade and loan agreements.
The Cofix branches are substantially smaller than those planned by Levy; their average size is only 200 square meters.
Profit margins in municipal branches are higher. Shufersal Ltd.'s (TASE:SAE) reports show that its gross profit rate from the neighborhood branches format was over 30% in 2016, compared with 23% in the chain's discount branches that year.
Another important advantage is the absence of the strong competition faced by discount branches. Most of the municipal format branches' clientele is captive: young families, students, and senior citizens, most of whom do not own cars and regularly do most of their shopping at the supermarket near where they live, and who are willing, or forced, to pay more for it.
In contrast to Levy's investment in Cofix, a large proportion of whose products are already being sold at prices even lower than those of Rami Levy, the expansion of Rami Levy BaShkhuna (Rami Levy in the Neighborhood) to additional branches is likely to affect competition - certainly in the areas in which it operates, and possibly also later for the entire format. The major supermarket chains enjoying trade agreements with significantly better terms than in the grocery stores and minimarkets sector do not face any substantial competition, and therefore enjoy higher profit margins.
There are several players that currently operate a format of municipal neighborhood branches. Shufersal has 82 Shufersal Sheli and 50 Shufersal Express branches. Mega B'Ir operates 106 branches, Tiv Taam B'Ir operates 20 branches and the Cofix chain operates 30 smaller-sized municipal Super Cofix branches.
In order to understand the effect of Rami Levy on competition, it is sufficient to recall measures such as Of Bashekel and his entry into online shopping, following which his competitors switched to discount pricing, which apparently is still making it difficult for them to earn a profit from online shopping. Rami Levy Chain Stores Hashikma Marketing's currently market cap is over NIS 2.5 billion, and the company reported a NIS 30.3 million net profit in the most recent quarter, 2% more than in the corresponding quarter in the preceding year. The company's sales revenue grew 3.2% to just under NIS 1.3 billion.
Published by Globes [online], Israel Business News - www.globes-online.com - on January 14, 2018
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