Torah scrolls and high margins

Shlomi and Yossi Amir  Illustration: Gil Gibli

Shrewd PR, an eye for location, and tough but fair practices, have brought Yossi and Shlomi Amir a NIS 1 billion valuation for their Fresh Market chain.

No fewer than 12 Torah scrolls in memory of people killed  in terrorist attacks and and fallen IDF soldiers costing a total of $250,000 were inaugurated at an event held by brothers Yossi and Shlomi Amir, owners of the Fresh Market supermarket chain, in 2017. What began as a custom - with every branch they open, the brothers contribute a Torah scroll - became at the same time a demonstration of power. The event that took place in the Ocean event hall in Tel Aviv attracted both senior media and business figures and important politicians, such as Minister of Justice Ayelet Shaked, Minister of Education Naftali Bennett, Minister of Labor, Social Affairs, and Social Services Haim Katz, Minister for Social Equality Gila Gamliel, and Israel Police Chief Roni Alsheikh.

Today, the large social events held by the Amir brothers are no longer confined to celebrations of the opening of a new branch; they take place on the first day of every month in the Hebrew calendar. Nevertheless, at least up until the past year, and even now to a large extent, all of this economic and political power is not reflected in media prominence.

Now, as many of their friends say, their world is about to change. After an unsuccessful attempt a year ago, the Amirs are holding an IPO for their retail empire on the Tel Aviv Stock Exchange (TASE) at a valuation of NIS 1 billion, after money. After staying under the radar, they will be subjected to the magnifying glass of the financial press. Every dot in their financial statements will be analyzed in an attempt to discover the source of their impressive profits. Their large family will be highlighted, and their conduct will be exposed, for better or for worse. The offering for investment institutions was successfully completed last week, with the company raising NIS 250 million at a before-money valuation of NIS 750 million.

"They are aware of the price paid in going public," one of their friends says. "They realize that they can no longer preserve their anonymity, but at the same time, this is the price that has to be paid for a NIS 220 million dividend (the dividend that will be distributed to the shareholders following the offering), so they are willing to pay this price," he laughs.

Thanks to the many brands

Yossi, 51, and Shlomi, 49, grew up in Nesher in a family with five children. Their father, David Amar, a Likud member who died last year, headed the Nesher City Council for 20 years. Yossi, who lives on Galil Yam, is chairperson of Fresh Market and is responsible for the company's finances. Shlomi, who lives in Holon, is the CEO and is responsible for retail trade. Their acquaintances say that both of them are hardworking; Shlomi spends Fridays and holiday eves in the office to this day.

Confidants say that the brothers contracted the retailing bug as children at the Shimon grocery store run by their grandfather, where they helped out after school. This story unquestionably fits the story of starting from the bottom that they encourage. Their lowly an origins are not, however, reflected in the high prices charged by Fresh Market.

They may not be true working class, but they certainly maintain strong family ties. Their mother, Sima; Shlomi's wife, Eleanor; and other relatives are currently employed in the company, although their other siblings are not involved in the family business.

Yossi and Shlomi's business saga began when they were demobilized from the army. They founded a restaurant near where they lived, which they sold after four years. Then they entered the supermarket business by acquiring a small supermarket in Kiryat Bialik. They later acquired a supermarket in the Carmel Center in Haifa, but sold it. In June 2004, they bought Fresh Market, which had two branches at the time: in Galil Yam and in Herzliya, and later expanded through more acquisitions.

The group now has five different sub-brands: Makhsanei Mazon, Mahksanei Lahav (a chain with 13 branches acquired from the Dan cooperative in 2016 for NIS 85 million, plus NIS 15 million for inventory), Dudu Supermarket, Tip Tov, and of course Fresh Market.

The multiple brands are no accident; they probably make a substantial contribution to the success of the chain, whose stores have high prices and do not usually provide much of a purchasing experience.

"The fact that they operate under five brands enables them to maintain a range of prices," a senior source in the sector explains. "For example, they can sell ketchup at five different prices in their five different brands. They are not committed to a uniform price of products at all of their branches. On the other hand, they get discounts from the suppliers, because they make joint orders for all of their branches. They sell like a grocery store, but buy like a supermarket chain."

The chain has 31 branches with average space of 700 square meters per branch. There are four stores in Herzliya and three each in Tel Aviv, Petah Tikva, and Haifa. The rest are spread over northern, southern, and central Israel. The chain, whose annual turnover is NIS 1 billion, has 1,250 employees, including 95 in the company headquarters. Its customers' club has 150,000 members under its various brands.

"Their branches are located in city centers, usually in well-off neighborhoods. They take advantage of the fact that convenience is more important than price to Israeli consumers," says a source in the sector, explaining the chain's high profits. According to the figures published in Fresh Market's prospectus, the chain has the highest profit margins in the sector, with a 33% gross margin. The corresponding figures are 31.5% for Tiv Taam, 25.9% for Shufersal, 25% for Victory Supermarket Chain, and 21.7% for Rami Levy Chain Stores Hashikma Marketing 2006.

"They have no special method," another retailer says. "They expanded one store at a time by buying existing stores. That's how they accumulated power. They are the most expensive by any measure, because they operate city centers and go for the most upmarket places. They have been very good at selecting successful locations."

Fresh Market also has no logistics center and no online sales. "They're smart," one supplier says. "In order to be strong online, you need huge investment, as Shufersal is doing, and such investment is too much for them. It amounts to hundreds of millions of shekels." Nevertheless, it is believed that when the company goes public, it will improve its technology, and online sales will probably come up for discussion.

Strong vis-à-vis the suppliers

What else accounts for the chain's success? A critical element in the sector is relations with suppliers. Sources in the sector say that the Amirs take care to maintain close relations with their suppliers, but the suppliers know that despite this friendship, they are nobody's suckers. "They're very pleasant," a source says, "but they're very tough."

Jerusalem Vineyard Winery Brig. Gen. (res.) Erez Winner, who is both a supplier and a friend, says, "Shlomi is very tough. He is very precise and exacting in business and gets low prices, even if you're his friend. On the other hand, once you have closed a deal with him, that's it. You know that what he ordered is what will happen. He is very firm in business."

The social events that the Amirs hold also contribute to close relationships with important players in the sector. "It begins and ends with human relations," explains a business source who has worked with them for many years.

The Amir's first attempt at an IPO was in July 2018, but market sentiment was also a factor at that time. There was a lack of demand, and the offering did not go through. They are far more prepared now, and have commitments from several investment institutions to buy shares for a total of NIS 300 million. The most important agreement obtained so far is with investment house Altshuler Shaham, the anchor investor in the IPO, which will invest NIS 100-150 million. There are also agreements with other institutions for smaller amounts.

The prices involved are not bargains. The company value in the offering will be NIS 1 billion, after money, equal to the company's annual turnover, meaning that it is in no way cheap. In the prospectuses for both offerings, the one that failed and the one now getting underway, an exceptional net profit margin of 5.4% was reported, significantly higher that reported by Rami Levy and Victory, for example. The question of the company's growth horizon using its methods can only be settled when put to the test.

How will the company switch from such personal and informal management style to the inflexible rules of corporate governance? "It can be assumed that the Amir brothers have taken this into account, and are prepared for it," says someone who knows them,"but it will undoubtedly still be a shock for them."

There is also the question of salaries, which will now become public information. The two brothers are asking for a monthly salary of NIS 190,000 each, plus an annual bonus of up to NIS 2 million. "This is considerably different from their colleagues," a market source says.

Gilad Altshuler, head of Altshuler Shaham, the leading institution in the IPO, does not sound worried. "I've gotten to know them in the past year, especially Shlomi, since they wanted to hold an IPO," he told "Globes." "Shlomi is a street cat. He understands the business very well, and adjusts very quickly to dynamic market situations. He has a very realistic view of what is happening in the market. I know that he built the business with his own two hands, starting working at a very young age, and he has many capabilities. In an investment in this type of business, you also have to believe in the people, and I hope it will be all right."

"Globes": What about the pricing in the IPO? It's not cheap.

Altshuler: "The pricing isn't bad for the sector. I look at the pricing of Shufersal, Victory, and Rami Levy in comparison with their net and gross profits. According to that, the pricing isn't high. This entire market isn't cheap. I regard it as an opportunity."

How do you think they get such high profit margins?

"There's no fixed formula. They maneuver with the various food companies and suppliers."

From the other side, it can be asked what persuaded the brothers to step outside the borders of their family business, which is growing nicely, and become a public company. "If you took a NIS 100 million bank loan, wouldn't you want to raise money the next morning, pay back the bank debt, and keep what you have?" a market source asks rhetorically. "If they hold an IPO, they can easily repay the loans and keep the principal."

To this can be added the fact that according to the prospectus, NIS 220 million will be distributed to the shareholders at the end of the offering. "First of all, it's an opportunity to distribute a dividend and be capable of taking advantage of the place you have reached and let others share in further expansion. Secondly, it's a way of arranging the relations between them, and within the family," another market source says. "Beyond that, the entry of investment institutions into the company will bring strategic thinking and technological methods. It will bring order into the business,"

Becoming a public company will unquestionably bring them to a higher level. One supplier says, "Today, they are among the medium-sized retailers. Maybe they want to leap to the level of the major ones. The next milestone in the food business is the level of Hatzi Hinam and Yochananof. If they want to inject money into the business, it might be in order to add more commercial space, and if they can rake in some money while doing it after their years of hard work, why not?"

Some believe that the ambition to move up a level is not in the food business at all but outside it. "If you get NIS 220 million now," one source says, "you can go to the banks and get financing to buy any serious company: El Al, Dor Alon, and many others. I think they want to move up the ladder and be among the large companies, not necessarily in the food sector."

Published by Globes, Israel business news - - on May 12, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Shlomi and Yossi Amir  Illustration: Gil Gibli
Shlomi and Yossi Amir Illustration: Gil Gibli
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