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Israel small country, big market for Blue Sq.

By Dees Stribling

Just 6.2 million people live in Israel. That’s fewer than the 8 million or so who live in New York City, and yet Israel supports two major, highly sophisticated supermarket companies, each of which operates several specialized supermarket chains. Whenever Israelis go grocery shopping, there is a one-in-four chance that they will be buying their provisions from a supermarket owned by Blue Square-Israel. The company is Israel’s No. 2 supermarket owner-operator in market share terms, with about 26 percent. (First-place Super-Sol holds about 40 percent.) Besides these, there are much smaller operations: grocery chains, mom-and-pops and open-air markets.

This small country is nonetheless wealthy enough to sustain a thriving supermarket sector. According to the CIA’s World Factbook, Israel’s gross domestic product per capita as of 2005 is $25,000, just behind such prosperous places as Spain and New Zealand, and slightly ahead of South Korea and Greece. “The supermarket business in Israel is highly consolidated,” said Fred Eden, president of Nativ Consulting, an Israeli retail consultant firm. Until about a year ago, Eden says, there was a third main operator, Clubmarket. “Now there are two leaders,” he said. “Clubmarket went under, and Super-Sol bought its sites, which vaulted that company into the number-one position.”

Super-Sol and Blue Square are taking different approaches to branding themselves among their respective shopping bases, Eden says. “Super-Sol takes more of what you’d call the Tesco approach,” he said. Thus, just as British supermarket giant Tesco usually affixes the Tesco name to its stores — Tesco, Tesco Express, Tesco Metro and so on — Super-Sol operates units under the Super-Sol Big, Super-Sol Deal and Super-Sol Sheli names.

Blue Square, by contrast, operates under three different names: Mega, Shefa and Super Centers. The Mega stores tend to be, as the name says, large by local standards. These hypermarkets offer a large variety of food and nonfood items across the price spectrum, from discount to premium, and they can be as large as 86,000 square feet (8,000 square meters). The Super Center units are smaller neighborhood stores (32,000 square feet) offering higher levels of service and some products at premium prices. Shefa (the word means “plentiful” in Hebrew) runs “hard discount” stores that serve the particular needs of Israel’s Haredic (ultraorthodox) community. “A lot of people don’t even know, for example, that Mega and Shefa are owned by the same company, but that hardly seems detrimental to their sales,” Eden said. “Super-Sol and Blue Square represent different lines of thinking about branding, but as long as customers perceive that the stores are meeting their needs, both approaches are valid.”

Though Blue Square is an entirely Israeli operation, its corporate connections reach far beyond the Middle East. Since 2003, Blue Square has been majority-owned by a consortium of energy giant Alon Israel Oil Co. and a company controlled by Canadian Seagram heir Matthew Bronfman. Alon, for its part, owns a myriad of other retail interests, some within Israel. Among these are Alon-Dor gas stations, the Super Alonit convenience store chain, the Israeli franchises of Pizza Hut and Kentucky Fried Chicken. The company also controls some U.S. stores through subsidiary Alon USA, which owns about 1,450 Fina stations in Texas and neighboring states as well as Southwest Convenience Stores, the largest 7-Eleven licensee in North America.

Blue Square is a public company, with a substantial minority of its stock traded on both the New York and Tel Aviv stock exchanges. In the third-quarter report, CEO Gil Unger put Blue Square’s strategy succinctly: “We continue with a policy of aggressive expansion,” he said.

That would seem to be a difficult goal, given that Israel is geographically no bigger than New Jersey, but the company has been expanding in several ways of late. For one thing, Blue Square has been adding physical stores; over the past 12 months, the company has opened six and now operates 171 across the country, with three others under development. The six new stores represent the addition of nearly 108,600 square feet of sales space.

The company has grown through acquisitions as well. In 2005 Blue Square acquired 50 percent of the holdings of Hamachsan Hamerkazi Kfar Hashaashuim, one of Israel’s largest operators of retail franchises, including toy stores and dollar stores. That purchase, in turn, is helping facilitate the expansion of Blue Square’s supermarket nonfood offerings to toys and dollar-store items alongside housewares and home textiles. The company’s offerings of health and beauty aids, baby items, cleaning supplies and other “near food” items have grown recently too.

Blue Square pursued yet another avenue of growth this year when it spun off its real estate activities into a subsidiary called Blue Square Real Estate and completed an IPO on the Tel Aviv Stock Exchange that raised net proceeds of about 879 million New Israeli Shekels ($204.4 million). Blue Square Real Estate owns about 100 properties, with area totaling 1.57 million square feet, mainly supermarkets rented to the parent company. The subsidiary will manage the properties.

Recent results for Blue Square seem to bear out its strategies. Third-quarter revenues rose 7.9 percent year on year, to $390 million. Same-store sales, meanwhile, rose 2.7 percent, with sales per square meter rising 2.1 percent over a year ago, to $1,184 per square meter, or about $110 per square foot. The operating margin increased to 4.9 percent, versus 3.7 percent for the year-ago quarter.

Blue Square and its competitors operate in a highly complex market and, from a North American perspective, one with a host of unfamiliar characteristics. Most of the population of Israel is urban-dwelling, though there has been growth in suburban, or car-dependent places, and the supermarket business has followed the population to such suburbs as there are. About 85 percent of Israeli shopping centers still have a supermarket anchor, Eden says, but since the 1990s, supermarkets have also been associated with power centers, and developers have built freestanding supermarkets as large as 90,000 square feet, with do-it-yourself and other specialty stores nearby. “That configuration has come about in the last 10 years or so because the population is moving a bit out of the city,” he said.

But it isn’t creeping suburbanization that makes Israel’s demographics unique in the industrialized world. Unlike countries in North America or the European Union, whose mainstream consumer populations form large numerical majorities, Israel’s “mainstream” is barely a majority, if at all. “It might be a rough rule of thumb in industrialized nations that your mainstream supermarket customers are about 80 percent of the total population,” Eden said. “In Israel, that might be only 50 percent.” The other half of Israel’s population is divided into smaller consumer subgroups with quite different buying habits from both the mainstream and each other.

One subgroup is the Arab population, which, according to Eden, is the least likely to patronize the larger chains, preferring smaller stores or open markets. Another subgroup is made up of relatively recent immigrants from the former Soviet Union. They are more likely than the Arabs to patronize the major chains. The third subgroup is the Haredic population (ultraorthodox as a term is less favored by this community, though the word could describe the strength of its religious and social conservatism). Capturing this group’s business, though, is important enough to have motivated Blue Square to launch Shefa. Among the Israeli Haredim, household income tends to be lower than average, but the percentage spent on food is higher because the families tend to be large. “They need large sizes, but not premium products,” said Eden. “They also buy much more per basket [per household, per visit] than anyone else.”

Furthermore, the Haredic interpretation of Jewish dietary law is far stricter than among the rest of the population. So while food sold at other supermarkets is usually kosher, it is not kosher enough for the Haredim. Religious law also affects supermarkets through its impact on operating hours, particularly in the observation of Shabbat, which runs from sunset on Friday to sunset on Saturday. Because stores need to close on Friday afternoons a few hours before sunset, the retail trade is limited in practice to operating five and a half days a week. Thus, 24/7 food retailing is generally confined to convenience stores.

Finally, Israeli supermarkets operate under vastly different security parameters than their counterparts in North America or Europe. Eden estimates that the major chains spend the equivalent of 1 percent to 1.5 percent of their income on security. Guards are posted outside store entrances and metal detectors screen patrons.

The potential impact of larger geopolitical problems is also a constant reality for Israeli supermarkets, as it is for the population as a whole. A single line in Blue Square’s financial report attests to this reality: “The Company’s sales were not,” the report mentioned almost in passing, “materially affected by the Lebanon War which took place in the third quarter.”

Countries and people may differ, but Blue Square can be thankful for one thing: Everyone has got to eat.