Super-Sol devises strategy for era of lower prices, tougher competition
'The Israeli sensitivity to prices has increased dramatically,' says CEO Itzik Abercohen.
Super-Sol's stock market valuation has fallen by NIS 188 million in the wake of the cost-of-living protests, intensified competition from discount supermarket chains and poor second-quarter results.
And for CEO Itzik Abercohen, his company's stock market performance is nothing less than a battle cry. The company is poised to reassert its industry dominance and turn the tide, he said an an interview with TheMarker.
"I hear many people deriding the protest and its results, but I disagree," Abercohen says. "The Israeli sensitivity to prices has increased dramatically."
Formerly the supermarket chain's vice president for operations, Abercohen took over the reins of the company eight months ago from Effie Rosenhaus and Richard Hunter. He blames Super-Sol's problems on its failure to react rapidly and seriously enough to the younger and smaller retail food chains, which began expanding fast while Supersol and Blue Square's rival Mega chain remained laid back.
"During those dynamic years, Super-Sol wasn't focused on its competitive environment," continues Abercohen. "Super-Sol allowed smaller players to come along with a strategy offering 'the same item for one shekel less.' They prospered because they were more flexible, had smaller overhead, and enjoyed more pricing maneuverability."
Super-Sol posted a NIS 36-million net profit in the second quarter - a drop of 55% from last year -while evenues were down 3.9% to NIS 2.9 billion. Its operating margin was down sharply from 4.9% a year ago. But, at 3.4%, it was a big improvement over the first quarter's 2.5%.
What lessons did Supersol learn from the cost-of-living protests?
"We found ourselves looking terrible in the periphery with high prices, so in early 2012 we cut prices while inputs, at the same time, rose in price. We built a business model that wouldn't put branches in the periphery into a loss, but would reduce their profitability.
"Afterwards we put into action a voluntary retirement plan for hundreds of employees that led to tens of millions of shekels in savings. We also reduced headquarters staff by 50 to 60 out of 420 at the intermediate and senior levels."
After years of losing market share to private chains, Super-Sol changed tack and began fighting back, with drastic price reductions at its branches in Beit Shemesh, Ma'aleh Adumim, Ashdod and Be'er Sheva to go toe-to-toe against the private chains operating in those cities, particularly Rami Levi Hashikma Marketing and Osher Ad. Super-Sol's advantage is being able to absorb losses in four of the hundreds of points where it operates.
Doesn't your strategy send a dubious message that Super-Sol is taking advantage of its strength to pummel the competition?
"We are sending a message that we will continue leading in food retailing as the largest chain. We will do everything to keep operating margins around 4% to 5% and maintain our workers' employment security into the future. Israelis want the lowest prices and we will provide them. Until recently we saw the private chains exhibiting condescension, arrogance and conceit - but now they're becoming more rational."
How do you intend sending a message to the private chains while bringing operating margins back up from 3.4% in the second quarter to 4% to 5% as before?
"We are streamlining and reducing overhead, advertising and other costs. In addition, there are suppliers and manufacturers with whom we need to come to arrangements and improve our commercial relations.
"We have also closed six or seven branches, and will close another one or two by the end of the year. We're also opening new branches: Today we have 21 Super-Sol Express branches, and we'll reach close to 30 by the end of the year."
Will you raise prices for Super-Sol's private brand after the holidays?
"Everything will go according to the mood in the market after the holidays."