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Blue Square marks down Mega in the City By Yoram Gabison Tags: Mega in the City, Blue Square  Seven months after Blue Square launched its Mega in the City chain, the results do not look good. Blue Square's manager at the time, Gil Unger, announced the conversion of 100 branches of the sub-chain Super Center - which was characterized by relatively high prices - into Mega in the City outlets, whose prices run about 15% below regional rivals, and about 5% above the discount giants such as Super-Sol Deal, Hetzi Hinam or Mega itself, which operates outside city centers in the format of gigantic supermarkets. The whole point of Mega in the City was to bring that concept of discount outlets to the inner city. Since the launch Unger has left Blue Square, and the new CEO, Zeev Kalimi, survived in the job for a whole two months. He was replaced by Zeev Vurembrand, who declared upon the release of Blue Square's financial statement for 2007, "The launch of Mega proved itself." Not according to the figures in Blue Square's report. Advertisement Blue Square's sales grew by 12.2% in the fourth quarter of 2007 against the parallel quarter of 2006, but the 2007 figure includes sales of the Vardinon chain of towels and bedclothes, revenue from the Naaman Porcelain housewares chain and the from organic Teva Market scores, which Blue Square acquired last year. If their contribution of NIS 45-50 million is deducted, then Blue Square achieved 9% revenue growth last year, which falls short of rival chain Super-Sol's 9.4% expansion. The increase in Blue Square's same-store sales (which means, comparison only of stores that were fully operational in the fourth quarter of 2007 and in the fourth quarter of 2006) was just 4.8%, compared with 8.8% at Super-Sol. Considering that the fourth quarter was characterized by rising prices, and the fact that Blue Square actually lowered its prices in order to lure back clients to the city center from the monster discount stores in industrial zones, it seems that something went wrong. Blue Square's market share dropped to 23.9% in 2007 from 25% the year before, and the attempt to reverse that trend cost it heavily in terms of profit. Blue Square's operating income did increase by 8.5% in the fourth quarter of 2007 against the parallel quarter of 2006, but that was because of NIS 10 million in nonrecurring income from the rising value of property owned by subsidiary Blue Square Properties. Minus that, operating income actually fell by 5.3% to NIS 67 million or 3.7% of the company's turnover, compared with 4.5% in the parallel quarter. Meanwhile, over at rival Super-Sol, if we discount the rising value of real estate, operating income increased by 31% against the fourth quarter of 2006 to NIS 101 million or 3.9% of turnover. The interim results of the great Mega in the City launch is that price erosion at the neighborhood stores did not significantly increase Blue Square's consolidated sales, but they did decimate profit, while over at Super-Sol, profit increased. Blue Square claims mitigating circumstances such as heavy advertising costs, but at least some of the increase in operating costs involved in Mega in the City's launch were offset by conversion fees paid by the chain's suppliers, which are nonrecurring gains that won't help Blue Square in the quarters to come. Moreover, Blue Square owns about 50% of the areas from which it sells, while Super-Sol owns only about 20% and therefore has heavier costs in rent. The financial statement of subsidiary Blue Square Properties sheds some light on the disappointing results of Mega in the City. Blue Square Properties handles most of the really big Blue Square stores, with space of more than 1,500 square meters: it operates 68 outlets, of which 35 are Mega, and of which 15 were converted into Mega in the City branches. Blue Square Properties' revenues increased by 7.1% in the fourth quarter of 2007 compared with the corresponding period of 2006, but same-store sales increased by only 2.4%, mainly because of branch conversions to Mega in the City, the company says. And that means, contrary to the company's expectations, that Mega did suffer from cannibalization when the sub-chain was launched. That means Mega in the City attracted customers from Mega (rather than from Super-Sol or some other rival). It also suffered from intensification of the price wars. The upshot was a nearly 23% drop in Blue Square Properties' operating income. Possibly it would be fairer to view Blue Square's results as part of a greater picture, namely that of the Alon Group, which owns the controlling interest in Blue Square and also owns the AM:PM chain of groceries in the greater Tel Aviv area. AM:PM has been growing like a weed and is highly profitable, too, so it could be said that the Alon Group has complementary formats in the cities: low-cost outlets Mega in the City and costlier AM:PM, which charges more for being a 24/7 chain (open 24 hours a day, 7 days a week). Unhappily for Blue Square shareholders, however, they don't get a share of AM:PM's profits and yet could suffer from the wrath of the ultra-Orthodox sector if it does decide to boycott the whole Alon Group, a threat hovering in the ether, because of AM:PM's disrespect for the Shabbat. However, Israel's capital market scene had evidently expected Blue Square's results to be even worse. The share price did not suffer: In fact it rose yesterday by 9.4% on respectable turnover of NIS 1.3 million. Still, in the last 12 months, Blue Square stock has lost 35%. Super-Sol lost only 1.4% in that time. Bookmark to del.icio.us   Graphic footage Israel posts clips on YouTube of Jerusalem yeshiva terror attack. Remembering Gaza Knesset approves bill to commemorate the Jewish settlements of Gush Katif.

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