Alon Holdings Blue Square Israel, the retail monolith operating Mega supermarket chains, said this week CEO Zeev Vurembrand is stepping down at the end of February after heading the company for five years. His successor will have a lot of cleaning up to do.

On Vurembrand's watch, Mega has grown from 185 stores and 342,000 square meters of floor space to 217 stores and 386,000 square meters. But the operational results were dismaying: Sales per square meter tumbled 13.5% in nominal terms to NIS 4,300 and the adjusted operating margin fell from 5.7% to 3.5%.

"The Mega we once knew wasn't at all like the Mega we see today," lamented a senior industry source about Vurembrand's pending departure. "Until 2005 Mega was the leading chain in terms of profitability, with other chains trying to follow its example. It wasn't the cheapest but stood for quality, and its operations were outstanding."

Mega now plays second fiddle to Super-Sol and hasn't been seen as a market leader for years but rather as a follower, even in the backwash of discounter Rami Levy with his 25 stores. Mega's power and position have eroded so much that reports several months ago on Rami Levy trying to acquire several dozen branches from Mega barely raised an industry eyebrow.

The supermarket group is part of the Dor Alon Blue Square web of public and private companies, which also includes gas station and convenience store chains under the control of energy mogul David Wiessman, lawyer Shraga Biran, and the purchasing cooperatives belonging to the kibbutz and moshav movements.

Mega's decline is said to have begun well before Vurembrand became CEO in March 2008. Mega only launched its discount Mega Bool chain the following December, three and a half years after its main competitor launched its low-price Super-Sol Deal chain. Only later did Mega introduce its own private-label brand, which now accounts for 12% of its overall sales. But it did so more than two years after Super-Sol made the same move toward the end of 2006.

Unable to position itself as an alternative to the low prices offered by Rami Levy and other price choppers, Mega's position deteriorated until Vurembrand had no choice but to regroup around the chain's strongholds, the Mega Ba'ir stores and its choice city core locations, while offloading uncompetitive Mega Bool branches.

"The discount arena now comprises 70% of the market and Mega entered this arena late - and having done so didn't offer the lowest prices," said a senior industry official. "You can't be late entering the game and also consistently fail to be the cheapest player."

Haredi boycott

A consumer boycott of the group's Shefa Shuk outlets by their target market, the ultra-Orthodox community, since the start of 2008 led to more trouble for the company. Through no fault of Vurembrand, the boycott was called against David Wiessman in reaction to Dor Alon's acquisition of the 24/7 chain AM:PM which, as the name indicates, operates on Shabbat.

The target chosen from among Wiessman's operations was Shefa Shuk, where sales and profits began plummeting. Only 10 of its original 40 outlets remained viable when, in September 2011, they were renamed Zol B'Shefa. They currently include 17 stores.

Blue Square's expansion into nonfood retailing like its purchase of the Kfar Sha'ashuim toy-store chain, presumably also on Wiessman's initiative, brought further losses and diverted much-needed managerial attention away from the competitive groceries market.

Market-share loss

Since 2007, the independent discount supermarket chains including Rami Levy Hashikma Marketing, Victory Supermarket Chain, Hatzi Hinam, Kimat Hinam and Yeinot Bittan have deepened their aggregate market share from 20% to 26%, according to the Czamanski Ben Shahar and Co. economic consulting firm. Three-quarters of the increase came at the expense of Mega, whose share has plunged from 16% to 11.5%. In contrast, market share for Super-Sol suffered a much slimmer drop, from 22% to 20.5%.

Blue Square reported the lowest operating margin of all public retail companies for the first half of 2012, 1.4%. In 2007 its operating margin was 4.1%. Its parent, Alon Holdings Blue Square, underperformed the Tel Aviv Stock Exchange's TA-75 index by 59.6% over the past five years. Blue Square's merger with the Dor Alon energy business failed to generate any synergies that could be deduced from examining financial results.

A drain of NIS 1.4 billion in dividends from Alon Holdings Blue Square since 2007 to provide Alon Israel Oil Company with cash lowered its equity capital to NIS 1.6 billion, barely 16.7% of its balance sheet. Onerous financing costs to cover the resulting debt cut net income to the bone, just NIS 51 million in the first half of the year, a mere 0.65% of turnover.

"The chain is in terrible condition," said a top executive at a competing chain. "The Mega brand is washed up no matter what they do. Consumers lost faith in the chain because of its zigzagging."

According to Wiessman, "Zeev received a chain facing complex challenges during a volatile period and leaves behind a leading and innovative retail chain with vision toward the future."