Lehem Erez
A Lehem Erez outlet in Tel Aviv.
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Dan Keinan
Erez Komorovsky Photo by Dan Keinan

After failing to find a knight armed with a checkbook to rescue it from debt, Lehem Erez sought court protection from creditors this week. The aim is to keep creditors at bay while the business continues to run, under the management of a trustee, and the owners continue to seek a buyer.

Lehem Erez is a chain of shops and restaurants featuring specialty breads and cakes. These days it's owned by Giora Naftali. Of the 16 stores, three are owned by Lehem Erez outright while the remainder are franchise operations. The company's 85 employees are divided among the baking plant, Netanya office headquarters and the self-owned branches. The franchisees employ an additional 90 people between them.

Here are some more interesting statistics: Lehem Erez owes a total of NIS 12.4 million, including NIS 5.7 million to Bank Hapoalim, NIS 925,000 to Bank Leumi and NIS 1.47 million to employees workers and the Tax Authority. It owes another NIS 3.85 million to various unsecured suppliers, who would be last in line to recoup their money.

For years Lehem Erez has existed in a state of management turmoil. In April 2007 Giora Naftali fired CEO Nir Segal, who had owned 10% of the chain, just eight months after hiring him. Since then the top job changed hands several times and the losses mounted. The company closed down 10 branches in two years.

Lehem Erez was founded in 1996 by Erez Komorovsky and Ilan Rom. Komorovsky sold his share of the business in 2007, and is no longer involved with the bread that bears his name. He recently opened a cooking school at his Galilee home in Matat, and is currently launching a line of frozen vegetarian products for Osem's Tivall group.

Giora Naftali came on board in 2004, buying a 50% interest in Lehem Erez, which was already in financial straits. Haim Ben-Shahar, who still owns 10% of the company, also became a partner that year. Naftali owns 12.4% of the Mayanot Eden mineral water bottling company; his brother Roni Naftali owns a 44% stake.

In 2007 Giora Naftali increased his stake in Lehem Erez to 70% when he bought 20% from Ilan Rom. He has since bought out Rom's remaining share and today owns 90% of the chain.

Yearning for a buyer

Over the years, negotiations were held time and again to sell Lehem Erez, but none of them panned out. The Spaghettim chain of pasta restaurants considered buying a 50% interest but backed out. A source at one of the country's larger cafe chains told TheMarker that they had also been contacted but that the asking price was "illogical" in light of the state of the company and the investment it would require. They wanted NIS 8 million and agreed to take NIS 6 million, but even that was too much, he said.

About two years ago Lehem Erez announced its imminent merger with Coffee Bean & Tea Leaf, whose Israeli operation was then owned by none other than Giora Naftali. The chain announced details: The merged chain would have 41 outlets. The two brands would continue to exist independently, but would be run by a common management.

Shortly after the announcement, however, the deal fell apart. Coffee Bean's Israel business was purchased by City Food, which is presently embroiled in a bitter dispute with the global Coffee Bean & Tea Leaf over the way the local outfit is being run.

Naftali is suing City Food for NIS 590,000, money he claims City Food undertook to pay him - but its check bounced.

As for Lehem Erez, in court this week the company said it had instituted efficiency measures in the last couple of years and that since 2008 it has been breaking even. To achieve this Naftali himself laid out millions of shekels, the chain's lawyers told the court. Over the past 18 months alone, he personally injected NIS 6.5 million of his own money into the company, to repay past debts. But for now the chain needs a stay of proceedings, it says.

Why? Because at any moment its checks will start to bounce. That is because of nonrecurring costs from previous years, says Lehem Erez. If it isn't granted the stay of proceedings, creditors will start to sue and the chances of being able to sell the chain as a going concern will evaporate.

Lehem Erez does not intend to fire workers and vows that July and August salaries will be paid. It adds that it biggest creditor, Bank Hapoalim, agreed to the stay of proceedings. Hapoalim and Naftali have each agreed to provide NIS 350,000 to keep the business running during the period of the stay, if granted, the chain told the court.

A whole sector in trouble

But what are Lehem Erez's chances, in the big picture? The truth is that the whole cafe-restaurant sector isn't in good shape. Coffee Bean & Tea Leaf Israel has also been closing down branches and is facing claims of nonpayment from employees and suppliers. It is also accused of defaulting on rent for its stores.

The troubles at Lehem Erez and Coffee Bean are mere symptoms of a whole sector in pain. Business Data Israel estimates that by year-end 2010, about 385 restaurants and cafes, or 5% of the market, will have shut down.

"The main danger is to neighborhood restaurants, not to the big chains," says Eyal Yanai, co-CEO of BDI. Chains are more stable, and profitable branches can keep the nonprofitable ones afloat, which is obviously not an option for mom and pop businesses. He adds that establishments in central Israel are in less danger than the ones in farther-flung areas, where sales turnover is lower.

Restaurants are generally a risky business and the economic crisis of the last couple of years did them no good, he adds. Israel's economy may be relatively robust but the food and beverage sector has not returned to pre-crisis levels. Restaurants require relatively high investment relative to turnover, Yanai explains, and are highly vulnerable to changes in the environment, whether they be war, economic trouble or simply seasonal factors. Costs are high and unless the owners have a strong financial foundation they will founder.

Total restaurant sales turnover in 2009 came to NIS 12 billion, says BDI - but that's 4% less than the previous year. The number of operating restaurants was 7,930, down 2% from 2008. The company says that 57% of all restaurants are in the center of the country.

Experts say the trouble at Coffee Bean was its failure to distinguish itself from the competition. Tamir Ben Shahar, CEO of the consultancy Czamanski & Ben Shahar, says it didn't seek out unique locations and didn't adapt its products to Israeli tastes. Its owners didn't "live its business" day to day, he sums up. It is indeed hard to stand out from the crowd in the food service sector, where change is constant and the rule is move with the times, and quickly, or starve.