Israel's Big Supermarket Chains Fall Flat in Foray Into ultra-Orthodox, Arab Sectors

Both sectors promised to offset declines in mainstream sales, but Supersol and Mega have found the going tough.

Emil Salman

Supersol and Mega, Israel’s two biggest supermarket chains, are pulling back from their efforts to open stores in Israeli-Arab towns and ultra-Orthodox neighborhoods.

In the past two months, Supersol and Mega have sold stores they were operating in Daliat al-Carmel and Sakhnin. Among the nationwide supermarket chains, only Yenot Bitan has any outlets in Israeli-Arab towns. But after closing its branch in Tamra, it has only two left – one in Daliat al-Carmel and the other in Nazareth.

“There are almost no Jewish supermarkets in the Arab sector anymore. There were only a few anyway, and we bought many of them because they simply didn’t succeed,” said Magdy Kitani, CEO of the Israeli Arab-owned food retailer King Stores, with seven outlets.

Meanwhile, Supersol has converted 41 branches of its Yesh brand, which targeted Haredi shoppers, to its mainstream Supersol Deal and My Supersol brands. Only 28 Yesh groceries remain – and just eight of the smaller versions of the stores called Yesh Neighborhood targeted at heavily Haredi areas inside larger cities.

The retreat marks a major setback for the two chains, which have been struggling to find an answer to the upstart discount grocers like Rami Levy and Victory that have gnawed away at their market share.

The Haredi sector looked promising. It already accounts for 14% of total food sales and has been growing over the past four years while the rest of the market was stagnant. Last year sales of food and other household goods rose 1.7% in the Haredi sector, against a 1.4% decline nationwide.

But figures from the market research firm Nielsen show that Haredi consumers, in contrast to other Israelis, prefer to shop in smaller discount stores. The big chains account for just 38% of Haredi food purchases, compared to 48% for the discounters.

Only a year ago, Supersol launched the sub-brand Yesh Neighborhood to try to break the stranglehold of the discount supermarkets, particularly Osher Ad, among ultra-Orthodox shoppers by offering products with a stricter-than-usual standard of kashrut and very low prices since Haredi families typically have much lower incomes. At the same time, Supersol expanded its bigger Yesh B’chesed sub-brand directed at big Haredi towns like Bnei Brak and Betar Ilit.

With its 40 stores and turnover of 900 million shekels ($231 million), Mega had been a leader in the Haredi sector with its Shefa Shuk stores. But the brand was hit by a boycott in 2008 after David Weisman, one of the controlling shareholders in Mega’s parent company Alon Blue Square, bought the AM:PM chain of convenience stores. AM:PM provoked Haredi outrage because it keeps its stores open on the Sabbath. Weisman refused to back down. He changed the name of the chain to Zol B’shefa in 2011, but that had little effect and today the chain counts just 12 branches.

Mega’s latest strategy has been to launch a joint venture food retailer with the Haredi millionaire Arye Wolfson called Tachlis, but it has yet to be proven.

Rami Levy, who owns and manages the chain by the same name, said it was inevitable that Supersol and Mega would lose out to the discounters.

“With the high cost structure at the big chains and the stiffer competition as more branches are added, they can’t keep operating stores with such low sales per square meter,” he said. Even though the ultra-Orthodox segment is growing, it still accounts for less than 15% of food sales nationwide.

In the Arab sector, meanwhile, spending by households climbed 30% in the five years to 2012 due to a combination of increased spending and a growing population. Kitani of King Stores said the big food retailers failed to stock the right foods at the right prices.

“We know how to speak to the Arab consumer and embrace him – they don’t,” he said. “We have sales on economy-size products and we don’t condition sales on spending at least 100 shekels. The Arab customer wants a personal connection.”

Levy added that the big chains were also constrained by their policy of closing on the Jewish Sabbath and the inability to sell alcohol in their stores in order not to offend Muslim shoppers.