Supersol, Israel’s biggest supermarket chain, has declined in status over the last five years from the undisputed king of the food retail market to playing catch-up with its smaller, more nimble rivals.
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The retailer’s first-quarter financial results, which saw operating profit plummet 54% to just 1.2% of revenues, were evidence enough of its problems. But the fact is Supersol’s problems aren’t due to the decline of food spending this year but to a changing food retail industry.
It was in this context that Supersol is now undertaking a wide ranging cost-cutting program. No details were provided, but its parent company, IDB Development Corporation, gave some clues.
“It will include reducing prices on the one side and on the other eliminating discounts for certain [consumer] segments and customer clubs. It will also include closing or shrinking branches, strengthening existing operations on the chain’s selling floor and developing new or complementary operations,” the company said in a prospectus issued on Monday.
Many in the industry called the plan too little, too late. Supersol shares dropped 4% on Tuesday in Tel Aviv Stock Exchange trading to close at 12.58 shekels ($3.7), making it the biggest loser among major stocks for the day.
“Very justified but also late,” said one executive, who asked not to be identified. Another, suggested cynically that the cutbacks were aimed at ensuring that Supersol could keep paying dividends to IDB Development and its new controlling shareholders, Moti Ben-Moshe and Eduardo Elsztain.
Supersol has been paying out annual dividends of 260 million shekels over the past three years.
Supersol and its No. 2 rival, Mega, have lost their competitive edge to smaller competitors, like Rami Levy, Yayanot Beitan and Osher Ad, which focus on low prices. As recently as 2009, Supersol’s 22% share of food retail sales was equal to that of all its smaller rivals combined; five years later, Supersol’s share is down to 18% and the smaller chains have grown to 27%.
In the first quarter, Supersol sold 5,100 shekels worth of product per square meter of floor space at its 284 stores while Rami Levy was racking up sales of 20,120 shekels. Supersol's operating margins were just one fifth of Rami Levy’s. That, together with sales of 2.9 billion shekels, suggests that a large number of branches are either losing money or earning only marginal profits for the chain.
Moreover, Supersol has to contend with an oversaturated food retail sector. Driven by the expansion of the smaller discount chains, new supermarket space has been growing faster than the increase in consumer spending over the last five years.
The market research firm Czamanski & Ben Shahar estimates there is some 300,000 square meters of supermarket floor space nationwide, but based on average household spend of 2,000 shekels per square meter, the market can only support two-thirds of that space.
In its new retrenchment program, Supersol will likely act to close about 15 outlets, which are believed to be losing money, and reduce the size of discount branches that are over 2,000 square meters.
“I estimate that Supersol has about 30 money-losing branches, which it’s keeping open to prevent the smaller chains from getting hold of the space,” said the principal of one of the smaller chains. “But the competition has grown so intense and their per-meter sales are so low that they can’t continue to operate these stores.”
Such big cutbacks will entail laying off large numbers of its 12,300 staff, which will need to be negotiated with its powerful workers committee. A big branch easily employs 70 people and there will be staffing cutbacks at the headquarters level as well.
Ariella Siso, who heads the Supersol workers committee, said she only learned about the plan two nights ago and was unable to say how workers would respond. “We’ve been talking about something like this happening for most of the past year, because some branches are bleeding and need to be closed. Now there are new owners that have to act. I just hope it won’t be painful,” she said.
Supersol will also act to increase sales of its long-neglected private label products. They now account for about 10% of sales, but the aim is to bring them to 15% and maybe even 20%.