Kroger Expected to Join Group Bidding for Israel's Mega Stores

U.S. giant in talks to join Sagol-Meital group; would be first overseas retailer to enter Israeli supermarket sector.

Ofer Vaknin

Kroger, the biggest supermarket chain in the United States, may be coming to Israel as a partner with Yossi Sagol and Eran Meital, two investors bidding to buy food retailer Mega, TheMarker has learned.

Sagol and Meital, who were expected to join the contest for control of the chain and its 127 stores, have reached an agreement with the giant U.S. retailer to join their bid and become an operating partner if they win.

Founded in 1883 in Cincinnati, Kroger is the second-largest retailer in the U.S. after Walmart and the fifth-biggest in the world. It operates 2,700 supermarkets as well as hundreds of convenience stores, pharmacies and other retail formats, and 37 food factories. In 2014, it had turnover of $108 billion.

Kroger’s entry would be the first by an overseas player in the Israeli supermarket sector. Unlike in other retail sectors such as apparel and furniture, foreign companies have been deterred by obstacles like kashrut and low profit margins.

Tamir Ben Shahar, CEO of the retail consulting firm Czamanski & Ben Shahar, said Kroger would shake up food retailing by bringing in American management practices and service.

“An overseas player could change the standards of supermarkets in Israel,” he said. “Americans, in particular, are recognized as retailers of the highest caliber. They have systematic policies and very clear procedures about how to manage a chain. It has to be good for Israeli retailing.”

Sagol and Meital began talks about buying Mega before a court granted the chain protection from its creditors last month. They have now shifted negotiations from Alon Blue Square to the court-appointed trustees.

The group expects to make its formal proposal in the next few days and formalize Kroger’s role in the bid and in Mega’s operations.

In related news, on Sunday Central District Court Judge Ilan Shiloh extended Mega’s court protection by three months until May 17 at the request of the trustees.

One of the key issues still under discussion is whether Sagol, Meital and Kroger will divide control three ways or try to recruit an Israeli retailer as a fourth partner. Another is whether the chain will operate under the Kroger name or not.

Sagol, a scion of the family that controls Keter Plastics who has been running the company’s American operations, has been conducting talks with Rodney McMullen, Kroger’s CEO, in recent weeks. In the last few days they reached an agreement in principle on bidding for the chain and operating it together.

Sagol, who as head of Keter’s U.S. operations accounts for about a third of the company’s sales, will not leave the family business even if the group takes control of Mega. However, he will be able to lend it his retailing experience from stints he had with the U.S. retailers Kmart and Sears.

The Sagol-Meital-Kroger group will almost certainly face competition for Mega. Before the deadline for bids closes next Tuesday, the Israeli food retailers Yenot Bitan, Victory and Rami Levy are expected to make offers. Rami Levy is likely to meet antitrust objections, and the Victory bid hinges on talks the chain reportedly is holding to team up with an unnamed European supermarket chain.

Victory’s Eyal Ravid has approached the Antitrust Authority about whether it would countenance a joint bid by Victory, Rami Levy and other chains, which would then divide up the Mega branches among themselves. The authority has not responded, but sources said it was unlikely to approve the proposal.

Ben Shahar said it was logical for Kroger to team up with local partners.

“The Israeli market is the most competitive there is, with very low operating profits that require careful attention to the shopping behavior of the Israeli consumer, which is different than the American,” he said, giving as one example that Israelis are less loyal to their supermarket than American shoppers are.

He cited a string of American retail flops in Israel, including Starbucks, Burger King and Dunkin Donuts. Ben Shahar said that if the Sagol-Meital-Kroger group moves Mega from its neighborhood-store format to discount, it will have a major impact on the supermarket business. It will likely try to bring lower prices to shoppers by parallel imports and stocking shelves with Kroger private-label brands