The Man Behind the Mess at Israel's Mega Supermarkets

The chain, struggling with $360 million in debt, has been in trouble for years. Most of the blame goes to former CEO David Wiessman.

David Bachar

In 2003, it was hard to imagine a scenario in which Mega, Israel’s second-largest supermarket chain, would find itself on the verge of bankruptcy. Alon Holdings, controlled by Canadian Mathew Bronfman and Yaakov Shalom Fisher, bought a 78.1% stake in Blue Square, Mega’s parent company, for 1.38 billion shekels ($360 million at current exchange rates).

So David Wiessman, then the CEO of Alon Holdings, planned with complete confidence to create a retail business empire combining gas stations and food retailing.

Twelve years later, the dream is in tatters. Analysts say Mega has a negative net worth, and the company last week asked a court to let it hammer out a debt accord with creditors, which include banks as well as the food companies and importers that stock its shelves.

A week before that it reached an agreement with unions to close nearly a fifth of its stores and lay off 1,000 staff in exchange for handing over a third of Mega’s equity to employees.

Mega has some 1.3 billion shekels in debt, a little over 700 million of which is owed to suppliers and the rest to banks. Alon Blue Square’s share price has plunged 40% since the middle of June.

Moti Kimche

Mega’s rehabilitation plan, which was presented to the court, provides a brief survey on how Mega got into this mess. Some of the reasons were out of the company’s control, such as the surge in the number of supermarket chains  in recent years, growth that far exceeded the increase in Israelis' purchasing power.

But many of Mega’s failings are linked to management, including its huge investments in the You discount brand, which failed to win over shoppers. Efforts to change the company’s image as a high-priced supermarket came too late because management was too late noticing the sea change in consumer habits: Low prices were now king.

But Mega’s decline was largely the story of Wiessman’s failure as a manager.

Iron-handed CEO

Wiessman, who ruled Alon Holdings and Mega with an iron hand until he was dropped earlier this year, was the person who in 2006 bought the AM:PM chain of urban convenience stores for 146 million shekels. Wiessman bought AM:PM via sister company Dor Alon, not through Mega.

But that didn’t make any difference. The fact that AM:PM is open on the Sabbath triggered a consumer boycott of the entire Mega chain and its brand catering to ultra-Orthodox Jews, losing Alon hundreds of millions of shekels in revenues.

When the Israel Securities Authority told Alon to break down AM:PM’s financial results, shareholders learned that any benefit Alon gained from the chain paled in comparison to the losses it sustained by driving away ultra-Orthodox customers, the fastest-growing segment in Israel. AM:PM posted an operating profit of just 5.4 million shekels in the first nine months of 2014.

Another painful Blue Square mistake during Wiessman’s tenure was letting the group accumulate sizeable debt relative to equity. Blue Square paid out 1.5 billion shekels in dividends between 2006 and 2011, including an 800-million-shekel dividend after it bought Dor Alon in October 2010.

Another astonishing step by Wiessman was a series of investments, many of them outright failures. Others demanded large amounts of precious management time; for example, in chains such as Kfar Shashuim toy stores, Vardinon household textiles and Naaman housewares. The free daily newspaper Israel Post cost Mega 10 million shekels a year in advertising in the paper.

When Mega did try to ride a new consumer trend, such as the growing interest in organic food, its effort was flawed. In December 2008, Wiessman bought 51% of Eden Teva Market, Israel’s biggest health and organic food chain, in a peculiar agreement that left control of the supermarkets with Eden Teva’s founder and CEO, Guy Provisor.

Moreover, Provisor wasn’t required to put up his 49% share of the financing in the event of losses at Eden Teva Market. Mega had no influence on how the chain was managed and watched from the sidelines as it ran up a 15-million-shekel operating loss in 2014 and a 54.7-million-shekel net loss on revenues of 405 million shekels.

Another Wiessman step that remains a huge burden on the group is the splitting off of real estate, including 84 stores rented out to Mega, into a new company named Blue Square Real Estate. Before the new company conducted its initial public offering in August 2006, Mega signed an agreement with its new landlord, one that was recently extended through March 2019.

But TheMarker has found that Mega is paying above-market rates for the stores it rents from sister company Blue Square Real Estate. Figures obtained by TheMarker show that Mega is paying as much as twice the market rate for leases on 86 stores it rents from Blue Square.

In Modi’in, for instance, Mega is paying 112 shekels a square meter, compared with 55 and 65 shekels that sources say is typical for the area. And in some cases, it is renting more space than needed.

Blue Square Real Estate, which now trades at a stock-market value of 1.4 billion shekels, generates 78% of its revenues from its rental-property portfolio. But any attempt to have rental costs lowered is complicated by the fact that the landlord and tenant are sister companies.

Now that Mega is downsizing, the fact that it pays high rents will make it even harder for Mega to find tenants.

In addition, Mega employs a mature workforce; the average age is 45 and the average wage costs dozens of percentage points higher than at other supermarket chains. Mega revealed in its court petition for a creditor meeting that its wage costs amounted to some 600 million shekels a year, or 11% of sales. At Rami Levy, Super-Sol and Victory the numbers are 9.2%, 8.4% and 8.9%, respectively.

Fatal error

The mistake that most likely put Mega on the path of a slow and agonizing death was its late arrival and inconsistent response to the appearance of discount chains such as Rami Levy, Victory and Hatzi Hinam.

One reason for the lethargy was a headquarters heavily larded with managers and a big investment in infrastructure, such as its two huge logistics centers, which made it very hard for Mega to survive the price war that developed.

The discount chains are characterized by very lean staffs and low overheads. The large number of brands and sub-brands of stores Mega operated sent consumers an inconsistent message. One thing they did know was that Mega was the expensive alternative, which wasn’t the place to be after the 2011 social-justice protests.

Under the management of CEO Moti Keren, who has also left, Mega tried to change its image and make a splash in the discount arena. The company launched the You chain two years ago, investing some 200 million shekels in refitting stores and advertising. Almost a decade late, the effort stood no chance.

By 2013, Israelis were unwilling to buy into Mega’s new image as a discount chain. It was quickly blown out of the discount market by more experienced players enjoying much stronger reputations. Meanwhile, Mega’s price-cutting to make You a low-cost retailer lost it sales in the tens of millions of shekels.

Avigdor Kaplan, the ex-insurance executive brought in as Alon Holdings CEO to replace Wiessman, is trying to save Mega, but he may well find himself empty-handed, since he has turned down offers to sell You and is sufficing with closing 32 stores under the agreement with unions. The stores to be shuttered are responsible for half the company’s operating losses, but the closings will leave it with just 20 You supermarkets, hardly enough to give it economies of scale or make it a nationwide brand.

It’s possible that if Kaplan had accepted the ridiculously low offers for the stores offered by competitors Rami Levy, Victory and others for some of the You stores, and had closed the rest down, he could have saved the core Mega in the City (Mega Ba’ir) chain. That outfit is still making a profit.