Israelis Love Low Prices, but Love Brands More

Despite its appeal of cheap no-name products, Iri Shahar's supermarket chain Ehad has failed.

The Ra’anana branch of the Ehad supermarket, January 29, 2015.
The Ra’anana branch of the Ehad supermarket, January 29, 2015. Tomer Appelbaum

Iri Shahar learned the hard way: Israeli shoppers like low prices at their supermarkets, but they like their brands even more, and they aren’t so ready to give them up.

With great fanfare, Shahar opened the first of his Ehad supermarkets at the start of 2015. Modeled on the German deep-discount chains Aldi and Lidl, he would offer low prices in stores stocked with products by manufacturers that consumers may never have heard of or ignored in favor of the category leader.

But Ehad, which Shahar promised would add a new store every three months, never grew past two supermarkets. The first, in Ra’anana, closed two weeks ago, and the second, in Netanya, is due to be converted into an ordinary supermarket in the next few weeks.

“Unfortunately, the Israeli consumer proved that he can’t live without brands. It’s very disappointing, but that’s who we are,” Shahar said in an interview with TheMarker.

“Our country knows how to go out and protest but in the end fails. Israelis shout, but they like those who abuse them. If they raise the price of cottage cheese tomorrow by a shekel, maybe they’ll go out and protest but they’ll continue to buy it,” he said.

Shahar was referring to the social justice protests of 2011, which were ignited by Tnuva’s decision to raise the price of its best-selling cottage cheese. The protesters’ agenda quickly widened to the generally high cost of living and a host of other issues, prompting Prime Minister Benjamin Netanyahu to form a committee to propose reforms and putting fear into the hearts of consumer-goods makers and retailers.

It was against the background of a changing consumer environment that Shahar, a former CEO of the retail group Fishman Chains, came up with the idea of Ehad (“One” in Hebrew) and enlisted Georgian-Israeli billionaire Yitzhak Mirilashvili as a backer.

Ehad’s shelves would sell its no-name products at 10% to 20% less than equivalent items at Israeli discount chains. The chain did offer some name-brand products, like imported chocolates, but only about 5% of the stock, which is the mix Aldi uses.

The product mix didn’t attract shoppers, Shahar said, so he gradually increased it to 17%, close to the 25% mix that Lidl uses.

“We took about 250 leading products from Osem, which gave a big push to sales. I bought Coca Cola from wholesalers abroad and imported it — and sales doubled inside six months and reached a record of about 2.5 billion shekels [$650 million] in the two stores,” Shahar said.

But Mirilashvili wanted to move over to a more standard supermarket format, Shahar left the business and the last remaining Ehad will be ending its no-name policy.

What consumers want

Shahar says he has gained a lot of knowledge about the Israeli consumer in the 14 months since Ehad was launched.

Shoppers were content to buy dairy products from Israel’s distant No. 3 dairy, Tara — although the company eventually cut off the supplies to Ehad when it won a contract to make private label products for Super-Sol, the biggest supermarket chain. But Shahar found there are some products the Israeli consumer can’t live without.

“He requires that a supermarket has Coca Cola, some Osem products, mainly Bamba and Bisli, even though we offered similar snacks of excellent brands,” he said, referring to two immensely popular salty snacks for children. “Also, consumers are still fixated on butchered meat even though from a veterinary-health perspective, packaged food is better. Shoppers like to see a man cutting the meat in front of them.”

Shahar concedes that one reason for Ehad’s fall was the change in Israeli shopping. Consumers have become more price conscious and supermarket chains have responded with lower prices and frequent sales. He estimates that about a fifth of all items at a typical supermarket these days are on sale.

“The consumer sees a sale on a well-known product and says to himself, 'Wow, it usually costs eight shekels and today it’s only five shekels, I’ll buy it.' He doesn’t think logically — 'Wait, how can the product originally be eight shekels? Even when it’s five shekels, the manufacturer is making a profit.' It’s disappointing but that’s the reality.”