Will the Shopping Bubble Burst? Israel's Big Fashion Chains Grow Bigger

Top three now control 30% of all Israeli apparel sales, and their share is forecast to grow

Dizengoff Center Mall in Tel Aviv
Dizengoff Center Mall in Tel Aviv Eyal Toueg

The casual shopper prowling Israel’s malls might be under the impression that the fashion business is highly competitive. Every shopping venue, it seems, has a Fox, Castro, Gold, Zara, Pull&Bear, Hamashbir Lezarchan, an H&M and a host of other local and international brands.

But the truth behind the glitzy store windows is very different. About 30% of all apparel sales are controlled by just three groups, although the market concentration is disguised because each won multiple labels.

Fox-Weisel has no fewer than 15, which include Fox, Fox Home, Mango, Charles & Keith and Aerie Lingerie. Castro-Hoodies counts those two brands as well as TopTen Accessories and Urbanica. Gottex Group operates stores under its own name as well as Zara, Zara Home, Pull& Bear and Nike. Each group has about 9% of the market.

Another four groups – Hamashbir, H&M, Al-Srad and Golf – control another 15%. The rest is split between smaller chains and mom-and-pop shops.

The market concentration is only expected to get worse as the advantages of bigness grow and competition from online sales shrinks the pie. The market research firm Czamanski Ben-Shahar predicts the big three will be up to half the market in another five years.

Shopaholics
Share of all turnover
among all Israeli shopping centers.*

The big chains can’t get better deals from shopping mall landlords than from smaller ones because they bring in traffic. They get direct financial aid, reduced rent, long-term contracts and the best locations.

Concentration in the apparel sector is a new phenomenon in Israel. It began a few years ago amid a wave of global brands entering the Israeli market and gave local retailers a run for their money. The answer was to get bigger.

Fox was the first to act, buying smaller chains and acquiring its own international labels like American Eagle Outfitters and Foot Locker. Castro quickly followed suit, buying a 26% stake in Hoodies and venturing into non-apparel with the French Yves Rocher line.

Others have also entered non-fashion retail, the most popular new segment being houseware. Castro-Hoodies recently announced it had acquired rights to the Italian cosmetics chain Kiko and will open scores of the shops.

The giants of the industry not only expanded their brands but expanded the floor space of their existing stories as well.

Larger sizes
Retail apparel market shares by turnover in 2017

“The first Castro store that opened at our mall was less than 100 square meters,” said a manager at one of the big mall operators, who asked not to be named. “Today Gabi Rotter [the principal] is expanding his stories from 350 square meters to 1,200. Zara began with 1,200 square meters and today it doesn’t open stores of less than 2,000 to 2,500.”

The big chains have shifted the balance of power between them and the mall operators, which once were able to dictate terms thanks to the business concentration that has long existed in that industry: Azrieli Group and Offer (Melisron) control 35 malls, less than a 10th of Israel’s total, but accounting for a third of total mall turnover.

“Until recently the malls controlled everything, but today the big fashion chains are often the ones to dictate terms to the malls,” said one mall executive. “They control huge amounts of floor space in the malls in Israel while the malls have been undermined by the plethora of new shopping centers and excess floor space in some areas.”

The executive said Fox is so big and has so many brands it could build its own mall and populate it just with Fox brands. He said a retailer like Gottex could be offering to take 7,000 square meters in a new mall, enough to justify the mall owner giving it millions of shekels in subsidies, rents based on 7% of turnover rather than the industry norm of as much as 15%, and a long, seven-year lease.

Both the mall owners and apparel chains face the same problem of growing competition from online buying, mainly from big overseas sites like Amazon and Alibaba. A survey by TheMarker of 1,500 Israeli shoppers found they were spending 15% of their monthly apparel shopping online.

For the fashion industry, the figures are worse: Czamanski Ben-Shahar estimates that of 19 billion shekels (about $5.4 billion) of apparel spending annually, as much as 3 billion shekels was spent online. Plunging airfares have enabled more Israelis to travel abroad and they spent another 1.1 billion shekels shopping for clothes when they are abroad.

“All the players are fighting over less and less money. When the big chains are growing stronger, the medium-sized and small chains are left with the crumbs,” said the firm’s principal, Tamir Ben-Shahar. “We have twin concentration – in the shopping mall groups and now with the fashion chains. In a situation like that there’s no chance [for smaller chains] to survive.”

Sybil Goldfiner, who co-owned the small Comme il faut fashion chain said her store at the Ramat Aviv Mall, which is part of the Ofer Group, loses money because of high rent. “It absurd that they demand from the smallest [fashion chains], whose situation is the hardest, the highest rents of all,” she said.

Small groups are fighting back by trying the play the expansion game, too. H&M is bringing Poland’s LPP to Israel, which includes the Reserved label.