Suddenly, Discount Stores Are Dressed for Success

Cut-price fashion thrives, high-end retail looks threadbare as middle class consumers rein in spending.

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It used to be that in order to get great deals on clothing, you had to paw through piles in the open-air markets, sort through shelves in the cut-rate stores or resort to buying basics in the supermarket.

No more. Dozens of large, well-designed discount stores with roomy dressing rooms and smiling sales associates offer such finds as jeans for NIS 39, pajamas for NIS 20 and a matching top and bottom for the preschool set for just NIS 15. The discount clothing sector, also known as the "bazaar market," is thriving.

"Over the last year, as a result of the cost-of-living protests, we are seeing the middle class beating a path to our stores," says Eyal Haddad of the Selection Fashion Warehouses chain.

"If once only people from neighborhoods within the city shopped at our Be'er Sheva stores, today people also come from Omer, Meitar and Lehavim," he says, adding, "People are sensitive to prices and apprehensive about the future. They do the math and realize there's no reason to spend NIS 300 for a designer label when they can buy the same thing for NIS 50."

Haddad founded the chain, which now has 20 stores, in 1999 together with his brother Yaniv. They have doubled the number of stores since 2008. Three were opened in the last year alone, and two more stores are scheduled to open by the end of the year. At a time when mid-price and premium retailers are reporting declining sales in the wake of the social protest and the economic slowdown, Selection reported a 12% rise in same-store sales over the past year.

"Discount clothing stores have had a crazy magnetic pull in the past year and a half, because the market went in the direction of smarter buying and reduced spending," says Hai Galis, vice president of operations at Big Shopping Centers, which operates 14 shopping centers in Israel.

"These stores offer very good merchandise at very low prices," Galis says, adding, "These stores are very important to the [tenant] mix, and in every center we have one large store of this kind. All sorts of people come, and even those from economic levels that in the past wouldn't have come near these stores now think it's completely acceptable - because of the social protest and the change in awareness, alongside the improvement in the appearance of these stores," Galis explains.

Taking over the industry

A survey carried out by Gil Harlap, an analyst at Czamanski Ben Shahar and Co., corroborates the observations of Haddad and Galis: In the past three years, 100,000-150,000 square meters have been added to the sales area of Israel's discount clothing market - a 50% increase. The consulting firm estimates that an additional 75,000 square meters will be added in the next two years, 20%-25% more than the floor space today, or more if the trend increases.

Czamanski Ben Shahar and Co.'s figures indicate that the discount market is set to take over the clothing sector, which takes in around NIS 11 billion a year. There are around 2,500 discount clothing stores in Israel, many of them small, and new players enter and exit the market all the time. Every day, a number of stores of up to 4,000 square meters each open around the country. The discount sector represents 28% of Israel's clothing market, with an annual turnover of around NIS 3 billion. Including the low-price international chains such as H&M, Forever 21 and Payless Shoes, the discount fashion market represents 33% of the total, compared to 20% - if that - just two years ago.

The mid-price market, which includes such chains as Castro, Fox, Renuar and Hamashbir Lazarchan, still represents 62% of the market, with annual turnover of around NIS 6.9 billion. The premium segment, which includes chains like Nautica, Factory 54 and Bebe, represents 10% of the overall fashion market.

The hallmarks of the discount clothing stores are low prices, non-name-brand items and reasonable quality. Most of the stores are large, located in industrial areas and power centers and only rarely in shopping malls.

"In the past two years the shopping experience in the discount malls has changed," says Czamanski Ben Shahar and Co. CEO Tamir Ben Shahar. "If in the past the feeling was of an open market, today the discount chains emphasize the shopping experience and invest in store design," he says.

Industry figures say upwards of NIS 2 million is spent on opening a new store, and also claim that the quality of the clothing is generally comparable to mid-price chains.

"Most of our merchandise comes from Chinese factories that also manufacture for the other companies. However, we offer less trendy and more basic clothing, like sets for preschool, tricot, jeans, sweatsuits and the like," says Pinhas (Pini ) Partok, an owner of Zebra Fashion Store House, which has 18 branches.

The discount stores can offer prices that are half or less of mid-price stores mainly by keeping costs low. Partok says he won't pay more than NIS 90 per month per square meter, or more than 10% of the take in management fees, and notes that only eight people work at company headquarters. In addition, he says, "We don't pay tens of thousands of shekels to celebrity spokesmen, instead using B-list models, and we don't spend millions on advertising."

Selection operates along similar lines. "Our gross profit is low, at around 34%-36%," says Haddad, adding, "By way of comparison, Fox and Castro have gross profits exceeding 55%. The key is low operating expenses, low rent and a small headquarters," Haddad says.

Zebra stands out from its discount competitors in that it has mall stores. Just this week, the chain opened a 2,000-square-meter branch in Krayon, in Kiryat Bialik, but as Partok explains, "We don't get a central location in a mall. However, we receive very similar terms to what we get in industrial zones and other places. The shopping malls today recognize there's a demand. Ten years ago customers were embarrassed to be seen walking around with our shopping bags. Today people feel they're being wise consumers if they buy from us and pay half the price of Fox," says Partok, who cites a 9.5% rise in same-store sales from the start of the year.

Local discount chains, like their higher-priced counterparts, are feeling the pinch from the entry of international chains such as H&M and Forever 21, whose lower prices forced mid-price chains like Fox and Castro to cut prices and hold earlier end-of-season sales.

The global chains, Partok says, "sell fashion to young women, but you won't see them printing school logos on shirts" for school uniforms or selling other basic items. Nor, Partok says, do the international chains open stores in non-central locations or in communities such as Ramle, Modi'in or Nahariya.

Eyal Haddad of Selection Fashion Warehouses: Wider appeal.Credit: Ilan Assayag



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