Israeli Retailers Turn to Online Sales Despite Risk

Shoppers are flooded with ads touting bargains, but most businesses haven’t mastered the economics of online selling. Is Amazon going to show them?

Send in e-mailSend in e-mail
Packages move along a conveyer belt at the Inc. fulfillment center in Robbinsville, New Jersey, U.S., on Monday, Nov. 27, 2017.
Packages move along a conveyer belt at the Inc. fulfillment center in Robbinsville, New Jersey, U.S., on Monday, Nov. 27, 2017. Credit: Victor J. Blue/Bloomberg

When Harel Wizel, owner of the Fox fashion chain, launched the site TerminalX, it ran out of Uniqlo, Urban Outfitters and even Mango and Fox items in a day. Food retailers, meanwhile, say they struggle to fill the orders pouring in, which is why delivery can take a day or two.

But Haaretz has discovered that despite the reports of stampeding shoppers, most of Israel’s online ventures by grocery, drugstore and fashion chains are losing money.

“All are losing money online, mainly on food,” avers Eyal Ravid, among the owners of the Victory supermarket chain. It’s been selling by internet since the start of the year and its site is now responsible for about 4% of the company’s total sales, according to Ravid.

The ability of Israeli retailers to make a go of their online businesses is growing more critical. Israelis are already big online shoppers, but they spend a lot of their budget on overseas websites like Amazon and Alibaba. Exemptions from value-added and customs for orders up to $74 (and from customs for up to $499).

This week reports circulated that Amazon planned to open a local logistic center, which would make it an even more formidable competitor than it is today by being able to offer a wider assortment of products and faster delivery times, although it would have to pay customs and charge VAT.

“Ostensibly online sales are supposed to be on top of existing stores,” Ravid says. Victory collects the items for online orders from six of its 46 branches. Online business doesn’t add to its city taxes, rent or electricity bills, but it’s manpower-heavy, with a high churn rate among workers filling out the orders. “That means zero efficiency, because by the time you teach somebody the job, they leave,” Ravid says.

They also have to maintain a large customer service division: an offline physical store will have one person answering the phone but the online business takes eight. The online business’ costs on wages, cardboard boxes and deliveries are much heavier than offline, he says.

“I estimate that the most efficient chains wind up with a loss of 2% of turnover, and the less efficient lose 5%,” Ravid adds.

Each delivery costs the company almost 40 shekels (11 cents), he estimates, including three shekels per cardboard box and the cost of dry ice. “Factor in that the average online purchase is 550 shekels: we’ve lost 7% on the spot.” On top of which customers may have issues, like broken eggs.

A competitor agrees: “Nobody makes money on internet. The range is from a few that earn nothing to the majority that loses 1% to 3%. I lose money on internet.”

Fashion is first

According to the market research company TASC, 40% of Israel’s online market is Israelis buying from overseas but there are big differences by category. Online fashion sales have grown from 800 million shekels a year in 2013 to 1.7 billion shekels in 2016 and constitute 12% of total fashion sales.

The biggest online sellers to Israelis, with a 60% market share, are the multinational chains: 22% of Israeli online shoppers say they only buy from foreign sites, chiefly through Next, Alibaba and eBay.

In electric appliances and electronics, foreign sites supply 40% of the Israeli online market. In drugs, internet is responsible for 8% of total sales and the online market is shared roughly equally by local and foreign sites.

In January 2017, Super Pharm launched an online business at an investment of 10 million shekels. It’s losing money. “We built a model that isn’t supposed to lose money, and we constantly think how to improve,” says Michael Mitrani, head of digital and innovation at Super Pharm.

“For example, we stress having customers pick up from the branches. Seventy percent of orders are for collection from the branch and only 30% are for home delivery.” They’re working on logistics: finding ways to deliver heavy, large products to customers without losing money.

But even fashion loses money online. “Maybe people will make money by 2023 but right now they’re all losing. Me too,” says an executive at a major chain that’s been selling online for years. Sales on the site are constantly increasing, but as volumes increase even more, the chains should be able to economize on logistics and start to profit, he predicts.

The reason for the losses, says another executive from a major clothing chain that’s been online for years and losing money on it, is heavy investment in operations, and on generating traffic to the site. Physical shops have the advantage of shopper traffic in malls who see the store with their own eyes; online it depends on advertising on Google, Facebook and Instagram and various marketing ploys.

“It’s like building a totally new business. We invested about 10 million shekels and turnover is just 3% of the group’s sales,” says the executive, who asked not to be identified.

All the groceries charge for delivering orders made over internet, and it isn’t cheap. Super-Sol Online, Rami Levy, Mega, Tiv Taam and Victory charge 28 to 30 shekels (which can drop depending on the size of the order). Super Pharm offers home delivery for 29.90 shekels for orders up to 300 shekels; collection from the branch within three hours for 20 shekels; or collection from the branch within 24 hours for free (applicable to orders over 100 shekels).

Clothing chains charge less. Castro offers free delivery for orders of 99 shekels and up; Golbary and Renoir charge 15, or nothing for orders from 299 shekels. TerminalX Fox has free delivery within 24 hours. Orders to certain remote places may take up to three business days, or be sent to a collection point. Al Srad handles deliveries, returns and substitutions for free within 24 hours.

However, realizing that something wasn’t working, a bunch of chains teamed up and formed multi-brand sites. Al Srad offers about 100 brands on its site, including Factory 54 to Adidas to Tommy Hilfiger and others.

The company hasn’t invested in marketing the site and doesn’t expect its online activity, launched just last week, to make money for a couple of years, says one of its owners, Roni Irani, but during that time he anticipates sales of 80 to 100 million shekels a year. Once it starts selling abroad, at some point, he expects its fortunes to blossom.

Their failure is the Israeli chains’ own fault, says Dedi Schwarzberg, CEO of Adika and Golf online: “The players in Israel don’t really understand how to work in e-commerce. Castro launched a site years ago but they treat it like another shop in the physical chain, as a way to bring people to stores. They originated offline and are finding the online transition hard. Online is another speed, different prices, completely different marketing. It makes me laugh to see the fashion chains offer the same bargains online that they do in the physical shops, for instance, buy 350 shekels worth of stuff for 250. It doesn’t work that way.”

No choice

Israeli retailers agree however that they have to keep at it, for the sake of the future, even if not many expect profit in the foreseeable future. A survey recently conducted for Haaretz by the consultancy Czamanski Ben Shahar among 1,500 Israelis found that 15% of their monthly outlay on clothing is online, up from 13% in 2015.

In the first half of 2016, online food sales constituted 4% of total retail food sales, according to the TASC survey, a figure expected to double by 2020.

“We know that our children’s generation will shop online and we want to be ready,” explains Victory’s Ravid. For the nonce, they’re subsidizing the activity. But even though the investment is for the long-term, he warns – the food retailers will have to jack up online prices, at some stage. “You can’t provide service without charging for it,” he says simply. “When prices rise, the operations will earn money.” A competing retail executive who declined to be named agreed with every word.

Shufersal is placing its hopes on automated and semi-automated warehouses that collate the online orders, collecting hundreds of items each hour, compared with human workers who collect dozens of items in that time. Shufersal’s online sales constitute 11% of turnover, says the company’s CEO, Itzik Abercohen – and he adds that it is profitable.

Could efficiency make the companies profitable sooner? “We’re going to turn profitable within less than a year,” claims one fashion executive. “We used to pour out money on packaging, assembling the boxes ourselves, and they’d sit in piles in the warehouse, creating a logistical logjam. We outsourced the packaging. They can pack 1,000 deliveries an hour, while it would have taken us five days. It also saves me a lot of money. Before I only worked with one delivery company, to the home. Now I enable delivery to lockers and collection points.”

Why maintain one’s own fleet, anyway, with drivers and mechanics? Outsourcing delivery is one answer, and a way to focus one’s attention on the company’s core business and how to make it profitable.

Click the alert icon to follow topics:



Automatic approval of subscriber comments.

Subscribe today and save 40%

Already signed up? LOG IN


Palestinians search through the rubble of a building in which Khaled Mansour, a top Islamic Jihad militant was killed following an Israeli airstrike in Rafah, southern Gaza strip, on Sunday.

Gazans Are Tired of Pointless Wars and Destruction, and Hamas Listens to Them

Trump and Netanyahu at the White House in Washington, in 2020.

Three Years Later, Israelis Find Out What Trump Really Thought of Netanyahu

German soldier.

The Rival Jewish Spies Who Almost Changed the Course of WWII

Rio. Not all Jewish men wear black hats.

What Does a Jew Look Like? The Brits Don't Seem to Know

Galon. “I’m coming to accomplish a specific mission: to increase Meretz’s strength and ensure that the party will not tread water around the electoral threshold. If Meretz will be large enough, it will be the basis for a Jewish-Arab partnership.” Daniel Tchetchik

'I Have No Illusions About Ending the Occupation, but the Government Needs the Left'

Soldiers using warfare devices made by the Israeli defense electronics company Elbit Systems.

Russia-Ukraine War Catapults Israeli Arms Industry to Global Stage