Beefed-up Super-Sol Means to Wrest 5% Discount From Suppliers

The biggest suppliers are expected to kick, the smaller ones to be steamrolled into agreeing

Super-Sol (TASE: SAE) is demanding that it suppliers lower their prices by 5%, on top of the discounts the retail chain, the biggest in Israel, already gets from them.

Market sources relate that its strategy will be to meet first of all with representatives of its biggest suppliers to avoid disputes (which would reach the press). Super-Sol management has already sat down with people from Strauss-Elite (TASE: STEL) and Dudi Ezra of Neto to present its case, say the sources.

Market sources surmise that if the big suppliers cave in, Super-Sol can save NIS 250 million a year, which would certainly improve its margins. The chain's chief executive, Effie Rosenhaus, has undertaken before the board of directors to achieve NIS 270 million in such savings, through supplier discounts, say the sources.

Super-Sol sales consolidated with those of Clubmarket, the bankrupt chain it took over, are expected to reach $9 billion in 2006. Its present cost of sales is 73.7% of turnover. If the suppliers agree to give it a 5% additional discount, it could cut its procurement costs by NIS 330 million, which would lift its gross margin from 26.3% of turnover today to about 30%.

However, some of the discounts it would get would service to finance lower prices at discount outlets Super-Sol Deal. Out of the 253 Super-Sol (and Clubmarket) outlets, no less than 52 have been converted into discount stores.

The chain bases its demand on its sheer bulk. It had been the biggest retail chain before buying Clubmarket and now controls 40% of Israel's bar-coded retail market. the second-biggest chain, Blue Square Israel (NYSE, TASE: BSI), has a market share of about 25%.

Certainly the management believes the chain is entitled to sweeter terms from suppliers: Rosenhaus and chairman Avraham Bigger said so openly in conversation with the press.

But market sources don't believe the suppliers will roll over without a fight. "The smaller ones will have no choice. The medium-sized ones will try to argue, and the biggest ones will compromise on a discount of 1% or 2%," the sources predict.

A Strauss-Elite spokesperson commented that it does not discuss its relations with its customers. A Super-Sol spokesperson commented that it does not discuss its relations with its suppliers.