Pigs in Clover

It was downright hilarious to watch the managers of the big marketing chains, and manufacturers, reacting to the news that Arcadi Gaydamak was buying Tiv Taam.

Gaydamak, as usual, delighted in dropping a bombshell or two, stating that Tiv Taam would stop marketing pork products, and that he meant to massively expand its reach by opening new branches. With a few sentences, Gaydamak completely gutted Tiv Taam's strategy, replacing it with something new.

Dan Propper, leader of Osem (TASE: OSEM), was openly horrified. Roni Kobrovsky, president of Coca Cola Israel, squealed like a stuck you know what. Efi Rosenhaus of rival supermarket chain Super-Sol (TASE: SAE) almost choked.

These aren't the rules of the game that they know. They had no experience with a provocateur like Gaydamak. They had become used to having a retail sector that forged ahead steady as an ocean-liner on quiet seas, after the trauma of Clubmarket's collapse.

The last thing that these sated gentlefolk wanted swimming in their puddle was a voracious shark with deep pockets, forcing them to rethink their strategy.

Much has been and will be said about Gaydamak. His considerations are clearly not confined to the purity of dollars and cents: there is an element of achieving political and social clout through his acquisitions and philanthropies, while meanwhile the French police are clamoring to question him over alleged money-laundering.

But leaving those aspects aside, let's look at the Tiv Taam deal from a purely business perspective. The Gaydamak takeover could have enormous impact on Israel's retail sector.

Clubmarket had been Israel's third-biggest chain after Super-Sol (1) and Blue Square (2). Ultimately the trustbuster let Super-Sol buy it, buttressing its status as the biggest player with some 40% of Israel's retail market.

None of the little chains, such as Tiv Taam, Hetzi Hinam or Rami Levy was positioned to move out of the group jestingly called "the fourth chain" (all together) to take Clubmarket's place as No. 3. 

Any of them could, with investment in expansion, but none leaped to the challenge, because the only way to take on the Big 2 is through guerrilla warfare. Judicious branch launches, ultra-lean costs structure, policies regarding price and products to stand out from the others - that's the way to win customers from the deep pockets of Nochi Dankner (Super-Sol) and Dudi Wiessman (Blue Square).

To take on the Big 2, somebody would need not only a rock-solid concept (prices, products, unique customer experience) but also deep pockets too.

Tiv Taam has a rock-solid concept, which Gaydamak is about to throw out. He has deep pockets, so he has room to play with trial and error. He could definitely drag the entire sector into a price war, involving frequent changes in strategy.

And that is what terrifies the manufacturers. They're still licking their wounds from Clubmarket's implosion. But whatever they say, their real fear is not that Tiv Taam will collapse and leave them holding unpaid bills (this time they'll get better collateral). No, their real fear is that competition between the retailers will turn feral, forcing the retailers to squeeze the food manufacturers for better prices, which will hurt their profits and executive bonuses too.

Removing pork from Tiv Tam is a relief for the pigs. But Gaydamak's entry to Tiv Taam is a very confusing day for capitalist piggishness, which doesn't like competition, not at all.