Rami Levi Tries Out for the Big Leagues

Discount grocery king has eye on 50 Mega outlets, but expansion poses risks.

When Rami Levi arrives at capital market conferences dressed simply and without a slide representation, his standard opening line is: "Ask me questions." He tells the assembled investors and analysts, "You know that I don't know how to talk."

Maybe he doesn't speak the language of the Tel Aviv Stock Exchange, but this week he put into motion a giant deal with Dudi Weissman to buy scores of Mega branches.

Levi is deciding whether to purchase 50 out of 70 Mega branches. Today, his chain of Rami Levi supermarkets operates just 24 (two of them through franchises ) and he is regarded as the No. 3 player in the supermarket business in terms of sales. In first place, of course, is Super-Sol, which operates 267 outlets and has a 21% market share. In second place is Mega, with 200 stores and an 11.7% share.

"I succeed because I create demand," Levi said this week. "I didn't have any business plan when I started the businesses with a flagship in the Jerusalem market, but I worked with the shopper in mind and I created demand for my business. Once I created that demand, I expanded. It was that simple. "I work around the clock," he said, "except for Shabbat, and surround myself with friends and family. Eighteen family members work for me."

But Levi does not just rely on family and hard work. His entire business strategy relies on his man-of-the-people image, that of someone from the city's Gilo neighborhood and Mahane Yehuda.

He reaches decisions based on calculations made on his Casio and arouses a sleepy branch by announcing that shoppers at cash registers four and six can leave without paying. He sells fresh chickens for NIS 1.90 a kilo, matza at a steep discount for Passover and the same for hummus and kebab on Independence Day. And he doesn't forget to tell the media about it, the better to unnerve the competition.

He identifies with the middle class, but in fact left it long ago. Today he is one of the richest people in Israel, with a fortune of more than $1 billion. His stock market holdings alone are worth more than NIS 900 million and his private real estate holdings are estimated at NIS 300 million and NIS 500 million. Since Rami Levi went public, he has collected NIS 230 million in dividends.

Levi and his wife Adina, the company treasurer and a board director, make handsome salaries. Between 2001 and 2007, the cost of his compensation to the company was NIS 23 million, and hers was NIS 12 million.

Changing of the guard

The dialogue between Levi and Weissman does not reflect just the strength of the one and the weakness of the other, but a changing of the guard at Israel's highest echelons. The tycoons are wrestling with heavy debt and giving up their pride of place while hungry, ambitious new entrepreneurs come in.

Even if the deal with Weissman does not go through, what is clear is that from Levi's perspective he has risen in status. He has little debt, NIS 200 million in cash and anhuge deire to be No. 1. He is always looking for new ways to expand.

Meanwhile, however, Levi is anxious. "I didn't sleep well last night," he said. "I woke up at 4:30 in the morning with a lot of disturbing thoughts and I couldn't get back to sleep," he told TheMarker a day after the deal was announced. Under the circumstances, a night of insomnia was understandable.

Even Levi realizes that rapid growth via a major acquisition is not a simple thing to execute. To make it in the big leagues, he will have to make organizational changes and take on much bigger responsibilities.

His company was first listed on the stock exchange five years ago with just five stores but a very high rate of profitability. He was greeted coolly.

Rami Levi shares fell sharply and only after a year-and-a-half did they begin to climb on the back of strong earnings and an expanding branch network. It became a hot stock. Since July 2007, the stock has jumped 260%. During that time, Alon Blue Square - Weissman's company - fell 80% and Super-Sol was pretty much unchanged.

Rami Levi's market capitalization of NIS 1.5 billion is roughly three times that of Alon Blue Square, which has more branches as well as a property arm and energy interests. Super-Sol has a market cap of NIS 2.2 billion.

From the perspective of one year, Rami Levi's market performance is less impressive - zero growth, reflecting the troubles of the food retailing sector after last summer's social protests. But then again, Super-Sol dropped 40% and Alon Blue Square 70%.

Rami Levi finished 2011 with revenue of NIS 2.2 billion and a net profit of NIS 94 million. In fact, his gross margin is lower than his competitors because of his strategy of discounting and aggressive sales.

But thanks to his low-cost structure, operating profits are high - 5.5% versus 3.6% for Super-Sol and 2.6% for Blue Square.

Levi has tried for years to enter new businesses. IN 2011, he entered the cellphone market and today counts 70,000 subscribers. He sells insurance policies at his supermarkets and in recent months allowed Bank of Jerusalem to set up branches in them.

"I'll enter any business where I think I can serve my consumer," he said.

But none of these new ventures has marked a breakthrough for Levi, not even the cellphone business. They are principally aimed at enhancing the Rami Levi brand as the place for the consumer to buy goods and services at low prices.

Alon Bloue Square offered 50 branches for sale, but Levi will probably have to give up on 30 of them because they operate in the same areas as his existing stores. He wants to avoid cannibalizing his existing business. He also has to worry about whether he can maintain the razor-thin management and cost structure.

In the past, Levi has said he can manage at his current cost structure so long as his network doesn't grow past 50 outlets. But growing so quickly with his new acquisitions will require investment information systems, a bigger purchasing operation and perhaps the building of a logistics center. He will have to take on new managers beyond his old and trusted team.