Super-Sol Wakes Up in Fighting Mood

Chain killing off Super-Sol Big hypermarkets, replacing with discount branches.

Five years after launching the Super-Sol Big chain of hypermarkets, the retail giant yesterday announced a reversal. Under the new strategic plan for the next five years, management announced, all 30 of the giant supermarkets will be converted into Super-Sol Deal discount branches. The conversions start on January 4.

At the end of the move, the chain will have no Super-Sol Big and 75 Super-Sol Deal outlet. The cost of the change: NIS 400 million in the first year alone.

Super-Sol (also called Shufersal ) is controlled by Nochi Dankner's IDB group and by the Bronfman-Fisher group. It has the biggest market share in Israel, a share made even bigger by the acquisition of Clubmarket in 2005.

It isn't that the Super-Sol Big format wasn't profitable, insists Rafi Bisker, CEO of the group. "It makes money and profits well. But consumer habits have been changing." People have been shifting to the discount stores and a leading retailer has to change with the times. Marching in place is a mistake, he explains.

Also, while many discount outlets deliberately situate themselves on city outskirts for the sake of low rent, people want them inside the cities. By converting its Super-Sol Big into discount branches, Super-Sol will be meeting the dual requirement of discount shopping and city convenience, Bisker says.

Super-Sol's chief business manager is Richard Hunter. The company has been conducting opinion polls for months, he says, and it found a clear preference for the Super-Sol Deal format. "Eighty-seven percent of respondents wanted a Super-Sol Deal outlet nearer their homes," Hunter says. The aim is for Super-Sol Deal branches to be within a 10-minute drive, at most, for 90% of the population of Israel.

In fact the move already began. In recent weeks the company converted four Big stores to Deal and saw a 20% increase in sales, at least.

The chain learned a lesson from Wal-Mart, which has "good prices all the time," says Hunter. There, almost 30% of the chain's turnover is from bargains. Deal isn't about to become a bargains-oriented chain: It won't have 1,200 constant special deals like Big had, he says. But it will continue to provide 200 to 400 special deals to keep customers happy.

Suppliers not happy

Among suppliers, feelings are mixed. "As market leaders they aren't doing the smart thing," claims a top executive at one of the leading consumer product companies. "Instead of developing Super-Sol as a format with added consumer and marketing value, they're taking the fight to pricing, and there, they're going to lose big time to the private-label chains. We see in their results that they won't know how to sell like Rami Levy and the private-label chains. I think it's going to weaken them in the long run."

On the other hand, the manager of a foodstuffs manufacturer thinks Super-Sol is doing what needed to be done. The Big format had no right to exist any more, he argues. "Consumers are moving to the edges, either neighborhood grocery formats or hard-discount formats. They don't like what's in the middle any more. By the same token, Blue Square is scaling down its Mega hypermarkets format and is converting branches to [discount] Mega Bool."

Mega hypermarkets are down to eight in number, from 32 two years ago. But Blue Square states that it has no intention of abolishing the brand, as Super-Sol is doing to Super-Sol Big.

Sluggish reaction to lightning changes

Abolishing Super-Sol Big is just one of multiple moves by the chain to spur growth in its 5-year plan. The very title of the plan, "Strategy for Accelerated Growth," highlights the retailer's worst problem in the last two years - its growth is nonexistent. Not happening. It can thank conservative strategy in opening new outlets while its rivals expanded aggressively.

Super-Sol's market share eased back 1% to 1.5% in the third quarter of 2010 compared with year-end 2009. Sales increased by a wee 0.3% in the third quarter. Sales per square meter contracted by 1% to NIS 5,644 in the quarter, which is less than rivals such as Rami Levy and Mahsanei Kimat Hinam ("Almost Free", incorporated under the name A.R. Zim Direct Marketing ) which, to drive home the point, announces on its website the opening of a new branch in Nahariya on December 28 and, shortly, one in Matan ).

Not only does the company hope to accelerate growth, but its 5-year plan is a revamp of marketing strategy. Its reactions to trend changes in retail have been sluggish and feeble in view of shoppers' massive shift to discount stores and to private-label chains such as Rami Levy, Victory, Hatzi Hinam and others.

Super-Sol also tarried with opening its Express chain of stores as a counter to competition from kiosks and convenience stores in city centers, which specialize in fast service though prices are high. AM:PM is an example of this, or the Yellow chain of stores at gas stations. Both have been eating into Super-Sol's market share.

In short, Super-Sol is fighting to preserve its leading market share. It means to do so by firing up six growth engines.

The first is to increase floor space by 19%, specifically by 100,000 square meters by 2015. A fifth of that should be online by the end of the first quarter of 2011. At the end of this process, Super-Sol should have 400 branches, up from 254 today. The company has contracts in place for most of that future space, says Super-Sol president Efi Rosenhaus. He also discusses the concern of cannibalization - that one Super-Sol store will eat into sales by another. The solution is to establish branches where there are none, such as Tel Mond and Maaleh Adumim.

"Half the areas where we will open stores have none today," Hunter says. "Obviously, each store launch affects the surroundings in some way, but most of the sales will come from the market, which is growing by 1.5% to 2% a year, and from competitors."

Secondly, Super-Sol means to increase sales per square meter, which has barely budged in the last year from NIS 22,000 a year. It thinks the conversion from Big to Deal can achieve that aim.

Thirdly, the company will get serious about launching its sub-chain of Super-Sol Express stores in neighborhoods and city centers. So far it has 13 branches, mainly in Tel Aviv, which did well enough to persuade management to accelerate expansion. Three more branches will begin operations in the next few months, and 15 by the end of 2011. Its Express stores, with their typically higher prices, offer gross margins of more than 30%.

Hunter mentions the world's leading retailer, Tesco of Britain, as an example and says the discount format has been the biggest growth driver. At the international chains, operating profit of discount platforms is typical of the sector, ranging from 6% to 9% of turnover, he says.

Missing the boat on organics

Super-Sol also wants to close the gap, which is a big one, created between itself and the rivals when it comes to organic foods. Rival chain Blue Square for instance is expecting sales at sub-chain Eden Teva Market to reach NIS 300 million this year.

Eden Teva Market stores stand alone. But to get its bite of organics, Super-Sol is launching 20 "health food" counters inside its existing stores, which it means to brand Green. The idea is to get into the field at low cost.

Apparently, Super-Sol means to compete with the entrenched organic stores through price. "By the end of 2011, Super-Sol will have the biggest number of health-food spaces in Israel, with prices that are 10% to 30% lower than other health food stores," says Hunter. "We believe the move will lead to a change in consumption habits."

Another growth driver is sub-chain Super-Sol Direct, which operates on line. The company means to upgrade the site by the second quarter and hopes to double its online sales by 2015. In the last five years, its online sales grew by 115%.

What will Israel's retail market look like in five years? That's anyone's guess. Hunter's is that Super-Sol will retain the lead while the sector undergoes consolidation. In England, there had been dozens of players and formats in the 1970s, he explains, which is the situation in Israel today. Over time the forces came together and now there are six big chains.

Will consolidation diminish competition? Not in his opinion.