Supermarket Chains: A Retrospective and Forecast for 2007

Consumers can expect more price wars, better service and more supermarket branches - even in urban locations.

"The number of private supermarket chains will decline, and the big chains - Super-Sol, Blue Square and Clubmarket - will increase their market share," predicted Super-Sol CEO Ephraim Rosenhaus at the kick-off of the supermarket Super-Sol Deal.

The ensuing price wars contributed to the collapse of Clubmarket, which was purchased by Super-Sol, helping the latter establish itself as the leading supermarket chain in Israel.

However, private supermarket chains have neither disappeared nor declined in Israel.

Market share figures for the past two years, compiled by the ACNielsen market research firm, indicate that the private supermarket chains' market share in 2006 grew by over 2 percent, while that of Super-Sol and Blue Square declined by 1.5 percent.

For anyone who thinks 2 percent is not much, the shekel value of that market share was enough to prompt Rosenhaus to declare war. The Israeli food market is estimated at NIS 37 billion annually, with the supermarket chains attracting NIS 26 billion of that sum. Super-Sol paid about NIS 800 million for Clubmarket's clientele, which at the time of the chain's collapse was worth some NIS 3.5 billion a year. Despite the large chains' heavy investments in marketing and discounts, aimed at offering consumers the lowest-priced shopping cart and reducing the private chain's market share, the public is spending an additional NIS 500 million at the private chains.

Super-Sol has had a busy year, launching both the Super-Sol Big and My Super-Sol chains, completing the strategic plans for marketing a single house brand at all three chains, and launching the house brand itself. Such a multifaceted, concentrated effort is unprecedented in Israeli retailing. In addition, Super-Sol's increased market share enabled it to pressure suppliers into accepting preferred terms. The chain also squeezed the less powerful suppliers and sidelined their products, to make room for the house brand.

A new reality

The suppliers were forced to cope with a new reality, in which they had little room to maneuver against the leading market player. Even so, despite Super-Sol's increased power, in a market in which almost 80 percent of the products are provided by a dozen suppliers, Super-Sol also realized there were limits to its demands.

In the past two years, Super-Sol has grown considerably, thanks to the acquisition of Clubmarket; and the chain's revenues have grown even more. Blue Square has also broken its own efficiency and profit records. Even so, in the market share department, it seems that Rosenhaus has spent the past two years just treading water. At the end of 2006 the two big chains had a combined market share of 62.8 percent, compared to 64.3 percent at the end of 2005. The independent chains (including Tiv Ta'am, Rami Levy Shivuk Hashikma, Abba Victory and Co-op Jerusalem) increased their combined market share to 19 percent, up from 17.3 percent in 2005. Hetzi Hinam, which has five branches in the coastal region from Petah Tikva to Rishon Letzion, also increased its market share in 2006, from 5.1 percent to 5.5 percent.

Two main reasons

How did the private chains manage to increase their market share, despite the price wars declared by the big chains? There are apparently two main explanations. Firstly, with Clubmarket out of the picture, suppliers began currying favor with the private chains, helping them to retain their market positions and the balance of power between them and the two big chains. Suppliers also found it easier to negotiate and close special deals with the private chains and still make a reasonable profit.

The second reason is harder to prove - that consumers prefer the private chains. Perhaps shoppers steer clear of the big chains out of habit, perhaps out of a desire to support "the underdog," or because they do not believe the big chains' "lowest price" and "mega-special" slogans.

The private chains usually have only a few branches and were initially opened by local entrepreneurs who prospered with their first outlet and then gradually became a dominant force in their region. Their clear advantage when the first opened was the low prices they offered, making them a cheaper alternative in the days before Super-Sol Deal and the big chains' discount subsidiaries.

Partially correct prediction

There are also administrative differences. The private chains do not have multiple vice presidents - just the CEO, who makes all the decisions: from closing deals with suppliers to allocating advertising budgets and devising the special offers. Thus the private chains' operating expenses are significantly lower.

Rosenhaus was not completely off the mark in early 2005. He was right about their being fewer chains in the future. One branch at a time, the larger private chains have swallowed the smaller ones. Super-Sol was also forced by the Antitrust Commission to sell some of Clubmarket's branches to the private chains. These acquisitions by the private chains have naturally contributed to their all-over growth, and some of them are now aiming to be Israel's third largest supermarket chain. This effort will apparently dominate the supermarket chain landscape in 2007, as each chain builds new branches and tries to muscle in on the other's territory, all the while nibbling away at Super-Sol and Blue Square's market share.