Taking Stock / Blue Mood and Super Sad

We used to call Supersol the Recanatis' bank. In fact, it was better than regular banks because it had no doubtful debts. The cash registers rang on, suppliers bent like weeds in the wind, customers paid up, margins widened, and cash flow remained higher than profit.

Its arch-rival, Blue Square Israel, was one of the most successful weighty stocks on the Tel Aviv Stock Exchange. Within a decade, the company's market cap was 10 times higher than on the day it went public, making Jacob Gelbard one of the most respected managers around.

Yes, those were grand days for the great supermarket chains and their managers. Days of creamy profits, mushrooming growth through the addition of new branches, bloated managements. Those were grand days, and they will never return.

For three years, the large supermarket chains have been slithering down a slippery slope. For the first two years, some people mistakenly blamed their shrinking fortunes on the intifada and recession. The economic shocks Israel underwent, which hit hard at private consumption, blurred the real picture: the structural change in the retail industry had nothing to do with the recession. As the economy recovered in the last year and private consumption rose, the truth came out. Israel's supermarket sector had entered a new era: an era of competition.

The people behind Israel's largest companies loathe regulation in general and the antitrust commissioner in particular, and for good reason.

Regulation can have astonishing effects in certain sectors.

Two-trick pony

In September 2001, Antitrust Commissioner Dror Strum announced he would not allow Blue Square to buy the private supermarket chain Haviv.

During the 1990s, both Blue Square and Supersol had bought any number of small marketing chains, and Strum's announcement didn't attract much attention. Haviv was a small chain turning over maybe NIS 200 million a year, and many saw the ruling as petty. The commissioner would do anything for a headline, they sniffed.

But the commissioner spelled it out to the giant retailers: it was not a whim. From that point on, he clarified, he wouldn't let the big chains buy any smaller ones, or large private stores. And that ended an era of "swallow the competition and raise prices some more."

Until Strum put a stop to it, the model had been to open a few stores, grow fast, annoy Blue Square or Supersol, and let them buy out the pest. Eli Lahav became a multi-millionaire by doing that trick twice: he set up two small marketing chains, selling one to Supersol and one to Blue Square.

Strum's decision to make the giants stop buying was a watershed, and the smaller chains had to find a new model. Their job was made easier by the fact that Supersol and Blue Square are bloated giants crammed with expensive management echelons who respond sluggishly and work with suppliers who have been nursing grudges over years. The market was dying for competition to arrive.

Today's business model is not to be sold to the giants: it's to create a strong, efficient business that offers more attractive prices. Zaki Shalom did it with Hetzi Hinam and so did a dozen other entrepreneurs who brought a new culture with them: the culture of discounts.

Lower that price!

Four years after Strum put his foot down, the process is reaching new heights. The great Blue Square - Supersol duopoly realized that if it didn't want to crumble, if it wanted to remain relevant, it had to play by the new rules.

The new rules state that customers won't settle for logos or television campaigns any longer. They want a lower price and then an even lower one. It's nice if the store is clean and attractive, if service is excellent, and if there's convenient parking and location. But if your prices aren't right, forget it.

The results are palpable throughout the retail industry. Supersol has become mainly Supersol Deal, Clubmarket has become Empire, and the Blue Square manager told Haaretz he was considering selling bread and milk at a loss to drive the market nuts.

If we'd asked the Blue Square or Supersol managers five years ago whether the market was competitive, they'd have wailed, "cut throat." In practice, competition only arrived after the regulator stepped in and put a stop to eating the competition alive.

The results of the change are evident in the companies' financial statements. Five years ago, Israel's big supermarket chains were among the most profitable in the world; now their earnings have been halved. Since Israel's supermarket chains lag behind their foreign peers, such as Wal-Mart and Tesco, in logistics and inventory management, their profitability is substantially inferior.

Now let your imagination take wing. Imagine what would have happened to the banking or cellular or energy or electricity or shipping sectors in Israel if there had been genuine competition.

Even more exciting: think how our economy would look if the government had the horse sense to allow competition and free market principles into the vast world of public services.

That is enough daydreaming for one morning. We have to run to Mega; they're selling diapers for NIS 33.99 this morning.