Taking Stock / Why Sagis Left Supersol

After 4.5 years as president of Supersol (NYSE, TASE: SAE); after taking home NIS 15 million in salary, bonuses and options; after signing eight months previously a new employment contract that granted him another bonus of NIS 2 million if he stayed at the company for two more years, Ami Sagis got up and walked off last week, abandoning the supermarket chain and leaving its chairman, Dalia Lev, livid.

Sagis doesn't like media attention. He doesn't like to chit-chat and doesn't want to expound on his motives. But we can hazard a pretty safe guess at his secret motives. At the last second, Sagis is abandoning the sector that began to crash a year ago and is likely to rocket downhill even faster this year.

The year 2003 is going to be an ugly one for Supersol, Blue Square and most of the retail sector - and would have been for Sagis himself too. He spent most of the last couple of years building his reputation as Supersol's savior, and was commensurately rewarded by its board and the press. He doesn't want to be there when the crunch comes and explanations are required.

Less spending by households

Supersol's profits collapsed in the last couple of quarters and are likely to implode even more in the fourth quarter of 2002 and the first of 2003. The trouble is hitting in every direction.

Firstly, food consumption per capita has been eroding for years. The marketing chains have been saving themselves by increasing market share. But their growth halted last year, and the recession began to gnaw away at same-store sales. This year, as unemployment widens, the trend can only worsen.

Secondly, there's a new fashion in Israel: Don't be a sucker when you buy food; get it at a discount. It isn't only a question of expedience, it's that families watching their incomes shrink have no choice. It's practically a fad: Consumers who get a good deal rush to tell their friends.

The chains' massive shift to discount outlets can be expected to continue eroding their margins, and Sagis knows it well.

The chains' cost structures don't augur good things either. Disposable income of households is shrinking, but, at the same time, spending by companies such as Supersol on municipal taxes (arnona), electricity and security just keep climbing.

The stock market has been digesting Supersol's state of affairs gradually. The company's stock has sunk by 60 percent in the last year, reducing Supersol to trading below its book value for the first time in many, many years.

While Supersol grapples with all that, uncertainty continues to hover over control. For a year - some say three years - the IDB group has let go. Within two months, a consortium headed by Nochi Dankner is supposed to be taking it over; but, meanwhile, it's like a headless chicken.

At the same time, Sagis was getting mixed signals about Dankner's intentions. Some associates claimed Dankner wanted him to stay. Others said he'd ditch Sagis in a shot.

The capital market's prevailing assumption is that after taking over IDB, Dankner will implement drastic steps so as to improve the group's profitability. Supersol could find up to a third of its outlets abolished; and both Dankner and Sagis know it would be easier for a new broom to sweep them out the door than it would be for the man who launched dozens of new branches.

End of an era carved in stone

The media has been obsessing about Sagis's sudden departure and the bonus he accepted so shortly before. But the really interesting part of the story is the next chapter in his career, as CEO of Granite Hacarmel (TASE: GRNT).

The advantage of running Granite Hacarmel compared with Supersol is obvious. Granite Hacarmel is a holding company that focuses on the over-centralized energy sector, while Supersol is an operational firm in the cruel, abrasive retail world. In times like these, Sagis surely figured, it's better to stand behind the fuel pumps at the gas stations than by the cash register in a food store.

What about remuneration? Dedi Borovitch, who controls the Granite-Sonol, Tambour, Knafaim-Arkia groups with his brother, Israel, elected to notify the people of Israel that "with him," Sagis will receive NIS 107,000 a month, no options or cooling-off compensation. Compare that with Sagis's NIS 273,000 monthly salary cost at Supersol in 2001, including creamy bonuses.

Nobody knows why Dedi says the things he says, including his comment about Sagis's pay. How much Sagis's salary and bonuses will cost Granite Hacarmel is anybody's guess. But between the lines, Borovitch was carving a message in stone for the benefit of Israel's salaried executives: Ladies and gentlemen, salaries are done ascending non-stop. That era is over.

Salaries in the IDB group may be the last vestige of the gay days. The transfer of control to new hands, the companies' enormous leverage and, primarily, the terrible economic times will start pressing hard on executive paychecks. Companies aren't just trimming the ranks; they're slashing on top too.

Which doesn't mean that managers will start earning almost the same as tea ladies; the gap will remain wide. But salaries won't be rising automatically any more, nor will people get more money every time they change company.

A lot of Israel's executives will shortly be making the same decision Sagis did: They'll agree to a substantial reduction in pay and terms in exchange for job security. If in the past, money did the talking, it'll be security from now.