Navit Zomer | 09/05/2023 | 06:44
Today (Tuesday) Israel will see the launch of its newest supermarket chain by French Carrefour, which in the absence of any other solution by the current government for fighting the rising cost of living, has been presented by relevant ministers such as the Minister of Economy, Nir Barkat, and the Minister of Finance, Bezalel Smotrich, as a “solution” for Israel’s cost of living problem.
At this stage, only 50 branches will be opened, out of 132 Yeinot Bitan and Mega branches owned by the chain, with the rest to be converted later on. Electra, controlled by the Salkind brothers, owns the franchise for operating Carrefour in Israel, in partnership with Phoenix Insurance. The new chain is based on the infrastructure of the Yeinot Bitan chain, which was purchased by the two companies just before its collapse. Alexandre Bompard, Carrefour CEO, will attend the launch ceremony in Ra’anana.
1. The Format
It is no coincidence that the Ra’anana branch was chosen to host the launch. It is one of only three current branches in the Hyper-market format – an especially large branch with a more impressive display and cheaper prices. The other converted branches, and in fact the lion’s share of them, are small branches covering only a few hundred meters, in the neighborhood-store format called Carrefour City, with prices more expensive than Hyper, or medium-sized branches operated in the Carrefour Market format, that will also be pricier than Hyper. It should be noted that many of the currently converted branches are in the most expensive format: neighborhood City branches.
The franchise allows Electra to import products from Carrefour’s private label, and the plan is to also parallel-import known brands. For the launch, a shopping cart filled with Carrefour-label products will be displayed at the front of the branch, alongside a cart of equivalent known brands, with the total price of each cart displayed to emphasize the significant difference (about 40%) in Carrefour’s favor.
2. The Test of Time
The real test will be whether the average family’s overall shopping basket – dairy products, fruits and vegetables, meat and chicken, and other products – will be cheaper in Carrefour in comparison to its competitors, and whether it will also stay cheap over time and is not only cheaper because of special launch discounts that will disappear after a few months.
The chain has stated that at this stage there are 1,000 Carrefour-label products in 80 categories, but half of these categories are non-food categories such as homeware in the style and price level of discount variety stores (known in Israel as “stock” stores). Moreover, the 500 food products listed include different varieties of the same category, each counted separately, like different varieties of tea packets, so in actuality fewer product types are included. As long as Carrefour branches do not offer the full range of private-label products, it is hard to determine whether the relative proportion of Carrefour-label products out of the average consumer’s total basket is large enough to significantly affect the total price. The chain has announced that they will also bring known-brand products in parallel import, as parallel-import benefits for foreign chains have come into effect recently. The proportion of the entire chain in the retail map is also not very large in comparison to competitors: Yeinot Bitan’s annual sales turnover in 2022 was ILS 2.7 billion, in comparison to Shufersal with ILS 15 billion and Rami Levi with close to ILS 7 billion. Will the size and geographic coverage be enough to revolutionize the Israeli retail market? One thing is clear, the curious and foreign-brand loving Israeli public will flock in the upcoming weeks to the Carrefour stores, which, we should note, are attractive and modern in design. The question is whether consumers will return for another buy. Therefore, the chain’s success should really be tested in at least a year, once the launch dust has settled and the prices are stable.
3. Chances of Success
Will the promises be fulfilled, and will consumers love the French chic? Unfortunately, the baked-goods counter displayed near the entrance, as befits the legacy of French culinary arts, does not offer éclairs and tarte tatin, but mostly roghallach and bourekas. Carrefour Israel CEO Uri Kilstein addressed this matter and said that French baked goods will be added gradually.
But beyond this, the fundamental question is whether the chain, financially, will succeed and survive. Will Electra’s gamble – investing hundreds of millions of Shekels to purchase a failing business, then make additional huge investments in converting it – will indeed prove wise?
As we know, at this stage Electra’s financial reports include a loss of ILS 109 million generated by the activity of Yeinot Bitan, which since its purchase has given Electra only losses. The decision to purchase the chain may have been made only a year and a half ago, but it may as well have been another age and an entirely different economy. The purchasers’ working assumptions were based on the excellent economic conditions that existed at the time of purchase, and are nothing like the current conditions.
Interest has skyrocketed from almost 0% to 5%, taking the price of money higher along with it (the purchase transaction is mostly leveraged). Inflation has also risen and with it operating and financing expenses. And mostly, consumers’ purchasing power is getting eroded. On the other hand, the transaction’s risk level increases. Under these conditions, when labor wages are going up, the price of money is rising, and prices are soaring, can the chain keep the price of cereal at 7 Shekels or tea at 6.90 Shekels over time?
Investors are also staying away at the moment: for the past six months, Electra have been searching for another investor in the chain, to invest funds estimated at ILS 500 million, and the fact is it has yet to find one. The Israeli food chains’ sales turnover margin is lower by an average of 1.5% to 3.5% , competition is fierce, and every mistake or failure can lead to loss.
The new reality increases the transaction’s risk level, which is greatly dependent on Carrefour’s success in fulfilling all the hopes of the Israeli market.
4. Price War
In the meantime, consumers can celebrate and take advantage of Carrefour’s launch prices. The entrance of a new player is challenging not only to the competitors, but also to Israel’s food suppliers.
Cheaper tea by private labels, including Carrefour’s and Rami Levi’s, both sold at a similar price of around 7 Shekels, has already led Wissotzky to announce a second item for half the price sale – an actual discount of 25%. Suppliers, at least initially until some time has passed and they can estimate whether this is a real threat, will offer benefits for competing retailers, to strengthen them against Carrefour’s entrance.
Rami Levi has already announced that his chain will not be more expensive than Carrefour, with Yochananof and others soon to follow suit, and all that is left is to keep our fingers crossed for Electra and for us, that the chain will succeed, that low prices will be maintained, and that competition will increase.