Available capital and good performance during the Corona have turned the retail industry into a hot investment for the big groups. Through a large scale acquisition campaign, they have created a portfolio of holdings in a variety of areas - fashion, food, finance, cellular, gas and aviation. With no one to restrain them - the harm to competition is already felt.
06 February 2022
Last week, while the agenda dealt with handling prices in the food market, there were two events that illustrated a much broader and more difficult problem to deal with - which affects competition and the consumer.
The first event took place on Monday morning at the Azrieli Mall in Tel Aviv, where Harel Wiesel, the controlling owner of the Fox Group and the Minister of Absorption of international brands launched another chain in Israel: the Danish Flying Tiger for design products and stationery.
Three months ago, Wiesel launched at the same mall a new chain of cellular stores, RED - in partnership with HOT) FOX 51% HOT 49% (62430 +0.69%) ). When asked what he was looking for in a field that yields low profitability, he replied, “The cellular industry will be part of the retail sector in the next forthcoming decades, and Fox wants to be a part of it”.
Wiesel, who runs Fox, which is traded at a value of NIS 1.9 billion, wants to be deep in our wallets - in the sense that he wants to take part in every purchase of consumer products. Whoever buys fashion, gadgets, shoes, a baby stroller, stationery and in the future also a hamburger or a cup of coffee - will be able to do so at the Wiesel’s chain (who is negotiating to bring the Starbucks coffee shop chain for another round in Israel, and with the New York hamburger chain Shake Shack.
Three days after Wiesel’s launch event, on Thursday, Shufersal announced (2929-0.2%) that it was acquiring 60% of Miniline, importer and owner of the A.L.M chain of electricity and electronics stores for NIS 536 million, after entering the fields of pharma (BE), finance (PayBox with Discount, (2196 +2.14%) credit card with Cal), tourism and real estae. An official import franchise for home appliances of Samsung and AEG - and a chain with 40 branches, this is a nice and even called for addition for a company that for a long time does not see itself as a food chain.
• The new head of the Competition Authority has stated that she will be an activist. This is how she should act
• Harel Wiesel has turned Fox into an empire - and his brothers into multi-millionaires
• Getting back on track - and gaining momentum: an onslaught on shopping centers and entertainment
• How sour are the lemonade lemons? Depends on who you ask
“The consumer does not even know he is a captive”
Fox and Shufersal are two of several retail octopuses, which are consistently tightening their grip on the local market, mainly in the field of consumption. In recent years, the list of companies and businessmen, with capital of billions of shekels, invested in the retail industry - which is enjoying an increase in sales and profitability in the Corona - has been increasing. They leverage this activity to grow their business groups - which have grown into giants as well as quite centralized. With no one to restrain these octopuses, they expand at a rapid pace and send arms to additional areas.
They compete, sometimes collaboratively, for franchises of international brands and business ventures. The competition between them exists but is seemingly limited - the overriding goal is to maintain a balance that is good for everybody, except those who are not related to them and are in a clear position of inferiority.
This is how a senior in the retail industry describes the situation: “In the end, these groups plan all the inventory and demands from above, and the customer does not even know he is captive and that each group plays a game of chairs with itself - raises prices in one chain and lowers in another, closing a store of one brand and opening one of another. This is good for investors and owners, but consumers are getting less sophisticated competition”.
Simply put, Israeli consumers get less competition - and business group owners get stability and risk diversification.
“Unlike the US and Europe, international brands prefer to enter Israel through a local franchisee - because we are a small country and for political reasons”
A senior in the mall industry
“No matter where the market goes - they too go there - because they are the market”, says a senior in the capital market. “Those are companies that have become conglomerates, desiring to be everywhere. The hunger of these people cannot be satisfied whether it is the Horesh, Salkind, Levy or Wiesel family.
“In the end, it’s a matter of ego and who has bigger - not the highest quality”, he adds. “They turn each other on for action. Shufersal acquires a Pharm chain, so Supr-Pharm will enter the food industry` Electra invests in a food chain, so Shufersl will purchase a chain of electrical products.”
Hunger mixed with ego
And indeed it is hard not to wonder how much Shufersal-Miniline deal is based on business motives, and how much on Shufersal’s ego, maybe even revenge, in another octapus: Elco of the brothers Mikey and Danny Salkind - which acquired through the subsidiary Electra Consumer (Shekem Electric, Mahsanei Hashmal and more) the control of Yenot Bitan-Mega group, and recently received the franchise to establish the Seven Eleven food chain.
By the way, Electra Consumer first competed on the franchise for Seven Eleven (20200 + 2.45%) together with Harel Wieisel from Fox. Zvika Schwimmer, CEO of Electra Consumer, is a graduate of Wiesel’s Advanced Retail School. These days he is trying to satisfy the hinder of the Salkinds to grow, while applying the lesson he has learnt about the improtance of risk diversification through diversity of business activity.
Schwimmer is working to turn Elco into a consumer products group - sending arms into new areas through acquisions (Colombia and Office Duty), receiving brand franchises and soon credit cards and customer clubs. At the same time, Elco - whose value soared to NIS 7.6 billion - continues to expand into other areas, such as communications (through Cellcom, in which it holds 30% via DIC), public transportation, infrastructure, gas and real estate.
“If I could, I would buy A.L.M. tomorrow morning, and like me another six-seven investment funds” says a senior in the investment fund. “We all have a lot of money and we are all looking to buy - and this is a company that ended the year with a net profit of NIS 100 million under the auspices of the Corona and price increases.
“In the immediate term we would pay higher rents in the malls and in a few years sell it. This way, it would not have reached Shufersal, which now has dozens more stores in malls, and the next time the company looks for an electrical store or a supermarket - it will be preferred over a small player”.
According to him, “past experience shows that in the long term the big ones almost always take advantage of it to raise prices and impair competition. The consumer does not feel right now that it is harming him, but in the end there will only be large groups that can do whatever they want - and the small ones will die”.
The senior official in the investment fund also says that “the fashion industry has become more centralized and controlled by some groups, while the rest have almost no right to exist. The same can be seen in the food industry. When these players begin operating in every possible field, it means that the consumer will be impaired in the long run. As the small players disappear, competition will decrease - and the prices will rise”.
The Shufersal-Miniline deal reflects the increase in concentration in the retail market and the potential for conflict of interest. Currently Avi Asher (40%), Allied Investment Group headed by Yitzhak Swary (40%) and Leumi Partners (20%) own Miniline. In recent years, Allied has expanded and is one of the largest and most prominent investment groups in the economy - with holdings in the areas of retail, automotive, finance, real estate, infrastructure and energy.
Following the transaction with Shufersal, Allied will hold 16% of Miniline. The group holds 30% of Newpan, which is controlled by Zvika Gior’s family (50%) and imports more than 20 electrical and electronics brands. Shufersal sells online and in the chain branches part of Newpan’s products. it will be interesting to see if it continues to sell Newpan products - which might harm Miniline’s revenue and profitability, and how will Allied, which holds shares in both chains, respond to this.
Problematic policy of the Competition Authority
Creating the power groups was also made possible due to the incompetence of the Competition Authority, which allowed the octopuses to acquire more and more companies. The Competition Law stipulates that the Authority will disqualify a merger if it believes it may harm competition. The Authority adopts a limited interpretation of the law, which examines what the effect of the transaction will be on the industry or the category, sometimes even a sub-category, and not in a broad perspective of the implications of the aggregate power that the group will have.
That is, if Wiesel does not have a baby clothing chain, he will be able to purchase Shilav, Shufersal received approval to purchase New-Pharm (currently BE) because it did not own a Pharm chain, so it may also be approved to purchase Miniline.
I would like to bring a desirable international brand, with whose owner I have made contact - but I don’t stand a chance. A brand that wants to enter moves among the major groups”
Manager of a leisure products chain
In the days when the Competition Authority was headed by Michal Halperin - currently headed by Michal Cohen - they believed that a very large player should not be prevented from expanding to other areas, since only such a large player could compete with a large player operating in another market. But this did not stand the test of reality.
A price comparison published last week in TheMarker revealed that prices at Super-Pharm and BE - in the pharma products inspected, were almost identical - and about 40% higher than the same basket price on Amazon. When Shufersal competed for the acquisition of New Pharm (BE), it claimed that it would introduce competition to the market controlled by Super-Pharm and offer significantly lower prices.
Evidence of an attempt to maintain balance and ostensibly harm competition can be found in what Shufersal CEO Itzik Abercohen said against the background of the new competition in cities: “I have not seen the companies entering the city centers being criticized for their high gross profitability, and therefore everyone is running there. Our work assumption is that the main idea of players, such as Paz (FreshMarket, Super Yuda) and Electra Consumer (Bitan wines-Mega, Seven Eleven) when entering city centers - is not to create a discount in the city but rather to earn well.
Eveyone will try to keep the gross, because if they lower it, the extra turnover they will get - will not cover the profit they will lose”, Abercohen explained.
The small ones do not stand a chance
“I would like to bring a desirable international brand, with whose owners I have already made contact - but I don’t really stand a chance”, says a leisure product chain manager. “When managers of a leading brand wish to introduce it into Israel, they move between the large groups - for whom this is a way to continue growing and developing after having exhausted the growth in a certain field.
The advantage of their size and aggregated power gives them an advantage also vis-a-vis the property lessors, the banks and lenders - the rent is lower and commissions are reduced. Introducing a variety of activities under one roof makes it possible to reduce costs and purchase at lower prices, due to the large purchasing power. The business expansion stems also from the fact that some of the companies mentioned are public, and their managers are required to present investors with continued growth and development.
The model of groups operating by obtaining franchises to import and market many brands in a variety of industries is not unique to Israel - but is also not very common.
Experience shows that in the long run the big ones use their power to raise prices. In the end, there will be only large groups that will do whatever they want”
Senior in the investment fund
The model of groups operating by obtaining franchises to import and market many brands in a variety of industries is indeed not unique to Israel - but is also not very common.
“The leading fashion brands generally operate their stores independently as they enter Europ and the U.S.A”, says a senior in the mall industry. “With us, with the exception of Decalthon, international brands prefer to enter through a local franchisee. This stems from the fact that we are a small country and for political reasons”
According to him, “the same happens in Arab countries and South America. In such places, when an international brand seeks to penetrate a new market, it moves between the large groups that already hold franchises of international brands”.
Thus, for example, the ALSHAYA group, founded in Kuwait, operates in franchises thousands of stores of dozens of brands in Arab countries and Russia. These are brands such as h&m, Starbucks, American Eagle, Victoria Secret, Mack, Foot Locker and Next.
The counterpart in Israel, the Fox Group,was wise enough to take advantage of the Centralization Law in its favour. With the assistance of antitrust experts, Fox realized that the Centralization Law, enacted in 2013 with a goal for weakening the excessive power in the market of some groups - has a lacuna. The law does not deal with a player that imports brands in various fields, does not apply for licenses and allocation of assets from the state and does not merge with existing Israeli companies, even if there is fear that it will be centralized.
The Law of Centralization turned Paz into a retail giant
The strength and financial backing imparts the big group power that is hard to resist. In the past year, many grocery store owners have received an exit offer from Shufersal, Electra and Paz. The latter, the industry says, is the one willing to pay the highest amounts as part of its strategy to part with the Ashdod refinery and focus on retail, real estate and renewable energy.
In the past year Paz carried out(48080 +1.41%) some significant moves - and became, similar to Sufersal a company without a controlling nucleus following the Centralization Law, which forced Tzadik Bino about five years ago to sell it - that made it a retail giant. First and foremost, a huge transaction to purchase Freshmarket for NIS 2.1 billion. In March 2021, it acquired Super Yuda for NIS 170 million, and recently it took over the small supermarket chain Emanuel, with an investment of more that NIS 30 million.
Meanwhile, the person who is delaying the development of his neighborhood chain, but finds time for non-food-related activities, is businessman Rami Levy - who acquired Cofix Group and Good Pharm, and developed private real estate activities (some of the assets are leased to the public Shivuk Hashikma). Levy is also considering an IPO at a value of several billion shekels.
About a year ago, Levy, with Shalom Haim, took over the Israir airline and tourism company, which was acquired from IDB’s creditors; purchased hotels in Israel and Cyprus; he is developing his financial activity through launching a digital wallet, a partnership with a credit card club with Isracard - and does not rule out the establishment of a digital bank. Levy is also active in the field of communications, through Rami Levy Communications, and holds 11% of DIC, which controls Cellcom (about 46%).
Another group that is consistently expanding its retail activity is Alon Blue Square of Moti Ben Moshe, which joins groups with real estate activity in Israel and abroad, fuel and energy, infrastructure, public transportation, logistics, non-bank credit and more. The group’s retail arm, Extra Retail, acquired the Afrodita lingerie in November, and a year earlier it purchased Bonita de Mas, which is added to GANT - Vardinon and more.
Alon Blue Square is currently examining an IPO of Extra Retail on the stock market exchange, at an estimated value of NIS 1 billion. Ben Moshe also has retail activity in Israel through Dor Alon, which controls the AM-PM chain of stores and Blue Square Real Estate, which has full ownership of the TLV mall in Tel Aviv, which so far is not rising.
The retail sector has been attracting in recent years also large financial entities such as banks, insurance companies and private investment funds. Thus Bank Hapoalim(3386 +1.47%) has carried out in 2020-2021, through Poalim Equity, five investments in the retail industry with a cumulative amount of about NIS 270 million - in Newpan, Lalin, Shilav, Gambo and idigital.
Leumi Partners acquired 20% of Miniline about three years ago and recently has sold its full holding in Retailers , (9290 - 0.11%), which it acquired two years ago - at a profit of NIS 350 million. Last year, Discount Capital acquired 20% of the Steimatzsky chain for NIS 45 million.
Sky Fund, which has holdings in iDigital, acquired last year 50% of the Soltam Radad chain for housewares for NIS 100 million. Kedma Fund acquired ACE-buy and build from Electra Consumer in 2017, at a value of NIS 190 million - and issued it about a year ago at a value of NIS 400 million. Now ACE, renamed Multi Retail Group (2086+ 0%) is traded at a value of NIS 480 million.
At the end of the week, Multi Retail announced its activity expansion through the acquisition of the activity of the retail chains Betili, Urban and IDdesign, as well as a furniture plant that serves the chains’ operations - for about NIS 100 million. The activities were acquired from Ikoo Designs, owned by Carmel Company.