Israel’s second-largest supermarket chain, Blue Square, operates in a difficult and unpredictable environment, amidst political and economic instability. In an exclusive interview with just-food.com correspondent Aaron Priel, Blue Square chairman David Wiessman shares the secrets of survival.
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The art of identifying on time economic developments and analysing their causes and implications for forming a strategic policy, in this case for the retail food sector, has been a winning tool for Blue Square Israel and its sister-company in the USA, 7-Eleven convenience stores. The Blue Square supermarket chain, parent to seven other supermarket chains bearing different names, is at present Israel’s second-largest chain in terms of sales returns, “but first in operating profits, which is what really counts,” according to David Wiessman, chairman of the boards at Blue Square and Alon USA.
In an exclusive interview with just-food.com, Wiessman explained the strategy that is leading his company to emerge as the dominant food marketer in Israel: “Recognising the economic developments, taking into account the recession and the shaky political situation in the region, we decided to limit our investments in new assets. In the past four years we have not purchased new assets, contrary to the policy applied by our competitors,” he noted.
Blue Square, which established the first supermarket store in Israel 67 years ago, focuses its resources, both financial and managerial , on building its Mega chain, considered the most innovative food chain in the country. This called for limiting Blue Square’s operations in relation to unprofitable stores while concentrating its nationwide efforts on three fronts:
- No acquisition of assets;
- Massive support to develop the Mega hypermarkets throughout Israel;
- Closing non-profitable neighbourhood stores.
Power of the big supermarket chain
“There are indeed several disadvantages connected with running a big supermarket chain: no managerial costs are imposed on branches, and the chain is bound by the unionised employment agreement, which calls for the remuneration of employees according to the law – and we pay more than the law prescribes, whereas small, privately owned chains are not bound by union-based agreements. Another disadvantage is that big chains are relatively slow to respond to market changes, compared with small, privately owned stores. A big chain is like an aircraft carrier. It needs more space and time to make a turn on the high seas, whereas the smaller stores are like speed boats, fast and able to make sharp turns,” Weissmann remarked.
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The advantages, on the other hand, provide a big chain with the tools constantly to become more efficient, to downsize its managerial staff, and as far as Blue Square is concerned, “We delegated more authority to branch managers, shortening the distance between them and the president of the chain.” Wiessman revealed that Blue Square’s new policy is to cut down on the number of its subsidiaries’ store banners from seven at present to no more than two or three “within the foreseeable future.”
Wiessman dwelt on one primary advantage of a big chain: it can contract food manufacturers in a long-term supply pact, usually for a 12-month period. Preliminary agreements with suppliers regarding quantities and products enables manufacturers to plan their production schedules. Considering Blue Square’s annual sales returns of NIS5.5bn (US$1.3bn), against NIS4-4.5bn for the acquisitions of goods, “we take advantage of long term supply pacts. It serves us well, and it certainly serves our customers, especially those that patronise our hypermarkets. Customers take advantage of lower prices on practically all leading brands, compared with prices charged by other stores for the very same products. In a fiercely competitive market such as Israel’s food sector, price, quality and service are the name of the game,” he said.
A developing industry
Supermarket retail is, on the whole, a rapidly developing industry in Israel, as it is in the western world. About a decade ago, only 32% of food in volume terms was purchased in supermarkets. This figure now stands at 52%, and is expected to rise to 70% within the next four to five years, similar to levels in Western Europe. Blue Square’s share of the organised supermarket sector is currently 32%.
Wiessman noted that the key to Blue Square’s success on the local market is its ability to adapt the structure and nature of its stores to a given environment, as well as identifying the needs of the population they serve. By properly responding to different purchasing habits, and by taking into account the “economic sensitivities” and the service demanded by the non-homogenised structure that comprises Israel’s society, the chain, he asserted, has a winning strategy: different stores, varying in size, in product range, in type of service, in geographical location and in price profile.
Hard discount strategy
In the past three years, Blue Square has focused its activities on a “hard discount” marketing strategy, in view of the decline in consumers’ purchasing power, the ongoing recession, and the fragile security problems. “We were the first to identify the problem and mid-1999 established our Mega outlets, which quickly became the leading hard discount chain in Israel’s food retail market. We consider Mega to be one of our most significant successes. It provided a unique opportunity to serve consumers during an economic crisis which resulted in changes in food purchasing habits,” Wiessman commented. Other stores under the Blue Square managerial umbrella are:
- King Center: launched 2002, middle-sized neighbourhood stores, emphasising inexpensive products and special sales deals;
- Super Center and Super Center City: neighbourhood hard discount stores;
- Co-Op Convenience Stores: neighbourhood quality stores, based on providing personal service and home delivery to customers, and operating delicatessen, special bakeries and top-quality meat product departments;
- Shefa-Shuk: special stores geared for the ultra-orthodox communities, offering family-packaged products at low prices;
- Blue Center: enabling customers to purchase food products via telephone, fax or Internet, providing home deliveries service.
Wiessman told just-food.com that Alon USA, a subsidiary of Alon Israel, is rated second in the world, after Saudi Arabia, in the volume of foreign investments in the USA. Alon USA owns FINA, which comprises 1,700 gas stations and an oil refinery, as well as terminals, pipelines and retail assets in the US, and in 2002 it purchased SCS (Southwest Convenience Stores), the largest licensee of the 7-Eleven chain in North America. “Under the chairmanship of Jeff Morris, SCS has become a regional leader among convenience store operators,” according to Josef Lipman, CEO of the 7-Eleven chain. Lipman said that SCS currently owns and operates 170 7-Eleven stores in the Southwest, adding that “we are seeking the acquisition of additional stores, and are in the process of replacing outdated locations with newer high performing stores.”
