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Economy fuels transformation of Israeli retail

By Edmund Mander

You can tell a lot about a country from its grocery stores. Take Israel.

Israel has long dazzled the world with its military innovation and daring exploits but, until comparatively recently, its performance in the civil and economic sectors was far less heroic.

For most of its modern history, Israel was straddled with a massive and intrusive government bureaucracy, inefficient nationalized industries, powerful strike-happy trade unions, expensive subsidies and heavy taxation, part of which went to pay for a huge defense budget. Amid this personal and national economic stagnation the country's retail scene was, to say the least, uninspiring.

But Israel has turned its economy inside out in recent years, renouncing its entrenched socialist heritage in the same spirit former Prime Minister Margaret Thatcher swept away Britain's postwar culture of state paternalism.

Personal wealth in Israel has skyrocketed, thanks to the unfettering of the economy, resulting in a retail revolution. Spearheaded by retail conglomerates such as Blue Square Israel Ltd. and Super Sol, the economic reform has brought great changes to the Israeli way of shopping, spawning gleaming new supermarkets, malls and power centers across the country.

A visitor returning to Israel after an absence of only 10 years would be astounded by the changes.

The "makolet," as the old mom-and-pop groceries were called in Israel, were in a way symbolic of the old Israel, as journalist Larry Derfner observed in the Israeli business magazine, Link. Often having only one or two employees behind the counter -- however long the line of people lining up for a markedly narrow choice of groceries -- the makolet offered their customers "laziness, sloppiness, rudeness, passivity at work and indifference to planning," Mr. Derfner said.

Israel's planned and centralized economy contributed to this state of affairs, not only in retailing, but across the board in industry and government. Certain enterprises exercised a monopoly over segments of the market, and they were protected from cheaper imports both by the Arab boycott of foreign companies trading with Israel, and by high trade barriers erected by the Israeli government itself. For example, pasta and baked goods were the domain of a company called Osem; another company, Elite, provided nearly all the chocolate and coffee consumed in Israel; and Tnuva and Strauss had a lock on milk, ice cream and cheese.

But much has changed in Israel, and not just on the economic front. The country has seen a dramatic population increase, including a massive influx of people from the former Soviet Union. The overall population grew from 4.6 million in 1989 to more than 5.6 million by 1994.

"We are a relatively small country, and within two or three years we have raised the population 15% or 20%," said Dov Carmeli, head of property and development at Blue Square Israel Ltd., a public company based in Givatayim, a suburb of Tel Aviv.

Blue Square has seized upon the opportunities offered by economic reform, as well as by this wealthier, larger and changed population. Economic reforms have helped spur a staggering jump in per capita income from $8,000 four years ago to $17,000 today, a figure fast approaching that of Britain.

This has changed the way Israelis shop. Ten years ago, the vast majority bought their food, clothing and consumer goods in open-air markets or mom-and-pop stores. Many did not own cars or large refrigerators, and purchased only the groceries they could carry by hand. Today, their appetites have expanded, in terms of the quantity, variety and quality of foods they are bringing home.

The grocery and retailing industry has risen to the occasion. In the last five years, selling space devoted to food and nonfood retailing has doubled. In a country approximately the size of New Jersey, this period has seen about 30 new shopping malls and a multitude of power centers spring up.

Blue Square, which employs about 6,000 people, has been at the forefront of this development. Not only has it opened new state-of-the-art supermarkets -- some of them in shopping centers and power centers, but most freestanding -- the company has molded its six grocery chains in very distinct ways to meet the different needs of Israel's diverse population.

"We want to be as close as possible with the customer and meet as much as we can his needs," said Mr. Carmeli, describing how different supermarkets cater to the various ethnic, religious and economic sectors of the population. The six chains it operates are:

* Hyper Co-Op. These stores target upper-income groups, and charge premium prices. They offer a wide selection of merchandise besides food, including household goods, clothing, accessories, appliances and cosmetics. They are quite a bit larger than the average Israeli supermarket, extending from 16,000 square feet to 37,674 square feet. **how large is the typical market? **They are built in central locations and offer ample parking. They also provide selling space for specialized concessionaire operations. There were 13 of these supermarkets at press time.

* Super Co-Op. There were 50 of these supermarkets by the beginning of this year, mostly located in densely populated urban residential areas. These stores, which range in size up to 16,000 square feet, offer a high level of customer service, a wide selection of food and general merchandise, along with various specialty departments.

* Zil v' Zol A neighborhood minimarket designed to compete with open air markets and small local grocery stores, it offers a minimum of service, emphasizing low prices instead. There were 57 of these in operation at press time.

* Super-Center. Ranging from 16,000 square feet to 53,820 square feet, these large discount stores attract customers who like to save by buying in bulk. They offer food and nonfood items, keep long hours, and have large parking lots. Blue Square was the first company to open these types of stores, and early this year it was operating 24 of them.

* Shefa Mehadrin Supermarkets. These cater to Israel's growing ultra orthodox population, which demands exceptionally high levels of rabbinical supervision over their food products. Four of these stores were open at press time, with another three due to open this year, offering foods that have received the approval of each of their local community's rabbis.

Blue Square also opened a Super Center supermarket this year catering to Israeli Arabs in the Western Galilee town of Shfar'am, and more are set to follow. Blue Square is the first Israeli supermarket operating company to cater specifically to Israel's Arab population, much of which can be found in the Galilee area. Israeli Arabs inside Israel's pre-1967 borders account for 20% of the country's population, and their wealth has been growing at a fast pace.

Just as the supermarkets' customers have diversified, so have their offerings.

"A few years ago we had one or two kinds of yogurt, now you have more than a hundred," Mr. Carmeli said, describing how Israelis now expect to be able to choose between brands that are imported, domestic, or nonfat, to name but a few options. Like the Western supermarkets they are modeled after, the stores feature salad bars, bakeries and precooked meals.

One of Mr. Carmeli's customers, Tel Aviv resident Anna Biegun, reported that the selection and quality has indeed improved in recent years. She can find American and European products on the shelves, such as mayonnaise, and a greater choice of fruit and vegetables. Health foods also are a recent newcomer.

But while the general level of quality is high, Ms. Biegun said it can be spotty. Frozen fish and vegetables occasionally seem not as fresh as they should be, and packaged vegetables are not always discarded when beyond their prime.

A giant improvement, however, is the packaging of milk, Ms. Biegun noted. This used to come in sometimes leaking soft plastic bags, dripping with condensation which, if opened without extreme care, would spurt milk in all directions rather like a water bomb. Now milk comes in cartons.

Besides improving the food selection, Blue Square is making efforts to introduce innovations to improve customer service that are already in place in Western supermarkets. The company issues a debit card to its clientele exclusively for the purchase of products in its stores, and deducts funds for purchases directly from their bank accounts. Even more important, the card allows the company to track its customers' purchases.

Shoppers also may order groceries by computer or fax for home delivery, although very few are taking advantage of that option so far.

"It's very very small. People, they want to see the food," Mr. Carmeli explained, although he added that those who are "free of this habit" of having to squeeze the fruit and vegetables are ordering from the home or office. Home delivery is more popular with the religious community, much of which lives in apartments without elevators to avoid violating the laws of operating machinery on the Sabbath, he added.

Some of these innovations have come about through a relationship Blue Square has forged with Tesco -- Britain's largest supermarket chain -- and other European grocery chains. Among other things, Cheshunt-based Tesco has advised Blue Square on how to make good use of television commercials.

But while Western supermarket ideas have breached Israel's frontiers, the chains themselves have not.

"Israel, even though it makes a lot of noise, it's still a small country, and it will take a lot of time until a chain from Europe or America finds it useful or economical to come," Mr. Carmeli said.

Apart from anything else, laws restricting the import of nonkosher food makes entry for outside operators difficult. But, if a more permanent peace in the region opens up Arab markets as well, Western companies might decide it is worth their while to expand into the Middle East, he added.

When it comes to employee professionalism, efforts are being made to change the image that Link magazine's Mr. Derfner held of grumpy store clerks holding lines of customers to ransom.

"We have a very developed training program," Mr. Carmeli said, explaining that everyone from store managers down to those on the shop floor receive regular training.

At Ms. Biegun's supermarket, she said she finds staff behind the food counters and cash registers very helpful and friendly.

"The staff here does not change often, and as a result the relationship between customers and salesperson can be individual and personal," she said. However, the attitudes among other staff can be mixed. Those stocking the shelves are often unwilling or unable to answer questions, and sometimes block the aisles, seemingly oblivious to the customers who need to get past, she said.

Modern innovations, and the strategy of tailoring supermarkets to different segments of the population, is paying off for the company.

"In the last five or six years we have doubled our turnover," Mr. Carmeli said, describing his company's part in Israel's great leap forward.

Blue Square traces its roots to 1937, when it started out as a neighborhood grocery store, organized along the lines of the British cooperative store movement in Britain ,which allowed its customers and employees to own shares. The company went public in 1988.

Blue Square's supermarkets sell 13% of the total food sold in Israel. That might not sound like much for a company that bills itself as one of Israel's leading grocery chains. But it should be remembered that, despite recent progress in food retailing, chains in Israel still only account for about 42% of the groceries sold, with independent stores selling the rest. In America, chains sell about 70% of the food, and in Europe they have a 65% market share.

This relatively low market share for Israeli chains is seen as an opportunity by Blue Square, and catering to different groups is the key to the company's future growth, Mr. Carmeli said. Blue Square, whose main competitor is Super Sol, a major operator of supermarkets, home centers and office equipment stores, is aiming to dominate the supermarket chains' market share within the next five years, Mr. Carmeli said.

Blue Square's nongrocery business also is expanding. It owns 80% of Hamashbir Lazarchan, Israel's largest full range department store chain, with 22 locations, half of which are in malls. Besides carrying a wide range of apparel, home furnishings, housewares, cosmetics, electronics and toys, Hamashbir operates a chain of discount apparel stores under the name of Bon Mart. It also has exclusive agreements for the distribution in Israel of various international brands both within its own stores and in facilities bearing their names. These include Guess; Zara, the Spanish-based international retailer of fashions for all the family; Mango, a Spanish retailer of women's fashions that has expanded throughout Europe and Asia; Mothercare, the British retailer of maternity and children's wear; and Pull & Bear, selling men's casual fashion-wear manufactured by the Spanish Inditex Group of companies.

Hamashbir also operates more than a dozen Home Center home improvement stores, selling tools, paint, appliances, fixtures and a range of other goods. Three Home Center locations include U.S.-based Bed Bath and Beyond home textile departments.

And at press time, the company was looking for a suitable 12 acre site to build an Ikea store that it will operate.

But, despite these nongrocery ventures, "food is our main focus," Mr. Carmeli noted.

A Westerner walking into a Blue Square supermarket today would feel quite at home. The shelves offer a wide variety of goods, the aisles are bustling with affluent shoppers, and technologically up-to-date checkout counters get customers on their way with the minimum of delay. You can tell a lot about a country from its grocery stores.

Executive Editor Edmund Mander lived in Israel for four years in the late 1970s and early 1980s.