As of December 31, 2014, Dor Alon operated 208 filling stations, 215 convenience stores, including 169 convenience stores branded “Alonit” and
“Super Alonit” (we refer to these stores as Alonit convenience stores), and 46 convenience stores operated by the AM:PM chain of stores. Four convenience stores were operated by third parties. As of December 31, 2014, the total consolidated assets of Dor Alon and its subsidiaries aggregated approximately NIS 2.5 billion, or $639.3 million. Dor Alon’s assets constitute approximately 29% of our total consolidated assets at that date.
BSRE is the owner of most of our real estate properties, and its revenues are primarily derived from real estate lease payments received from Mega Retail and third parties. As of December 31, 2014, the consolidated assets of BSRE aggregated approximately NIS 3.0 billion, or $780.1 million. BSRE’s assets constituted approximately 35% of our total consolidated assets at that date.
As of December 31, 2014, we were the owners, through our subsidiaries, of 101 of our Housware and textile stores, while the remaining 11 of our Housware and textile stores were owned and operated by franchisees. As of December 31, 2014, the consolidated assets of our Housware and textile segment (excluding the stores owned and operated by franchisees) aggregated approximately NIS 188.1 million, or $48.4 million. Our Housware and textile’s assets constituted approximately 2% of our total consolidated assets at that date.
Our Strategies
Our strategy is to take advantage of our position as a leading retailer in Israel in order to offer a variety of products and services which meet our customers’ daily needs, while leveraging potential synergies within our group. To achieve this goal, we intend to pursue a number of operating and growth strategies, which include:
x continue growing our filling stations and convenience store operations, including expanding the variety of products and services offered within the stores and identifying new areas of operation that are synergetic to our fueling operations;
x expanding the marketing of natural gas for industry and maintaining operation in the private electricity sector while examining the development of additional projects and expanding the marketing of Dor Alon’s private brand in the lubricant oil sector, “Dor Oil”;
x maintaining and strengthening our market positioning within the supermarket segment by rebranding our store formats, renovating and improving existing stores, evaluating the strategic positioning of some of our stores, adjusting the format of some of our stores all in order to meet the needs of our customers;
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Supermarkets General
Through our supermarkets, which are operated mostly through Mega Retail, we offer a wide range of food and beverage products and “Non-Food”
items, such as houseware, small electrical appliances, cellular phones and cellular phones accessories and entertainment products and textile products (called
“Non-Food” in this Annual Report), and “Near-Food” products, such as health and beauty aids, baby and young children products, cosmetics and hygiene products (called “Near-Food” in this Annual Report).
x increasing operational efficiency, including by reviewing and taking concrete steps to improve our distribution and supply capabilities, including self distribution and the launch of a new distribution center, implementation of a cost reduction plan, and the successful implementation of the self-arrangement of shelves in our supermarkets;
x developing and expanding of the real estate segment by developing and improving of the existing real estate properties, maximizing of leasings, increasing building rights, and purchasing additional commercial real estate in Israel;
x cautiously examining the possibility of expanding our activities outside of Israel;
x increasing our market share of “Non-Food” and “Near-Food” products and capitalizing on potential operating synergies between the food and Non-Food segments of the Company and the other subsidiaries of the Company, including by increasing of the sale of products of “Naaman” in Mega Retail’s supermarkets;
x strengthening and increasing of our market share in the organic products market and the health food in order to preserve our position as a leading company in the organic and health food market in Israel;
x improving the status of Diners credit cards by launching attractive loyalty plans with third parties and increasing the acceptance of these credit cards by Israeli merchants; and
x expanding and improving our You loyalty plan offering, increasing the number of You club members who hold the “You” credit card and the number of customers of our Alon Cellular MVNO offering, and increasing cooperation with Diners Israel to add additional You loyalty club members.
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The following table sets forth the change in the number of our supermarket stores (net of store closures) and supermarket store space as of the dates indicated:
The following table sets forth the selected operating data of our supermarket stores as of the date indicated:
Our supermarket stores are divided into three main categories: Discount chains, Quality and Service chains, and Mega@Internet website. In order to meet the needs of our customers, both the Discount chains and Quality and Service chains have regional stores and local neighborhood stores. The Discount chains include the regional store brands “You” and “ZolBeShefa” and the local neighborhood store brand “You Neighborhood Store”. The Quality and Service chains include the regional store brand “Mega”, the local neighborhood store brand “Mega in Town” and the organic, natural and health product store brand
“Eden Teva”.
Number of supermarket stores (at year end) 212 213 197
-Increase (decrease) in same store sales(1) (2.6)% (1)% (3.6)%
-Total square meters (at year end)(2) 369,000 360,000 303,000
-Supermarket sales per square meter (in NIS) 17,180 18,171 19,017 4,890
Supermarket sales per employee (in thousands) 910 812 864 222
(1) The percentage change in same store sales is the percentage change in sales of those stores that operated continuously during the entire reporting period of both the current year and that preceding it. Stores are not deemed to have operated continuously (and therefore not included as “same stores”) if such stores were permanently closed during the reporting period or the preceding period, were resized significantly during the period or were significantly renovated or expanded during the period. Store resizing is considered significant if it exceeds 5% or more of the store’s original size. The comparative figures include the results of branches whose operations we resolved to cease.
(2) Based on an average total square meters at month end during the relevant year.
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In Our Discount chain, “You” chain stores are regional hard discount stores designed to provide customers with name brand quality at everyday affordable prices. The “You Neighborhood Store” chain comprises hard discount stores located in urban areas. Our “ZolBeShefa” chain stores are low-priced stores oriented towards Israel’s growing ultra-orthodox Jewish population. In our Quality and Service chain, “Mega” chain is comprised of large supermarkets with a variety of food and non food products designed to be a “one stop shop” for our customers. The “Mega in Town” chain stores, located primarily in urban areas and city centers, combine reasonable prices with convenience for neighborhood shoppers. “Mega in Town” stores offer fresh food, a large variety of items in residential areas. In our “Eden Teva” stores, we focus on offering organic, natural and health food products together with offering many of the items sold in our other supermarket stores. The “Eden Teva” stores are divided into 12 stand alone stores and 10 stores which are inside our “Mega” stores under the concept of a store within a store. As of December 31, 2014, we operated a total of 197 stores consisting of approximately 303,000 square meters space.
Our Mega@Internet website allows customers to place orders via the Internet 24 hours a day and to have the products in our stores delivered to their homes from a nearby store within a few hours.
We launched our “You” and “You Neighborhood Store” supermarket formats in November 2013. The initiative included the conversion of a number of our “Mega Bool” stores to the new “You” brand. As of March 31, 2015, we are no longer selling under the "Mega Bool" brand, and all remaining branches were converted to the "You" brand.
We are also the holder of 51% of the outstanding shares of Eden Briut Teva Market Ltd. (“Eden Teva”). Eden Teva incurred operating losses in 2014 and requires financing in order to meet its operating needs. We have commercial disagreements with the minority shareholder of Eden Teva, who also serves as the CEO of Eden Teva, with respect to the responsibility of the shareholders to finance the operations of Eden Teva. We believe that resolution of said disagreement and reduction of operating expenses at Eden Teva will improve the financial status of Eden Teva.
Our supermarkets offer a wide selection of supermarket goods. The mix of products of each supermarket format varies to address the preferences of its target customers. Many of our supermarkets offer specialty departments such as full service bakeries, delicatessens, fresh meat and prepared food departments;
certain supermarkets also contain franchise operations, which sell a variety of goods. In addition, we offer a range of “Non-Food” and “Near-Food” items and operate several houseware departments within most of our large stores. Furthermore, our supermarkets sell and market our “Mega” line of private label goods, including “Mega Home”. Private label products provide customers with an attractive alternative selection of products that are comparable in quality to name brand products. We believe that our private label products enhance customer loyalty, differentiate our stores from those of our competitors and provide a competitive product to those offered by our suppliers. In addition, usually the average gross profit from private label products is higher than the average gross profit from other products. During December 2014, the products that we sold under the “Mega” private label constituted approximately 10.4% of our supermarket sales.
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During 2014, we closed 19 branches with a total area of approximately 50,000 square meters and reduced store space with a total area of 14,300 square meters as part of our strategy. All of our supermarket stores operations are owned by Mega Retail and its subsidiaries, and Mega Retail leases the real estate underlying the stores that it operates from BSRE and third parties.
Industry Overview
We estimate that retail sales of food, beverages and tobacco in Israel were approximately NIS 68 to 69 billion, or $17 to $18 billion, in 2014. This estimate is based on the data published by the Israeli Central Bureau of Statistics of the retail sales of food, drinks and tobacco in Israel in 2012 (2013-2014 has not yet been published) and the growth of expenditure of 3.5% in each of 2013 and 2014 for the consumption of food, beverages and tobacco of households in Israel at current prices.
The retail sales of food, beverages and tobacco in Israel include supermarkets, grocery stores, mini-markets and retail sales of fruit and vegetables, meat, poultry and fish. The supermarket retail chain market consists of two large chains: Shufersal and us, as well as other growing chains.
Based on data published by the Israeli Central Bureau of Statistics of the retail sales of food, drinks and tobacco in Israel, we estimate that approximately 29.7% of the total retail sales of food, beverages and tobacco in Israel in 2014 was made by the two largest chains and approximately 29.5% of the estimated retail sales made by supermarkets, groceries and mini-markets in Israel in 2014 was made by the two largest chains.
Competition
The Israeli food retailing industry is highly competitive and is characterized by high turnover and narrow operating margins. We compete with the largest supermarket chain, Shufersal, growing low-priced supermarket chains, such as Rami Levy, Bitan, Victory, and Osher Ad, independent grocers, open-air markets, and other retailers selling supermarket goods. Competitive pressures increase as the supermarket sector in Israel approaches higher saturation levels and will continue to increase in the event that our competitors expand their operations. Because there are few barriers to entry, new companies continue to enter the market with hard discount formats throughout the country, increasing available store space in an already saturated market.
According to Nielsen, our market share in 2014 was 12.2% of the total retail market of food, beverages and tobacco. The market share of our largest competitor, Shufersal, based on its financial reports, was approximately 20% in 2014. This market share is based on revenue as a percent of the retail market for food, beverages and tobacco in accordance with the definition of the Central Bureau of Statistics for 2012 and market growth of approximately 3.5% in each of 2013 and 2014. The difference in market share may give Shufersal a greater competitive advantage in its dealings with customers, suppliers and other third parties.
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In recent years, we and our competitors have established or expanded low-price and hard discount store formats. In 2013, we began rebranding “Mega Bool” stores as “You” stores. We completed converting a number of “Mega Bool” stores into “You” stores. As of March 31, 2015, we no longer sell under the
"Mega Bool" brand, and all remaining branches were converted to the "You" brand, which had a total of 37 branches as of March 31, 2015. Additionally, we decreased the size of some of our supermarkets, re-deployed the stores, and adjusted prices and product diversity. Other supermarket chains in recent years continued to aggressively increase their market share and expanded their presence in locations throughout Israel, often geographically beyond their original locations. The low barriers of entry, including the relatively low cost of establishing new smaller supermarket chains, have contributed to the increase in number and expansion of smaller supermarket chains in recent years and the corresponding decrease in the number of branches held by Mega and Shufersal.
Shufersal, the largest supermarket chain, has taken numerous initiatives in the last few years to improve its competitive position. The competitive position of Shufersal, together with the expansion of smaller supermarket chains in recent years, has contributed to the intensified competition we experienced in recent years, particularly with our larger stores.
Fourth Chain Company Ltd., consisting of a number of smaller supermarket chains which previously operated on a local geographic level, such as such as Rami Levy Rami Levy, Bitan, Victory, and Osher Ad, market a private label brand and jointly negotiate with suppliers. Possible similar mergers and combinations of other smaller supermarket chains in the future, may generate the efficiencies of a major nationally-spread chain and enable them to compete more efficiently with us and adversely affect our competitive position.
In January 2013, Bitan Wines Ltd. and the Zim Direct Marketing Ltd. chain of discount supermarkets merged. This merger, and possible similar mergers in the future, could adversely affect our competitive position.
Mega Retail signed an agreement under which it transferred eight branches with a total area of 25,000 sq. meters, to a new competitor in the fourth quarter of 2014. Under the agreement, the purchaser will have the option to use the purchasing and supply services of Mega for the branches in respect of the transferred activity, and Mega has the option to repurchase these branches at the end of the period defined in the agreement. In addition, other store branches sold by Mega Retail in 2014 increased the market share of a number of its competitors.
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Based on an approval from the Commissioner of the Israeli Antitrust Authority, the Fourth Chain entered into certain arrangements with certain smaller supermarket chains. This approval was granted subject to certain conditions and has since been extended until June 10, 2015. The Fourth Chain combines a number of other supermarket chains (the “Members”) which operate in locations throughout Israel and its purpose is to develop a private label and to jointly negotiate with suppliers. Pursuant to the approved extended arrangement, the Fourth Chain is permitted to negotiate with suppliers regarding the private label brand. The aforesaid arrangement, and possible similar combinations of other supermarket chains, may generate some of the efficiencies of a major nationally-spread chain and therefore enable them to compete more efficiently with the major chains.
In the sale of cosmetic, toiletries and hygiene products, we compete against establishments that sell such products, including the drug store chains SuperPharm and NewPharm.
Operations
The following table provides certain information regarding our supermarket stores as of December 31, 2014:
(*) Includes nine Eden stores within Mega.
Purchasing and Distribution
We purchase products for our supermarkets through a central purchasing office that selects products for all of our supermarkets (as well as a number of the products sold in Alonit/SuperAlonit and AM:PM stores, and not including Eden Teva) and negotiates prices, promotions and terms of payment with individual suppliers on a company-wide basis. We believe that the large volume of our purchases and our ability to offer chain-wide exposure for our suppliers’
products and promotions, enable us to avail ourselves of attractive volume-buying opportunities and manufacturers’ discounts.
Properties Number Square
meters
Stores(*) Leased from BSRE 86 132,000
Leased 111 171,000
Stores In Development Leased -
-Offices Leased from BSRE 2 8,220
Warehouses Leased from BSRE 2 40,000
Leased 1 14,000
Warehouses in Development Leased from BSRE and others -
-Car park Leased from BSRE 14,260
Total 202 379,480
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Through our distribution center in Rishon Letzion, we can distribute products from suppliers, manufacturers and importers, thus reducing prices and broadening the range of available products. The distribution center was sold on December 31, 2014, and we lease approximately 14,000 square meters at this site, of which approximately 7,000 square meters are operated as warehouse space and supply of fruits and vegetables. We conduct the administration of the warehouse and distribution by means of a computerized system that consolidates orders from all the stores and other stores while giving consideration to inventory levels, store requests and company planning. In addition, the Company signed a development agreement to build an additional distribution center which was completed in June of 2014, for which a building permit has been received. Mega Retail Ltd. commenced the operation of the logistics center in July of 2014.
This new distribution center will have approximately 28,000 square meters. For more information, see “Item 4. Information on the Company – B. Business Overview – Real Estate – Description of Real Estate Properties – Warehouses and Logistics Areas – Kibbutz Eyal.”
We purchase products for our supermarkets from approximately 530 suppliers, including manufacturers, importers and distributors. In 2014, approximately 81.5% of our grocery items and 97.4% of our meat and fish were delivered directly by suppliers to our stores. For certain other items, including 94.4% (in 2014) of fruits and vegetables, we provide distribution to our supermarkets through our distribution center. For the year ended December 31, 2014, approximately 32% of our supermarket purchases were of products distributed from our distribution center.
We actively seek to diversify our suppliers. However, we still purchase most of our dairy, fresh produce and poultry products from the Tnuva Corporation, which holds a leading position in the domestic dairy and poultry markets. In 2014, Tnuva’s products accounted for approximately 12.9% of all the products sold at our supermarkets. For more information on our arrangements with Tnuva, see “Item 7. Major Shareholders and Related Party Transactions – B.
Related Party Transactions – Agreements between Alon and Alon Blue Square's Subsidiaries – Arrangements with Tnuva.” In addition, the Strauss group, an Israeli food manufacturer, accounted for approximately 7.7% of all products sold at our supermarkets in 2014, and the Osem-Nestle group accounted for approximately 6.9% of all products sold at our supermarkets in 2014. We are a leading food retailer in Israel, as a result of which we are able to offer wide
Related Party Transactions – Agreements between Alon and Alon Blue Square's Subsidiaries – Arrangements with Tnuva.” In addition, the Strauss group, an Israeli food manufacturer, accounted for approximately 7.7% of all products sold at our supermarkets in 2014, and the Osem-Nestle group accounted for approximately 6.9% of all products sold at our supermarkets in 2014. We are a leading food retailer in Israel, as a result of which we are able to offer wide