Seeds of Failure at a Supermarket Chain

The collapse of a company is not necessarily an outcome of a single calamitous event. More likely, a final collapse will follow a period of several months or years of gradual deterioration in the management and performance of the failing company. The causes are usually a mixture of external events or market factors and not least internal actions or non-actions committed by the company. This seems to be the case with Mega Retailing, the second largest chain of supermarkets in Israel, that practically collapsed this month (January ’16) but the process of its deterioration may be traced through at least five years backwards.

The current Mega retail chain is in fact a successor of a consumer co-operative chain, “Co-op Blue Square”, established in the 1930s. That co-operative existed until the late 1990s when it could no longer sustain itself. Consumers who had a stake in the enterprise were required to sell their shares and a majority stake in “Blue Square” (73%) was acquired by the Alon energy group.

The company, renamed in Israel as “Alon Blue Square”, expanded since 2003 and added more business units in different retail areas. For instance, Alon brought under the rooftop of Blue Square (holding a 78% stake) its compounds of car fueling stations with adjacent trade services. The chain of supermarkets received the new brand name Mega (after going through an earlier short phase under the name “Super Centre”), instituted as a subsidiary in full control of Blue Square, its home company. Yet another critical move saw the establishment of “Blue Square Real Estate”, a subsidiary of the home company, which divorced Mega from control over its physical locations, making the real estate company its landlord. At the end, Blue Square is about to lose the core business that carried its name to begin with.

  • Alon Blue Square also acquired a chain of convenience stores (“am:pm”) that is separate from Mega but competes with it in city centres and neighbourhoods.

Multiple reasons can be given for the poor condition of Mega as proposed in the media. Some blame the high operating costs of Mega on wages and benefits for employees being higher than standard in the food retail industry; it is probably a legacy inherited from the older days of Co-op Blue Square when it was affiliated with a strong labour union. Not to be confused, employees in stores still earn relatively low wages, but with the low margins in the industry, the differences from competitors are claimed to be crucial. On the other hand, the management could be held responsible for keeping deficiencies reminiscent of the culture of Co-op in those older days. The owners on their part did not seem to be interested enough in what was happening to their supermarket company. Mega was lacking in strategic (marketing) thinking and mindset that would allow it to adapt better to new realities of a competitive market and higher standards of servicing and merchandising.

One should not go far to find what is wrong with the Mega chain. The problems of Mega show most visibly and strikingly in its stores. A particular branch is used here as an exemplar to demonstrate some troubling aspects. It is a neighbourhood store in the northern part of Tel-Aviv. The supermarket is not large (estimated at a little less than 300sqm or about 2500sqf) with a main hall (75% of its area) and an extension (two “corridors”). The store was established in the early 1970s and for a decade or two it was considered spacious and modern. The last major renovation took place about fifteen years ago but unfortunately within a few years it has lost much of its newly gained attraction.

There are six columns of displays across the main hall which leave too little space for moving in the aisles between them. In addition, the displays reach high above the head. The whole arrangement of this hall makes a shopper feel lost in space and closed-in. Bad merchandising appears to make the supermarket look crowded and untidy. A whole new concept should have been applied to this store with fewer columns, lower displays (e.g., no more than 1.50m) that would allow shoppers to look beyond the aisle, and fewer product types and brands (SKUs) on offer — in this supermarket ‘less is more’ would be perfectly right. Shoppers obliged to get essential products like bakery and dairy in corridors may find it unpleasant.

Another troubling matter in the store concerns the shopping carts and baskets, or rather the lack of them. To pick-up one of the few shopping carts available one has to pass across the cashiers and away from the entrance. Even if one was lucky to get a shopping cart, he or she would find the cart difficult to navigate with in the aisles, especially as the store, like the whole chain, moved to larger carts definitely not useful in this specific store. What shoppers should have been provided are hand-held baskets (or wheeled baskets), and these should have been arranged in ‘towers’ near the entrance of the supermarket (not hidden under cashier desks). The baskets would serve a much better purpose in the entry area than a large unappealing promotional stand positioned there. As a result, the store also does not have a welcoming and convenient “decompression zone”.

  • Considering the competition in vicinity (e.g., a large supermarket of the leader chain “Supersol” in a nearby shopping centre; a minimarket store across the street), the approach in that  Mega’s store, whether out of flawed thinking or lack of care, could not be affordable.

Similar problems can be found in other Mega stores: (a) A delivery service interrupts and blocks the way out for customers who take home their shopping bags  — delivery boxes are piled in a passage on the exit from cashiers, personnel are handling deliveries in the same area where customers should complete their shopping and leave, and preparing deliveries for some shoppers halts others for long minutes; (b) The staff arranges merchandise on shelves during the day, often blocking aisles with box-loaded shopping carts or boxes left on the floor — shoppers have to make their way competing with personnel on access to displays; (c) Product displays do not look neat and tidy, some items get out-of-place, some are falling to one side or another — even if shoppers are responsible for not leaving items in place, a store worker should always pass by, check and fix displays. If shoppers find a store in good order, clean and tidy, they will (mostly) feel obliged to make an effort to keep it that way for everyone to enjoy.

It does not seem to be a question of good will. Mega stores are missing order and organisation. Moreover, the employees may not have a guiding hand and initiative they need from either general management or store managers to get the supermarkets look and feel the way they probably aim at. In a  presentation (in Hebrew) of a strategic plan from 2013 (Blue Square’s website) the management of Mega shows that on top of every other goal they want the customers to love their stores; Mega’s vision through its history is “At Mega (we’re) listening to you! Always, at every place and in every encounter, because we really care.” Yet the stores could not show for it. The employees may have wanted it to happen but the management was not behind them to show them how, and it is still unclear why store managers were not helping or how well coordinated they were with top management.

A seasoned consultant in marketing and retailing (Galit Moor, “Shopoholist”) told “The Marker” Israeli business newspaper about rivalries and non-coordination between the trade and operational departments of Mega — the trade people would reach agreements with suppliers but operations people would not respect them and not follow them through in the stores, causing confusion and loss of trust of suppliers. She also related to lack of understanding of consumers and not really listening to their concerns, a top management detached from the stores, and mistakes in running stores, particularly failures in dealing with details at the store level (MarkerWeek, 24 July 2015). The management was not focused, undecided whether to compete on price (e.g., to fight off discount chains) or on enhanced customer experience (blending price perception, service, convenience, variety and quality of products), and therefore it must have had difficulties setting clear priorities to staff at stores. It is not too surprising that staff and managers could neither treat properly details of service and merchandising in the stores.

In mid-2015 Mega was in debt of 1.3 billion shekels (~$340m), 700 million shekels of which owed to suppliers and the rest to banks. The delay in payments to suppliers has led to sour relations with them, where some have also froze or reduced further supplies to the retail chain. Mega started with an aggressive plan of cuts, primarily closing stores, but it could not save it at this stage. By the end of 2015, just before the court intervened (stay of proceedings), the debt accumulated to 1.5 billion shekels, half of which to suppliers who largely lost confidence in and patience with Mega.

In the previous decade Mega has expanded while defining three sub-chains: “Mega City” supermarkets for serving neighbourhoods, large central “Mega”-stores, and large discount stores (“Mega Bull”, i.e., “target”). The latter was re-named just three years ago “You” and added more stores.  Mega was actually responding to a move similar in kind by the leading competitor Supersol with their sub-chains “My Supersol” neighbourhood  supermarkets, “Supersol Express”, and large discount stores “Supersol Deal” (a confounded fourth sub-chain of ‘warehouse’ discount stores “Big” was later eliminated). Probably not by coincidence, the restructuring of chains by Mega and Supersol resemble a strategic move by Tesco in the 1990s. The expansion, and especially the establishment of very large stores, has led the Israeli chains, like the British one, into trouble. The suspect reasons are failure to adapt in time to changes in economic atmosphere and consumer behaviour since 2008 vis-à-vis an inadequate reply to the challenge from new discount chains. (It is now revealed that Tesco faulted in delaying payments to suppliers, as Mega did.)

  • Mega operated in total about 185 stores in mid-2015. Initially the plan was to close 32 stores, mainly their “You” discount stores. However, it eventually closed at least 55 stores by the end of the year, and Mega is now left with fewer than 130 stores. Its number of employees was intended to be reduced from 6,000 to 5,000 but actually dropped to 3,500 (most of them were store employees, but the staff in headquarters was also significantly cut).
  • In the first half of 2015 Mega reported sales of 2.6 billion shekels (~$685m), down from almost three billion shekels in same period of 2014. Of total sales, 80% were attributed to the stores Mega expected to keep and 20% to the 32 stores intended to be shut down. In profit, stores planned-to-continue earned 55m shekels whereas stores planned to close lost 577m shekels. As it turned out, the initial recovery plan was not sufficient.
  • Mega is second to Supersol in the food retailing industry yet not so close behind: Supersol’s market share in 2014 was estimated 18% versus Mega with 9% (a ratio of 2:1). The private discount chains held together 28% [stable 45% attributed to open-air markets, groceries and minimarket stores]. It should be noted that according to predictions (2013-2015) the private chains were expected to gain mostly at the expense of Mega with a small but not negligible slide down for Supersol (The Marker, 30 Dec. 2014) — Mega found itself in a classic disadvantageous ‘sandwich’ position.

From start Mega committed to selling at lower prices than other stores in towns and cities. At the same time, it aimed for each store to be an integral part of its community, so that residents-shoppers will feel at home in their supermarkets. However, Mega did not succeed in maintaining its ‘low price’ position according to price comparisons published over time. It is questionable whether restructuring its chain, following Supersol, was necessary and suitable for Mega. The position of Mega City on prices may have been only weakened and diluted relative to its discount sub-chain. Mega has already had a well-entrenched network of neighbourhood supermarkets with emphasis on lowering cost to consumers — it should have concentrated its efforts on this chain. Yet, Mega did not succeed to keep lower prices as well as invest in the shopping experience and product variety in its stores, potentially conflicting objectives; it did not offer thereof a consistent value proposition.

It is difficult to understand how the owners of Alon Blue Square did not notice what was happening at Mega. They are accused of taking high dividends over time (the owners claim they have been misinformed about real profits, ringing bells from Tesco). The owners may have also acted irresponsibly by means of an over-charging rental policy of its real-estate subsidiary towards Mega’s stores.

The interests of the owners at this stage are vague. Blue Square chose to rent properties to chains that took over stores of Mega-You — was it to salvage Mega or to protect other interests of Blue Square? Proposals published to buy Mega retail chain actually focus on Blue Square Real Estate. Truly, one has to buy the properties in order to be able to continue operating stores in them, but that is only due to a status created by the owners that may now play against Mega. Hence, it could be a major difference if the potential buyer is a retailer or a real-estate developer. It is in the public’s and the food retailing industry’s interest that the buyer is required to take over also the supermarket business of Mega and not dispose of it. It is furthermore important that the supermarket industry has at least one other strong retail chain as a challenger to Supersol, not leaving Supersol over-powered against a competition too dispersed among several small and medium chains.

There is not really a good reason to miss “Blue Square” as a co-operative. A new competitive business ownership and directive has had an opportunity to re-create the supermarket chain and its brand. The chain was re-branded as Mega and yet it disappointed because core components of strategy, culture and implementation were flawed. It is now time to re-invent the concept of the chain and its brand. Nonetheless, the title “Blue Square” at Alon without the supermarket retail chain will be quite void and meaningless.

Ron Ventura, Ph.D. (Marketing)

2 thoughts on “Seeds of Failure at a Supermarket Chain

  1. Danny Rainer

    Highly insightful and informative article which sheds a lot of light into the collapse of this supermarket chain.

  2. Yoav Tenembaum

    An excellent article! I think that the comparison drawn with the Tesco experience adds a general conceptual dimension that goes beyond the particular case study of Mega. It’s a well-written and clearly argued article!

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