Rami Levy Sees Improved Profits, 23% Sales Rise in 2017By
New stores, better cost structure to boost gross profit: Levy
Levy expects revenue to rise to 5.6 billion shekels this year
Israel’s leading discount food chain expects profitability to improve this year as new stores boost sales, and the company moves past one-time costs.
Revenue at Rami Levy Chain Stores Hashikma Marketing 2006 Ltd. is expected to grow by 23 percent this year to 5.6 billion shekels ($1.5 billion), Rami Levy, the retailer’s biggest shareholder, said in an interview in the company’s Jerusalem headquarters. That would be the biggest jump since 2012, according to data compiled by Bloomberg.
The company will open at least 14 branches this year, including its first 10 in major cities, Levy said. The 11 stores opened last year didn’t fully contribute to 2016 sales while incurring one-time costs, but those stores should be the driving force behind higher sales and profit this year, he said. The chain posted gross margins of 22 percent in 2016, according to its annual report, a slight increase over the previous year.
Opening more stores is central to the strategy of the company, which as a discount chain relies on maximizing each shop’s sales volume. That tactic backfired last year, as the new stores cannibalized existing ones and sales per meter fell by 11 percent, according to the company’s annual report. Unlike last year, the stores slated to open in 2017 won’t be located close to existing branches, Levy said.
While Rami Levy struggled, its biggest rival capitalized on the crash of the Mega grocery chain -- at one point Israel’s second-largest -- which was sold off in parts last year. Shufersal Ltd., Israel’s largest supermarket chain, boosted margins more and its shares have risen almost 50 percent since the start of 2016. Mega’s misfortunes will help Rami Levy this year, said Ilanit Sherf, head of research at Psagot investment House Ltd.
“Mega won’t survive in its current state, and that will benefit the others,” Sherf saiid by email. “In addition, the market is crowded with small, leveraged players and rising interest rates will lead to their disappearance one way or another.” Sherf recommends buying both Rami Levy and Shufersal shares.
Shares of Rami Levy have fallen 12 percent since the start of 2016 but are up 1.6 percent so far this year as of 1:02 p.m. in Tel Aviv.
“We didn’t have an easy year,” Levy said. “But we’re seeing the fruits of what we did now.”
Operating expenses should drop now that the company’s new vegetable logistics center is up and running, Levy said. Last year, Israel’s antitrust authority ended the company’s equal partnership with Bikurey Hasade, which managed the center, forcing Rami Levy to spend time and money to build its own. Vegetables account for about 14 percent of total revenue, Levy said.
Rami Levy was one of the big winners to arise from the 2011 social protests, the largest in Israel’s history. While middle-class Israelis directed their frustration with the high cost of living toward tycoons and big corporations, Levy grew his revenue by aggressively marketing his cheaper prices to the public.
Another piece of Levy’s push to boost profit margins is the private-label business, where the company buys food from local farmers and manufacturers and then slaps its brand on the product. Levy aims to increase private-label’s share of sales to 20 percent this year, from 12 percent now.
“The private label has a higher gross profit because you buy for less,” he said. “I won’t be competing against Coca Cola there.”
Boosting Online Sales
Rami Levy intends to hire 750 to 1,000 people for its online sales division, aiming to double its contribution to 7 percent of sales this year. That business isn’t as profitable as the traditional supermarket because worker productivity is lower, but Levy said he must increase investment there to match competitors and meet customers’ needs. The aim is to eventually reach a fifth of sales, Levy told Bloomberg News in 2015.
Shufersal’s online business provides 12 percent of revenue. That’s the largest proportion of any major chain in the world, according to Shufersal.
“I’m lagging behind Shufersal in the online business by a lot,” Levy said.