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Jun 19, 2012

Osher Ad vs All the Rest

All the local papers, or most of them at least, had features about the cut-throat competition in the supermarkets that we are suddenly experiencing in Bet Shemesh since the opening of the Osher Ad supermarket.

The main focus of the articles was actually looking at the devastating results of the competition on the city shuk that operates right across the street from Osher Ad twice a week. The shuk merchants are suffering terribly from the below-cost prices being offered in the supermarkets, along with the problems of the shuk itself that the city has been negligent in dealing with for so many years, leaving it dirty, hot, and with not enough parking. The city leadership has discussed for years the need to find a new and improved location for the shuk, yet it has done nothing to actually locate and prepare a location and effect a move. It was very painful to read the stories of how these merchants who were already having a difficult time because of the poor conditions of the shuk are now completely devastated with barely a customer coming to buy in the shuk.

The city really does need to find them an alternate location with decent conditions, and give them a chance to compete and do business respectfully.

There was one more interesting article. In the Tmura newspaper they had a brief interview with Miki Naimi, the entrepreneur behind the mall under construction in which Osher Ad is already operating.. Naimi said that he has decided to forgo management fees and rent from Osher Ad to the tune of 400,000 NIS per month (!) until further notice.

Naimi is doing thsi to give Osher Ad breathing space, to make a dent in the market and solidify their presence.  In order to be able to allow Osher Ad to continue offering rock-bottom pricing on products, thus effecting the overall dropping of prices in other supermarkets as well. This, Naimi says, will be remembered in the long-run by the customers.

Along with that, Naimi  is also the owner of a company dealing with housewares and other goods, and says they will sell supply to Osher Ad at cost, thus ensuring further bottoming of prices.

Using this long-range vision, as Naimi puts it, will ensure that the Naimi complex will be a success for a very long time and serve the city and its residents for a very long time.

That revelation by Naimi almost makes it seem as if the competition, or war as Naimi puts it, is on an unfair playing field. Despite the massive size of the shop, they are still functioning on minimal overhead.

On the other hand, it is hard to imagine how Osher Ad, a chain of supermarkets with about 8 locations, if I am not mistaken, can outbuy at cheaper prices other supermarkets like Shefa, Yesh, Shufersal (aka SuperSal), Mega, Kimat Chinam and others. The other supermarkets have chains of tens of stores each all around the country. their buying power should be far greater than that of Osher Ad. And the prices in Osher Ad are right now a bit better than in other Osher Ad stores, but still, Osher Ad is considered very cheap even in its other locations.

Why is that?

Naimi is definitely offering them a great perk that lets them cut costs and keep prices unusually low, but they have shown the ability to offer their cheap prices elsewhere as well, while other larger-chain supermarkets with better buying power kept prices inflated. So the difference is not just the rent, but more in the attitude of the store. Osher Ad is looking to bring the customer low prices (while obviously profiting more on quantity and volume), while the others are using low prices on some items to bring customers in and get them to pay high prices on many other items.

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  1. FYI - rent free periods for "anchor tenants", or "rental holidays" as they are known in the business are pretty standard at the begining of leases in Israel/Europe at all but the most exclusive of malls. I have seen rent free periods of longer than a year in 5 year plus leases (albeit management fees are normally charged).
    Naimi (as with other landlords) is doing this out of purely sensible commercial reasons.

    Your friend 'astute'

  2. It's very simple how Oshar Ad (and Rami Levi) can survive with lower prices. It's called making up for lower profit margins with higher volume. It's a simple model that the other greedy supermarket chains choose to ignore while they continue to rip us off. That is why you can buy Israeli products (such as Osem, Wissostky tea, etc.) for cheaper prices in the US. They are used to lower profit margins there and make up for it in volume

  3. Anon, not quite accurate. The large supers, Blue Square and Shufersal operate regular businesses that they have developed over the years, which include lots of internal departments, lots of staff, major logistical warehouses and the need to service hundreds of stores, most of which are located inside cities and rent is high. The private supers are family run (mostly, some are actually owned by the big ones) have less branches to worry about, located outside the city or in industrial zones and area usually concentrated in certain regions without the need to worry about far off branches like the big supers.

    You are right about the high volume. I read only a few years ago that Hatzi Hinam with only five stores, was over 4% of the entire food market (Blue Square and Shufersal have hundreds of branches each).

    The issue with cheaper prices in the US is about the producers and less the stores. Profit margins are not necessarily lower in the States.

    and like I commented early, this is now less about competition and more about ego and greed.

  4. Someone posted on the local email list that Osher Ad is illegally employing Eritreans - that would be one way to keep the costs down...

  5. "Someone posted on the local email list that Osher Ad is illegally employing Eritreans - that would be one way to keep the costs down...

    1. Who, precisely, is this mysterious "someone"?

    2. Which "local email list" is that?

    3. "Osher Ad is illegally employing Eritreans" is a potentially libellous remark. Can rw produce proof of such an accusation?

  6. josh - disagree. The larger supers have the ability to take advantage of the economies of scale associated with operating a large number of chains. They can negotiate better prices with suppliers, take advantage of central distribution warehouses, etc. The producers are certainly a large part of the problem, however, the large chains should do more to negotiate prices down.

    There are so many examples of how we get ripped off. My favorite is BBQ sauce..You can compare the cheapest price you'll find for Osem BBQ sauce versus the Hunt's imported sauce that Best Market sells and you will see that, per volume, the imported Hunt's sauce, at what many consider the most expensive supermarket in the Ramah, is cheaper!! It is insane.

  7. Darth Zeidah, you are right to ask for proof, this is a message that was sent to the Bet Shemesh and RBS email lists, feel free to follow up further with the poster...

    Date: Tue, 19 Jun 2012 11:58:25 +0300
    From: "Phil'n'Chanie Rosenfelder"
    To: BS_List , rbs lists - huji , Rbs2
    Subject: [BS/RBS list] from the RBS hebrew list

    for those who aren't on the hebrew list, but are interested in what the neighbours are thinking:
    a discussion is underway regarding the employment of illegal (eritrean)
    workers at certain stores (including / starting with osher-ad) and the low prices at such shops

    i feel it is important when choosing when to shop, to think i one can
    afford to spend more than the minimum in order to be mefarness local
    residents / jews

    as it happens, there are halachot about exactly these two issues:
    - saving money by shopping somewhere that hires illegal workers/ doesn't
    pay taxes
    - paying more in order to be me'farness neighbours / other Jews

    just wanted to invite everyoen to join the Hebrew rbs group -
    ramat@yahoogroups and be part of the "larger community"

  8. Hello rw, and thank you for taking the time and the trouble to post further information for me.

    I am not blaming you in any way, shape or form (after all, you are only the herald!), but the thoughts expressed in the e-mail quoted above just don't sit well with my conscience.

    I just think this call for discriminating against a business that may (or may not) employ Eritreans who may (or may not) pay taxes stinks of the racial discrimination that made apartheid-era South Africa a pariah nation.

    But hey! I do not live in RBS - in fact, I don't even live in Israel - so my opinions on the matter aren't really relevant.

  9. They can negotiate better prices with suppliers, take advantage of central distribution warehouses, etc.

    You'd be then surprised to know that the producers like Osem might actually give the independent supers better prices. They encourage the private supers because they want to break the duopoly that Mega and Shufersal still have on the entire industry. The deals are secretive, and in one case, I think that Mega bought a private super in Petach Tikva called Habiv that was selling at low prices, in order to get to look at the secret paperwork and contracts between it and the producers.

    It's not fair to compare US products with anything prepared elsewhere. The US is still the strongest market in the world and products are still cheap there given the economies of scale you mentioned. Given that, until about a few years ago, I was able to consistently buy Heinz ketchup at Hatzi Hinam for less than the Osem. The 1kg Heinz was priced around the same as the 750g osem. I remember specifically that it was during a period of very high tomato prices in Israel, that suddenly the Heinz became much more expensive and making it the 'premium' brand it still is today (where they can spend millions on Israeli tv marketing campaigns). Were import duties placed on it? I kind of doubt that actually.

  10. This is basic economic theory -- re: Oligopoly.

    This is an industry where brand is more important than price. Osher Ad is trying to use the price war to get a foothold into the market, while the competitors are joining in the price war to try to minimize the damage. In the long run, the war chests are going to run out and stores are going to go back to charging regular pricing or go bankrupt. However, Oseher Ad's presence will for the new regular pricing to be somewhat more competitive than it did before.

    The owner of the mall has a lot of incentive for helping to load up the war chest. A store that draws people into the mall, will make it more attractive to new tenants. Plus the new mall Big mall is going to open at some point. He would benefit by having Migdal HaMayim as "the" place to shop.

  11. Osher Ad, while one of the best supermarkets in Israel, frequently rings items erroneously. In my experience, about 5 to 10% of the items were ringed higher. I try to speak with the manager, but was not "available."
    Just beware. Check your receipt before you leave Osher Ad.


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