International investors love Rami Levy a supermarket chain in Israel. Sima Ella in a special interview tells you why.
/ By Sima Ella /
Rami Levy Chain Stores Hashikma Marketing 2006 Ltd. is a publicly listed company which has its headquarters located in the heart of the dilapidated Tlapiot Industrial Zone in Jerusalem.
The supermarket chain and wholesale distribution company was founded by Rami Levy in 1976 on Hashikma Street – which gave the company the core of its somewhat convoluted name, and the company is still controlled by him though it is now listed on the Tel Aviv Stock Exchange. Hashikma means “sycamore tree” in Hebrew by the way and it has been a symbol of prudent long-term growth for him ever since he began.
The man whose net worth is estimated to be around $500 million is sitting with me just one floor above that very first branch of the supermarket chain he opened on Hashikma Street. His original private holding company through which he controls 52% of the public entity (and holds much of its real estate which is leased to the branches) bears almost the same name: Rami Levy Hashikma Marketing Ltd.
How Does He Operate?
We sit together in a tiny, stuffy meeting room, illuminated only by harsh neon lighting. The restrooms, on the other hand, are spacious and spotlessly clean. I cannot help but asking myself if this may be some kind of a statement about the company’s priorities. What is more important…. an impressive meeting room, a stylish entrance lobby or…. clean toilets? If I have got it right, the meeting room is considered less important because it is used only by senior management and by the company’s business partners. However, the core of the company is not there anyway. The heart of the business is Mr. Levy himself, and in management terms he reports to himself alone, wherever he goes – obviously by definition an efficient process.
Most of the managers in the privately owned firm are operating branch managers of his 26 supermarkets. They all report directly to Rami Levy himself, and one of their primary goals is to make sure that every local branch supermarket offers the cheapest prices in its local area. They are authorized to cut prices when necessary without asking for anyone’s permission first. They are obliged to report to Rami Levy himself only after the prices are updated. He explains that this mechanism has saved the company a whole layer of middle management. He certainly has little time for “all the so-called great managers, who speak about new innovative methods of increasing sales” he tells me and adds: “Its all bullshit; only an excuse to raise salaries. They are not inventing anything. That kind of middle manager is completely redundant and simply gets in the way”.
Rami Levy is sitting in front of me in a simple blue T-shirt. Next to him sits Ran Efrati, he is Legal adviser who also handles Investor Relations – certainly an unusual combination of roles which probably reflects a very cautious company outlook on the outside world. I find myself looking at both of them, trying to solve a significant mystery: how is it that MSD Capital, a private equity firm founded by Michael Dell, and whose investment portfolio is believed to be over $10 billion, one day picked up the phone, rang a small supermarket chain in a tiny country like Israel and said Mr. Levy, we are interested in your company? And, adding to that this was the first investment MSD Capital Fund came to make in Israel, taking a 6.1% stake.
Or, for that matter, how is it that Fidelity Ventures, a major US venture firm, and part of the Fidelity Group, came to invest in the company for a 5.3% stake and become a business partner of Rami Levy as well thereby?
How Does he Succeed?
Rami Levy, who is today fifty-seven years old, did not invent the wheel. He did not invent an amazing formula in a laboratory, enabling him to bypass all his eleven other competitors, and build such a prosperous business leaving everyone else behind.
There are other discount supermarket chains in Israel. All his competitors also claim that they are selling a wide variety of products at the lowest price. All these chains are using marketing tricks developed by professional marketers, such as attractive merchandise displays and sales-stimulating fragrances in their branches.
All through our conversation I could not stop asking Rami Levy the same reasonable question: why were those prominent American private equity firms interested in his small Israeli supermarket chain in particular?
I got the best answers he could provide. I understand that their interest must have been raised initially by screening the company’s financial and business reports, which is their typical approach, but the final decision to invest in the company was likely made only after meeting Rami Levy himself!
Just as Warren Buffet purchased 80% of ‘Iscar’ for a $4 billion price tag, not just because it is a successful company, but because it was owned by people who obviously cared so much about it, in Stef and Ethan Wertheimer. It turns out the most sophisticated investors, who sometimes seem to be swimming in oceans of money, can see far ahead of the curve. And they have come to realize and value the company’s entrepreneurial roots and would not be blinded by numbers alone.
The message is clear: healthy firms, whose business success has been achieved with continuous growth – and strong balance sheets – and still have the continuing commitment of an energetic founding entrepreneur, likely have not yet reached their maximum growth point and such a company can be a good bargain
What then is making Rami Levy Hashikma Marketing (even the parent private company’s name is still a mouthful!) so successful?
A. Commitment: Levy is committed to his promise to sell at the lowest prices. He hires employees whose only task is to compare prices with all other food and grocery chains. If they find a product whose price is higher – their own price is cut immediately. Simply put: the customer comes first.
B. Business growth– The chain has been demonstrating continuous growth since inception. Currently, the company has 26 supermarkets, 2 of which are owned by franchisees. Levy plans to open 24 more by the end of 2015.
C. Profitability – In calendar year 2012 the company’s turnover for the year was NIS 2, 800, 000 or about $750 million. This is four times higher than the NIS 689 million it achieved in calendar 2007, which was the year the company first went public. In calendar 2012 net profit for the year was NIS 110 million – providing a 40% return on the company’s book equity of NIS 253 million at December 31st 2012. Impressive – hard numbers rarely lie and certainly not these numbers. By turning over his book equity nearly twelve times in the year Rami Levy can make a decent return on his capital with razor thin margins on each shekel of sales – and that is his secret for offering low prices.
What Then is His Story?
Practically every Israeli has heard about Rami Levy and many of them sympathize with the man, who is regarded as a reliable business person, who is truly willing to grant his customers the cheapest price possible. In short, consumers have given him their trust just as some of his larger competitors have foolishly squandered their previous hold on the loyalties of their customers – to his advantage. Trust is much harder to gain than it is to lose and Rami Levy is well aware of this.
Here is how it all started…. there was a 40 Square metre grocery store which belonged to Rami Levy’s grandfather in the ‘Machane Yehuda’ Market, on Hashikma Street in Jerusalem. Rami Levy himself grew up in poverty in the Pachim neighborhood nearby – pachim means garbage in Hebrew by the way. His parents were kind, ordinary people who immigrated to Israel from Kurdistan. His father was a worker employed by the Jerusalem municipality and his mother was a stay-at-home housewife who had to take care of a big family.
Rami Levy flunked out of school due to severe dyslexia, and even today he still has trouble reading. As an aside, it seems the impact of dyslexia has been a contributing feature driving a number of important people to succeed – the Chairman of Cisco, to name but one and who has publicly documented its effect on him. At age 14 Rami Levy began working with his grandfather at the store, pushing a wheelbarrow around in the market and, after completing his army service in 1976, he joined his grandfather in the little store in Hashikma Street –which later became the source of his supermarket chain’s brand name.
Whenever he served customers, Rami Levy noticed that many of them were looking to buy merchandise at wholesale prices. Most wholesale suppliers could not handle this kind of low-volume selling, and that made him take the decision which eventually led to the birth of his entire empire: selling his merchandize to single customers at wholesale prices. In North America, a similar revolution that was called “Cash and Carry” had been underway for some time. At the beginning, however, Rami Levy gained precisely zero profits doing this.
The next step he took was to-form stronger business relationships with his suppliers, enabling him to buy more keenly and this enabled him to making a small profit for the first time due to the wider spreads he could obtain. The grocery business is one where margins are razor thin at the best of times and to succeed you must also rapidly rotate your capital by driving large volumes of business in as short a time as possible. Rami Levy understood and implemented this philosophy. By that time, the rumour about the grocery store selling at cheap prices had already begun to spread. Rami Levy then had to renovate and enlarge the small store in order to turn it into a more than 100 square meter establishment, allowing him to increase the variety of products he could carry and increase his business
After two more years Rami Levy was able to start selling to business customers as well, such as restaurants, hotels and other big customers, thus entering the wholesale distribution business – first for groceries and later for other products as well. By doing so it gave him even greater buying power with his suppliers, enabling him to shave his costs continually for the benefit of all of his customers, including retail. It then took him 5 more years to open a double-size store of about 200 square meters, serving customers from all of Jerusalem and its surroundings. By 2008, Levy had already opened several giant supermarkets in the Jerusalem area.
Rami Levy Goes Public
In 2007, after the operating company subsidiary Rami Levy Chain Stores Hashikma Marketing 2006 Ltd. went public on the Tel Aviv Exchange he was already a Jerusalem-native business hero, but few people outside of the relatively small city of Jerusalem had heard of him.
In that year, Levy made the first move that made the other supermarket chains notice him. He opened a giant store near the northern city of Haifa. The big players in the market, ‘Shufersal’ and ‘Haribua Hakachol’ reacted immediately by cutting their own prices in their nearby branches.
The price war that followed was described by the Israeli media as: the “chicken battle”: the price of chicken declined from NIS 10-20 per kilo to as little as NIS 0.89 per kilo at one point. The media immediately began chasing the new star. Who is he? Where did he come from? How can he fight the food tycoons? Is he some kind of modern Robin Hood?
At some point it looked as if Rami Levy’s willingness to cut prices drastically might have permanently damaged his own business but he did not worry at all. On the contrary, Levy was celebrating. More than that, sales in the quarter following the “chicken battle” soared increasing by 40%. Encouraged by this success, Rami Levy addressed the next destination for his chain, opening stores in the Dan conurbation, otherwise known as the greater Tel Aviv metropolitan area.
The supplier’s side of things was also worked on and Rami Levy began to offer his customers an additional discount for bulk purchasing. The manufacturers did not like the idea and prominent suppliers like Coca Cola boycotted the chain, though this was later called off after antitrust authorities ruled this to be illegal.
“I’m not struggling against nor fighting anybody”, explains Rami Levy, “I compete with the big supermarket chains fairly and honestly. My business strategy is to act for the benefit of all of my customers” There it is again in a nutshell: the customer comes first.
In August 2009 Levy acquired the almost-bankrupt factory “Of Ha’emek”, a chicken products plant. In September 2010 he founded his cellular telecom branch: “Rami Levi Communications”.
Since 2010 Levy has been active in the real estate field in Israel and also in Bulgaria. In 2011 he entered the insurance business. Levy also finds the time to serve on the Jerusalem City Council.
Rami Levy Speaks for Himself
Levy is married to Adina, who serves as the group’s treasurer. The couple have four children.
When I called Iris, Rami Levy’s secretary to find out who takes care of the group’s public relations, she laughed and informed me that they have no public relations service. “So how can I set a date for a meeting with Rami?”, I asked. She replied: “Tomorrow afternoon at 1:00 PM, does this suit you?”
Even now Rami goes out and visits his stores almost every day, checking the prices, arranging the displays, and he knows many of his employees by their first names.
“I did not start from the bottom”, says Rami Levy, “I don’t even realize what does the word ‘bottom’ means. I chat with all my customers as an equal. Each of them can complain directly to me. I am truly interested in those complaints because I wish to fix their problems. My experience has taught me that taking good care of your customers’ complaints can only improve your business.”
The Rami Levy chain’s method of displaying its products is different from any other supermarket. Basics and child- oriented products are arranged near the entrance, in order to enable the customer to purchase the things he actually most needs first, and then decide whether he or she would like to buy some of the additional merchandise on offer in the rest of the store. Rami Levy says that he is not interested in urging his clients to buy more. He prefers that the client buys less this time, but will be a satisfied customer and come back again.
Sales are booming so it all must be working and the stock is up 400% since going public in 2007. In the last three months alone it has gone up 25% and now has a market cap of almost NIS 2, 300, 000, or about $600 million. Rami Levy says there is plenty of room to grow further in Israel and plans to double the number of his stores here by 2015: his competitors are probably quite worried.