Checkout champion

Rami Levy transforms Israel's supermarket culture by offering lower prices, good service.

By SHLOMO MAITAL
supermarket521 (photo credit: Yossi Zamir/ Flash90)
supermarket521
(photo credit: Yossi Zamir/ Flash90)
The high cost of Living, an American journalist once wrote, is simply the cost of high living. Not for Israel’s embattled working middle class. They struggle to pay for groceries, housing, property taxes, gasoline, water and electricity, as prices rise and incomes remain flat. Food, heat and shelter are not high living.
Last summer’s massive demonstrations focused on the cost of living and may reignite again this summer. Even the Bank of Israel is concerned, devoting an unusual chapter to the subject in its latest annual report.
This is why the saga of Rami Levy, price-cutting entrepreneur, is so important. On completing his army service in 1976, Levy went to Jerusalem’s Mahane Yehuda market.
He spotted something. Many shoppers bought from wholesalers in that market because their prices were cheap. But the wholesalers treated such customers with scorn; they brought little revenue and were a nuisance.
So Levy rented an old warehouse, bought produce from wholesalers and sold it to customers at the prices he himself paid, offering fast, courteous service. After three months, with a large and growing customer base, he negotiated quantity discounts with his suppliers, passed on the savings to his customers, began to expand − and the rest is history.
Success story
Today, 36 years later, Rami Levy Hashikma Marketing Ltd. has 24 discount supermarkets throughout Israel, with 2 billion shekels ($533 million) in annual revenues, 4,000 workers and prices 10-20 percent less than regular supermarkets.
Levy’s goal: 50 supermarkets, one in every city or town. Levy also invests in real estate, has opened a cellular telephone company and serves on the Jerusalem City Council, with responsibility for human resources.
His company’s shares are listed on the TA 100 Index at the Tel Aviv Stock Exchange.
Levy holds about 60 percent of his eponymous company’s shares, worth an estimated 1 b. shekels ($267 m.). He grew his company slowly but surely by reinvesting profits. Unlike most Israeli tycoons, he has almost no long-term debt.
“I worked in my business from day one, and I know every aspect of its operations, every department, every division,” says Levy, expounding his philosophy of business to The Jerusalem Report. “I ‘feel’ my clients and use this knowledge of my clients and their needs to plan and to build my goals for the chain’s expansion. I also use it for opening new businesses, such as Rami Levy Communications.”
Last autumn, Levy announced he would open a discount cell phone company, leveraging a change in government regulations that allows him to sell cell phone minutes as a mobile virtual network operator, using the infrastructure of Pelephone, an existing company.
His prices per minute are half those of his competitors and his contract “deals” are ultra-simple. He recently announced a new venture: marketing luxury espresso coffee machines. Nespresso machines can cost as much as $300; count on Rami Levy’s version to cost far less. As he has done consistently, Levy spots high-margin items and uses his business skill and efficiency to slash prices while maintaining sustainable profits.
Just before Rosh Hashana, in 2010, Levy got free publicity for his stores with a stroke of marketing genius. He offered shoppers chicken for one shekel per kilo (about $0.12 a pound), limited to two kilograms (4.4 pounds) per customer. For those for whom chicken is a luxury, it was a sensation. Levy does not spend money on advertising; he relies on word of mouth.
Despite government task forces on social inequality and wealth concentration, the middle class is increasingly squeezed. The problem is that in dollars or euros, prices in Israel are equal to or higher than those in advanced Western nations, but incomes are 30 percent lower. So, for instance, the business daily “Calcalist” claims it takes 11 years’ worth of average wages to buy a two bedroom apartment in Israel, compared to half that in America and only 30 months in Sweden.
Stung by such statistics, the government recently announced plans to construct some 180,000 flats over the next five years in an effort to make housing more affordable.
Paamonim, a non-profit organization that helps households manage their finances more efficiently, reported that the number of middle-class families seeking its help has recently spiked. Some 1,400 families contacted Paamonim in January and February alone, 60 percent more than during the same months last year. One of the main causes was a steep rise in the price of electricity.
When income barely matches outlay, any price rise tips families into the red. Many of those helped by Paamonim had household incomes of 15,000 shekels a month, placing them in the top 70 to 90 percent of all income earners.
The Levy school of economics
Levy sees the heavy hand of government behind much of the country’s socioeconomic woes and calls for an end to public sector monopolies, “for example, in ownership of land, in taxes, electricity prices, water prices.”
“Government bureaucracy contributes to this,” he says. “If someone earns 15,000 shekels a month, double the average wage, he is left with 9,000 shekels after taxes. But he then pays another half, or 4,500 shekels, in property tax and import duties. The state takes 10,000 shekels! This is the whole problem. Even those who earn minimum wages pay high taxes as duties on imported products, property taxes and more.”
While Levy’s 4,500-shekel figure seems high, it may also include the “tax” citizens pay in higher prices, through monopoly pricing.
He believes in mutual responsibility.
“Large organizations must contribute to their community,” he says. “Beyond that, I believe in work. There should be tax relief given to employers so that they can increase the number of jobs. We need to raise the minimum wage. Many times, my workers stop working, so they can protect the state benefits they receive from having low incomes.”
Levy’s business model is pragmatic and simple. To offer low prices, you must have low costs. Levy pays the same as his competitors for produce and food. But he says he keeps his overheads to a bare minimum, perhaps one-tenth that of his competitors.
He employs family members; his wife Adina is his deputy, and his three children and his father, a former Jerusalem Municipality worker, have senior positions in the business.
The entrepreneur, along with his staff, keeps track of his competitors’ prices, to ensure his are lowest. He promotes from within.
His operations manager began as a truck driver and his supply-chain manager started as a cashier.
But he does not skimp on customer service.
He says he employs double the proportion of workers in customer-facing departments.
“We are committed to being the cheapest chain,” he says, “but not at the expense of good service,” He is a classic example of Darwin’s theory of evolution, applied to business. Where existing supermarket chains enjoyed high profit margins, through monopolistic market power, Levy found an evolutionary niche.
He occupied that niche cleverly, offering both lower prices and good service, and prospered.
The existing chains fought hard. They brought legal suits to keep his chain out of the city of Modi’in, for instance, but lost.
Now they are imitating him. In nature and in business, a successful “mutation” reproduces to utilize a plentiful food source, if it can. Levy has spawned several imitators, including Supersol’s “Yesh” discount chain, launched in August 2008.
If there is a weakness in Levy’s business design, it is in management capacity. As he expands, I believe his senior management team will be increasingly stretched. At present, I have no idea how he himself runs a hands-on two-billion-shekel operation while at the same time playing a demanding role on Jerusalem’s City Council and constantly initiating new businesses. He told me he does not believe in hiring management consultants.
But I fervently hope he will find a way to get management help without ruining his super-lean cost structure.
In the final analysis, Darwin and business innovation will always trump government committees and task forces. If aspiring innovators like Levy find uncompetitive high margin products and supply them at cut-rate prices, defying the monopolies and the tycoons, everyone will benefit.
It is gratifying that today, Rami Levy’s shares are worth more than, for instance, the shares held by tycoon Nochi Dankner in his IDB holding company. IDB used bank credit to pyramid extensive leveraged industrial holdings and is a focus of the current Committee on Increasing Competitiveness, which has just tabled its draft report.
The committee, headed by Eyal Gabai, a former director general of the Prime Minister’s Office, and Haim Shani, a former director general of the Finance Ministry, is mandated to find ways to increase competition in Israel’s monopoly-ridden economy.
I hope entrepreneurs like Levy will proliferate.
Let them woo customers with good value and fair prices. And let them prosper and grow wealthy as a result. Author Ayn Rand once wrote that the upper class is the past, but the middle class is the future; perhaps Levy and other discounters will help ensure that the middle class has one.