Mega mistakes

The Mega supermarket chain is the latter-day descendant of the old Histadrut labor federation-owned chain of groceries that once dominated the Israeli landscape.

Supermarket. (photo credit: MARC ISRAEL SELLEM/THE JERUSALEM POST)
The Mega supermarket chain is more than what meets the eye. It is the latter-day descendant of the old Histadrut labor federation-owned chain of groceries that once dominated the Israeli landscape.
Known as the Tzarchania, these socialist emporiums appeared as the ever-present arm of the establishment.
In time and after a succession of privatization essays and frequent name-changes, we today know Mega, its low-cost latecomer offshoot, You, and its organic retailer, Eden Teva Market.
Some of the country’s wealthiest kibbutzim – 42 in all – comprise Mega’s largest single shareholder, controlling 47 percent of its stock. They are also major suppliers, which leads to a curious situation whereby owners sell wholesale to the company they control.
But that is not the only anomaly in the conglomerate.
Its entire structure almost collapsed in a messy heap this week and was ostensibly saved in a cliffhanger court-imposed compromise that may or may not work in the long haul. Only time will tell whether the chain can be saved.
The Mega story begs comparison to incomparably greater economic upheavals and, although the scale is vastly different, not all the analogies drawn are baseless.
There are many who likened the Mega throes to those of the global banks that teetered precariously in the 2008 credit-crunch crisis. They were judged to be “too big to fail.” In the modest Israeli retail scene, Mega too is considered “too big to fail.”
Even after it was seemingly rescued, 1,000 of its employees and another 600 from Eden will be laid off.
The chain will close 35 branches. But were it not for the bailout, 6,000 employees would have been sacked and many of the smaller businesses that supply Mega would have gone belly up, costing a further 4,000 to 5,000 jobs.
A total of some 11,000 jobs is huge in the Israeli context and therefore the knee-jerk orientation was not to let Mega go under.
Mega’s misadventures have also been compared to Greece’s near-insolvency. Again, the scales are different, but heedless mismanagement and outright greed feature in both stories and not dissimilarly so.
Eden was mismanaged in many ways. It pretended to feature low-cost outlets that on the whole were more expensive than its traditional competitors. The fact that genuine discount chains now dot Israel’s retail map cut deeply into Mega’s profits yet didn’t mitigate its conceit.
Still, that is the least of Mega’s troubles. It was milked by its owners. The Alon-Ribua Hakahol holding company, of which Mega is a subsidiary, also owns the real estate firm from which the supermarkets rent their premises at exorbitant rates. Thus no matter how badly the stores do, the corporation profits.
Moreover, although Mega was failing spectacularly, its shareholders awarded themselves impressive dividends.
All the while, they held their helpless suppliers hostage and left them no choice but to support the holding corporation’s rehabilitation program – for fear that if Mega were allowed to disintegrate, its massive debts would remain unpaid. Thus the fate of small wholesalers was inextricably tethered to Mega.
Finally, it was a mammoth creditor – Bank Hapoalim – that forced the holding company to do what the captive suppliers could not.
The bank dragged the shareholders to court and nixed their convenient cop-out deal. It coerced the holding company to invest more of its own resources in a business it had exploited to the point of near-destruction.
There are no guarantees of Mega’s long-term survival, but at least its behind-the-scenes movers and shakers were not allowed to get away with extorting vulnerable employees and dangerously exposed suppliers.
There is a lesson here for the economy as a whole.
Financial trickery can work only so far, even if it is not illegal in the narrowest interpretation of trade regulations.
In the end, sleight of hand and abuse of the system are bound to undermine the basic business on which the corporate edifice is constructed and which finaglers scheme to squeeze dry. Profiting beyond one’s means is inescapably the fastest route to ruin.