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Blue Square Israel Ltd.

Blue Square Israel Ltd.

2 Amal Street
Afek ind, zone
Rosh Haayin 48092
Israel
Telephone: (+ 972)3-9282222
Fax: (+ 972)3-9282999
Web site: http://www.coop.co.il

Public Subsidiary of Co-Op Blue Square Consumer
Cooperative Society Incorporated:
1991
Employees: 7,400
Sales: NIS 5.2 billion ($1.29 billion)(2000)
Stock Exchanges: Tel Aviv New York
Ticker Symbol: BSI
NAIC: 44511 Supermarkets and Other Grocery (Except Convenience)Stores

Israeli retail leader Blue Square Israel Ltd. is helping to change the way Israel shops. The publicly listed company on both New York and Tel Aviv stock exchanges is a subsidiary of Co-Op Blue Square Consumer Cooperative Society, which owns 80 percent of Blue Square Israel and is itself preparing to convert from its cooperative status into that of a publicly listed corporation. After selling off a number of diversified interests, including department stores, furniture centers, DIY stores, and retail franchises for such international brands as Zara and HM, much of which were sold back to its Co-Op parent, Blue Square Israel is concentrating on building its nationally operating network of more than 170 supermarkets. Since the late 1990s, Blue Square has been consolidating its supermarket operations into several supermarket formats to position itself within each of Israels varied consumer segments. The companys youngest is the low-priced Mega Outlet, featuring selling floor space of more than 5,000 square meters, launched in 1999. At the end of 2000, there were seven Mega Outlets operating in Jerusalem, Holon, outside of Tel Aviv, Beer Sheva, Hadera, and Netanya, and two stores in Haifa. The companys primary retail chains operate under the Super Center, Super Co-Op, and Hyper CoOp banners, accounting for the bulk of the companys retail portfolio and sales. More specialized formats include Pharm Store, a pharmacy chain located primarily as in-store shops in the companys larger supermarkets; and Shefa Mehadrin, a supermarket chain catering to the specific demands of Israels large ultra-orthodox population. The company is phasing out its small-format, discount Zil vZol, in favor of the new Super Center City store format meant to compete with the countrys open-air markets and traditional small grocer shops. Blue Square also has targeted Israels Arab citizens, adapting its stores for these customers as well. In addition, Blue Square Israel has launched an on-line shopping site. The company has more than 250,000 square meters of total selling space. With sales of NIS 5.2 billion ($1.29 billion), Blue Square retains the leading share as the countrys largest retailer, ahead of rival Super Sol Ltd. Yet the relatively low supermarket penetration in the country, where open-air markets and small stores still account for more than half of all food and clothing purchases, gives Blue Square plenty of room for future growth.

Cooperative Pioneers in the 1930s

Blue Square traced its origins to the pre-Israel 1920s, when a group of workers in the town of Givatayim set up their own cooperative grocery business. Inspired in part by the socialist idealism that formed the backbone of the growing Zionist movement and based on a model already prevalent in Europe, the cooperative was also a means for its members to make their food purchases at lower prices than they could find otherwise. Operated by workers for workers, this first cooperative proved to be the first of many similar cooperative ventures across the then-British colony.

Blue Squares oldest direct predecessor was the labor federation Histadruts cooperative set up on Tel Avivs Reines Street in 1937. This and the many other cooperatives formed during the prewar years bore little resemblance to supermarkets. Often operated from their members homes, the cooperatives products were available only to members, who each paid annual fees and often provided manpower as well. By the mid-1940s, there were more than 26,000 cooperative members throughout Israel, and their purchase power already represented some 3 percent of the near-nations total retail activity. The cooperatives remained small, independent operations, linked together in a more or less informal affiliation.

The end of the first Arab-Israeli war in 1948 and the creation of the state of Israel that same year gave new impetus to the cooperative movement. The cooperative movement fitted in well with the spirit of the times, as the Socialist-led country, together with the strong kibbutz and related moshav movements, set about building the nation. The food cooperatives were able to offer products at fair prices despite a long period of food shortages and rationing.

The rise of Tel Aviv as Israels financial and business center helped the Reines Street cooperative grow strongly through the 1950s. Leading the cooperative then was Yehoshua Rabinowitz, who also served as the citys deputy mayor. Rabinowitz began a policy of purchasing properties with the cooperatives profits, thereby acquiring a number of prime real estate plots. The cooperatives strong real estate portfolio formed the foundation for its future growth, as well as later subsidiary Blue Square Properties.

Rabinowitz was also behind the process that slowly brought Israels many independent cooperatives together. By the end of the 1950s, Rabinowitz had helped put into place a centralized wholesale buying operation from which Tel Avivs many cooperatives could do their purchase. Their combined purchase power also enabled the cooperatives to demand lower prices from often unscrupulous suppliers. Combining purchasing activities proved a first step toward the consolidation of the cooperative market. Toward the beginning of the 1960s, cooperatives in each of the countrys major cities began to join together before starting a long process of local mergers that took off toward the end of the decade.

Merging Toward Retail Dominance in the 1970s

The 1960s marked the beginning of a different revolution for the young country. The first supermarket appeared, opened by longtime Blue Square rival Super Sol Ltd. The Tel Aviv cooperative, which had by then grown to include most of the citys formerly independent cooperatives, opened its own supermarket, Shefa Chen, on Tel Avivs Dizengoff Square in 1962.

During the 1960s, the Tel Aviv and other Histadrut-related cooperatives became affiliated under the Hevrat Ovdim holding company. The cooperatives were then operated under the Israeli branch of the 28-nation international cooperatives organization Consumers Cooperative Union-Central Cooperative Society (CCUCCS). The Histadrut cooperatives were granted permission to use the CCUCCSs Co-Op name. The Tel Aviv group was now known as Co-Op Tel Aviv Consumers Society.

Co-Op Tel Aviv Consumers Society joined in the consolidation of the countrys cooperative market, merging with the cooperative groups in the cities of Bat Yam, Holon, Eilat, and others at the end of the 1960s before turning to larger-scale mergers in the 1970s. The cooperative launched that decade with the merger agreement with the Dan Hasharon Consumers Society in 1972, which already had taken over the Haifa and Hadera cooperatives, among others.

Impetus toward consolidation was provided by the growing strength of Super Sol and other supermarkets in Israel. Nonetheless, Israels retail climate remained dominated by more traditional open-air markets and small, so-called mom-and-pop corner shops. Throughout the 1980s, these sectors remained the largest sources of food, clothing, and other household good sales. During that decade, however, the growing Co-Op Tel Aviv group began adopting a more modern format, helping to transform the Israeli retail map.

Modern Supermarket Culture for the New Century

Much of the cooperatives modernization was credited to Benny Gaon, who served as the cooperatives president and CEO throughout most of the 1980s and later became Blue Squares chairman. Gaon instituted many of the changes that later enabled Blue Square to capture the leading share of Israels retail market. An important change was the conversion of the groups grocery store format into the more modern supermarket format. The company also adopted new marketing techniques, and, significantly, moved toward a more traditional corporate culture.

An important move came when the cooperative created a limited company, Blue Square Israel, for its retail holdings, and formed a subsidiary under Blue Square Israel, called Blue Square Property and Investments, which then began issuing bonds on the Tel Aviv stock exchange in 1988. These moves enabled parent company Co-Op Blue Square, which adopted the name of Co-Op Blue Square Consumer Cooperative Society in 1992, to skirt restrictions that prevented it from raising capital through public placements. Until then, when the society had needed investment funding, it had been forced to seek capital from its own members.

When Gaon stepped down from the CEO spot in 1988, replaced by Yoseph Rosen, Blue Square was poised to enter a new growth phase. In 1991, Blue Square Property and Investments took a listing on the Tel Aviv stock exchange, selling some NIS 37 million in shares and options, approximately 10 percent of which had been bought by cooperative members. The following year, Blue Square merged with Jerusalems co-op. At the same time, Blue Square acquired another cooperative, Hamashbir Central Cooperative Society for Supply, adding a department store component under the Hamashbir Lazarchan name.

Company Perspectives:

We know the Israeli population very well and have a clear vision of how the Israeli retail scene will look in the future. Ten years ago, it was difficult to imagine that shopping in Israel could change so completely in such a short time. We foresaw the process, and are now moving to the next stage. Our expansion plan is the key to spreading our retailing vision to every corner of Israel and every Israeli shopper.

Rosen left Blue Square in 1993, replaced by Yaacov Gelbard. The company began expanding beyond supermarkets into other retail sectors, including a licensing agreement with the United Kingdoms Marks & Spencer, and franchises of other retail brands, including Bon Mart, Pull & Bear, Mango, Guess, Mothercare, ID Design, and Zara, while building up DIY retail chain Home Center with partner Bilu Enterprise HC Ltd. By 1995, the groups total sales had topped $700 million.

Blue Square went public a second time in 1996, as Blue Square Israel itself took a listing on the New York stock exchange, selling some 19 percent of its shares, with the remainder held by parent Co-Op Blue Square Consumer Cooperative Society. The company continued to expand through the country, acquiring a number of other as-yet unconsolidated cooperatives. Blue Square also began adopting cutting-edge supermarket techniques and methods pioneered in the United States and Europe, such as the creation of Buy and Bonus customer fidelity program; the opening of a centralized distribution center; and the development of a state-of-the-art computerized information system.

In 1997, Blue Square took another initiative aimed at increasing its margins while lowering prices for its customers. The company unveiled its own private label brand, Select, for a variety of products including frozen foods, housecleaning supplies, and cosmetics. Meanwhile, Blue Square continued to grow, acquiring the six-store chain of Co-Op Raanana. The company also continued to develop and refine its grocery store and supermarket formats. By 1998, the company operated more than 150 stores under five store formats targeted at specific customer sectors, reflecting the diversity of Israels population. The companys embrace expanded for the first time to Israels Arab population, when the company opened its first store in ShfarAM with a product range catering to that population.

Blue Squares operations at the time included another 44 specialty and department stores, as well as a new franchise to develop IKEA stores in Israel. Yet at the end of 1998, Blue Square had decided to divest its nonsupermarket holdings. The company already had abandoned its Marks & Spencer franchise in 1997, converting those locations to other brands. Blue Square sold its Hamashbir Lezarchan department store group to its parent at the end of 1998. That deal included most of Blue Squares other specialty retail holdings as well. The divestment coincided with a stepping up of Blue Squares supermarket openingsthe end of 1998 saw 11 new stores open in just four months.

Helping guide the companys refocus was Yoram Dar, then in grooming to take over the president and CEO position as Yaakov Gelbard prepared to retire in 1999. Dar, a 20-year veteran of the company, continued Blue Squares supermarket expansion, launching a new store format, the 5,000-square-meter Mega Outlet store, designed as a one-stop shopping environment with groceries, restaurants, and other retail goods and services. The discount Mega formula was a hit with Israeli consumers, and by 2001 the company prepared to open its ninth Mega Outlet store.

As parent Co-Op prepared for its own conversion from cooperative society to public company, Blue Square Israel enjoyed steady sales increases. The company also was working hard to improve its margins, including a stepping up of the number of private label goods present on its stores shelves. Blue Square hoped to build private label scales to more than 10 percent of total sales by 2002, in part by boosting the number of SKUs to as many as 2,500 products. In 2001, Blue Square took a major step toward that goal when it reached an agreement with number-two French hypermarket group Casino to bring that companys Leader Price private label brand into the Blue Star retail network. The agreement, made in February 2001, also called for Blue Square to drop its own and other private labels currently in its stores. Meanwhile, Blue Square continued to seek expansion in Israel. Whereas Blue Square had been an important force beyond the shifting consumer trends, nearly doubling the supermarket sectors percentage of total sales since the early 1990s, some 50 percent of Israels population had not yet converted to the call of Blue Squares modern supermarkets.

Principal Subsidiaries

Blue Square Properties & Investments Ltd. (80%); The Blue Square Chain (Hyper Hyper Ltd.); Pharam Blue Square Ltd.; Radio Non-stop Ltd. (35.8%).

Principal Competitors

Super Sol Ltd.

Key Dates:

1937:
Tel Aviv co-op is founded.
1962:
Shefa Chen supermarket is opened.
1972:
The company takes the name of Co-Op Tel Aviv Consumers Society; merges with the Dan Hasharon Consumers Society.
1991:
The company creates and floats Blue Square Property and Investments on Tel Aviv exchange.
1993:
The company acquires Hamashbir Central Cooperative Society for Supply.
1996:
The company is listed on the New York Stock Exchange.
1998:
The company begins divesting nonsupermarket operations.
1999:
The Mega Outlet format is launched.
2001:
The company agrees to carry Leader Price private label products.

Further Reading

Blue Square Israel in Talks with French Retailer Casino, Jerusalem Post, January 23, 2001, p. 12.

Gerstenfeld, Dan, Blue Square to Sell Hamashbir Stake, Jerusalem Post, July 22, 1998, p. 13.

Lipkis Beck, Galit, Co-Op to Raise $100m on Wall St., Jerusalem Post, July 5, 1997, p. 15.

Neiman, Rachel, Sixty Years of Store-Hood, Jerusalem Post, September 16,1997, p. 11.

M.L. Cohen

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