Shufersal intend to lead aggressive cuts of NIS 300 million a year and lay off 250 employees

Four months after Yitzchak Abarkhan returned to Shufersal, this time as chairman, and led to the appointment of Uri Waterman as CEO of the company, in the coming weeks the two intend to lead an aggressive streamlining program for the company.
Restoring the operating profitability of the food stores to a level of 3.5%-4% will require a cut of NIS 250-300 million per year in the company's operating expenses in view of the erosion of its market share.

The increase in the company's financing expenses on bonds in the amount of NIS 2.7 billion as a result of the increase in the index; the real decrease in food purchases due to inflation; And the assumption that Shufersal's growth potential in the food sector is blocked due to the provisions of the Food Law, which limit the opening of new stores by a retailer who owns a store with an annual turnover of NIS 100 million or more and a share of 30% of the sales of large stores in the relevant demand area.
Shufercell is expected to make the cut through layoffs, closing loss-making branches, and diluting holdings in start-ups, which negatively affect the bottom line. Shufersal's headquarters, which according to estimates includes 600-650 employees out of the chain's 16,600 employees, has increased the company's expenses by NIS 130 million a year over the past three years. Shufercell is expected to lay off 200-250 employees, most of them at the company's headquarters.
Through Paybox, Shufercell hoped to take a bite out of the banks' activity and improve its profitability. But at this stage, Paybox is incurring a quarterly loss of NIS 8 million
Shufersal's high tide years, which began with the continuous decline of Beitan Wines following a mega purchase and a jump in demand due to the restrictions in the 2020-2021 Corona years, allowed Shufersal to ignore the phenomenon of cannibalization of the physical branches by Shufersal Online - that is, the fact that in some branches an increasing part of the sales resulted from online sales.
The development of Shufersal's food retail sector revenue between 2015 and 2019, the last year before the coronavirus, illustrates this. Between these years, online sales increased by NIS 1.2 billion — from NIS 700 million (6% of turnover) in 2015 to NIS 1.9 billion in 2019 (15% of turnover) — while the company's total sales increased by NIS 1.1 billion in this period.
The increase in the minimum wage by 23% since the beginning of 2015, the increase in wages as a result of the lack of workers in the last two years, the increase in rent due to the acceleration of inflation, and the worsening of competition in the city centers - according to estimates pushed 20-30 of the 312 branches of Shufersal to a loss, some of them on a flow basis, i.e. The revenues in the branches are lower than their direct operating expenses.
The circumstances are somewhat similar to Shufersal's situation on the eve of the company's previous efficiency plan, announced in the summer of 2014 by Abarkhan, two years after his appointment as CEO. Even then, Shufersal suffered from low profitability resulting from a bloated headquarters, losing stores, and an erosion of the company's ability to compete.
The efficiency plan of 2014 was implemented under complex conditions: against the background of the fresh memory of the social protest and the fierce competition from discount marketing chains such as Rami Levy. The plan was also thwarted by the withdrawal of dividends in the cumulative amount of NIS 850 million in the three years preceding it by a controlling shareholder of Shufersal - Discount Investments, then under the control of Nochi Dankner.
The withdrawal of dividends caused an increase in the company's net financial debt - a ratio of financial debt to operating profit (Net Debt to Ebitda) of 3.8 at the end of the second quarter of 2014 compared to a ratio of 1.1 at the end of the second quarter of 2022 - and made it difficult for it to deal with the crisis.
The controlling owners of Shufersal today are institutional investors who are interested in a return on their investment, therefore foreign considerations will not stand in the background of the efficiency plan and will not interfere with its implementation. The return of the economy to normal activity after two years of increasing demand against the background of the Corona crisis and a year of managerial chaos as a result of power struggles at the top of the company degraded Shufersal's operating profitability to a low of 1.5% of the turnover and forced it to deal with problems that were pushed to the corner during the high tides of the Corona.
Shufersal's profitability is the lowest in the industry with the exception of Beitan wines, and it is clear that if at a relatively early stage of Abarkhan's tenure as chairman Shufersal does not return to operating profitability of 3.5%-4%, which is operating profitability of leading marketing chains in the world, or at least to the operating profitability it presented before the outbreak of the Corona epidemic — The institutional investors may regret that they aggressively promoted Abarkhan's appointment. Shufersal's operating profitability from operating 312 branches is even lower than that reported in the food retail sector. The reason for this is that this sector currently includes two profitable activities: the Gendron bakery products factory, which sells some of its products to external customers, and the credit card activity, which is operated by the Cal company and gives loans in an estimated amount of NIS 1.5 billion.
The attempt to improve profitability will encounter a difficult headwind. In 2023 and beyond, Shufersal will have to deal with the results of the increase in inflation, which only partially affected it in 2022. The increase in the index by 2.5% from the beginning of 2022 increases Shufersal's expenses on rents by NIS 234 million per year, most of which are linked to the index, and affects the company's salary expenses, which amount to NIS 1.4 billion per year, even if not all of them are contractually linked to the index.
In 2023, Shufercell will also face depreciation expenses and current losses on assets that have not yet completely overcome the problems that emerged during the run-in periods, such as the delivery centers in Modi'in and Kadima, as well as the holding (49.9%) of the shares of the Paybox company, which is establishing a digital wallet for the customers of all banks on the basis of The Paybox payment system owned by Discount Bank.