Today’s mail brought a reminder of why investors should be short Alon Blue Square Israel Ltd. (NYSE:BSI) based on the macro outlook for Israeli retailers.
Tucked between the bills was a flyer announcing the opening of a new branch of BSI’sYou store in my neighborhood. The store is a rebranding of a flagship Mega store and is part of BSI’s attempt to position itself as a friend to the consumer. Their slogan (in translation) is “Cheap Consumer Network”.
But don’t be fooled. Here are three reasons why Blue Square won’t win the on-going supermarket war in Israel.
Upstarts are kicking their ass. In the past year, new players have entered the market and are taking share from incumbents BSI and Shufersal. Warehouse stores — including Club 365, started by department store retailer Hamashbir, and newcomer Osher Ad — are discounting and big-boxing their way into the hearts of local consumers. Concept stores — like Ehad — are attracting customers by limiting their SKUs to off-brands for staples and swearing off any items manufactured by giants Strauss and Osem. In my case, the new You store is a 600-yard walk from a recently opened Ehad store, where, for example, all price controlled dairy products are sold at less than the government-controlled price and a bag of coffee is priced 25% less.
Reason number two is the upcoming election and its likely aftermath. First place in voter surveys seems to be a toss-up. But looming as a kingmaker is a new party led by former Finance Minister Moshe Kahlon. It was in that role that Kahlon led an upheaval of the mobile phone marketplace that knocked a good chunk of value from incumbent providers Partner Communications (NASDAQ:PTNR) and Cellcom (NYSE:CEL). (At our house, mobile phone expenses with new entry Golan Telecom are half of what they were.)
Kahlon will be gunning for the Finance Minister portfolio in exchange for the Knesset seats his Koolanu (All Together) party could bring to a coalition government (Eight seats in a recent poll). And once again in the FinMin role, he’s promised to focus on food prices as he did with telecoms.
Finally, food prices are a proven grass-roots issue, capable of rousting Israelis to the streets in protests. In October, a government report showed that between 2005 and 2015, food prices in Israel shot up 34.1%. In 2011, street protests forced food producers to lower their prices. A secondary effect was the sparking of a new political party that, with a commitment to lowering the cost of living for Israel’s 99%, took 20 seats in the last election and is now polling at eight for the March vote. As well, for the first time, Arab parties are running a unified list that’s polling at 12 seats. With a constituency that earns 36% less than Israeli Jews, the Arab parties will be likely allies in any efforte to lower food prices.
Nothing that I’ve seen indicates that Blue Square is capable of getting ahead of the curve on this. Despite the shares regaining ground from last month’s two-year low, I don’t see much upside evident in the fundamentals.