/Shufersal mulls cutting store space 20% due to online sales

Shufersal mulls cutting store space 20% due to online sales

The switch in consumer habits to online shopping is leading Israel’s largest retain chain to mull cutting store space, sending shock waves through the real estate sector. Sources inform “Globes” that Shufersal Ltd. (TASE:SAE), managed by CEO Itzhak Aberkohen, is considering a plan to cut  commercial space by 100,000 square meters, 20% of its total space, over five years. Shufersal declined to comment on the matter.

If this actually happens, it will be a momentous step that will highlight a change in the chain’s policy, in line with the rising trend towards online shopping, and perhaps the entry of Internet concerns such as Amazon. Furthermore, this measure will also be significant for owners of the properties that Shufersal leaves now and perhaps in the future, and perhaps also for its competitors. Shufersal is an important tenant, sometimes an anchor tenant, in shopping malls, commercial centers, and ordinary properties in specially adapted properties in city centers and on the outskirts of cities.

Market sources say that Shufersal is considering a plan submitted to its management involving deployment five years from now in terms of commercial space. Under this plan, once Shufersal achieves its target for the proportion of online sales, it will begin reducing its physical commercial space by 100,000 square meters out of its current 520,000 square meters, and will limit the size of its branches to 4,000 square meters. “This will of course be only after it is convinced that the chain’s sales per square meter will not be affected,” the source said.

Improving sales per square meter and making operations more efficient

Shufersal has been implementing a plan to reduce commercial space and make its use of real estate more efficient for a number of years in order to upgrade the efficiency of its operations and increase its sales per square meter. In its 2017 financial statements, Shufersal said that it was planning “continued development of small branches in city centers and continued consideration of the total commercial space used for the group’s activity.” Shufersal added that its management had discussed its 2017 results with respect to “continued real estate streamlining, including adaptation of commercial space.”

As of the end of the third quarter of 2018, Shufersal had 520,000 square meters of commercial space, including New Pharm, which it acquired and currently operates under the Be brand, and 500,000 square meters without it. This is a slight increase over the chain’s 487,000 square meters of commercial space at the end of 2017, but less than its 502,000 square meters at the end of 2016, 514,000 square meters at the end of 2015, 537,000 square meters at the end of 2014, and 558,000 square meters at the end of 2013. Actually, except for a slight increase in the first nine months of this year, the trend in the chain’s commercial space has been downwards.

This plan fits in well with the plan to establish an automated system for online sales and logistic warehouses to streamline and expand the chain’s online business in the next four years. Six months ago, Shufersal reported an agreement to build a 34,000-square meter automated logistics center for its online activity, in addition to an 8,100-square meter automated warehouse in Kadima for online business. Total investment in building the automated warehouses in Modi’in and Kadima is estimated at NIS 600 million over four years, mostly payment for automation equipment and construction.

The reduction of real estate space is naturally likely to have a major effect on both the retail sector and the owners from whom Shufersal rents properties in branches that it does not own. These include regional and urban shopping malls, open shopping centers, and street stores. If this plan goes through, property owners will have to deal with available space and find tenants for it. Furthermore, a measure like this by a market leader like Shufersal is liable to lead its competitors, such as Yenot Bitan (Bitan Wines), Rami Levy Chain Stores Hashikma Marketing 2006 Ltd. (TASE:RMLI), and others with large amounts of commercial space, to follow suit.

Shufersal’s reduction of commercial space comes on top of an existing trend towards vacating commercial space by retail chains, especially in fashion, following a trend toward bankruptcies, mergers, and acquisitions of other chains caused by growing competition, the increase in operating expenses, and the corrosive effect of online sales. For example, a retail fashion chain collapsed a year ago, leaving dozens of empty stores in shopping malls in its wake (other changed hands and were operated by other players). Actually, Shufersal has an even more significant effect, because it occupies large spaces that are unsuitable for most renters. The space it vacates, whether by downsizing branches or closing them down, will join more vacated space, while on the other hand, more commercial space and shopping malls are being built in Israel. Shufersal, Israel’s largest retail chain, operated 350 branches nationwide: 280 Shufersal branches and the rest belonging to New Pharm, acquired a year ago.

Explosive situation for commercial centers

This situation is relevant in the long term, at least a number of years in the future, to both the large shopping malls and commercial centers, such as Azrieli, Melisron, and Big, and to shopping malls belonging to smaller groups, such as those of Zim. For owners of commercial real estate anchored by a supermarket, as is the case in neighborhoods and regional centers (which feature large discount branches), the potential implications are even more explosive, due to Shufersal’s importance as a renter and a factor that brings shoppers to these centers.

This explosive situation, even if it concerns the relatively long term, not the immediately future, is even more significant given the global trends having an effect on Israel. These trends are the most significant of the circumstances leading Shufersal to consider the change, headed by the steep increase in online commerce, the need to reduce commercial retail space, and the advent of more logistics centers and warehouses making merchandise more accessible to Internet shoppers.

Published by Globes, Israel business news – en.globes.co.il – on January 2, 2019

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