Thursday, January 20, 2005

Retail in Israel

I spent a summer when I was 16 with a guy named Forest, now Forest is not a rocket scientist, but he sure knows retail. One can learn a lot about how to walk stores, look at spacing, look at image and look at style to figure out how to do retail right from a guy like Forest. Frankly I learned more from Forest then I learned in a bunch of marketing classes.

Forest, built competitive matrix in his head, he did it naturally for retail. All business school did was teach me how to take those matrixes and put them into excel and be able to share them. Now without the formal education I doubt I could do as well as I can, but with it I can do very well.

The fact is no matter what you are selling there is a right way and a wrong way. In Israel they do it the wrong way.

First rule of thumb:
You care about Revenue per square meter not Inventory. If you have stock that is worth $500 per square meter, and it moves 10 times per year, that is a much better business then getting $2500 in stock and moving it 2 times per year all other things being equal. In reality you can not get 6 times the stock into the store, but in Israel they really try to get in 2x what the store should hold and I frankly think that reduces sales.

If you design right you can get the maximum stock into the store but that takes design and keeping with some rules. For example the ADA made some rules in America on how wide store isles had to be, these rules have been a god send for good retail business because 3 foot wide isles makes for happier customers and better business.

If you have a product that is 8 inches deep and your store shelf is 16 inches deep, on a 3 foot long shelf you are left with two choices, the first is to double stack, this works well with Cherrios, and coke, but it does not work well with wine and other things where each product is more unique and when you stack people have to move to get at the stuff in back. So many stores, consumer electronic stores come to mind quickly make this mistake and frankly end up with a stuffed turkey look, where not only is the store feeling like it is going to fall down on your head when you open the door, but it takes a store clerk to help you find the AA batteries.

Your other option is to go for the stark look, but lets say that you have 20-30 cabinets and they each have 5 shelves and each other is 8 inches to deep, and you pay $2 per square foot per month, you are going to pay for this extra look $1000 per year in rent on unusable store space, you either eat that or you do the over full look, and giving the choice I would go stark, but given the choice make the shelves fit the product and throw out the old shelves when you have new products.

Second Rule of Thumb:
Profit per square meter is driven by three things, COGS, and overhead vs revenue. My favorite eatery is in a space that can not be more then 800 sq feet including the back room. It sells a product that is roughly flour and water, and it sells a lot of it, for about $4.5 per meal. The fact is the margins are huge, the overhead is low, and the guy who runs it probably makes more money then any other in Ra'anana. It is hard to compete with someone who makes a food for 40 cents (This is high) in ingredients and gets $4 for it. He does 100-200 NIS per hour in revenue when it is slow and when he is busy he does 400-600 NIS per hour. He is grossing easily 100,000 NIS per month and he is netting probably over 1/2 of that. He is the only food company in Israel that I have noticed who does it right, and what is so funny is that his model is really limited to one store. He could never build a chain, but for him his model is probably ideal.

Third rule of thumb:
Ignore your competitors if they are flawed. Please build a competitive matrix, if there are five shoe stores, and none of then cater to kids and teens they you have a niche, do not let people tell you that there are too many shoe stores. When I did a look at the top 10-15 companies over the last 20 years, names such as Dell, Home Depot and Citi Bank came up. All three of these has 100's of competitors, but frankly it does not matter, they just have sat down and serviced their market better then the competitors. They have managed their 5 forces better and they are kicking ----- because of it.

Fourth rule of Thumb:
Know your knitting, do not go into a business unless you know it, I do not mean that you have studied your competitors business plans, but that you truly know the business. You also should love what you sell. Frankly that is key in a country where you have Israelis who speak bad English selling English books, and white guys trying to make Chumus. Somethings are genetic and unless you can tell good business from bad business do not get involved.

Israel is like every other third world country, and frankly because of that it is ripe to get rich in. A few people own most of the means to wealth on a retail scale and frankly they are not doing as good of a job of keeping competitors out. I must say that they are learning on many grounds, but the number of stores, where they have not stuck to good retails rules and are paying the price is huge. They have played every game in the book to compete without inovating on their store models.

In 5 years this country will have completely changed on a retail level and a lot of these old line stores will be out of business, but for the next five years building retail in Israel is ripe with opportunity, but please do not open another women's shoe or clothing store, and also we have enough bad places to eat.

Have a good Shabbat.



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