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Direct-to-retail deals firmly entrenched in Israel

There is a Yiddish proverb--'If you can't go over, you must go under'--that accurately describes the flexibility companies must have in order to survive in Israel's retail landscape. The sector has undergone a radical transformation in the last 10 years, moving from outdoor markets where consumers and vendors would haggle over price, to a more sophisticated style of retailing that's dominated by large Wal-Mart-like chains selling every product under the sun. But since the re-emergence of the Intifada in 2000, the country's economy has sputtered into recession, making retailing in the territory a very tough sell today.
September 1, 2002

There is a Yiddish proverb–’If you can’t go over, you must go under’–that accurately describes the flexibility companies must have in order to survive in Israel’s retail landscape. The sector has undergone a radical transformation in the last 10 years, moving from outdoor markets where consumers and vendors would haggle over price, to a more sophisticated style of retailing that’s dominated by large Wal-Mart-like chains selling every product under the sun. But since the re-emergence of the Intifada in 2000, the country’s economy has sputtered into recession, making retailing in the territory a very tough sell today.

Israel’s unemployment rate currently hovers at 10.6% (its highest level in over a decade) and is expected to hit 11% next year, according to a recent government report. Additionally, the country’s GDP fell by 0.6% in 2001 and is projected to tumble by another 1% this year.

Those grim economic realities, coupled with already high import tariffs on toys and video games, has meant that many of the staple licensed kids products remain beyond the reach of most Israelis. Consequently, retailers have been forced to add lower-priced licensed goods such as food, home textiles and stationery to their product offerings.

The weakened purchasing power of most Israeli consumers has also necessitated a closer working dynamic between licensor and retailer. Direct-to-retail (DTR) deals are becoming the norm in the country, as retailers look for ways to improve their margins.

This year, product flowing from DTR agreements will account for 100% of character-branded merchandise sales at Club Market, one of the country’s largest hypermarket chains with 134 stores. That figure represents a 50% jump over last year, says the company’s VP and head of commerce Gershon Weisman. At gift and card chain Happening, DTR product represents 60% of the retailer’s licensed character merchandise, according to head of marketing Shai Elitzur.

Tel Aviv-based agent Licensing Dynamics International (LDI) has recently put a new twist on the direct-to-retail deal model. Managing programs for kids properties from major studios including HIT Entertainment (Bob the Builder), Marvel (Spider-Man) and Warner Bros. (Looney Tunes), the company has inked agreements with competing hypermarkets Club Market and SuperSol to ostensibly manage the DTR business for both retailers. LDI will oversee every aspect of their programs–from selecting the product mix, to shipping the correct POP, to ensuring that everything runs smoothly from a logistics perspective.

While it’s hard to fathom Toys ‘R’ Us and Wal-Mart allowing a third party to choose their product offerings, LDI’s Philips says the arrangement works in Israel. The retailers, he explains, recognize that licensing is not where their expertise lies and are willing to cede that part of their business to an outside company.

With suicide bombings a constant threat in the country, the one-stop-shop appeal of hypermarkets such as Club Market and SuperSol (which Philips says currently account for 55% to 65% of all character-branded merch sales) have made them a preferred destination for security-minded consumers wary of being caught in the wrong place at the wrong time.

Though revenues at the three largest hypermarket chains (SuperSol, The Co-op and Club Market) have fallen in the last two years, their profits have risen–mainly because of healthy private-label products that offer a cheaper price for consumers and higher margins for retailers. Viewed in this context, says Philips, LDI’s more intimate approach to direct-to-retail deals will enable the company to keep licensing afloat as a viable business in Israel.

Along with the hypermarkets, Israel’s main distribution channels for licensed character product include home and textile stores (Golf & Co. and Wardinon); specialty stationery stores (Office Depot and Kravitz); department stores (Hamashbir Lazarchan); apparel outlets (Hamashbir Ofna); and toy stores (Toys ‘R’ Us, Han Toy and Kfar Hashaasuim).

Israel’s retail landscape also features retailers that cater specifically to the country’s various ethnic and religious groups. The nine-store chain Tiv Taam, for instance, services Israel’s large segment of Jews from the former Soviet Union, which comprise roughly 25% of the country’s six-million population. Though the majority of hypermarkets have Kosher licenses, they also maintain separate chains that cater to orthodox Jews.

As for major shopping windows, unlike in North America or Western Europe, where the majority of licensed merch sales occur during Q4, Club Market’s Weisman says sales in Israel generally spike during four periods of the year–starting with Purim and Passover (March and April), back to school (July and August), the Jewish new year (September or October) and Hanukah (December).

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