Last week three major players announced the closure of four online third party marketplaces: Azrieli Group (TASE: AZRG) closed Azrieli.com, Shufersal (TASE: SAE) closed its Marketplace site, which it inaugurated less than a year ago, and Melisron (TASE:MLSR) closed Groo and Baligam, which it acquired two years ago.
The Covid pandemic made online shopping on marketplace websites that have the widest range of products into a required asset for every retail company. But the pandemic faded and so has the charm, for many, of digital shopping. Three years ago, the expectation was that these sites would maintain the momentum, and their sales would continue to soar. However, eulogies for shopping malls and physical stores were premature, and the websites are struggling to fulfil the forecasts..
Now, with the risks from the Houthis threatening ships in the Red Sea, which is expected to create serious problems in the supply and import chains, together with the economic difficulties that increased with the outbreak of the war, the online players have chosen to get rid of their failed investments, and return to focusing on their core. Why did these marketplaces fail, and who will be the biggest beneficiaries?
Azrieli and Melisron - no retail capabilities
There is a difference between a marketplace and regular ecommerce site. An online third party marketplace is like a huge virtual shopping mall where everything is sold but that doesn't mean that mall owners like Azrieli and Melisron, owned by Ofer Malls, will necessary understand how to operate such a site.
Competition in the virtual marketplace sector in Israel is between local sites like Walla Shops, KSP, and Super-Pharm and international sites that ship to Israel like Amazon, AliExpress, eBay and Shein. Each such site connects sellers and buyers, without the person who operates it owning the products. The site does not purchase it for themselves, doesn't store them and doesn't deliver them but just provides a stage for the vendors. The larger and more significant the marketplace, the more sellers will want to be included in it and they are willing to pay commission of about 15% to this platform.
Data from Shop Analytics, which monitors the online purchases of Israelis through a technological consumer panel, shows that the Azrieli, Walla! Shops and Groo websites have a similar amount of revenue of NIS 90-100 million per website per year.
What are buyers looking for on these sites? First of all, the possibility to buy as cheaply as possible, but also reliability, good customer service and a positive buying experience. These are probably the things where Azrieli and Melisron failed.
Azrieli bought the buy2 website in 2016 and changed its name to Azrieli.com. and has recorded a loss of NIS 300 million on this investment. Two years ago Melisron acquired Grouper, which operates Groo, from the Sky Fund, and it has invested about NIS 100 million in its operations.
The core activities of these two companies is real estate: income producing malls and offices for rent. In contrast, managing a marketplace requires huge investment in bringing in traffic, advertising, customer services and more and in most cases there is no overlap between the suppliers and the tenants in their malls.
"Azrieli and Melisron don't have retail capabilities and there is a conflict with the tenants that rent from them," says a senior figure in Israel's retail world. "When you rely 100% on logistics companies you have no ambition to buy inventory that will give you bigger profits.
"Their chances in their ecommerce marketplace are zero, and that's why they lost so much money before even really getting going. It is more of a burden than an asset. When their tenants didn't agree to be a part of it, the bubble burst. They also could not be direct importers of companies from abroad, who would compete with tenants sitting in shopping malls.
"Danna Azrieli already knew years ago that the market was problematic, and the competition was problematic. She's not a retailer. To be successful, you have to be a retailer."
Shufersal: Cutting costs
The situation with Shufersal, Israel's largest food retailer, is a little different. The chain did not have to invest like the rivals in setting up a website, even though there, as in all marketplaces, they use the technological infrastructure of the French company Mirakl.
Shufersal had very high capabilities, but the fact that the company is currently in a challenging business period led to the closure of the activity, as an overall decision to cut costs. This is not a stinging failure as with the real estate companies, but trial and error.
When revenue in the entire non-food sector is about NIS 170 million out of sales turnover of NIS 15 billion, it is easy to understand what yields particularly low profit margins and what should be given up. Since these are the numbers, Shufersal was not even required to notify the TASE, unlike Azrieli and Melisron.
The war is an excuse to stop unprofitable activity. It's not that the company is failing, it's the situation in the country. When there is a trend in the market, it is easier to communicate and explain it to employees, customers, and in the case of a public company, to investors. In a war, everyone's sales are hurt, people buy less, and rents will probably have to go down, since renters won't be able to pay due to the drop in foreclosures. Therefore, reduce as much as possible.
Walla! Shops - No plans to stop
In September, two weeks before the start of the war, tech consumer club Hitech Zone acquired Walla! Shops. Despite the recent closures, there are no signs of concern, and according to management, there are no plans to stop investing in additional purchases.
"The change now taking place with great force in the e-commerce market was expected and bound by reality, due to the general atmosphere in the country, and it has simply accelerated greatly in recent weeks," explains Hitechzone cofounder and CEO Noam Boussidan.
"From the beginning of 2023, we have been experiencing extreme uncertainty on the political and economic levels, and the war as a whole gave a small boost to those who even before that had difficulty finding economic justification for shedding activity, which involves large investments, and above all requires a lot of stamina.
"Ecommerce is a demanding field that requires commitment and focus. In order for you to profit, it must be a core field for you, and you have to be oriented toward intensive commercial activity, take inventory risks, invest in technology and supply chain, while having to build added value as a brand and justify customer loyalty.
"Israeli buyers are not suckers. They are sophisticated, know how to compare prices and level of service. Despite the current sentiment, we strongly believe in the Israeli market, and we believe in online. This purchase and other moves we are leading testify to that."
Who will be the Israeli Amazon: KSP or Super-Pharm?
The fact that three major players in the market have announced their closure raises the question of what will happen to companies like Super-Pharm, KSP and also Walla Shops? "The industry is about to stabilize. There won't be many players, but 4-5 big players, who invest in technology and goods, and who have built things that generate turnovers that justify the activity," says a source in the market.
"Why does Super-Pharm have the ability to succeed? Because it does not have the drive to control the entire process, unlike Shufersal," explains a senior official in the e-commerce world. "The chain profits, among other things, from retail media, and it gets the customers who come for diapers and wipes used to also start buying products from the marketplace. The result: they sell more than NIS 100 million a year.
"Super-Pharm's goal is to be the Israeli Amazon. It has the patience and the ability to adapt step by step. They do not release statements, they simply work, and are not afraid to do a lot of trial and error, with very high business flexibility.
"There is NIS 300 million now being freed up. Who will capture it? Mainly the big suppliers, who sold in the marketplaces that have closed, and suppliers of parallel imports of furniture, toys, garden furniture and the automotive worlds. All of these are strong categories in Israeli e-commerce. Even KSP, which is not a marketplace by definition, will continue to grow. By the way, if they (the government) cuts the VAT exemption on good up to $75, it will help Israeli websites."
Published by Globes, Israel business news - en.globes.co.il - on December 26, 2023.
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