The Central Bottling Company's (Coca Cola Israel) decision to halt supplies to the Mega supermarket chain, and the slowing of supplies by a long list of other suppliers, is having an effect on the chain's shelves. Shortages of products made by Coca Cola Israel, Tara Dairies, Unilever, Diplomat, Guri, Leiman Schlussel, Schestowitz, and other have already begun.
A Mega source told "Globes," "It's no drama, but the problem with these things is the cumulative impact. Mega is an organization that was hit hard in July, and is now under the gun again. How much more can it take in a sector that works on very low profit margins? Today is a crucial day for Mega, because it involves shopping for the weekend. We'll have to take care of the shortages." Mega is in advanced negotiations with Coca Cola Israel and Strauss Group Ltd. (TASE:STRS) for an agreement for the two companies to resume regular deliveries of merchandise. Strauss Group limited its deliveries this week, although sources in the group said that the reason was that Mega had made only limited orders.
The guarantee provided to Strauss by Alon Holdings Blue Square - Israel Ltd. (NYSE: BSI; TASE: BSI), Mega's parent company, have expired, and the guarantee held by Coca Cola Israel is due to expire soon. In the past, Alon Blue Square offered to provide guarantees through Mega's fellow-subsidiary, Dor Alon Energy in Israel (1988) Ltd. (TASE: DRAL). This would mean the setting off of payments between the two companies, because major manufacturers buy fuel from Dor Alon.
NIS 70 million payment next week
Mega is due to pay suppliers NIS 90 million tomorrow (Friday). Mega confirmed that the payments would be made on schedule, and that the transfers had already been ordered today. Mega is scheduled to pay NIS 70 million more next week.
Alon Blue Square is close to completing a debt arrangement with its bondholders and the banks, and this is also critical for Mega.
Mega is waiting for the beginning of next week to see what the suppliers decide, given the announcements made this week that Mega could no longer provide guarantees, and would be unable to pay in cash, and was therefore seeking to revert to the previous credit terms, which some of the suppliers refuse to accept. Reverting to the previous number of credit days exposes primarily the uninsured suppliers.
In recent days, many suppliers demanded payment exclusively in cash for merchandise, in addition to other that have been doing so for weeks, such as Neto ME Holdings Ltd. (TASE;NTO), Leiman Schlussel, and others. Payment in cash will detract significantly from the chain's cash flow. According to one of the suppliers delivering goods on a limited basis, "No supplier wants large-scale sales to Mega, because it increases their exposure. The way of doing this is not to offer bargains. The result is that Mega is also paying high prices."
Mega's policy with the suppliers is probably the result of a lack of choice in the matter. It is obvious that if suppliers halt the supply of goods to the chain, it will collapse in a matter of days. Referring to this situation, a Mega source said, "Resources and strategy are involved. The banks and bondholders have made their decision; it’s the suppliers' turn now."
A meeting at the Manufacturers Association of Israel between the Association and the leaders of the Alon Group and Mega will take place today. Many suppliers were invited to the meeting. Both suppliers and Mega sources are doubtful about the benefits of such a meeting. From the suppliers' perspective, the chances of Mega offering a new arrangement suitable for all the suppliers are less than poor; furthermore, in the end, each supplier will act according to its judgment.
For Mega, such an attitude could aggravate the situation for the chain. As a Mega source said, "The meeting is in a bad place, because common sense says that everyone will fall in line with the dominant suppliers, who could be opposed."
Published by Globes [online], Israel business news - www.globes-online.com - on November 5, 2015
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