The Arta of business
by Heike Dieckmann
Often overshadowed by political and religious issues, Israel nevertheless has a thriving business sector. Tel Aviv-based Arta Art is at the very heart of the country’s OP and artist community, serving a wide variety of customers in a fragmented and challenging environment
Among all the depressing talk of economic woes and double-dip recessions, the Middle East remains one of the best performing regions in the world and a good place indeed to do business.
Regardless of the fact that it’s a small fish in the big Middle East pond, Israel has outpaced many of its neighbours with growth of 4.7 percent in the second quarter of 2010, according to the Bank of Israel, significantly higher than the 2.9 percent increase originally expected when analysts said the ongoing crisis in Europe was likely to affect Israeli growth as well.
In September, Israel also became the first country in the region – and the 33rd in total – to become a member of the Organisation for Economic Cooperation and Development (OECD). The OECD predicts growth of 4.2 percent for 2011, down on quarterly figures, but up on Israel’s total 2010 forecast of 3.8 percent.
Arta Art is a company that has very much grown up with the country itself. US-born founder Leo Osheroff left his Florida home in 1950 to immigrate to Israel – following the Zionist movement that saw hundreds of thousands of Jews leaving their native countries after the proclamation of the State of Israel in 1948, a movement that continues to this day.
Having lived and worked in a Kibbutz in the desert (Mashabei Sade) for several years where he met his wife Tamar – a former member of underground movement Haganah, the paramilitary group that preceded the Israel Defense Forces (IDF) – the couple moved to Tel Aviv and founded Arta Art in 1964, a company that sold art and craft products and catered predominantly for the local artist community.
Says Osheroff: "Tamar and I didn’t think we would build a business when we founded Arta Art, we did it in order to eat. But it soon became very interesting and very important to us."
The company is still 100 percent family-owned. With a total workforce of 150, it is now a diversified firm operating in several distribution channels. Its origin lies in retail, however. The first retail store opened in 1966. A year later, its flagshop store in the centre of Tel Aviv, Nachalat Benjamin, followed. It remains the company’s largest store in terms of footprint and product assortment.
By 1980, the Osheroff family had opened several stores – all in the greater Tel Aviv area – and decided to geographically expand the business by offering Arta Art franchising opportunities. The current total runs at five Arta-owned stores and 20 franchises, including one in the Palestinian Authority of Gaza. Arta was in fact one of the first Israeli businesses to establish a franchise operation in the neighbouring authority.
Coming of age
Israel’s office products industry has changed considerably over the past decade, transformed in no small measure by the emergence of large office supplies retail stores in the country.
One of Arta’s main competitors is long-established Kravitz, an Israeli company that has nearly 70 stores around the country selling everything from traditional office supplies and furniture over electronics equipment to art products and gifts. The company also has a prominent OP-focused B2B operation, as has fellow competitor Graffiti, part of paper and paper products manufacturer Hadera Paper.
Office Depot is the only international OP reseller in the market with an impressive 46 stores in the country although, as OPI went to press, negotiations on the sale of these stores to department store chain New Hamashbir Lazarchan were hotting up (see ‘Depot to sell Israeli operations’, page 42).
Despite the dominance of some large players, however, Osheroff has his own interpretation of what the Israeli market looks like. He says: "There is a Russian word called ‘balagan’ which means circus or chaos. You have 15 acts going on all at the same time. That’s about the right description for the office products industry here. It’s a bit of a mess. But, as Winston Churchill once said, ‘we will muddle through’. Seriously though, Israel is situated in the Middle East, but it’s trying to be a westernised country and it more or less succeeds in spite of everything that goes on here."
That said, the size of the country – among several factors – means that clear channel or even product division is a rare thing, and Arta Art is no different to many other players in the market.
Osheroff explains: "We have several divisions in the company, from our Craft and Hobby Divisions to Arta Computers over Arta Retail to Arta Wholesale. Israel makes a lot of noise, but it’s a really small country and to survive here you really have to diversify and have a lot more on offer than if we were, say, in the UK. In the UK, a company could specialise just in office supplies. Here, I don’t think we would survive with just this category."
Office supplies and associated categories like furniture, Jan/San and breakroom products account for almost half of Arta Art’s product portfolio. The other 50 percent is made up of art, craft and hobby products, sign writing and screen printing products and services plus computer hardware and software.
From a B2B perspective, the company is a long-standing supplier to some of the largest organisations in the country, including lsraeli bank Leumi with over 800 branches nationwide, pharmaceuticals giant Teva and the Israeli aircraft industry.
In fact, securing the winning bid to supply the country’s aircraft industry for a period of four years prompted the company to move its logistics centre outside Tel Aviv to bigger premises in Rishon le Zion in 2003, giving it access to over 3,000 square metres of warehouse space. From there it also delivers to customers around the country with its wholesale services, mostly in the art and educational sectors.
In addition to different customer segments in terms of B2B, retail or wholesale, religious affiliations again penetrate business life more than in most other markets. On Arta’s home turf of Tel Aviv, the vast majority of customers are Jewish. With 2.5 million Jews – equating to about 92 percent of the city’s total population – Tel Aviv has the world’s largest Jewish community. The picture is very different in Gaza of course, where Arta has a franchise store and where the population is over 99 percent Sunni Muslim.
Says Osheroff: "Demographically-speaking, I would say that 80 percent of the population in Israel is Jewish, whereas in Palestine about 70-80 percent are Arabs. So you could say that the great majority of our sales are to Jews."
Does this matter? It’s certainly not irrelevant in terms of customer habits and preferences. The finer details of these, however, remain firmly hidden behind closed doors.
Depot to sell Israeli operations
Amidst the interviews and research for this reseller profile with Arta Art came the somewhat surprising but infinitely timely announcement that Office Depot is in negotiations to sell its Israeli business.
Israel was one of Office Depot’s very first ventures outside the US, established in 1994 as a joint venture between the company and a group of entrepreneurs.
Office Depot increased its stake in the operation in 2006 before acquiring the business outright in March 2008. Office Depot Israel currently operates 46 stores which account for 90 percent of the company’s total annual turnover in the country, thought to be in the $200 million region.
Depot’s partner of choice in the current negotiations is New Hamashbir Lazarchan (NHL). Israel’s leading department store chain, NHL was founded in 1947 and now operates 37 stores with 3,500 employees.
The figure agreed for the sale is $47 million, less outstanding debt at the time of closing the deal, and the two parties have signed a letter of intent, meaning it’s more of a question of when and not if the deal will go through.
The financial markets were clearly pleased with the proposed transaction, as the companies’ share prices rose on both the Tel Aviv and New York Stock Exchanges on the news.
Depot and NHL are no strangers to each other in Israel. They are already partnering on a joint loyalty programme and a store-in-store concept in a number of NHL’s outlets.
As OPI understands it, NHL approached Depot with a strategic plan on how they could drive the Office Depot business forward in Israel under its own steam, with a target of achieving NIS1 billion ($278 million) in annual sales, considerably more than its current retail turnover of approximately $180 million. The negotiations currently taking place centre around a licensing and royalties agreement that would see NHL maintain the Office Depot name in the Israeli market.
An Office Depot spokesperson told OPI that moving forward with a strong local partner such as NHL represented a better opportunity to drive growth of the Office Depot brand in the country.