UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



FORM 20-F



(Mark One)



| |  ̈ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
| | - | ----------------------------------------------------------------------------------------------



OR



| | x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | - | ------------------------------------------------------------------------------------

For the fiscal
year ended December 31, 2013



OR



| |  ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | - | ----------------------------------------------------------------------------------------

For the transition
period from __________ to __________



OR



| |  ̈ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | - | -------------------------------------------------------------------------------------------



Date of event
requiring this shell company report ________



Commission file number 1-14426



ALON
BLUE SQUARE ISRAEL LTD.






(Exact
name of Registrant as specified in its charter)



Israel






(Jurisdiction
of incorporation or organization)



Europark
Yakum, France Building, Yakum 6097200 Israel






(Address
of principal executive offices)



Ortal
Klein, Corporate Secretary

Tel:
(972)-9-9618504; Fax: (972)-9-9618636






(Name,
Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)



Securities registered or to be registered
pursuant to Section 12(b) of the Act.



|Title of class                                                      |  | Name of each exchange on which registered
|------------------------------------------------------------------- |  | -----------------------------------------
|American Depositary Shares, eachrepresenting one Ordinary Share (1) |  | New York Stock Exchange, Inc.            
|                                                                    |  |                                          
|Ordinary Shares, par value NIS 1.0 per share(2)                     |  | New York Stock Exchange, Inc.            



| | (1) | Evidenced by American Depositary Receipts.
| | --- | ------------------------------------------



| | (2) | Not for trading, but only in connection with the listing of the American Depositary Shares.
| | --- | -------------------------------------------------------------------------------------------



Securities
registered or to be registered pursuant to Section 12(g) of the Act:



None






(Title
of Class)



Securities
for which there is a reporting obligation pursuant to Section 15(d) of the Act:



None






(Title
of Class)



Indicate the number
of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by
the annual report:



66,161,860
Ordinary Shares, par value NIS 1.0 per share



Indicate by check mark
if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.



Yes  ̈
No x



If this report is an
annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Securities Exchange Act 1934.



Yes  ̈
No x



Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.



x
Yes  ̈ No



Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):



Large Accelerated
filer  ̈            Accelerated filer  ̈	               
Non-accelerated filer x



Indicate by check mark
which basis of accounting the registrant has used to prepare the financial statements included in this filing:



U.S. GAAP  ̈



International Financing
Reporting Standards as issued by the International Accounting 	Standards Board x



Other  ̈



If “Other”
has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has
elected to follow.

Item 17  ̈Item 18  ̈



If this is an annual
report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



Yes  ̈
No x











INTRODUCTION



Unless otherwise indicated,
as used in this Annual Report, (a) the term “Alon Blue Square” or the “Company” means Alon Blue Square
Israel Ltd., (b) the terms “we,” “us” and “our,” mean Alon Blue Square and its consolidated
subsidiaries, (c) “Mega Retail” means our wholly-owned subsidiary, Mega Retail Ltd., (d) “Dor Alon” means
Dor Alon Energy In Israel (1988) Ltd., a corporation of which we held approximately 78.43% of the outstanding ordinary shares as
of March 31, 2014, and the balance of whose shares are publicly held and traded on the Tel Aviv Stock Exchange, and its subsidiaries,
(e) “Bee Group” means our wholly-owned subsidiary, Bee Group Retail Ltd., and (f) “BSRE” means Blue Square
Real Estate Ltd., a corporation of which we held 74.71% of the outstanding shares as of March 31, 2014, and the balance of whose
shares are publicly held and traded on the Tel Aviv Stock Exchange, and its subsidiaries.



We operate in four
reporting segments. As of December 31, 2013, we were the largest retail company in Israel based on the number of stores. In our
Supermarkets segment, we are the second largest food retailer in the State of Israel. In our Fueling and Commercial Sites segment,
we operate a chain of filling stations and convenience stores in different formats in Israel, and we are considered to be one of
the four major gas companies in Israel. In our Non-Food segment, we sell “Non-Food” items in standalone retail outlets,
in our supermarkets and via our wholesale channels. In our Real Estate segment, we own, lease and develop yield-generating commercial
properties and projects. In addition to our reporting segments, we have activities in issuing and clearing credit cards through
our affiliate, Diners Club Israel Ltd., of which we held 49% as of March 31, 2014, and we operate in the cellular market via our
mobile virtual network operator (MVNO) network in Israel through our wholly-owned subsidiary, Alon Cellular Ltd.



Through our supermarkets,
which are operated mostly through Mega Retail, we offer a wide range of food and beverage products and “Non-Food” items,
such as houseware, small electrical appliances, cellular phones and cellular phones accessories and entertainment products and
textile products (called “Non-Food” in this Annual Report), and “Near-Food” products, such as health and
beauty aids, baby and young children products, cosmetics and hygiene products (called “Near-Food” in this Annual Report).
As of December 31, 2013, we owned and operated 213 supermarkets divided into three main categories, Discount chains, Quality and
Service chains and Mega@Internet website. In order to meet the needs of our customers, both the Discount chains and Quality and
Service chains have regional stores and local neighborhood stores. The Discount chains include the regional store brands “You”,
“Mega Bool” and “ZolBeShefa” and the local neighborhood store brand “You Neighborhood Store”.
The Quality and Service chains include the regional store brand “Mega”, the local neighborhood store brand “Mega
in Town” and the organic, natural and health product store brand “Eden Teva”.



2







As of December 31,
2013, Dor Alon supplied motor fuels, motor oil and other petroleum products to a network of 206 filling stations operating under
the “Dor Alon” brand. Integrated into most of Dor Alon’s public filling stations are Diesel Fueling Centers (“DFC”)
that sell diesel fuel for large vehicles such as trucks and buses at preferential terms. Dor Alon also supplies ARAL lubricants
and Texaco lubricants in Israel. As of December 31, 2013, Dor Alon also operated 215 convenience stores, of which 169 were convenience
stores branded “Alonit” and “Super Alonit” (called Alonit convenience stores in this Annual Report) and
46 convenience stores were operated by the AM:PM chain of stores. In addition, as of December 31, 2013, Dor Alon also operated
160 internal filling stations.



As of December 31,
2013, our Non-Food segment consisted of 131 non-food outlets, partially through franchisees, with activities in the houseware and
home textile, toys, leisure, and baby and young children sectors. Our Non-Food segment operates under the brand names Naaman, Vardinon
and Dr. Baby. In February 2014, we completed the sale of 65 percent of its holdings in Kfar Hasha’ashuim, which sells toy
and leisure products and operated 83 non-food outlets, mostly through franchises, as of December 31, 2013.



As of December 31,
2013, through BSRE1, we were the legal owner (including
through long-term leases from the Israel Land Authority and the Municipality of Tel Aviv) of 117 yield generating real estate properties
(including properties owned in connection with our Supermarkets and Non Food segments, which includes warehouses and offices),
totaling approximately 275,000 square meters, and approximately 149,000 square meters of unutilized building rights. In addition,
we engaged in the development of three projects totaling approximately 44,500 square meters. In addition, BSRE operated in the
area of residential real estate promotion and planning. For further information regarding our real estate, see “Item 4. Information
on the Company - B. Business Overview – Real Estate. ” Please note that unless otherwise indicated, as used in this
Annual Report, the term “owned” or “ownership” with respect to our supermarkets, Bee Group outlets and
filling stations means the ownership of the operations of our supermarkets, outlets and sites and not legal title to the real estate
underlying our supermarkets, outlets and sites.



Except for the historical
information contained herein, the statements contained in this Annual Report are forward-looking statements, within the meaning
of the Private Securities Litigation Reform Act of 1995, with respect to our business, financial condition and operating results.
Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors,
including all the risks discussed in “Item 3. Key Information - D. Risk Factors” and factors discussed elsewhere in
this Annual Report.










1The following data is presented in the aggregate with respect to all of the investment
property of BSRE, investment property of BSRE’s subsidiaries and the proportionate share of BSRE in jointly controlled parties.



3







We urge you to consider
that statements which use the terms “believe,” “do not believe,” “expect,” “plan,”
“intend,” “estimate,” “anticipate,” “project” and similar expressions are intended
to identify forward-looking statements. These statements reflect our current views with respect to future events and are based
on assumptions and are subject to risks and uncertainties. Except as required by applicable law, including the securities laws
of the United States, we do not undertake any obligation nor intend to update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.



All references in this
Annual Report to dollars or $ are to U.S. dollars and all references in this Annual Report to NIS are to New Israeli Shekels. Unless
mentioned otherwise, all figures in U.S. dollars are based on the representative exchange rate between the NIS and the dollar as
published by The Bank of Israel for December 31, 2013, which was NIS 3.471 per $1.00, except figures for the first quarter of 2014,
which are based on the representative exchange rate between the NIS and the dollar as published by The Bank of Israel for March
31, 2014, which was NIS 3.487 per $1.00.



4







TABLE OF CONTENTS



|          |                                                                              | Page
|--------- | ---------------------------------------------------------------------------- | ----
|          |                                                                              |     
|PART I    |                                                                              |     
|ITEM 1.   | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                        | 6   
|ITEM 2.   | OFFER STATISTICS AND EXPECTED TIMETABLE                                      | 6   
|ITEM 3.   | KEY INFORMATION                                                              | 6   
|ITEM 4.   | INFORMATION ON THE COMPANY                                                   | 28  
|ITEM 4A.  | UNRESOLVED STAFF COMMENTS                                                    | 84  
|ITEM 5.   | OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                 | 84  
|ITEM 6.   | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                   | 128 
|ITEM 7.   | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            | 152 
|ITEM 8.   | FINANCIAL INFORMATION                                                        | 170 
|ITEM 9.   | THE OFFER AND LISTING                                                        | 183 
|ITEM 10.  | ADDITIONAL INFORMATION                                                       | 186 
|ITEM 11.  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 202 
|ITEM 12.  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 205 
|          |                                                                              |     
|PART II   |                                                                              |     
|ITEM 13.  | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              | 207 
|ITEM 14.  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 207 
|ITEM 15.  | CONTROLS AND PROCEDURES                                                      | 207 
|ITEM 16.  | [RESERVED]                                                                   | 209 
|ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT                                             | 209 
|ITEM 16B. | CODE OF ETHICS                                                               | 209 
|ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                       | 209 
|ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.                  | 210 
|ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.      | 210 
|ITEM 16F. | CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT.                                | 210 
|ITEM 16G. | CORPORATE GOVERNANCE                                                         | 211 
|          |                                                                              |     
|Part III  |                                                                              |     
|ITEM 17.  | FINANCIAL STATEMENTS                                                         | 213 
|ITEM 18.  | FINANCIAL STATEMENTS                                                         | 213 
|ITEM 19.  | EXHIBITS                                                                     | 213 



5







| | ITEM 1. | IDENTITY OF DIRECTORS,
SENIOR MANAGEMENT AND ADVISERS
| | ------- | -----------------------------------------------------



Not applicable.



| | ITEM 2. | OFFER STATISTICS AND
EXPECTED TIMETABLE
| | ------- | ---------------------------------------



Not applicable.



| | ITEM 3. | KEY INFORMATION
| | ------- | ---------------



Selected Financial Data.



We have derived the following selected
consolidated financial data as of December 31, 2012 and 2013 and for each of the years ended December 31, 2011, 2012
and 2013 from our consolidated financial statements and notes included elsewhere in this Annual Report. We have derived the selected
consolidated financial data as of December 31, 2009, 2010 and 2011 and for each of the years ended December 31, 2009 and 2010 from
our audited consolidated financial statements not included in this Annual Report. We prepare our consolidated financial statements
in conformity with IFRS. Effective January 1, 2013, the Company applies new IFRS 11 “Joint Arrangements” retrospectively,
and jointly controlled entities are presented in the consolidated statements using the equity method. The Company provides the
quantitative disclosures of the effect of the application of IFRS 11 only for the immediately preceding period (i.e., year ended
December 31, 2012). The statements of operations for the years 2009 to 2011 have not been restated as a result of our decision
to adopt the relief of IFRS 11. For further information, see note 38 in the financial statements. As a result of our decision in
December 2012 to sell during 2013 Kfar Hasha’ashuim, which sells toy and leisure products, the data of the toy and leisure
activity of the Non-food segment have been presented as discontinued operations. In February 2014, we completed the sale of 65%
of our holdings in Kfar Hasha’shuim. For further information, see note 8 to the financial statements. You should read the
selected consolidated financial data together with the section of this Annual Report titled “Item 5. Operating and Financial
Review and Prospects”, our consolidated financial statements included elsewhere in this Annual Report, the related notes,
and the independent registered public accounting firm’s report.



6







|                                                                                                    |  | For
    the year ended December 31,                           |           
|--------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------- | ----------
|Statement of Income
    Data                                                                        |  | 2009                                                          |           
|In accordance with IFRS:                                                                            |  |                                                               |           
|                                                                                                    |  | NIS
    (In thousands, except per ordinary share or ADS data) |           
|Revenues                                                                                            |  |                                                               | 7,191,649 
|Less – government levies                                                                            |  |                                                               | -         
|Net revenues                                                                                        |  |                                                               | 7,191,649 
|Cost of sales                                                                                       |  |                                                               | 5,165,768 
|Gross profit                                                                                        |  |                                                               | 2,025,881 
|Selling, general and administrative expenses                                                        |  |                                                               | 1,790,730 
|Operating profit
    before other gains and losses and changes in fair value of investment property |  |                                                               | 235,151   
|Other gains                                                                                         |  |                                                               | 4,698     
|Other losses                                                                                        |  |                                                               | (32,253   
|Changes in fair value of investment property, net                                                   |  |                                                               | 20,775    
|Share of profit of investments accounted for using the equity
    method                            |  |                                                               | (37       
|Operating profit                                                                                    |  |                                                               | 228,333   
|Finance income                                                                                      |  |                                                               | 64,482    
|Finance expenses                                                                                    |  |                                                               | (175,045  
|Finance expenses, net                                                                               |  |                                                               | (110,563  
|                                                                                                    |  |                                                               |           
|Income before taxes on income                                                                       |  |                                                               | 117,770   
|Taxes on income                                                                                     |  |                                                               | 22,596    
|Net income from continuing operations                                                               |  |                                                               | 95,174    
|Gain (loss) from discontinued operations                                                            |  |                                                               | 2,627     
|Net income for the year                                                                             |  |                                                               | 97,801    
|                                                                                                    |  |                                                               |           
|Attributable to:                                                                                    |  |                                                               |           
|Equity holders of the Company                                                                       |  |                                                               | 77,163    
|Non-controlling interests                                                                           |  |                                                               | 20,638    
|                                                                                                    |  |                                                               |           
|Earnings (loss) per Ordinary share or ADS attributable to equity
    holders of the Company:        |  |                                                               |           
|Basic                                                                                               |  |                                                               |           
|Continuing operations                                                                               |  |                                                               | 1.71      
|Discontinued operations                                                                             |  |                                                               | (0.06     
|                                                                                                    |  |                                                               | 1.65      
|Diluted                                                                                             |  |                                                               |           
|Continuing operations                                                                               |  |                                                               | 1.71      
|Discontinued operations                                                                             |  |                                                               | (0.06     
|                                                                                                    |  |                                                               | 1.65      
|Cash dividends declared per ordinary share or ADS(2)                                                |  |                                                               | -         
|Number of Ordinary Shares Outstanding at the
    end of each year: (3)                              |  |                                                               | 43,717,058
|                                                                                                    |  |                                                               |           



| | (1) | The translation of the NIS amounts into dollars has been made for
the convenience of the reader at the representative exchange rate prevailing at December 31, 2013 (NIS 3.471 =$1.00),
as published by The Bank of Israel. During 2013, the US dollar depreciated in value vis-à-vis the NIS by approximately7.02%.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Including dividends paid of NIS 12.31 ($3.39) on October 18, 2010 after the issuance of 20,328
thousand shares as part of the acquisition of Dor Alon.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Does not include treasury shares.
| | --- | ---------------------------------



7







|                                                                             |  | At December 31,    |          
|---------------------------------------------------------------------------- |  | ------------------ | ---------
|                                                                             |  | 2009               |          
|                                                                             |  | NIS (in thousands) |          
|Balance Sheet Data:                                                          |  |                    |          
|In accordance with IFRS                                                      |  |                    |          
|Working capital (deficit)                                                    |  |                    | 492,938  
|Total assets                                                                 |  |                    | 5,165,497
|Short term credit from banks and others and current maturities of debentures |  |                    | 351,296  
|Long term debt, net of current maturities                                    |  |                    | 2,006,277
|Total equity                                                                 |  |                    | 1,229,750



| | (1) | The translation of the NIS amounts into dollars has been made for the convenience of the reader
at the representative exchange rate prevailing at December 31, 2013 (NIS 3.471= $1.00), as published by The Bank of Israel.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



*
Retroactive application, see note 38 to the financial statements.



| | B. | Capitalization and Indebtedness.
| | -- | --------------------------------



Not applicable.



| | C. | Reasons for the Offer and Use of Proceeds.
| | -- | ------------------------------------------



Not applicable.



| | D. | Risk Factors.
| | -- | -------------



Our business, operating
results and financial condition could be seriously harmed due to any of the following risks. If we do not successfully address
any of the risks described below, our business, operating results and financial condition could be materially adversely affected
and the share and ADS price of Alon Blue Square may decline. We cannot assure you that we will successfully address any of these
risks.



Risks Related To Our Supermarkets



We are engaged in
a highly competitive business. If we are unable to compete effectively against major supermarkets, low-priced supermarkets and
other competitors, our business will be materially adversely affected.



8







The food retailing
industry in Israel is highly competitive and is characterized by high turnover and narrow operating margins. We compete with the
other largest supermarket chain, Shufersal, low-priced smaller supermarket chains, independent grocers, open-air markets, and other
retailers selling supermarket goods. Competitive pressures increase as the supermarket sector in Israel approaches higher saturation
levels and continue to increase as our competitors expand their operations and new companies enter the market with hard discount
formats.



We believe that
an important factor in the purchase decisions of a large portion of the Israeli public is the price of the products it purchases.
As a result, in recent years, we and our competitors have established and expanded low-price and hard discount store formats.



In addition, other
supermarket chains during recent years continued to aggressively increase their market share and expand their presence in locations
throughout Israel, often geographically beyond their original locations, increasing competition in an already difficult market.
We estimate that our market share of the total retail market of food, beverages and tobacco decreased to 11.4% in 2013 from 11.9%
in 2012. The market share of our largest competing supermarket chain, Shufersal, based on its financial reports, was approximately
20.1% of the total retail market of food, beverages and tobacco in 2013 compared to 20.2% in 2012(market share estimates are based
on the calculation of the Central Bureau of Statistics of the total retail market for food, beverages and tobacco for 2011, and
our estimate for market growth of 3.1% in 2012 and 3.5% in 2013). The difference in market share may give Shufersal a greater competitive
advantage in its dealings with customers, suppliers and other third parties. The low barriers of entry, including the relatively
low cost of establishing a new smaller supermarket chain, have contributed to the increase in the number and expansion of smaller
supermarket chains in recent years. These smaller supermarket chains have been able to capture a significant part of the sales
from the major chains in their areas by using lower cost non-unionized labor and having lower operating costs.



Fourth Chain Company
Ltd., consisting of a number of smaller supermarket chains which previously operated on a local geographic level, markets a private
label brand and jointly negotiate with suppliers. In addition, in January 2013, Bitan Wines Ltd. merged with the Zim Direct Marketing
Ltd. chain of discount supermarkets, resulting in chain with 62 outlets throughout Israel. This merger, and possible similar mergers
and combinations of other smaller supermarket chains in the future, may generate the efficiencies of a major nationally-spread
chain and enable them to compete more efficiently with us and adversely affect our competitive position.



If we are unable to
maintain our current level of sales or if we lose market share to our competitors, our negotiating position with suppliers, which
is based, in part, on our market share in the Israeli retail market, and our revenues may be adversely affected, with a corresponding
impact on profitability. We cannot assure that we will be able to maintain our sales and market share.



9







We are dependent
to a significant extent on a limited number of key suppliers. If these suppliers raise prices or encounter difficulties in providing
their products, our operating results will be adversely affected.



We purchase most of
our dairy, fresh produce and poultry products from the Tnuva Corporation, which holds a leading position in the domestic dairy
and poultry markets. To the best of the Company’s knowledge, some of the collective acquisition entities of Kibbutzim in
Israel that hold shares in Alon, our controlling shareholder, also hold approximately 23% of Tnuva. In 2013, Tnuva’s products
accounted for approximately 12.2% of all the products sold at our supermarkets. For more information on our arrangements with Tnuva,
see “Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transaction – Arrangements
with Tnuva.” In addition, the Strauss group, an Israeli food manufacturer, accounted in 2013 for approximately 7.7% of all
products sold at our supermarkets, and the Osem group accounted for approximately 7.1% of all products sold at our supermarkets
in 2013. Due to our status as a leading food retailer in Israel which allows us to offer a wide assortment of products and promotions
on a national level of these suppliers’ products, and the fact that we maintain an excellent and long-standing relationship
with Tnuva, the Strauss group and Osem, we do not believe that there is a material risk of future discontinuance of the supply
of products of these key suppliers. However, we do not have a written contract with Tnuva, Strauss group or Osem obligating them
to supply products to us. The ten largest suppliers accounted for approximately 49% of our product sales in 2013. Due to the relatively
large market share of these suppliers, we depend on them and on a number of other suppliers that supply brands characterized by
high customer loyalty, such as the Central Company for the Manufacture of Soft Drinks Ltd., which is the exclusive franchisee of
Coca Cola in Israel and which also distributes other popular soft drinks. Increases in prices by our suppliers are generally
not offset, fully or as quickly, by increases in our selling prices and revenues because of competitive pressures. We cannot assure
that, in the future, Tnuva, Strauss group, Osem or any of these other suppliers will not significantly raise the prices of the
products they supply us in the future, or encounter difficulties in providing these products to us, in either of which cases our
operating results might be adversely affected.



The enactment of
new laws and regulations, including the legislation in favor of “Promoting Competition in the Food Industry”, may materially
adversely affect our sales and profits, including limiting our ability to purchase additional stores or obligate us to sell some
of our stores.



The food retail industry
in Israel is subject to laws and regulations which may adversely affect our sales and profits. In addition, from time to time,
new laws and regulations are enacted which may adversely affect our business and limit our ability to conduct our business.



10









In March 2014, the
Knesset adopted new legislation in favor of “Promoting Competition in the Food Industry” (the “Food Law”).
The purpose of the law is to promote and increase competition in the food and retail industry in order to reduce product prices.
The Food Law is divided into three (3) main topics: (i) regulation of operations of suppliers and retailers stating a list of required
and prohibited actions in the relationship between suppliers and retailers; (ii) application of geographical regions for the food
industry and geographic competition regions for the large retailers; this section includes limitations on large retailers to open
new stores and grants authorization to the court to cease the operation of large retailer stores and to assign the rights or the
sale of rights to such stores; and (iii) provisions related to increasing the transparency of prices. The effective date of the
Food Law is January 15, 2015, excluding the transparency of prices aspect which will become effective six months following the
enactment of regulations relating to this issue.



The Food Law may materially
adversely affect our ability to purchase additional stores in specific areas or could obligate us to sell some of our stores, may
materially adversely affect our sales and profits, and may adversely affect our relationships with the suppliers due to limitations
on shelves spaces. For additional information on this matter, see “Item 4. Government Regulation - Legislation in favor of
Promoting Competition in the Food Industry.” We cannot assure you that new laws and regulations will not be enacted in the
future, which may materially adversely affect our sales and profits and limit our ability to conduct our business.



Our profit margin
would be adversely affected if our ability to utilize our distribution centers were limited and if the launching of our new distribution
center were not to proceed as planned.



We have a distribution
center in Rishon Letzion from which we distribute a large portion of the products we carry to our supermarkets. The products distributed
by our distribution center to our supermarkets made up approximately 22.6% of our total purchases during 2013. In addition, we
are planning an additional distribution center for our supermarkets which we expect to be opened in the second half of 2014. Our
inability to utilize the distribution centers for any reason or to successfully launch our new distribution center may significantly
impair our ability to distribute our products to our supermarkets and would adversely affect our profit margin.



The Israeli Antitrust
Authority may take actions that limit our ability to execute our business strategy or otherwise affect our profitability.



Our strategy includes
expanding our market presence in existing retail food markets. The Israeli Antitrust Authority may limit our ability to execute
our strategy, inter alia, by limiting our ability to acquire existing stores or enter into mergers to acquire existing stores.
In 2011, we requested to purchase four of our competitors’ stores, in Ashkelon, Or Akiva, Beer Sheva and Hadera; however
the Commissioner approved the purchase of only two of the stores, in Ashkelon and Or Akiva. Such limitations may materially adversely
affect our ability to expand our business and compete effectively against our competitors.



11







In August 2006, the
Restrictive Trade Practices Court approved a consent decree reached between the Commissioner of the Israeli Antitrust Authority,
or the Commissioner, and certain specific food suppliers. The consent decree stipulates various prohibitions, conditions and restrictions
that would apply to certain practices of these suppliers. The consent decree addresses the following practices: arrangement by
which suppliers influence the number or identity of competing suppliers; acquisition of shelf and off-shelf display space; category
management; the use of suppliers’ representatives to physically arrange the shelves in the chains’ stores; discounts
and rebates in exchange for meeting sales targets; arrangements that determine a supplier’s market share; and exclusivity
in sales and price dictation by suppliers. The Company is not a party to the consent decree; however, it could nevertheless have
an effect on the practices of the Company’s suppliers and indirectly on the Company. For additional information, see “Item
4. Government Regulation - Arrangements between Major Supermarkets Chains and Large Suppliers” and “Item 4. Government
Regulation - Legislation in favor of Promoting Competition in the Food Industry.”



The Company is now self arranging all of
its product categories other than “van sale” products (such as ice cream, newspapers and bread products). The Commissioner
has committed not to take any enforcement action with respect to the arrangement of “van sale” products until the end
of 2014. Self arrangement has required the employment by the Company of many new employees, increasing our employment costs. This
may materially adversely affect the Company’s profits unless the Company is able to pass these costs to suppliers. We are
in the process of negotiating and entering into arrangements with several of our suppliers in order to share these costs with such
suppliers.



New legislation
in connection with gift certificates may have an adverse effect on our profitability.



On January 6, 2014,
new legislation regarding gift certificates was adopted by the Knesset which will become effective July 1, 2014. The new law establishes
a mandatory minimum validity period of a gift card of five years, and that the amount stated in the gift card must be uniform to
all businesses subscribing to the gift card. In addition, the new law grants the Minister of Economy the right to enact additional
regulations prohibiting the limit of use of the gift certificates. This legislation may adversely affect our profitability from
gift certificates, by increasing their cost and increasing competition in the market. For further information regarding gift certificates
see “Item 4. Information on the Company – B. Business Overview - Consumer Protection Laws.”



12







New collective bargaining
agreement regarding cleaning and maintenance employees may adversely affect our operating results.



Our supermarkets use
the services of cleaning and maintenance employees employed by manpower agencies. On July 11, 2013, the New Histadrut, an Israeli
employee organization, signed a collective bargaining agreement regarding cleaning and maintenance employees hired through manpower
agencies, granting such employees preferred terms of employment, including increased minimum wages. On February 5, 2014, The Israeli
Minister of Economy issued an extension order, so that such terms of employment apply to all cleaning and maintenance employees
employed by manpower agencies, including our cleaning and maintenance employees, causing a discrepancy in the employment terms
that we pay our cleaning and maintenance employees and our other employees. The order entered into force on March 1, 2014, and
according to it we are required to increase the payment terms to our cleaning and maintenance employees and/or to our employees
generally, this would increase our operating expenses and adversely affect our operating results.



We are exposed
to risks of fraud and theft with regard to our gift certificates which may cause a loss of revenue and non-recoverable expenses.



We run programs under
which we issue and sell gift certificates and electronic prepaid cards to institutions, companies and individuals, particularly
during the Jewish New Year and Passover seasons. The gift certificates and prepaid cards can be used in our stores as well as other
stores with which we entered into collaboration agreements. Based on our experience, we are exposed to risks connected with the
issuance of gift certificates, including risks that they may be fraudulently forged or stolen, and we are exposed to risks of computer
fraud or errors in connection with the issuance of prepaid cards. A substantial or large scale forgery, theft, fraud or error may
cause a reduction in our revenue and increase our expenses.



Government-imposed
price controls may have a material adverse effect on our operating results.



The Israeli government
is authorized to control the retail and wholesale prices of goods and services offered in Israel. At present, only a few of the
products we offer in our stores are subject to government-imposed price controls. In addition, during periods of high inflation
in the past, more extensive price controls were imposed throughout Israel. We do not believe that current price controls have any
material adverse effect on our business or operating results. However, any imposition of more extensive price controls in the future
may have a material adverse effect on our operating results. We cannot assure you that broader price controls will not be imposed
in the future.



Risks Related To Fueling and Commercial
Sites



Fluctuations in
the price of petroleum products and increases in excise tax rates may have a material adverse effect on the earnings and profitability
of Dor Alon.



The primary factors
affecting the price of petroleum products in Israel are the prices of petroleum products in the Mediterranean Basin, foreign exchange
rates and the excise taxes imposed on the sale of petroleum products in Israel. In the last few years, fuel prices worldwide and
in Israel have fluctuated significantly. Fluctuations in fuel prices have a direct effect on Dor Alon’s working capital.



13







Generally, an increase
in fuel prices causes increases in the value of Dor Alon’s inventory and increases the volume of customer credit that Dor
Alon extends to its customers and, therefore, also increases Dor Alon’s working capital requirements and increases its exposure
to customer credit risk. Increased working capital requirements result in increased finance expenses.



The excise tax component
of certain fuel prices such as diesel oil, kerosene and gasoline is significant. Excise tax is imposed directly on fuel companies
at the time of sale of fuel to customers and is generally payable within 10 days after the sale, while the credit line provided
by Dor Alon to its customers is significantly longer. As Dor Alon’s working capital requirements increase due to the increases
in excise taxes, it will be required to procure additional credit facilities and incur additional financing expenses. Failure to
obtain additional credit facilities would have a material adverse effect on the business, financial condition and results of operations
of Dor Alon.



In addition, a decrease
in fuel prices under supervision (octane 95 gasoline) generally causes decreases in the value of Dor Alon’s inventory. A
decrease in these fuel prices may cause a loss in the reporting period during which this price decrease occurs.



Competition in
the energy industry is intense, and an increase in competition in the market in which Dor Alon sells its products could adversely
affect the earnings and profitability of Dor Alon.





Competition in the
Israeli energy industry is intense and has even increased in recent years. Dor Alon’s major competitors are large fuel companies
in Israel and natural gas marketing companies: Paz Oil Company Ltd. (“Paz”), The Delek Israel Fuel Corporation Ltd.
(“Delek”) and Sonol Israel Ltd. (“Sonol”) are Dor Alon’s competitors in the filing stations field
of activity, and Paz, Delek, Sonol, PazGas, AmisraGas, SuperGas and tens of additional small and medium size fuel marketing companies
as well as small LPG companies, which are mostly local companies that operate in a limited geographic area, are Dor Alon’s
competitors in the direct marketing field of activity. The principal competitive factors affecting the retail fuel and natural
gas marketing business are location of filling stations, brand identity, product price, the variety of related services offered
to customers, the level of service, financial strength allowing the establishment of new filling stations, procurement of petroleum
products at competitive prices and the terms offered to fleet customers, real estate owners and/or owners of filling stations.
In addition, Dor Alon faces competition from Oil Refineries Ltd. (“ORL”) following its privatization and increased
competition from Paz which now owns one of the two oil refineries in Israel. Increases in competition may adversely affect the
earnings and profitability of Dor Alon.



14







If price control
over diesel fuel and LPG is imposed, it may have a material adverse effect on Dor Alon’s results of operations.



On July 31, 2012, an
amendment to the Price Control of Goods and Services Order (Application of the Law on Diesel Fuel for Transportation and Determining
the Level of Control), 2012, was published, requiring a fueling company to annually report the profitability of diesel fuel sold
at filling stations. In accordance with the amendment, the Company reports such data from time to time, pursuant to chapter VII
of the Price Control of Goods and Services Law, 1996. Although Dor Alon estimates that the reporting requirements of the Order
will not materially adversely affect Dor Alon’s results of operations, at this stage, the Company cannot evaluate the influence
of additional requirements which may be imposed in the future, including price control, which may materially adversely affect Dor
Alon’s results of operations.



The LPG price for
refineries is determined by the Fuel and Gas Administration at the end of each month for the following month. In May 2013,
the Fuel and Gas Administration notified of its intent to impose price controls for LPG sales to the private sector. At this stage,
the Dor Alon cannot evaluate the influence of price controls on LPG on its operation results.



Dor Alon is exposed
to risks associated with the reduction of the marketing margin of petroleum products, which may influence the financial results
of Dor Alon.



Dor Alon’s
profitability is derived from the marketing margin of petroleum products, which is a fixed amount that is not affected by oil prices
and is particularly low. Therefore, Dor Alon is exposed to risks arising from changes in the marketing margin of petroleum products
which are under price control and petroleum products that are not under price control. A reduction of the marketing margin by the
Israeli Ministry of National Infrastructure, Energy and Water Resources may adversely affect Dor Alon’s financial results.



Dor Alon may incur
costs to comply with petroleum and natural gas product and environmental regulatory controls related to its operating activities.



The sale and distribution
of petroleum and natural gas products in Israel is subject to extensive regulation and supervision that is focused on preventing
potential harm to the environment (principally water, air and soil contamination) and maintaining public safety. Petroleum and
natural gas products are classified, under certain circumstances, as hazardous materials that are potentially contaminating. Therefore,
handling and dealing with these products in Israel is subject to regulation and supervision. In recent years, enforcement of the
laws in Israel concerning environmental issues has become more stringent. These developments will likely increase the costs required
to construct and maintain Dor Alon’s filling stations and private filling stations. If Dor Alon does not comply with the
abovementioned regulatory controls, it may be subject to litigation by regulatory authorities, third party claims, class action
lawsuits and other litigation in addition to the risk of losing, conditioning or delaying the business permit of filling stations
with environmental contamination. Furthermore, defending ourselves against regulatory violations alleged by regulatory authorities
or consumers may in the future require substantial financial and management resources.



15







Dor Alon is exposed
to customer credit risk that may increase with future increases in the price of petroleum products.



Currently, accepted
practice in the fuel marketing industry in Israel is to grant customers (especially fleet customers and commercial customers) a
credit line for the purchase of products for extended periods without any security interest. Beginning in 2012, Dor Alon has reduced
the credit line for its customers. During 2013, Dor Alon had an average of NIS 597 million in outstanding customer credit (28 credit
days) in the Filling Stations and Convenience Stores operation, and an average of NIS 394 million in outstanding customer credit
(89 credit days) in the Direct Marketing operation. As a result of customer credit, Dor Alon is exposed to the risk of delayed
collections and nonpayment of debt.



Increases in the price
of petroleum products and in excise taxes as well as competition in the industry in which Dor Alon operates may lead to increases
in the amount of credit granted to customers. This would lead to a potential increase in the exposure to credit risks and to an
increase in Dor Alon’s working capital requirements. This would require Dor Alon to obtain additional credit lines which
may limit Dor Alon’s ability to conduct its business. A significant increase in the price of petroleum products and in excise
taxes may materially adversely affect Dor Alon’s ability to conduct its business.



Political, economic
and military instability in Israel may impede Dor Alon’s ability to operate and harm its financial results.



In addition to the
risks described below in the risk factor entitled “Risks Related To Our Business As A Whole - Political conditions in Israel
affect our operations and may limit our ability to sell our products”, the security situation in Israel tends to affect recreational
activities of private automobile owners in Israel, and as a result, affects their consumption of petroleum products. Deterioration
in the security situation causes a decrease in the consumption of petroleum products in Israel.



In addition, the
general security situation in Israel affects the incoming and outgoing tourist industry in Israel and the airlines’ volume
of activity, which in turn affects Dor Alon’s activities in supplying jet fuel to these airlines.



Risks Related To Our Non-Food Segment



We are engaged in
a highly competitive business. If we are unable to compete effectively against major non-food retailers and wholesalers, low-priced
non-food retailers and wholesalers, and other competitors, our business will be materially adversely affected.



The merchandise we
sell in our non-food and wholesale business is varied, and we therefore compete in several different markets. Our “Naaman”
and “Vardinon” stores compete in the houseware, home textile and accompanying accessories markets, and our “Dr.
Baby” stores compete in the baby and young children accessories markets.



16







In recent years
competition in the non-food and wholesale industry has increased, primarily due to the entry of retail chains and stores from outside
the food industry, and Office Depot, do-it-yourself chains such as Home Center and ACE (a franchisee of Ace Hardware), household
stores, home textile stores, such as Golf & Co. Ltd., Fox Home and Kitan Textile Industries Ltd., houseware stores, electricity
appliances stores, and also due to the expansion of the houseware and home textile departments in supermarkets, in the houseware
industry. This competition affects the selling prices of our products and the level of our sales. Increased competition may adversely
affect our level of sales and our profitability.



In addition, the barriers
of entry are low in some of the markets in which our non-food segment competes due to the price and availability of products from
overseas suppliers, although the establishment of a network of stores throughout the country together with the required import
and marketing of products requires a high level of investment. The entrance of new competitors may reduce our market share and
may reduce the selling prices of our products and lead to a reduction in our profitability.



Tension between
Israel and the Palestinian Authority may cause a delay in supply of products.



Some of our bed textile
products are sewn in the Palestinian Authority. If there is a closure of the borders between Israel and the areas governed by the
Palestinian Authority for security reasons, this could affect the transport of persons and goods and can harm the supply of products
from these sewing workshops. From our past experience, there were no significant delays in the supply of products from these sewing
workshops during such closures. Furthermore, sudden and unexpected interruption in supply by one of Vardinon’s suppliers
can cause a shortage in products which that supplier supplied for a period of several months until the beginning of supply from
an alternative supplier.



We are dependent
to a significant extent on one supplier. If this supplier raises prices or encounters difficulties in providing its products,
our operating results will be adversely affected.



Our non-food segment
is dependent on Office Textile Ltd. which provides us with dyed and printed fabrics. Delay in supply of products from, or a deterioration
in the terms of trade with, Office Textile may adversely affect our non-food segment operation.



Disruptions
of the Israeli ports may affect our ability to import products used in our non-food business.



Our non-food segment
acquires most of its products from suppliers outside of Israel, and most of its products are imported via the sea. A prolonged
general strike, shutdown or a disruption of any of the Israeli ports for an extended period of time, including as a result of a
military conflict, would affect our ability to import such products or increase their prices. In addition, since the peak selling
season of some of our non-food stores is before or during the holidays, disruptions in the ports before or during such holiday
seasons may adversely affect our sales and financial results.



17







Political and economic
conditions in China may affect the operating results of our non-food segment.



Most of our non-food
segment’s imports are from suppliers located in China. Because most of the products sold by our non-food segment are manufactured
in and imported from China, its activity may be affected by changes in the political and economic conditions in China. For instance,
any material change in the NIS-US dollar or the NIS-Chinese Yuen currency exchange rates may increase our manufacturing costs and
increase the price of those imported products from China.



Our imports from China
are affected by costs and risks inherent in doing business in Chinese markets, including changes in regulatory requirements or
tax laws, export restrictions, quotas, tariffs and other trade barriers, and the state of the economy.



Any of these risks
could have a material adverse effect on our ability to deliver or receive non-food products on a competitive and timely basis and
on our sales and profitability.



Our non-food segment
profitability is significantly influenced by the cost of raw materials and cost of sales. Increase in these factors may adversely
affect our operational results.



Our non-food segment
is exposed to fluctuations in the cost of raw materials used to manufacture our products, which affect the cost of our products.
We monitor the price volatility and may speed up or delay orders in cases we identify trends of increases or decreases in the price
of raw materials and products and adjust the sale price accordingly. Additionally, the cost of goods of our non-food segment products
is a fundamental component in the pricing of these products and the volume of sales and profit margins. Most of our non-food segment
products are imported (directly by us or by our suppliers). Cost of goods are affected or may be affected by changes in the rate
of import tariffs, especially a change in import tariffs in the Far East, costs of raw materials, changes in shipping rates and
changes in foreign currency exchange rates (mainly US dollar and Chinese currency). An increase in the price of raw materials or
cost of goods may adversely affect our operational results.



Risks Related To Real Estate



Entrepreneurship
in real estate and residential construction entails risks of not meeting the targets set forth in the original schedule and budget.



Entrepreneurship in
real estate and residential construction entails risks of not meeting the targets set forth in the original schedule and budget,
among others, due to lack of manpower in the construction industry, ongoing shortage of raw materials and/or increase in prices
of raw material. Given that BSRE’s activities include the development of residential and commercial areas in the wholesale
market project in Tel Aviv, this risk may materially adversely affect BSRE’s operational results



18







We are subject to
risks regarding the ownership of real estate assets, including a slowdown in the Israeli yield-generating real estate market, which
may adversely affect our business.



We own, through our
subsidiaries, real-estate assets, most of which are currently used by our retail operation, and the remainder is leased to third
parties or is held for future development. These assets are subject to risks with regard to ownership of real-estate assets, including
a slowdown in the Israeli yield-generating real estate market, evidenced by a decline in demand and surplus of supply of commercial
properties, a reduction in the availability of credit sources, an increase in financing costs and/or stricter requirements by banks
for providing such financing, which may have a material adverse effect on the real-estate markets, occupancy rates, rental fees
and revenues from third parties and on the value of the assets in the Company’s financial statements. These risks include
increase of operational costs, decline of the financial conditions of the lessees and additional factors which are beyond our control.
Any of these risks could adversely affect our business.



In addition, from time
to time we acquire real estate with the intention of changing the zoning of such real estate. We cannot assure that the relevant
planning authorities will approve these contemplated zoning changes or, if approved, that we will be able to sell our real estate
at a profit following a change of zoning.



BSRE may not be
able to obtain additional financing for its future capital needs on favorable terms, or at all, which could limit its growth and
increase its costs and could adversely affect the price of its ordinary shares.



Most of BSRE’s
activities, including its residential and commercial wholesale market project in Tel Aviv, are largely financed from external sources.
We cannot be certain that BSRE will be able to obtain financing on favorable terms for its activities, and BSRE cannot be certain
that its existing credit facilities will be renewed. In addition, an adverse change can occur in the terms of the financing that
it receives. Any such occurrence could increase BSRE’s financing costs and/or result in a material adverse effect on the
results of the Company and its ability to develop its real estate business. As of December 31, 2013, BSRE had long term loans
including debentures in the outstanding amount of approximately NIS 2.3 billion. The amount of long term loans currently outstanding
may inhibit BSRE’s ability to obtain additional financing for its future capital needs, inhibit BSRE’s long-term expansion
plans, increase its costs and adversely affect the price of its ordinary shares. For more information, see “Item 5. Operating
and Financial Review and Prospects - Liquidity and Capital Resources - BSRE Series D Debentures”, Item 7. Major Shareholders
and Related Party Transactions – B. Related Party Transactions – Agreement with the Wholesale Market Company”,
and “Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transactions – Agreements Between
Alon Blue Square and BSRE- Transfer of Real Estate Assets from Mega Retail to BSRE.”



19







An earthquake of
great magnitude could severely damage our business.



In the event of an
earthquake, BSRE may incur damages, including but not limited to extensive damages to its properties and loss of revenues, which
cannot be evaluated. As of the date of this report BSRE has insured its properties against earthquakes, including indemnification
for loss of rent revenues for a period of 12 months, although this insurance will not cover all the damages and losses we would
incur in the event of an earthquake.



Risk Related To Our Business As
A Whole



Economic conditions
in Israel affect our financial performance.



The financial performance
of each of our operating segments is dependent to a significant extent on the economy of Israel.



All of our supermarket
sales are made in Israel, and we acquire a substantial majority of the goods that we sell from Israeli suppliers. During 2011 and
2012, Israel’s Gross Domestic Product rose by 4.6% and 3.4% respectively. Reports of the Israeli Central Bureau of Statistics
indicate that during 2013 Israel’s Gross Domestic Product rose by 3.3%. We believe that our customers continue to be cautious
in their buying patterns and continue to choose to make their purchases at low-price and hard discount stores, which have a lower
profit margin. In addition, in connection with the public protests in 2011 resulting from the economic conditions and described
under “Risks Related To Our Business As A Whole – Enacting legislation, establishment of government committees and
protests against high cost of living may adversely affect our business”, there were protests in Israel against the supermarket
chains and a number of the products that we sell. The public’s continued awareness of the costs of food and other certain
products continues to negatively impact the food retailing business in Israel.



The demand for Dor
Alon’s products and petroleum products in general is materially affected by the state of the Israeli economy. An economic
slowdown may cause a decrease in demand for Dor Alon’s products and have an adverse effect on Dor Alon’s profit margins
and exposure to customer credit risk. However, some petroleum products sold by Dor Alon are considered basic products which have
a fixed demand.



The financial performance
of our Non-Food segment is also dependent to a significant extent on the economy of Israel. Global economic instability and uncertainty
affected our non-food and wholesale business in the past by causing a slowdown in the growth of private consumption, which affected
the growth of our houseware, home textile, toys, leisure, and baby and young children accessories businesses. Economic instability,
uncertainty or slow down could also affect the growth of our non-food businesses in the future.



20







For our Real Estate
segment, we value our yield-generating real estate property at fair value according to IAS 40 and changes to the fair value of
our real estate are reflected in our financial statements. The fair value of our properties could be impacted by a number of factors,
including the global economic and financial market crisis, as well as the retail sector in Israel because most of our assets are
intended for retail businesses. Reductions in the fair value of our real estate may materially adversely affect our financial results.



In addition, the global
economic instability, and uncertainty has also reduced the availability of credit, increased the costs of financing and the terms
under which banks agree to provide financing. These developments may reduce our sales, increase our costs of borrowing and reduce
our profitability.



Inability to create
synergies between our different businesses may adversely affect our operating results.



We currently operate
five operating segments - supermarkets, fueling and commercial sites, non food, real estate and other. The diversion of management’s
attention and any delays or difficulties encountered in connection with the realization of corporate synergies and operational
improvements could have an adverse effect on our business, financial results, financial condition or share price. If we are not
successful in creating synergies between our different operating segments our operating results may be adversely affected.



Enacting legislation,
establishment of government committees and protests against high cost of living may adversely affect our business.



In July 2011, a public
protest began in Israel with regard to high housing costs. This protest evolved into a wide scale public demonstration encompassing
many other issues, including claims that the cost of living has increased out of control and must be regulated. In response to
these protests, the Knesset has raised the priority of reducing the cost of living in Israel and has began in the process of enacting
legislation, including by way of establishment of government committees, in order to address this issue. These developments could
materially adversely affect our ability to open new supermarkets and convenience stores and the profitability of our existing
supermarkets and convenience stores. These developments could particularly adversely affect our Supermarkets segment in light
of the fact that we are the second largest supermarket chain in Israel. For additional information on this matter, see “Item
3. Risks Related To Our Supermarkets - The enactment of new laws and regulations, including proposed legislation in favor of “Promoting
Competition in the Food Industry” may materially adversely affect our sales and profits, including limiting our ability
to purchase additional stores or obligate us to sell some of our stores.”



21







We have a history
of quarterly fluctuations in our operating results and expect these fluctuations to continue due to seasonality. This may cause
the share and ADS price of Alon Blue Square to be volatile.



Our business is subject
to fluctuations in quarterly sales and profits. These fluctuations are primarily attributable to increased sales and higher operating
income in the holiday seasons occurring in different quarters from year to year. Thus, for example, in our supermarkets, and in
our “Naaman” and “Vardinon” chains, increased sales attributable to Passover, which occurs in either March or
April, may be realized in either the first or the second quarter, and sales attributable to the Jewish New Year, which occurs in
either September or October, may be realized in either the third or the fourth quarter. However, the timing of the holidays
does not affect our semi-annual results.



Many of our expenses
are unrelated to the level of sales. Therefore, a relatively modest increase or decrease in sales, whether or not related to the
timing of holidays, tends to have a disproportionately large impact on our profitability.



Because of the fluctuations
that we have experienced in our quarterly operating results, we do not believe that period-to-period comparisons of our operating
results are necessarily meaningful or should necessarily be relied upon as indicators of future performance. Accordingly, our operating
results may be below public expectations in future periods. Our failure to meet these expectations may cause the share and ADS
price of Alon Blue Square to decline.



A decrease in our
credit rating may require us to repay some of our bank loans.





In October 2010, Bank
Hapoalim loaned us an aggregate amount of NIS 200 million with an interest rate of 2.8% per year linked to the CPI. As of December
31, 2013, the balance of the loan was NIS 160 million (approximately US $46 million). A decrease in the credit rating to “Baa2”
will cause an increase of 0.25% per year in the interest rate we pay under such loan. A decrease in the credit level rating under
“Baa2” will provide the bank the right to an immediate repayment of the balance of the loan.



The credit rating of
our debentures is currently “A3/Stable” by Midroog Ltd., an Israeli rating agency and 51% subsidiary of Moody’s
(“Midroog”).



Alon is able to
control the outcome of matters requiring shareholder approval.



As of March 31, 2014,
Alon owned, directly and indirectly through Alon Retail Ltd., approximately 72.71% of Alon Blue Square’s outstanding ordinary
shares. So long as Alon, or any successor to its shareholdings in Alon Blue Square, continues to own beneficially more than 50%
of our outstanding ordinary shares and voting power, it will be able to control the outcome of matters requiring shareholder approval
that do not require a special majority, including the election of all Alon Blue Square directors, other than Alon Blue Square’s’
two external directors whose election, under the Israeli Companies Law, requires that a majority of the non-controlling shareholders
who participate in the vote, vote for their appointment, or that the total number of shares of non-controlling shareholders that
voted against their appointment does not exceed two percent of the aggregate voting rights in the Company.



22







We own a majority
interest in our subsidiaries. As a majority shareholder, we owe fiduciary duties to the non-controlling shareholders of our subsidiaries
and have to share dividends and distributions with these non-controlling shareholders.



In addition to our
wholly owned subsidiaries, Mega Retail and Bee Group, our two main subsidiaries are BSRE, in which we owned a 74.71% interest as
of March 31, 2014, and Dor Alon, in which we owned an approximately 78.43% interest as of March 31, 2014.



Through our subsidiary,
Bee Group, as of March 31, 2014, we held approximately 77.51% of the outstanding shares of Naaman Group (N.V.) Ltd., which is publicly
held and traded on the Tel Aviv Stock Exchange. In addition, as of March 31, 2014 through our subsidiary Mega Retail, we owned
51% of the outstanding shares of Eden Teva. The ordinary shares of Eden Teva that are not owned by us are held by private third
parties (including the CEO of Eden Teva).



Mega Retail leases
from BSRE the real estate underlying a substantial portion of the supermarkets that it owns. The ordinary shares of BSRE that are
not owned by Alon Blue Square are publicly held and traded on the Tel Aviv Stock Exchange.



In order to satisfy
whatever fiduciary obligations we may have under applicable law to the non-controlling shareholders of our partially owned subsidiaries,
we endeavor to deal with each of these subsidiaries at “arm’s-length.” Some transactions between Alon Blue Square
and any of these subsidiaries, including any cancellation of such transactions, require the approval of the audit committee, the
directors, and, under certain circumstances, approval of the shareholders of the subsidiary by special vote and are subject to
the receipt of applicable permits and approvals. In addition, any dividend or distribution from a subsidiary requires the approval
of the directors of that subsidiary, and may be subject to restrictions imposed by loan and other agreements to which they are
parties.



Increase in employee
minimum wage in Israel may adversely affect our operating results.



A substantial portion
of our employees’ wages is adjusted upon changes to the minimum wage in Israel. Under Israeli law, the minimum wage, which
is increased from time to time as a result of various economic parameters and updating of employee-union agreements, equals approximately
47.5% of the average wage for an employee in Israel, unless otherwise determined by government regulations. As of April 1, 2014,
the minimum wage was NIS 4,300 or approximately $1,233. In addition, collective bargaining agreements have imposed a higher minimum
wage for certain industries, such as cleaning employees and security employees. Increases in minimum wage in the future will increase
our labor costs and thus may adversely affect our operating results.



23







Rights to
filling stations in the Dor Alon chain, Mega Retail supermarkets and Naaman stores are subject to agreements with third parties
who may not renew the agreements or worsen their terms, which could affect our profitability.



The majority of the
real estate underlying the filling stations of Dor Alon, the Mega Retail supermarkets and the Naaman Group stores are leased from
third parties with whom we have entered into agreements to rent. Upon the expiration of such agreements, the owners of the stations,
supermarkets and stores may not renew their agreements with Dor Alon, Mega Retail and Naaman Group and enter into agreements with
other companies, or worsen the terms of the agreements, either of which would result in a loss of profits.



Increases in oil,
electricity, raw material and product prices may affect our operating results.



The sharp fluctuation
in oil prices in recent years has led to the fluctuation in our electricity prices and the price of raw materials used in the plastic
packing industry. We cannot assure you that our suppliers will not raise prices in the future. Further increase in oil, raw material
and product prices would impose significant expenses and costs on us, which could have an adverse effect on our operation results.
During 2013, electricity prices increased by approximately 5.5%. Increases in oil, electricity, raw material and product prices
may adversely affect our operating results.



Fluctuations of
inflation may adversely affect our financial expenses and operating income.



Our non-financial assets
and equity are not adjusted for inflation in Israel, while the repayment of interest and principal of part of our loans and debentures
are adjustable, linked to changes in the Israeli consumer price index, as provided in our loan and debenture agreements. As a result,
an increase in inflation in Israel would have the effect of increasing our financial expenses without any corresponding offsetting
increase in our assets and revenues in our financial statements, leading to lower reported earnings and equity. The extent of this
effect on our financial statements would be dependent on the rate of inflation in Israel. The Company has an excess of CPI-linked
liabilities over CPI-linked assets (mainly in respect of outstanding debentures). From time to time, we engage in transactions
to hedge a portion of this inflation risk through NIS – CPI swaps in order to reduce our risk to inflation, although we do
not eliminate the risk of inflation.



In addition, some of
our operating expenses are either linked to the Israeli consumer price index (such as lease payments payable by us under various
real estate property leases in connection with our operations) or are indirectly affected by an increase in the Israeli consumer
price index. As a result, an increase in the inflation rate in Israel would have the effect of increasing our operating expenses,
thereby affecting our operating income. The extent of this effect on our operating income depends on the rate of inflation in Israel.



24







In addition, BSRE,
a 74.71% subsidiary of the Company, is exposed to modifications of the construction valuation index, which may affect constructions
costs.



An increase in
the interest rate of the Bank of Israel may adversely affect our financial expenses.



We have issued debentures
and obtained loans in NIS, some of which bear fixed interest and some of which variable interest. An increase in the interest rate
published by the Bank of Israel will affect our financial expenses related to our debentures and loans which bear variable interest.
Additionally, an increase rise in the interest rate published by the Bank of Israel may adversely affect our financing costs, in
case we may be required to raise funds for future activities.



The value of our
securities portfolio may be adversely affected by a change in the capital markets, interest rates or the status of the companies
in whose securities we have invested.



As of December 31,
2013, we held approximately NIS 382.1 million in Israeli corporate and government bonds with fixed interest rates, a portion of
which are linked to the Israeli CPI. A decrease in the market value of these bonds or interest rates or a change in the status
of the companies in whose bonds we have invested could lead to a material increase in our net financing expenses.



Fluctuations in
the capital markets may affect our ability to raise funds in order to finance our operations, to refinance our debt and enter into
additional operational fields.



We fund our operations
from a variety of sources, including from operating activities and by raising capital from banks and the capital market. We currently
have issued debentures with an aggregate principal amount of NIS 2,880 million. From time to time, we refinance a portion of our
debt and issue new debentures to fund new projects. Adverse change in capital market conditions, specifically in the demand for
debentures and debentures yield, or new regulations in the capital market may adversely affect our business results.



Volatility of Alon
Blue Square’s share and ADS price could adversely affect our shareholders.



The market price
of Alon Blue Square’s ordinary shares and ADSs could be volatile and could be subject to fluctuations in response to numerous
factors, including the following:



| | · | actual or anticipated variations in our quarterly operating results or those of our competitors;
| | - | ------------------------------------------------------------------------------------------------

| | · | changes in financial estimates by securities analysts;
| | - | ------------------------------------------------------

| | · | conditions or trends in our business;
| | - | -------------------------------------



25







| | · | changes in the market valuations of our competitors;
| | - | ----------------------------------------------------

| | · | announcements by us or our competitors of significant acquisitions;
| | - | -------------------------------------------------------------------

| | · | entry into strategic partnerships or joint ventures by us or our competitors;
| | - | -----------------------------------------------------------------------------

| | · | the political, economic, security and military conditions in Israel;
| | - | --------------------------------------------------------------------

| | · | the inclusion of our shares on a specific index on the Tel Aviv Stock Exchange;
| | - | -------------------------------------------------------------------------------

| | · | additions or departures of key personnel; and
| | - | ---------------------------------------------

| | · | sales of ordinary shares by Alon Blue Square’s controlling shareholder.
| | - | -----------------------------------------------------------------------



Many of these factors
are beyond our control and may materially adversely affect the market price of Alon Blue Square’s ordinary shares and ADSs,
regardless of our performance.



Volatility of the price
of Alon Blue Square’s securities on the New York Stock Exchange or the Tel Aviv Stock Exchange is likely to be reflected
in the price of Alon Blue Square’s securities on the other market. In addition, fluctuations in the exchange rate between
the NIS and the dollar may affect the price of Alon Blue Square’s ordinary shares on the Tel Aviv Stock Exchange and, as
a result, may affect the market price of Alon Blue Square’s ADSs on the New York Stock Exchange.



Currency fluctuations
might affect our operating results and translation of operating results.



Any devaluation of
the NIS against various non-Israeli currencies in which we or our suppliers pay for imported goods has the effect of increasing
the selling price of those products which we sell in Israel in NIS and thereby our operating results. Dor Alon is exposed to fluctuations
in the US dollar - NIS exchange rate due to credit that Dor Alon obtains from its suppliers (mostly from Oil Refineries Ltd., which
is linked to the US dollar). Depreciations of the NIS - US dollar exchange rate could materially adversely affect Dor Alon’s
financial results. This devaluation would have a greater effect on our non-food retail and wholesale business because a higher
proportion of the goods that we sell in our non-food retail stores are acquired from overseas suppliers. Any devaluation of the
NIS would also cause an increase in our expenses as recorded in our NIS denominated financial results even though the expenses
denominated in non-Israeli currencies would remain unchanged.



In addition, because
our financial results are denominated in NIS and are translated into US dollars for the convenience of US investors, currency fluctuations
of the NIS against the US dollar may impact our US dollar translated financial results.



Also see “Item
3. Key Information – D. Risk Factors - Risk Related To Our Business As A Whole - Increases in oil, electricity, raw
material and product prices may affect our operating results.”



26







The failure of our
use of technological information systems and computer systems may adversely affect our day-to-day operations.



We use several IT systems.
Our day-to-day operations are dependent on the proper function of these systems. We take various measures to ensure the integrity
and reliability of the data and computer systems, including data protection and data back-up. However, a failure of our data and/or
computer systems may adversely affect our day-to-day operations.



Political conditions
in Israel affect our operations and may limit our ability to sell our products.



We and all of our subsidiaries
are incorporated under Israeli law and our principal offices and operations are located in the State of Israel. Political, economic,
security and military conditions in Israel directly affect our operations. Since the establishment of the State of Israel in 1948,
a number of armed conflicts have taken place between Israel and its Arab neighbors and a state of hostility, varying, from time
to time, in intensity and degree, has led to security and economic problems for Israel. We could be adversely affected by hostilities
involving Israel, the interruption or curtailment of trade between Israel and its trading partners, a significant increase in inflation,
or a significant downturn in the economic or financial condition of Israel.



The future of Israel’s
relations with its Arab neighbors and the Palestinians is uncertain, and several countries, companies and organizations continue
to restrict business with Israel and with Israeli companies. We could be adversely affected by adverse developments in Israel’s
relationship with its Arab neighbors and the Palestinians or by restrictive laws, policies or practices directed towards Israel
or Israeli businesses.



Many of our officers
and employees are currently obligated to perform annual reserve duty and are subject to being called to active duty at any time
under emergency circumstances. We cannot assess the full impact of these requirements on our workforce or business if conditions
should change, and we cannot predict the effect on us of any expansion or reduction of these obligations.



It may be difficult
to enforce a U.S. judgment against us and some of our officers and directors, to assert U.S. securities laws claims in Israel or
serve process on our officers and directors.



We are incorporated
in Israel. Our executive officers and directors are nonresidents of the United States, and substantially all of our assets and
most of the assets of these persons are located outside the United States. Therefore, it may be difficult to enforce a judgment
obtained in the United States based upon the civil liabilities provisions of the U.S. federal securities laws against us or any
of these non-residents of the United States or to effect service of process upon these persons in the United States. Additionally,
it may be difficult for you to enforce civil liabilities under U.S. federal securities laws in actions instituted in Israel.



27







We may be required
to invest resources in order to develop our mobile virtual network operator business. We cannot guarantee that the cellular services
business will be profitable.



Our expansion into
the cellular business has required us to enter a new business in which we have limited experience and where competitors are experienced
and have stronger market positions. We may not be able to successfully compete against our more experienced competitors in the
cellular services market, particularly given the high penetration rate of the Israeli mobile telephone market. Furthermore, during
2012, additional new operators began providing cellular services, further increasing competition in the Israeli cellular services
market, reducing prices in the cellular services provided, and made it more difficult to reach profitability in our cellular services
business.



In addition, the
telecommunications market in Israel is complex and is highly regulated. We may be required to devote substantial management attention
and resources to develop the new business. Current and future regulations will limit the manner in which we may conduct our business
and may increase our costs. We cannot guarantee if or when our cellular services business will be profitable.



We are exposed to,
and currently are engaged in, a variety of legal proceedings, including class action lawsuits.



We sell goods to
millions of consumers on a daily basis. As a result of the scope and magnitude of our operations we are subject to the risk of
a large number of lawsuits, including class action suits by consumers and consumer organizations. These actions are costly to defend
and could result in significant judgments against us. Recent years have been characterized by a substantial increase in the number
of requests for certification of class actions filed and approved in Israel, including against us, and this trend is expected to
continue. Currently, we are engaged in various material legal proceedings, many of which are for substantial amounts. Should these
requests to certify lawsuits against us as class actions be approved and succeed, this may have a material adverse effect on our
financial results. For a summary of legal proceedings against us, see “Item 8. Financial Information - A. Consolidated Statements
and Other Financial Information - Legal Proceedings.”



| | ITEM 4. | INFORMATION ON THE COMPANY
| | ------- | --------------------------



| | A. | History and Development
of Alon Blue Square.
| | -- | --------------------------------------------



Alon Blue Square Israel
- Ltd. was incorporated in June 1988 as a company under the laws of the State of Israel. Alon Blue Square’s principal
executive offices are located at Europark Yakum, France Building, Yakum 6097200, Israel, and its telephone number is +972-9-961-8504.



In 1996, Alon Blue
Square completed its initial public offering and its ADSs were listed for trading on the New York Stock Exchange. In November 2000,
Alon Blue Square’s ordinary shares were listed for trading on the Tel Aviv Stock Exchange.



28







On July 17, 2010, the
name of the Company was changed to “Alon Holdings Blue Square – Israel Ltd.”, and on April 24, 2013, the Company’s
name was changed to “Alon Blue Square Israel Ltd.”



In October 2010,
Alon Blue Square acquired all the shares of Dor Alon Energy in Israel (1988) Ltd. (“Dor Alon”), a publicly traded
company listed on the Tel Aviv Stock Exchange (“TASE”) that were held by Alon Israel Oil Co. Ltd.
(“Alon”). The shares acquired represented approximately 80% of the outstanding shares of Dor Alon, and in
exchange, Alon Blue Square issued 20,327,710 ordinary shares to Alon (the “Acquisition”). Dor Alon is one of the
four largest fuel companies in Israel based on number of filling stations and is a leader in the convenience stores
sector. For further information on the Acquisition, see “Item 7. Major Shareholders and Related Party Transactions
- Acquisition of Controlling Share in Dor - Alon Energy In Israel (1988) LTD.”



In 2012, our 100% subsidiary,
Alon Cellular, began operating as an MVNO as part of our strategy to expand the products and services we offer to our customers.



On May 31, 2012, BSRE,
Gindi Investments 1 Ltd. and an additional entity controlled by Moshe and Yigal Gindi (together with Gindi Investments 1 Ltd.,
“Gindi”) completed the purchase of long term lease rights for a portion of the wholesale market site in Tel Aviv for
the purpose of building and marketing on the property an apartment building complex (owned by Tel Aviv Lev Towers Ltd., a company
held by 49.5% by BSRE as of December 31, 2013) and a shopping mall (owned by Tel Aviv Mall Ltd., a company held by 50% by BSRE
as of December 31, 2013), from the municipality of Tel Aviv and the Wholesale Market for Agricultural Produce in Tel Aviv Company
Ltd. On June 26, 2013, Tel Aviv Lev Towers Ltd. (the Residence Company) and the Tel Aviv Mall Ltd. (the Mall Company and collectively
the purchasers), entered into a financing agreement with banks according to which the banks will extend financing and credit facilities
to the Residence Company in a total amount of up to NIS 2 billion and credit lines of up to NIS 450 million to the Mall Company.
For further information regarding the financing agreement see “Item 4. Information on the Company – B. Business Overview
– Real Estate – Wholesale Market Companies.”



Other Recent Developments



The following is a
description of certain events that have occurred during the last number of years:



In our
Supermarket segment:



| | · | The adoption by Mega Retail in 2013 of a new strategic plan, including the rebranding of its store
formats, increasing its operational efficiency, including by reduction of its store space, improvement of its distribution and
supply capabilities, including self distribution and the expected launch of a new distribution center, and the successful implementation
of the self-arrangement of shelves in its supermarkets. For further information see “Item 4. Information on the Company –
B. Business Overview – Supermarkets.”
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



29







In our Fueling and
Commercial Sites segment:



| | · | The execution of an agreement to purchase natural gas from the partners in Tamar partnership in
the amount of US$ 85 million (0.36 BCM) over a period of seven years while committing to a minimum annual quantity. The agreement
is subject to obtaining an approval from the Antitrust Authority; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | In February 2014, the Israel Land Authority approved the allocation of land in the southern industrial
region of Herzliya to a company owned equally by Dor Alon and a third party. The allocation is subject to several conditions, including
the payment of capitalized lease fees. The jointly owned company is in the process of submitting an objection with regard to the
amount of the capitalization lease fees and is working to complete the transaction with the Israel Land Authority. The zoning plan
permits the jointly owned company to establish a project containing 52,000 square meters designated for employment. Dor Alon intends
to continue to operate (through the joint company) the promotion and implementation of this project, including the allocation of
land to the project by the Israel Land Authority.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In our Non-Food segment:



| | · | The sale of 65 percent of the Company’s holdings in Kfar Hasha’shuim for NIS 13 million.
For further information see “Item 5. Operating and Financial Review and Prospects - General -Non-Food segment.”
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The conversion of 18 Sheshet stores into Na’aman stores. The remaining Sheshet stores were
closed by the end of 2013.
| | - | ---------------------------------------------------------------------------------------------------------------------



In our Real Estate
segment:



| | · | The construction of a 23,000 square-meter office building on real property BSRE owns in Ra’anana
and to construct a 3,500 square-meter basement, both of which will be leased to the third party for a period of 10 years. For additional
information, see “Item 4. Information on the Company - B. Business Overview – Real Estate– Investment in Comverse
Building (Ra’anana)”;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The sale, as of March 23, 2014, of 677 apartments in the Wholesale Market project in Tel Aviv and
the receipt of advance payments in the aggregate amount of NIS 962 million (including VAT) from the purchasers. For additional
information, see “Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transactions –
Agreement with the Wholesale Market Company”; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



30







| | · | The completion of the construction of an additional floor and the upgrade of Hadar Mall in Jerusalem
(in which BSRE holds 50% of the rights) with an area of 34,000 square meters (of which 12,000 square meters are for commercial
purposes and the remaining area is for parking).
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Capital
Expenditures



In 2013, we invested
approximately NIS 328.3 million, or $94.6 million, in property and equipment, intangible assets and investment property, a
29.7% decrease from our 2012 investment of NIS 466.8 million. Of our investment in property, and equipment and investment
property in 2013, we invested NIS 88.8 million, or $25.6 million, in land and buildings, including land that we lease and
investment property, as compared with NIS 62.0 million in 2012.



For additional information
pertaining to our principal capital expenditures and divestitures for the last three financial years and those of which are currently
in progress, and the method of financing, see “Item 5. Operating and Financial Review and Prospects - Liquidity and Capital
Resources.”



| | B. | Business Overview.
| | -- | ------------------



General



We
operate in four reporting segments. In our Supermarkets segment, we are the second largest food retailer in the State of Israel.
In our Fueling and Commercial Sites segment, we operate a chain of filling stations and convenience stores in different formats
in Israel. In our “Non-Food” segment, we sell “Non-Food” items both in our supermarkets and in standalone
outlets. In our Real Estate segment, we own, lease and develop yield-generating commercial properties and residency projects.



Our activities are
carried out via our consolidated subsidiaries, including Mega Retail, which has supermarket retail activities, Dor Alon, which
operates a chain of filling stations and convenience stores, Bee Group and Mega Retail, which conducts non-food activities, and
BSRE, which owns and invests in yield-generating commercial real estate and projects. As of March 31, 2014, Alon Blue Square owned
100% of the outstanding shares of Mega Retail, 78.43% of the outstanding shares of Dor Alon, 100% of the outstanding shares of
Bee Group, and 74.71% of the outstanding shares of BSRE. The balance of BSRE shares and Dor Alon shares is publicly held and traded
on the Tel Aviv Stock Exchange.



31







As of December 31,
2013, Mega Retail and its direct subsidiaries were the owners of all 213 of our supermarkets divided into three main categories,
Discount chains, Quality and Service chains and Mega@Internet website. In order to meet the needs of our customers, both the Discount
chains and Quality and Service chains have regional stores and local neighborhood stores. The Discount chains include the regional
store brands “You”, “Mega Bool” and “ZolBeShefa” and the local neighborhood store brand “You
Neighborhood Store”. The Quality and Service chains include the regional store brand “Mega”, the local neighborhood
store brand “Mega in Town” and the organic, natural and health product store brand “Eden Teva”. As of December
31, 2013, the consolidated assets of Mega Retail and its subsidiaries aggregated approximately NIS 1.5 billion, or $433 million.
Mega Retail’s assets constitute approximately 16.4% of our total consolidated assets at that date.



As of December 31,
2013, Dor Alon operated 206 filling stations, 215 convenience stores, including 169 convenience stores branded “Alonit”
and “Super Alonit” (we refer to these stores as Alonit convenience stores), and 46 convenience stores operated by the
AM:PM chain of stores. Four convenience stores were operated by third parties. As of December 31, 2013, the total consolidated
assets of Dor Alon and its subsidiaries aggregated approximately NIS 2.7 billion, or $783 million. Dor Alon’s assets constitute
approximately 29.7% of our total consolidated assets at that date.



BSRE is the owner of
most of our real estate properties, and its revenues are primarily derived from real estate lease payments received from Mega Retail
and third parties. As of December 31, 2013, the consolidated assets of BSRE aggregated approximately NIS 3.1 billion, or $903 million.
BSRE’s assets constituted approximately 34.2% of our total consolidated assets at that date.



As of December 31,
2013, we were the owners, through our subsidiaries, of 115 of our Non-Food stores, while the remaining 16 of our Non-Food stores
were owned and operated by franchisees. As of December 31, 2013, the consolidated assets of our non-food segment (excluding the
stores owned and operated by franchisees) aggregated approximately NIS 333 million, or $95.9 million. Our non-food segment’s
assets constituted approximately 3.6% of our total consolidated asset at that date. In addition, as of December 31, 2013, we had
83 Non-Food outlets operated by Kfar Hasha’asuim under the brand names “Kfar Hasha’ashuim” and “All
For A Dollar”. In February 2014, we completed the sale of 65 percent of our holdings in Kfar Hasha’ashuim.



Our Strategies



Our strategy is to
take advantage of our position as a leading retailer in Israel in order to offer a variety of products and services which meet
our customers’ daily needs, while leveraging potential synergies within our group. To achieve this goal, we intend to pursue
a number of operating and growth strategies, which include:



| | · | continue growing our filling stations and convenience store operations, including expanding the
variety of products and services offered within the stores and identifying new areas of operation that are synergetic to our fueling
operations;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | expanding the marketing of natural gas for industry and maintaining operation in the private electricity
sector while examining the development of additional projects and expanding the marketing of Dor Alon’s private brand in
the lubricant oil sector, “Dor Oil”;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



32







| | · | maintaining and strengthening our market positioning within the supermarket segment by rebranding
our store formats, renovating and improving existing stores, evaluating the strategic positioning of some of our stores, adjusting
the format of some of our stores all in order to meet the needs of our customers;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | increasing operational efficiency, including by reviewing and taking concrete steps to improve
our distribution and supply capabilities, including self distribution and the launch of a new distribution center, and the successful
implementation of the self-arrangement of shelves in our supermarkets;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | developing and expanding of the real estate segment by developing and improving of the existing
real estate properties, maximizing of leasings, increasing building rights, and purchasing additional commercial real estate in
Israel;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | cautiously examining the possibility of expanding our activities outside of Israel;
| | - | -----------------------------------------------------------------------------------



| | · | increasing our market share of “Non-Food” and “Near-Food” products and
capitalizing on potential operating synergies between the food and Non-Food segments of the Company and the other subsidiaries
of the Company, including by increasing of the sale of products of “Naaman” in Mega Retail’s supermarkets and
merging Bee Group into Mega Retail;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | strengthening and increasing of our market share in the organic products market and the health
food in order to preserve our position as a leading company in the organic and health food market in Israel;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | improving the status of Diners credit cards by launching attractive loyalty plans with third parties
and increasing the acceptance of these credit cards by Israeli merchants; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | expanding and improving our You loyalty plan offering, increasing the number of You club
                                                                                                               members who hold the “You” credit card and the number of customers of our Alon Cellular MVNO offering, and
                                                                                                               increasing cooperation with Diners Israel to add additional You loyalty club members.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



33







Supermarkets



General



The following table
sets forth the change in the number of our supermarket stores (net of store closures) and supermarket store space as of the dates
indicated:



|                        |  |               |  | Store Space     |        
|----------------------- |  | ------------- |  | --------------- | -------
|                        |  | No. of Stores |  | (square meters) |        
|                        |  |               |  |                 |        
|As of December 31, 2009 |  | 203           |  |                 | 365,000
|As of December 31, 2010 |  | 206           |  |                 | 366,000
|As of December 31, 2011 |  | 211           |  |                 | 377,650
|As of December 31, 2012 |  | 212           |  |                 | 369,000
|As of December 31, 2013 |  | 213           |  |                 | 360,000



The following table
sets forth the selected operating data of our supermarket stores as of the date indicated:



|                                              |  | For the year ended December 31,
|--------------------------------------------- |  | -------------------------------
|                                              |  | 2011                           
|Selected Operating Data:                      |  |                                
|                                              |  |                                
|Number of supermarket stores (at year end)    |  | 211                            
|Increase (decrease) in same store sales(1)    |  | (2.7%)                         
|Total square meters (at year end)(2)          |  | 377,650                        
|Supermarket sales per square meter (in NIS)   |  | 18,090                         
|Supermarket sales per employee (in thousands) |  | 965                            



| | (1) | The percentage change in same store sales is the percentage change in sales of those stores that
operated continuously during the entire reporting period of both the current year and that preceding it. Stores are not deemed
to have operated continuously (and therefore not included as “same stores”) if such stores were permanently closed
during the reporting period or the preceding period, were resized significantly during the period or were significantly renovated
or expanded during the period. Store resizing is considered significant if it exceeds 5% or more of the store’s original
size.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Based on an average total square meters at month end during the relevant year.
| | --- | ------------------------------------------------------------------------------



Our supermarket stores
are divided into three main categories: Discount chains, Quality and Service chains and Mega@Internet website. In order to meet
the needs of our customers, both the Discount chains and Quality and Service chains have regional stores and local neighborhood
stores. The Discount chains include the regional store brands “You”, “Mega Bool” and “ZolBeShefa”
and the local neighborhood store brand “You Neighborhood Store”. The Quality and Service chains include the regional
store brand “Mega”, the local neighborhood store brand “Mega in Town” and the organic, natural and health
product store brand “Eden Teva”.



34







In Our Discount chains,
“You” and “Mega Bool” chain stores are regional hard discount stores designed to provide customers with
name brand quality at everyday affordable prices. The “You Neighborhood Store” chain is a hard discount stores located
in local neighborhoods. Our “ZolBeShefa” chain stores are low-priced stores oriented towards Israel’s growing
ultra-orthodox Jewish population. In our Quality and Service chain, “Mega” chain is comprised of large supermarkets
with a variety of food and non food products designed to be a “one stop shop” for our customers. The “Mega in
Town” chain stores, located primarily in local neighborhoods and city centers, combine reasonable prices with convenience
for neighborhood shoppers. “Mega in Town” stores offer fresh food, a large variety of items and convenience in residential
areas. In our “Eden Teva” stores, we focus on offering organic, natural and health food products together with offering
many of the items sold in our other supermarket stores. The “Eden Teva” stores are divided into 12 stand alone stores
and nine stores which are inside our “Mega” stores under the concept of a store within a store. As of December 31,
2013, we operated a total of 213 stores consisting of approximately 360,000 square meters space. Our Mega@Internet website allows
customers to place orders via the Internet 24 hours a day and to have the products in our stores delivered to their homes from
a nearby store within a few hours.



We launched our “You”
and “You Neighborhood Store” supermarket formats in November 2013. The initiative included the conversion of
a number of our “Mega Bool” stores to the new “You” brand as of March 31, 2014.



As part of the acquisition
of 51% of the outstanding shares of Eden BriutTeva Market Ltd. (“Eden Teva”) in 2007, we agreed to provide all guarantees
and financing required in connection with Eden Teva’s operations in the future.



Our supermarkets offer
a wide selection of supermarket goods. The mix of products of each supermarket format varies to address the preferences of its
target customers. Many of our supermarkets offer specialty departments such as full service bakeries, delicatessens, fresh meat
and prepared food departments; certain supermarkets also contain franchise operations, which sell a variety of goods. In addition,
we offer a range of “Non-Food” and “Near-Food” items and operate several houseware departments within most
of our large stores. Furthermore, our supermarkets sell and market our “Mega” line of private label goods, including
“Mega Home”. Private label products provide customers with an attractive alternative selection of products that are
comparable in quality to name brand products. We believe that our private label products enhance customer loyalty, differentiate
our stores from those of our competitors and provide a competitive product to those offered by our suppliers. In addition, usually
the average gross profit from private label products is higher than the average gross profit from other products. During December
2013, the products that we sold under the “Mega” private label constituted approximately 11.3% of our supermarket sales.



During 2013, we exited
approximately 12,600 square meters of supermarket store space as a result of stores sold to third parties and the reduction of
store space as part of our strategy. All of our supermarket stores operations are owned by Mega Retail and its subsidiaries, and
Mega Retail leases the real estate underlying the stores that it operates from BSRE and third parties.



35







Industry Overview



We estimate that
retail sales of food, beverages and tobacco in Israel were approximately NIS 61 to 66 billion, or $17.6 to $19.0 billion, in 2013.
This estimate is based on the data published by the Israeli Central Bureau of Statistics of the retail sales of food, drinks and
tobacco in Israel in 2011 (2012-2013 has not yet been published) and the growth of expenditure of 3.5% in 2013 and 3.1% in 2012
for the consumption of food, beverages and tobacco of household in Israel at current prices.



The retail sales of
food, beverages and tobacco in Israel includes supermarkets, grocery stores, mini-markets and retail sales of fruit and vegetables,
meat, poultry and fish. The supermarket retail chain market consists of two large chains: Shufersal and us, as well as other growing
chains.



Based on data published
by the Israeli Central Bureau of Statistics of the retail sales of food, drinks and tobacco in Israel, we estimate that approximately
31.3% of the total retail sales of food, beverages and tobacco in Israel in 2013 was made by the two large chains and approximately
35% of the estimated retail sales made by supermarkets, groceries and mini-markets in Israel in 2013 was made by the two large
chains.



Competition



The Israeli food retailing
industry is highly competitive and is characterized by high turnover and narrow operating margins. We compete with the other largest
supermarket chain, Shufersal, low-priced smaller supermarket chains, independent grocers, open-air markets, and other retailers
selling supermarket goods. Competitive pressures increase as the supermarket sector in Israel approaches higher saturation levels
and will continue to increase in the event that our competitors expand their operations or new companies enter the market with
hard discount formats.



Our market share in
2013 was 11.4% of the total retail market of food, beverages and tobacco. The market share of our competitor, Shufersal, based
on its financial reports, was approximately 20.1% in 2013. This market share is based on revenue as a percent of the retail market
for food, beverages and tobacco in accordance with the definition of the Central Bureau of Statistics for 2011 and market growth
of approximately 3.5% for 2013 and 3.1% for 2012. The difference in market share may give Shufersal a greater competitive advantage
in its dealings with customers, suppliers and other third parties.



In recent
years, we and our competitors have established or expanded low-price and hard discount store formats. In 2013 we have
began rebranding “Mega Bool” stores as “You” stores. As of March 31, 2014, we have completed
converting a number of “Mega Bool” stores into “You” stores. In addition, other supermarket chains in
recent years continued to aggressively increase their market share and expanded their presence in locations throughout
Israel, often geographically beyond their original locations. The low barriers of entry, including the relatively low cost of
establishing new smaller supermarket chains, have contributed to the increase in number and expansion of smaller supermarket
chains in recent years.



36







Shufersal, the largest
supermarket chain, has taken numerous initiatives in the last few years to improve its competitive position. The competitive position
of Shufersal, together with the expansion of smaller supermarket chains in recent years, has contributed to the intensified competition
we experienced in recent years, particularly at our larger stores.



In January 2013, Bitan
Wines Ltd. and the Zim Direct Marketing Ltd. chain of discount supermarkets merged, following which the merged chain had 62 outlets
throughout Israel. This merger, and possible similar mergers in the future, could adversely affect our competitive position.



Based on an approval
from the Commissioner of the Israeli Antitrust Authority, the Fourth Chain Company Ltd. (“the Fourth Chain”) entered
into certain arrangements with certain smaller supermarket chains. This approval was granted subject to certain conditions and
has since been extended until June 10, 2015. The Fourth Chain combines a number of other supermarket chains (the “Members”)
which operate in locations throughout Israel and its purpose is to develop a private label and to jointly negotiate with suppliers.
Pursuant to the approved extended arrangement, the Fourth Chain is permitted to negotiate with suppliers regarding the private
label brand. The aforesaid arrangement, and possible similar combinations of other supermarket chains, may generate some of the
efficiencies of a major nationally-spread chain and therefore enable them to compete more efficiently with the major chains.



In the sale of cosmetic,
toiletries and hygiene products, we compete against establishments that sell such products, including the drug store chains SuperPharm
and NewPharm.



Operations



The
following table provides certain information regarding our supermarket stores as of December 31, 2013:



|Properties                |  |                             |  | Number |     |  | Square
 meters | 
|------------------------- |  | --------------------------- |  | ------ | --- |  | -------------- | 
|Stores(*)                 |  | Leased from BSRE            |  |        | 93  |  |                | 
|                          |  | Leased                      |  |        | 120 |  |                | 
|                          |  |                             |  |        | 213 |  |                | 
|Stores In Development     |  | Leased                      |  |        | —   |  |                | 
|Offices                   |  | Leased from BSRE            |  |        | 2   |  |                | 
|Warehouses                |  | Leased from BSRE            |  |        | 2   |  |                | 
|                          |  |                             |  |        |     |  |                | 
|Warehouses in Development |  | Leased from BSRE and others |  |        | 1   |  |                | 
|Car park                  |  | Leased from BSRE            |  |        |     |  |                | 
|Total                     |  |                             |  |        | 218 |  |                | 



(*)
Includes nine Eden stores within Mega.



37







Purchasing and
Distribution



We purchase products
for our supermarkets through a central purchasing office that selects products for all of our supermarkets (as well as a number
of the products sold in Alonit/SuperAlonit and AM:PM stores, and not including Eden Teva) and negotiates prices, promotions and
terms of payment with individual suppliers on a company-wide basis. We believe that the large volume of our purchases and our ability
to offer chain-wide exposure for our suppliers’ products and promotions, enable us to avail ourselves of attractive volume-buying
opportunities and manufacturers’ discounts.



Through our distribution
center in Rishon Letzion, we can distribute products from suppliers, manufacturers and importers, thus reducing prices and broadening
the range of available products. The distribution center is operated on a site of approximately 40,000 square meters. At this site,
we operate approximately 20,000 square meters as warehouse space. We conduct the administration of the warehouse and distribution
by means of a computerized system that consolidates orders from all the stores and other stores while giving consideration to inventory
levels, store requests and company planning. In addition, the Company signed a development agreement to build an additional distribution
center expected to be completed in the second half of 2014, for which a building permit has been received. This new distribution
center will have approximately 41,500 square meters. For more information, see “Item 4. Information of the Company –
B. Business Overview – Real Estate – Description of Real Estate Properties - Warehouses and Logistics Areas-
Kibbutz Eyal.”



We purchase products
for our supermarkets from approximately 1,000 suppliers, including manufacturers, importers and distributors. In 2013, approximately
17.7% of our grocery items and 2.1% of our meat and fish were delivered directly by suppliers to our stores. For certain other
items, including 88% (in 2013) of fruits and vegetables, we provide distribution to our supermarkets through our distribution center.
For the year ended December 31, 2013, approximately 22.6% of our supermarket purchases were of products distributed from our distribution
center.



We actively seek to
diversify our suppliers. However, we still purchase most of our dairy, fresh produce and poultry products from the Tnuva Corporation,
which holds a leading position in the domestic dairy and poultry markets. In 2013, Tnuva’s products accounted for approximately
12.2% of all the products sold at our supermarkets. For more information on our arrangements with Tnuva, see “Item 7. Major
Shareholders and Related Party Transactions – B. Related Party Transaction – Arrangements with Tnuva.” In
addition, the Strauss group, an Israeli food manufacturer, accounted for approximately 7.7% of all products sold at our supermarkets
in 2013, and the Osem-Nestle group accounted for approximately 7.1% of all products sold at our supermarkets in 2013. Because of
our status as a leading food retailer in Israel as a result of which we are able to offer wide exposure on a national level, to
these suppliers’ products, and the fact that we maintain an excellent and long-standing relationship with Tnuva, Strauss
group and Osem, we do not believe that there is a material risk of future stoppage of supply of products of these key suppliers.
However, we do not have a written contract with Tnuva, Strauss group or Osem obligating them to supply products to us. In addition,
in recent years, there has been a process of consolidation among our suppliers. As a result, our largest suppliers now account
for a larger percentage of our product sales. The ten largest suppliers for our supermarkets accounted for approximately 49% of
our product purchases in 2013. We have not experienced any material problems in obtaining products of the quantity and type required.



38







Marketing



We have joint advertising
and sales initiatives together with some of our suppliers. The stores accept cash, checks, credit cards, gift certificates and
prepaid electronic cards.



During the Jewish New
Year and Passover seasons, we run gift certificates programs, under which we issue and sell gift certificates and prepaid cards
to institutions, companies and individuals. The gift certificates and the prepaid cards can be used in our stores as well as other
stores with which we entered into collaboration agreements. We also participate in tenders in connection with the sale of our gift
certificates and prepaid cards. From time to time, we also operate joint marketing promotions with other entities. For risks relating
to the issuance of gift cards, see “Item 3. Key Information – D. Risk Factors – Risks Related to Our Supermarkets
- New legislation in connection with gift certificates may have an adverse effect on our profitability” and “Item 4.
Information on the Company – B. Business Overview – Additional Business Information relating to Alon Blue Square –
General Government Regulation – Costumer Protection Laws.”



In addition, we operate
the Mega@Internet website which allows customers to place orders via the Internet 24 hours a day and to have products from our
stores delivered to our customers’ homes from a nearby store within a few hours. Likewise, customers may order products by
phone (through a call center), email or by fax. The service is provided in most of Israel.



We aim to create an
awareness of our supermarkets as offering a combination of broad selection, high-quality service and competitive prices. Our primary
advertising outlets, in addition to point-of-sale marketing, are television, newspapers, radio, internet, billboards, SMS and direct
mail. Store promotions are conducted from time to time in all our supermarkets, in specific chains or in individual stores. These
promotions include, among other things, price reductions, gifts, coupons or deferred payment terms and are often available exclusively
to members of our Loyalty Plan - “You”, and the customer clubs of ZolBeShefa and Eden Teva.



39







The goal of our Loyalty
Plan, which we established together with Dor Alon and which offers to our customers credit cards (Diners and Mastercard) bearing
the name “You”, or a membership card, is to promote customer loyalty to the Company and Dor Alon by, among other things,
granting exclusive benefits to the Loyalty Plan members, including providing discounts and benefits at other businesses that joined
the Loyalty Plan, such as a monthly refund to the customer’s YouPhone account based on the aggregate purchases made in Mega
supermarkets, Alonit convenience stores or at Dor Alon filling stations. In addition, through the Loyalty Plan the Company may
provide other services such as personal finance, insurance products and tourisms packages. The benefits are advertised and disseminated
each month via e-mail to the members of the Loyalty Plan.



The Loyalty Plan also
owns a 50% share in the Israeli Hebrew-language free daily newspaper, Israel Post, distributed mainly in establishments such as
Mega Retail supermarkets, AM:PM convenience stores, Dor Alon filling stations and third parties establishments. A majority of the
revenue from this newspaper comes from selling advertisement space. Mega Retail believes that the partnership in this newspaper
provides it with a marketing platform for Mega Retail’s network.



Government Regulation



Supermarkets



Our operation of stores
in Israel requires permits from municipal authorities, which are conditioned on the prior approval of various agencies, including
the health ministry, the police and fire departments. If we are unable to obtain or maintain one or more required permits, we may
be required to close one or more stores or to take other remedial action to obtain or maintain these permits. As of July 2012,
due to Licenses Regulations amendment, permits will no longer be granted for an unlimited period of time. Rather, new permits will
be granted for periods of 10 to 15 years.



Price Control



The Israeli government
is authorized to control the retail and wholesale prices of goods and services offered in Israel. At present, a few of the products
we offer in our stores, certain bread, salt, eggs, milk and milk products and butter, are subject to government-imposed price controls.
Any imposition of more extensive price controls in the future than those that currently exist may have a material adverse effect
on our operating results. See “Item 3. Key Information – D. Risk Factors - Government-imposed price controls may have
a material adverse effect on our operating results.”



Environmental



Our supermarkets
are subject to environmental laws, including:



| | · | The Packaging Management Law, 5771-2011, which became effective
on July 1, 2011, determines arrangements for packaging manufacturing and packaging waste treatment. We are required under the law
to report regarding, and pay in accordance with, our private label packaging weights. We have engaged with T.M.I.R corporation
in connection with packages treatment.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | The Law of Deposits for Drink Containers, 5759-1999, which became
effective October 1, 2001, in order to improve public cleanliness and reduce the amount of buried waste. According to the law,
we accept up to 50 drink containers per customer per day. We are engaged with ELA recycling corporation for the purpose of collection
and treatment of the drink containers we collect from our customers.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



40







| | · | Water and Sewerage Corporation Rules (Plants Wastewater Discharged
into the Sewerage System), 5771- 2011, permits water corporations to conduct sampling tests on plants and imposes on factories
the cost of sampling and testing. The water corporations consider supermarkets as plants. Accordingly, we began to receiving payment
demands from different water corporations relating to sampling and testing costs.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Arrangements between
Major Supermarkets Chains and Large Suppliers



Following an investigation
conducted by the Israeli Antitrust Authority from April 2000 to May 2003 relating to alleged restrictive trade arrangements between
major supermarkets chains in Israel and large suppliers, in August 2006, the Restrictive Trade Practices Court approved a consent
decree reached between the Commissioner of the Israeli Antitrust Authority and certain food suppliers. The consent decree is directed
at the food suppliers listed therein and stipulates various prohibitions, conditions and restrictions. The consent decree addresses
the following arrangements:



| | · | Reduction in the number of suppliers. Suppliers are prohibited from being a party to an
arrangement by which they influence the setting of the number or identity of competing suppliers’ presence and their products
at retail chains.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Acquisition of shelf and off-shelf display space. A dominant supplier is prohibited to be
a part of: (i) an arrangement granting an allocation exceeding half of the overall display area designated for the product category
in which it has dominance; (ii) an arrangement the purpose of which or effect is granting exclusivity to one or more of the supplier’s
products in an off-shelf display in which it has dominance (nevertheless, exclusive arrangement for off-shelf display for a limited
discount period will not constitute a basis for enforcement measures under certain circumstances). In addition, arrangements with
suppliers (as opposed to dominant suppliers) regarding allocation of shelf area or off-shelf display, if not prohibited according
to the decree, may not exceed a period of one year (the retail chain and the supplier may enter into a new arrangement at the end
of the one year term, provided the period of such new arrangement does not exceed one year and is in accordance with the provisions
of the decree).
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Category management: Unless prior approval of the antitrust authorities is obtained, a dominant
supplier is prohibited to be party to an arrangement whose purpose or effect is the supplier involvement (including as advisor)
in the process of category management (nevertheless, a retail chain may consult with a supplier regarding innovations in this area).
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



41







Shelve arrangements:
The suppliers disagree with the position of the Commissioner that the use of suppliers’ representatives to physically arrange
the shelves in the chains’ stores constitutes a restrictive arrangement and the Commissioner agreed not to take enforcement
measures with regard to such arrangements for a limited period, as long as such arrangements satisfy certain conditions. The Commissioner
has indicated that it will no longer permit such practices. The Company is now self arranging all of its product categories other
than “van sale” products (such as ice cream, newspapers and bread products). The Commissioner has committed not to
take any enforcement action with respect to the arrangement of “van sale” products until the end of 2014.



| | · | Discounts and rebates in exchange for meeting sales targets. A dominant supplier may not
be party to an agreement whose objective or effect is the grant of benefits to the retail chain in connection with meeting sales
targets for the products in which the supplier has dominance, unless the benefit is given only as a discount to the purchase of
units sold in excess of the supplier’s sales basis in the chain and is restricted to these units alone. The prices of units
sold in excess of the sales goals shall not be lower than the production costs of these units. In addition, a dominant supplier
is prohibited from sanctioning a retail chain for failure to meet monopolistic sales targets regarding products for which the supplier
possesses monopolistic power.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Setting market share. A supplier is prohibited from being a party to an arrangement whose
purpose or effect is to determine the supplier’s market share (or restricting the market share of competing suppliers) in
the chain’s sales.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Exclusivity in sales: A supplier is prohibited from entering into the following arrangements
with retail chains without the prior approval of the antitrust authorities: (i) an arrangement whose purpose or effect is to restrict
the ability of competing suppliers to respond to sales conducted by such supplier by way of lowering their prices and (ii) an arrangement
whose purpose or effect is to restrict the ability of competing chains to respond to sales conducted by another chain, including
by way of commitment of the supplier not to offer a similar sale to competing chains.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Price dictation by supplier. A supplier is prohibited from setting the consumer price of
its products sold in the chain and from intervening in chain decisions regarding the setting of the consumer price of its products
or of its competitors’ products.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The consent decree
clarifies that nothing in the provisions contained therein prevents the chain from allocating shelf space at its own independent
discretion, even if such allocation exceeds half the available shelf space, so long as there is no involvement or interference
from the supplier and so long as there is no prior coordination or understanding with said supplier.



The Company is not
a party to the consent decree; however, it could nevertheless have an effect on the practices of the Company’s suppliers
and indirectly on the Company.



42







For additional information
regarding government regulations relating to our Supermarket segment, please see “General Government Regulation” below.



Legislation in
favor of Promoting Competition in the Food Industry



In March 2014, the
Knesset adopted new legislation in favor of “Promoting Competition in the Food Industry”. The Food Law is divided into
three (3) main topics: (i) regulation of operations of suppliers and retailers; (ii) geographic competition of retailers; and (iii)
transparency of prices. The effective date of the law is January 15, 2015, excluding the transparency of prices aspect which will
become effective six months following the enactment of the regulation relating to this issue.



| | · | Regulation of operations of suppliers and retailers. The Food Law states a list of required
actions and prohibited actions regarding the relationship between suppliers and retailers, such as: (a) a retailer may not dictate
or recommend to a supplier or interfere in any way with regard to the consumer price charged by other retailers for a product or
the terms under which other retailers sell products to consumers; (b) a supplier may not dictate or recommend to a retailer or
interfere in any way with regard to the consumer price charged by the retailer for a product provided by another supplier or the
terms under which the retailer sells the product of another supplier; (c) a Large Supplier (a supplier with total sales exceeding
NIS 300 million per year or a monopoly) may not arrange products at a Large Retailer (a retailer with at least three stores and
total sales exceeding NIS 250 million per year) and may not dictate, recommend, or interfere in any way with the arrangements of
its products (excluding guidance required to keep the quality and safety of its products); (d) a Large Supplier may not be a party
to an arrangement with a Large Retailer under which products are sold to retailer in a lower price than the marginal cost of supplying
the product to retailer; (e) a sale of a certain product to the retailer by a Large Supplier may not be a condition for the sale
of another product by such supplier; (f) a supplier may not grant bonuses to a Large Retailer; (g) the Commissioner may instruct
a Large Retailer, which sells a product of a Large Supplier, with regard to the steps that should be taken in relation with same
product or a substitute product in order to prevent reduction of competition or to increase competition. In addition, the Commissioner
may issue instructions with respect to the shelf space assigned to a specific product and substitute products and the payments
for such shelf spaces; (h) a Large Retailer may not assign shelf space to a Very Large Supplier (a supplier with total sales exceeding
NIS 1 billion per year) exceeding 50% of the shelf space in each of the retailer’s big stores. The remaining shelf space
must be assigned to suppliers which are not Very Large Suppliers; and (i) the Commissioner was granted the authority to issue instructions
to a Large Retailer if case its actions with respect to its private label may reduce competition or harm the public.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



43







| | · | Geographic competition of retailers. The following issues will apply to Large Retailers
and retailers with at least one store with sales exceeding NIS 100 million per year with regard to Big Stores (stores with sale
space exceeding 250 square meters): (a) the Commissioner will define for each Big Store its geographical area based on statistical
information, such as distance from consumers, store size and store area, whether it is in an urban area or other; (b) with respect
to each Big Store, the Commissioner will define its competition group which will include all the stores which compete for the same
consumers; (c) the Commissioner will calculate for each Big Store its share of the competition group according to the ratio between
its total sales compared to the total sales of the competition group; (d) once every two years, the Commissioner will notify each
Large Retailer with regards to the demand areas in which its Big Stores’ share in the competition group exceed 30% and 50%.
Opening a new store in such demand areas will require the Commissioner’s prior approval. Such request will not be approved
unless the Commissioner determines that there is no reasonable doubt that opening a new store will adversely affect the competition
in the relevant demand area. A request to open a new store in a demand area of which the retailer’s share compared to the
competition group exceeds 50% will not be approved, unless the Commissioner determines there is near certainty that opening a new
store will not adversely affect the competition in the relevant demand area. The Commissioner’s decision will be granted
within 90 days and may be appealed; (e) the Commissioner must publish the demand areas within six months from publication of the
Food Law; (f) the court, upon the Commissioner’s request, may order that a Large Retailer that owns a store, which its share
compared to the competition group exceeds 50% in a certain demand area, cease the store’s operation, transfer its right in
such store to another party, sell its rights in the store or take any other appropriate measure in order to increase the competition
in the demand area; (g) a Large Retailer that received a notification from the Commissioner as described in section (d) above may
not enter into an agreement which will limit other retailers from entering into similar agreements in the demand area; and (h)
once a year, each Large Retailer is required to report to the Commissioner with respect to each of its Big Stores: the store location,
the date of opening and the total sales of each store.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Transparency of Prices. The Food Law provides for the following, among others, with regard
to the transparency of prices: (a) a Large Retailer which owns stores with an average selling space exceeding 120 square meters
will publicize via the internet, with respect to each of its stores, the updated price of each product sold in each store, such
that a comparison between Large Retailers may be conducted; (b) the publication will include the list of all products sold in each
store, their prices, including prices for different consumers, special sales, deals and discounts, terms and date of expiration;
(c) the price of each product must be updated within an hour from the moment it is updated in the store; and (d) failure to comply
with sections (a) to (c) above may lead to criminal and monetary penalties.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



44







Seasonality



Our business is subject
to fluctuations in quarterly sales and profits. These fluctuations are primarily attributable to increased sales and higher operating
income in the holiday seasons occurring in different quarters from year to year. Thus, for example, in our supermarkets, increased
sales attributable to Passover, which occurs in either March or April, may be realized in either the first or the second quarter,
and sales attributable to the Jewish New Year, which occurs in either September or October, may be realized in our financial
reports in either the third or the fourth quarter. Generally, purchases for a particular holiday occur during the two-week period
prior to the commencement of that holiday. However, the timing of the holidays does not affect our semiannual results.



Many of our expenses
are unrelated to the level of sales, and therefore a relatively modest increase or decrease in sales, whether or not related to
the timing of holidays, tends to have a disproportionately large impact on our profitability.



Supermarkets Strategies



Our strategy in our
retail activities is to maintain our position as a leading food retailer in Israel and to expand our market presence in the existing
food retail market. To achieve these goals, we intend to pursue a number of operating and growth strategies, which include:



| | · | maintaining and strengthening our market positioning by rebranding our store formats, renovating
and improving of existing stores, evaluating the strategic positioning of some of our stores, adjusting the format and the size
of some of our stores, all in order to meet the needs of our customers;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | increasing operational efficiency, including by reduction of store space or the number of stores,
improving our distribution and supply capabilities, including self distribution and the launch of a new distribution center, and
the successful implementation of the self-arrangement of shelves in our supermarkets;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | new operating model focused on our customers’ needs by implementing policies and an organizational
structure to suit customers’ needs.
| | - | --------------------------------------------------------------------------------------------------------------------------------------



| | · | increasing our market share of “Non-Food” and “Near-Food” products and
capitalizing on potential operating synergies between the food and Non-Food operations of “Naaman” and Mega Retail’s
supermarkets;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | expanding and improving our You loyalty plan offering, and increasing the number of You club members
who hold the “You” membership and credit card customers;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | expanding sales through our internet sale site, Mega@internet website; and
| | - | --------------------------------------------------------------------------

| | · | solidifying and expanding our market share in the organic/health food market with the goal of establishing
Alon Blue Square as a leader of Israel’s emerging organic/health food market.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



45







Fueling and Commercial Sites



General



We operate filling
stations and convenience stores and market petroleum products in Israel through Dor Alon, our direct subsidiary in which we held
78.43% as of March 31, 2014. Dor Alon’s activity includes three primary fields of activity:



| | · | Filling Stations and Convenience Stores - Dor Alon supplies motor fuels, motor oil and other
petroleum products to a network of public filling stations operating under the “Dor Alon” brand. Dor Alon’s public
filling stations consist of four formats: stand-alone gasoline service stations, Alonit convenience stores (with gasoline service
stations), travel centers (commercial centers that include a gasoline service station) and “AM:PM” stores, a leading
convenience store brand in the Tel Aviv metropolitan region offering merchandise and food products, most of which operate 24 hours
a day and seven days a week. Dor Alon also supplies motor fuels and other petroleum products to internal filling stations in Israel
located primarily on kibbutzim and moshavim (cooperative communities).
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Direct Marketing - Dor Alon supplies fuel oil and other petroleum products, including Liquefied
Petroleum Gas(“LPG”), directly to residential and commercial customers as well
as governmental entities.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Marketing
                                         of Jet Fuel - Dor Alon supplies jet fuel to commercial airlines.
| | - | -------------------------------------------------------------------------------------------------------------------



In addition, Dor Alon
is in the process of establishing through a subsidiary, a power plant in Sugat’s industrial area in Kiryat Gat, Israel.



Filling Stations
and Convenience Stores



As of December 31,
2013, Dor Alon supplied motor fuels, motor oil and other petroleum products to a network of 206 filling stations operating under
the “Dor Alon” brand. Integrated into most of Dor Alon’s public filling stations are Diesel Fueling Centers(“DFC”) that sell diesel fuel for large vehicles such as trucks and buses at preferential terms. Dor Alon also
supplies ARAL lubricants and Texaco lubricants in Israel.



As of December 31,
2013, Dor Alon operated 215 convenience stores, including 169 convenience stores branded “Alonit” (we refer to these
stores as Alonit convenience stores) mostly located adjacent to our filling stations (27 stand alone stores), and 46 standalone
convenience stores operated by the AM:PM chain of stores. 211 convenience stores are operated by the Alon Group, and four convenience
stores are operated by third parties. All the stand alone convenience stores are leased for different periods.



46







The Dor Alon filling
stations and convenience stores network is divided into complexes owned by Dor Alon, complexes in which Dor Alon has a long term
lease (most of which are jointly owned or leased in equal shares with third parties) and complexes owned by third parties. As of
December 31, 2013, Dor Alon (either solely or through joint companies or partnerships) owned or held under lease and operating
agreements 170 commercial and filling sites. The other 36 filling stations and convenience stores are operated by third parties,
under the Dor Alon brand who have entered into supply agreements with Dor Alon for petroleum products. The filling stations and
convenience stores include four travel centers along the Cross-Israel Highway (Israel’s first toll road); Dor Alon has the
exclusive rights to operate these travel centers for a 30-year period beginning in June 1999.



The filling stations
and convenience stores sector demands substantial capital investment (the cost of establishing a refueling and commercial complex
is estimated at NIS 4-5 million, not including the cost of land) and competition is fierce. Most of the competition relates to
the acquisition of rights to establish new commercial refueling complexes and around obtaining commitments from existing filling
stations. In the last few years, there have been a number of developments in this sector, including:



| | · | intensified competition in marketing products to end users, such as price competition, reduction
of credit terms to customers, improvement of the quality of service and the diversity of the products and services;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | an increase in the investments necessary to build a new filling station due to higher building
standards of filling stations and due to planning and regulatory strict requirements regarding environmental protection and safety
imposed by the Israel Ministry of Environmental Protection;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | reduction of the marketing margin of 95 octane;
| | - | -----------------------------------------------



| | · | an expansion of retail activity in convenience stores apart from the filling stations; and
| | - | ------------------------------------------------------------------------------------------



| | · | imposition of price control on LPG and diesel oil.
| | - | --------------------------------------------------



Dor Alon adds filling
stations to its network by either developing - new commercial and filling stations or, less frequently, entering into an agreement
with the owner of an existing filling stations and convenience stores whose supply contract with another fuel company has expired.
Developing new commercial and filling stations often takes several years and requires compliance with numerous laws and regulations.



Dor Alon anticipates
opening and operating an additional 7-10 filling stations during 2014 and 2015. Dor Alon has plans and agreements to plan, establish
and operate additional filling stations, and these stations are currently in different stages of authorization and establishment.



Dor Alon has a cooperation
agreement with a third party to establish through a joint company a nationwide chain of Si “espresso-bars” to be located
in Dor Alon’s filling stations. As of December 31, 2013, Dor Alon’s filling stations included 16 Si cafes that were
operated by a joint company, three of which are located outside of Dor Alon’s filling stations. The cafes sell products under
the “Si” brand as well as other products. In addition, most of the Alonit convenience stores include a small coffee
bar.



47







Customers of Dor Alon’s
filling stations and convenience stores consist of the public at-large and, to a lesser degree, drivers of fleet vehicles (referred
to as fleet customers). Fleet customers use electronic fueling cards or vehicle mounted devices to refuel their vehicles, with
payment for the fuel products to be made at a later date, on a consolidated basis. The electronic fueling cards are also offered
to private customers. Customers utilizing electronic fueling cards enjoy preferential fuel prices and terms of payment, which Dor
Alon believes leads to concentrated buying by fleet customers from Dor Alon.



Internal Filling
Stations (fleet stations)



As of December 31,
2013, Dor Alon supplied motor fuels to 160 internal filling stations operating under the Dor Alon brand, including 94 fleet stations
operated by a joint company described below. Internal filling stations are stations in Israel located on the premises of kibbutzim
and moshavim, as well as some DFCs that are not integrated with filling stations. Fuel products sold in internal filling stations
are designated for a defined group of customers, such as inhabitants of the kibbutzim and moshavim, who receive preferential fuel
prices and payment terms.



Dor Alon also holds
50% of a joint company together with a certain third party (50%) which operates internal stations located in moshavim. Dor Alon
supplies this jointly held company with motor fuels and other petroleum products. As of December 31, 2013, this joint company operated
and supplied motor fuels and other petroleum products to 94 internal filling stations operating in moshavim.



Direct Marketing



Dor Alon and Dorgas
(a wholly owned subsidiary of Dor Alon) distribute petroleum products, including fuel oil, diesel, LPG, kerosene, naphtha and bitumen
as well as natural gas directly to commercial, industrial, institutional and residential customers as well as governmental entities.
They also supply, install and maintain customer end-user equipment, such as fuel tanks and LPG balloons, related to the petroleum
products they supply. The direct marketing of LPG is coordinated solely by Dorgas.



Most engagements with
industrial and commercial customers include installation of end equipment at the customer’s site, including the conversion
of the customers plants into natural gas generated plants. The engagement period is affected, inter alia, by the volume
of investment in equipment provided to the customer. Commercial customers include customers in the fields of industry, transportation,
earthwork, agriculture, infrastructure and marine works, among others. Institutional customers include municipalities and cooperatives
for public transportation. The majority of Dor Alon’s communications with institutional clients are commenced following a
public bidding process, are for a defined period and are based on terms of exclusivity.



48







Private sector clients
are mostly domestic customers and small businesses that use refined oil for heating and cooking, private homes, apartment buildings
and small businesses. As of December 31, 2013, Dor Alon had approximately 111,000 LPG customers. Agreements with domestic customers
are for fixed periods, with the agreement renewing automatically at the end of each period, with no need for any further notice.



Marketing of
Jet Fuel



Dor Alon’s jet
fuel marketing operations include marketing and sale of jet fuel to Israelis civilian airlines and foreign airlines which land
at Ben Gurion airport. In connection with this operation, Dor Alon has an agreement with Chevron. For additional information, see
“Item 4. Information on the Company – B. Business Overview – Fueling and Commercial Sites – Industry Overview
– Marketing of Jet Fuel.”



Industry Overview



Recent
Developments in the Israeli Fuel Market



The Public
Protest



In July 2011, a public
protest began in Israel with regard to high housing costs. In response to these protests, in August 2011 the Israeli Government
formed the Trachtenberg Committee whose role, inter alia, was to examine the living costs in Israel and the influence that
the lack of competition in the marketplace has had on these costs and to propose solutions to these issues. In September 2011,
the Trachtenburg Committee published its recommendations regarding competition in the filling stations sector and the promotion
of competition in the LPG market.



With regard to the
filling stations field of activity, the following recommendations, among others, were made: (i) the imposition of price control
on diesel oil; (ii) strengthening the independence of filling station operators by releasing the filling stations from agreements
with the fuel companies; (iii) providing priority to the establishment of independence filling stations which are not large fuel
companies; (iv) marketing of Israel Land Authority lands for the construction of 40 new filling stations for independence filling
stations; (v) implementation of a universal automatic fueling device; and (vi) setting a mechanism obligating the sale of filling
stations to small companies in areas with little competition, including assessing the level of competition among filling stations
from their establishment and through the paving and expansion of highways.



Due to such recommendations,
in December 2011, Dor Alon received a letter from the Joint Committee of Prices, the Ministry of Energy and Water and the Ministry
of Finance, stating that the committee intends to examine the imposition of price control on the marketing margin of diesel oil
for transportation in the filling stations.



In November 2012, amendment
to the Price Control of Goods and Services Order (Application of the Law on Diesel Fuel for Transportation and Determining the
Level of Control), 2012, was published, requiring a fueling company to annually report the profitability of diesel fuel sold at
filling stations.



49













With regard to the
LPG market, the following recommendations, among others, were made: (i) supervision on the refinery gate price and the consumer
prices; and (ii) reform in the accessibility to gas bulks in order to increase competition, including the implementation of free
access to different suppliers and protecting the small gas suppliers.



In December 2011, the
Government adopted the committee’s recommendations, and ordered the relevant government offices to consider implementing
such recommendations. We estimate that the adoption of the recommendations may have an adverse effect on the Dor Alon’s business
results. At this point we cannot assess the impact of the recommendations.



Control on
the Reducing of the Gasoline’s Marketing Margin



On August 31, 2011,
the Goods and Services Prices Order (Maximum Prices at Gas Stations) - 2011 was published reducing the marketing margin in connection
with the sale of full service gasoline by 0.184 (including VAT).On May 31, 2012 the Ministry of Energy and Water and the Pricing
Committee updated the marketing margin for self service by NIS 0.047 per liter (excluding VAT) and reducing the full service charge
by NIS 0.038 per liter (excluding VAT).



The reduction of
the marketing margins has had a negative effect on Dor Alon’s financial results. In the fourth quarter of 2011 Dor Alon took
steps to mitigate its effect by, among other things, reducing discounts at its filling stations and to its fleet customers and
reducing expenses. These actions significantly reduced the impact resulting from the reduction in marketing margins. For additional
information, see “Item 3. Key Information – D. Risk Factors - Risks Related To Fueling and Commercial Sites –
Dor Alon is exposed to risks associated with reduction of the marketing margin of gasoline under price control, which may influence
the financial results of Dor Alon.”



Competition



Competition in the
Israeli energy industry is intense. Dor Alon’s major competitors are the other large fuel companies in Israel: Paz, Delek
and Sonol. Dor Alon is the fourth largest fuel company in Israel based on the number of filling stations. The principal competitive
factors affecting the retail fuel marketing business are location offilling
stations, brand identity, product price, the variety of related services
offered to customers, the level of service, financial strength allowing the establishment of newfilling stations,
procurement of petroleum products at competitive prices and the terms of agreement offered to fleet customers, real estate owners
and/or owners offilling stations. With respect to its direct
marketing operations, Dor Alon expects to face competition from Paz, Delek and Sonol, the
gas companies Pazgas, Amisragas, Supergas and tens of additional small and medium size fuel marketing companies as well
as small LPG companies, which are mostly local companies that operate in a limited geographic area. The principal competitive factors
in the direct marketing business are product price, credit terms and levels of service. Moreover, a portion of the customers in
the direct marketing sector require professional support in installation of equipment and continuous maintenance. These direct
marketing customers view the significance in the quality of the petroleum distillate. Increases in competition may adversely affect
the earnings and profitability of Dor Alon.



50







Purchasing and
Distribution



Motor Fuel and Other
Petroleum Products



Dor Alon, like other
fuel companies in Israel, is dependent on Oil Refineries Ashdod (“ORA”) and ORL for the supply of refined petroleum
products. As of 2013, Dor Alon had significantly increased the purchase from ORA on account of ORL. If the oil refineries fail
to supply refined petroleum products or supply them at noncompetitive prices, Dor Alon would have to increase the amount of refined
petroleum products it imports. There is no certainty regarding the ability of Dor Alon to purchase these products at competitive
prices.



Dor Alon purchases
motor oils marketed by it from various suppliers, such as ARAL Lubricants GmbH and SA Texaco N.V. In addition, Dor Alon purchases
motor oils from local manufacturers and markets them under the private label brand name “Dor Oil.”



Convenience Store
Products



Dor Alon purchases
most of the food and non-food products sold in its convenience stores from our subsidiaries. Pursuant to an agreement with Mega
Retail, a subsidiary of Dor Alon pays that subsidiary the price of the products plus a 2% margin for the direct supply of products
by the suppliers to the convenience stores, and a 2.75% margin plus distribution costs for the supply of products from that subsidiary’s
central warehouse. The agreement also provides that if Alon Blue Square’s income from the agreed margin, less additional
expenses incurred by it as a result of the performance of the agreement, falls below a minimum amount of NIS 1 million a year,
Dor Alon’s subsidiary will pay our subsidiary the difference up to NIS 1 million. The agreement, dated May 1, 2004, has
an initial five year term and automatically renews for additional one-year terms unless terminated by either party upon 90 days
notice prior to the end of the term. The convenience stores that are not operated directly by Dor Alon have also joined this agreement
and they pay our subsidiary an additional profit margin. For further information on this agreement, see “Item 7. Major Shareholders
and Related Party Transactions – B. Related Party Transactions - Arrangements between Alon Blue Square and various subsidiaries
- Procurement Agreement with Dor Alon Management.”



51







When
Alon acquired Alon Blue Square, the Anti-trust Commissioner prescribed that he may direct Dor Alon and Alon Blue Square to fully
separate the purchasing activities of Dor Alon from those of Alon Blue Square if he deems that current market conditions, the purchasing
power of Alon Blue Square, or the state of competition so require.



Marketing



Direct Marketing



Dor Alon and Dorgas’
marketing and sales personnel or its distributors are responsible for entering into agreements with customers in this field of
operations. Products are transported directly to the customer’s facilities. Dor Alon has a marketing, service and support
apparatus for customers of this field of operations.



LPG marketing (for
use of homes and small businesses) is done partly by independent distributors. The agreements with the independent distributors
include a mutual exclusivity provision for a defined geographical area and are for an unlimited period. The distributors are responsible
for the marketing, payment collection and equipment maintenance as required by applicable law. For this purpose, Dorgas established
engineering and marketing system offering services, which include conversion to gas infrastructure in enterprises and supply of
natural gas.



Marketing of Jet
Fuel



Dor Alon’s jet
fuel marketing operations include the marketing of jet fuel to civilian airlines, which are conducted through a joint venture with
Chevron to market and supply jet fuel to commercial airlines at Ben Gurion International Airport. Each party refers customers to
the joint venture, with Chevron referring its customers, foreign airlines, with whom it operates abroad. The term of the joint
venture expires in mid-2019. All fuel companies marketing jet fuel are obligated to purchase refueling services for aircrafts at
Ben Gurion International Airport from two companies - Paz Aviation Services Ltd. and Mercury Aviation (Israel) Ltd., a company
in which Dor Alon holds a 31.25% interest. Mercury Aviation (Israel) Ltd. provides the customer refueling services to the joint
venture of Dor Alon and Chevron. As of the date of this Annual Report, Paz Aviation Assets Ltd. is the only company that provides
jet fuel storage services, though this company’s activities are regulated and it is obligated to provide storage services
at regulated prices. Dor Alon is dependent on this joint venture as a material customer in the marketing of jet fuel.



Marketing
and Distribution



In the filling stations
and convenience stores sector, Dor Alon markets and promotes its products using the following methods:



| | · | increasing the attractiveness of the refueling
and commercial compounds by diversifying its products and services;
| | - | ------------------------------------------------------------------------------------------------------------------



52







| | · | conducting sales and promotions in the filling
stations and convenience stores. Some of the sales campaigns are conducted jointly with Alon Blue Square;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | improving Dor Alon’s brand name recognition
and image through public relations;
| | - | -------------------------------------------------------------------------------



| | · | marketing of fuel products to fleet customers
along with discounts on fuel prices and preferential payment terms via electronic fueling cards or vehicle mounted devices;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | strengthening Dor Alon’s relationship
with its customers, and promoting customer loyalty to the filling stations and to the services provided by Dor Alon, through the
Loyalty Plan established by Dor Alon and Mega Retail in order to promote Dor Alon’s and Mega Retail’s marketing operations,
including by entering into a services agreement with Diners Israel. For more information on the Loyalty Plan, see “Item 7.
Major Shareholders and Related Party Transactions – B. Related Party Transactions – Transactions with Dor Alon in Connection
with Establishment of a Joint Loyalty Plan”; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | As of July 2009, a joint
company established by the You Loyalty Plan and a third party, began publishing and distributing a free daily newspaper called
“Israel Post”, which is distributed in Dor Alon’s filling stations, AM:PM stores, Mega Retail stores and third
parties. A majority of the revenue from this newspaper comes from selling advertisement space. Dor Alon believes that the partnership
in this newspaper provides it with a marketing platform.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In the direct marketing
sector, Dor Alon markets its oil distillates using Dor Alon sales personnel and independent distributors. The marketing of some
of the LPG (for use in private residences and small businesses) is performed by independent distributors. The distribution agreements
with distributors are on a mutually exclusive basis for marketing LPG to private residences and retail customers and are for an
unlimited time. The distributors are responsible for marketing the LPG, collecting payments and maintaining the LPG equipment as
required by law. Consumers who purchase LPG from the distributors are customers of Dorgas.



Marketing and distribution
in the jet fuel sector is done through the joint venture with Chevron (as mentioned above).



Other Activities



Establishment of
a Power Plant



In February 2012, Dor
Alon Energy Centers, a limited partnership under the control of a subsidiary of Dor Alon (55%) and a third party (45%) (the “Partnership”),
entered into an agreement with Sugat Sugar Refineries Ltd. (“Sugat”), according to which the Partnership will plan,
finance, establish, maintain and operate a power plant in Sugat’s industrial area in Kiryat Gat, Israel, consisting of an
energy output of up to 124 megawatts. In the first stage, the energy output of the plant is to be 64 megawatts.



53







The Partnership is
to provide Sugat’s energy requirements until January 2037. Sugat has the option to extend the term of the agreement following
the first stage of the agreement.



The Partnership will
be authorized to sell electricity and steam manufactured at the facility also to third parties. The agreement is in effect until
July 31, 2029 with an option to extend for an additional five years.



Natural Gas Purchase
Agreements



On December 9, 2012,
the Partnership signed a natural gas purchase agreement with the partners of Tamar Partnership for the operation of existing facilities
and the power plant, if established, aimed to provide Sugat’s energy requirements. Pursuant to the agreement, Tamar Partnership
is to supply the Partnership with natural gas in the amount of up to 1.68 BCM (billion cubic meters) (the “Total Agreed Quantity”).
In addition, the Partnership has the right to reduce the quantities purchased in the event that it does not establish the abovementioned
power plant.



The agreement is to
be effective from the second quarter of 2014 until the earlier of approximately 15 years or upon the Partnership’s consummation
of the Total Agreed Quantity, with an option of both parties to extend for an additional two years or upon the consummation of
the Total Agreed Quantity, whichever is earlier.



The Partnership has
committed to acquire or pay (Take or Pay) a minimum annual quantity of gas in accordance with the mechanism set in the Supply Agreement.



In November 2013,
New Dorgas Ltd., a subsidiary of Dor Alon (“Dorgas”),signed a natural gas purchase
agreement with the partners of Tamar Partnership in the amount of US$ 85 million. According to the agreement, Tamar Partnership
is to supply Dorgas with natural gas in the amount of up to 0.36 BCM (billion cubic meters) (the “Total Agreed Quantity”).
The agreement is to be effective from the fourth quarter of 2013 until the earlier of seven years or upon the consummation by
the purchaser of the Total Agreed Quantity. The purchaser has committed to acquire or pay (Take or Pay) a minimum annual quantity
of gas in accordance with the mechanism set in the agreement.



It was further agreed
that during an interim period until the enlargement of the supply capacity abilities of Tamar, if applicable, the natural gas supply
will be subject to the availability of the natural gas quantities, after supply to other third parties, to whom there are prior
commitments.



The agreement is subject
to obtaining an approval from the Antitrust Authority.



54







Government Regulation



Environmental
regulation



In its filling stations
and convenience stores business, Dor Alon is subject to various laws and regulations aimed at preventing damage to the environment
(mainly air, water and soil contamination), including the following laws and regulations:



| | · | The Water Law, 5719-1959, or the Water Law, provides for the protection of all water resources
in Israel and imposes liability on those who, by action or lack thereof have caused and/or may cause contamination of water sources.
The law gives the authorities broad powers, including the authority to require whoever caused the damage to do everything necessary
to stop the contamination, restore the status quo ante and fined for violating the order.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The Water Regulations (Prevention of Contamination) (Filling Stations), 5757-1997, promulgated
under the Water Law, or the Water Regulations, which provides regulations for the construction of filling stations, and directives
issued by the Commissioner (as defined under the Water Regulations) concerning the planning, construction and operation of filling
stations, including the insulation and protection of fuel tanks.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Public Health Regulations (Wastewater Quality Standards and Rules for Sewage Treatment), 5770-2010,
and the Water and Sewage Rules (Factories Wastewaters Discharged into the Sewage System), 5771-2011, published during 2010-2011
aim to protect the public health, prevent water pollution from wastewater and sewage, protect the environment including the ecosystems,
land and crops, by regulating discharge of wastewater from factories (including filling stations) to prevent damage to the sewage
system by imposing penalties and by sampling. As of the date of this Report, some of the water corporations have begun sampling
pursuant to the rules and regulations. Dor Alon estimates that the costs for the sampling are insignificant.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The Environmental Protection Regulation, 5768-2008, which increases the penalties determined in
other environmental laws.
| | - | -------------------------------------------------------------------------------------------------------------------------



| | · | The Dangerous Goods Law, 5753-1993, which imposes an obligation to obtain a permit to handle dangerous
substances.
| | - | ------------------------------------------------------------------------------------------------------------------



| | · | Business Permits. In order to obtain business permits to operate filling stations, Dor Alon must
install devices at some of its stations. In addition, the regulations state the manner in which storage fuel and how to obtain
the associated licenses.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Our natural gas operations are subject to the Natural Gas Industry Law, 2002-5762, which regulates
the natural gas sector in Israel. The law determines, among others, that one must not engage in the construction and operation
of a transmission system or part of it, the establishment and operation of a distribution network or part of it, the construction
and operation of a LNG facility and the construction and operation of the storage facility, without a license issued by the Minister
of National Infrastructure (hereinafter in this section “Minister”) and in accordance with its terms. In addition,
the Natural Gas Industry Law states that the following shall not engage in the sale and marketing of natural gas: (a) a transmission
system licensee, (b) an electric power provider, and anyone who is involved with oil refining at a rate exceeding ten percent (10%)
of the oil refined in Israel. According to the Natural Gas Industry Law, the sale and marketing of natural gas does not require
a license, provided however, that the Minister, in his sole discretion, under the conditions stipulated by law and the consent
of the Minister of Finance and the approval of the Knesset Finance Committee, may determine that for a period to be determined,
the marketing of natural gas will require a license.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



55







| | · | The Planning and Building Regulations (Licensing of Natural Gas Facilities) Law, 2003-5763, lists
the requirements of the permit application to be submitted for the construction of a gas facility by an applicant requesting to
construct a gas facility.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Dor Alon is aware
of environmental law proposals including,inter alia theBill for Preventing Land Contamination and Treatment
of Contaminated Lands, 5772-2012 which, among others, defines the term “Contaminated Land”, prohibits contamination
of lands and disposal of contaminate materials, establishes a fund for rehabilitation of contaminate lands, authorizes a commissioner
and defines its governance enforcement authority, including monetary sanctions, and establishes a criminal offense for breaching
the law. These law proposals may influence Dor Alon’s financial results if the laws are approved.



Dor Alon expects to
invest approximately NIS 13 million in 2014 in order to satisfy the environmental laws and regulations. Dor Alon currently expects
that the costs of environmental restoration and implementation of the environmental laws and regulations in the upcoming years
are expected to be similar to those in 2014. These amounts may vary depending on the actual costs of the required restoration work
and the planning and construction of new facilities and whether new laws, regulations and other requirements will be imposed for
which additional expenses will be incurred.



Dor Alon reached an
arrangement with the Israeli Ministry of Environmental Protection regarding the execution of an eight year plan for identifying
and treating contaminations at 54 filling stations operated by Dor Alon built before 1997. In addition, Dor Alon reached an understanding
with the Ministry of Environmental Protection concerning a vapor recovery system (referred to as Stage 2) in fuel stations located
in residential areas. Pursuant to the understanding, Dor Alon has installed Stage 2 in fuel stations located within 40 meters
of residential areas.



Additionally, and without
derogating from Dor Alon’s obligations above, in September 2011 and in January 2012, the Ministry of Environmental Protection
issued directives pursuant to which Dor Alon would be required to install vapor recovery systems in each of its fuel stations located
within 80 meters of residential areas by the end of 2013; and in all other fuel stations by the end of 2015. Pursuant to the aforementioned
directives, by the end of 2013 Dor Alon installed the vapor recovery system in 130 filling stations and is expected to install
vapor recovery systems in an additional 72 filling stations by the end of 2015.



56







In
its direct marketing business, Dor Alon is also subject to various laws and regulations, including laws and regulations that:





| | · | Impose duties of licensing and of obtaining various permits, such as permits to operate as a gas
supplier and licenses to operate and deal with LPG and LPG’s storage;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------





| | · | Impose provisions related to safety in connection with the marketing and supplying of gas; and
| | - | ----------------------------------------------------------------------------------------------



| | · | Impose provisions related to the marketing of LPG, such as standards for gas containers, gas systems
and installation of central gas systems.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------



In its jet fuel business,
Dor Alon is subject also to other laws and regulations. Dor Alon’s activity as a provider of infrastructure services for
jet fueling and jet fueling services for jets at Ben Gurion International Airport are subject to regulation.



Legislation
in favor of Promoting Competition in the Food Industry



In
March 2014, the Knesset adopted new legislation in favor of “Promoting Competition in the Food Industry”. For further
information see, “Item 4 – Supermarkets – Government Regulation - Legislation in favor of Promoting Competition
in the Food Industry.”



Other
Government Regulation



Dor Alon, as a fuel
company, is subject to various other laws and regulations, including laws and regulations that:



| | · | The
Planning and Building Law, 5725-1965, or the Planning and Building Law, which provides that any use of property must be done in
accordance with the designated purpose of the property. Often, the permit for establishing filling stations involves changing
the designated purpose of the property;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



57







| | · | impose duties of licensing and obligations to obtain various permits from various
                                                                                                               governmental authorities, including the police, the Ministry of Environmental Protection, the Ministry of Industry, Trade and
                                                                                                               Labor, the fire department and the relevant zoning committees. As of the date of this Annual Report, there are a few
                                                                                                               indictments or sentences pending against Dor Alon and its subsidiaries regarding the operation of filling stations and/or
                                                                                                               convenience stores without permits. A number of indictments are pending against Dor Alon and its subsidiaries with respect to
                                                                                                               filling stations and convenience stores concerning the operation of filling station and convenience stores without permits.
                                                                                                               With respect to 2 filling stations and with respect to 2 convenience stores closure orders have been issued. These closure
                                                                                                               orders have been suspended for a short period of time in order to obtain the appropriate permits;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | establish the duty of fuel companies to maintain an inventory of fuels for emergency purposes,
the expenses of which are paid by the Israeli Fuel and Gas Administration, and to maintain, at their own expense, a supply of diesel
fuel that is not an emergency supply;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | impose an excise tax on the supply of fuel from ORL and on the release of fuel from customs;
| | - | --------------------------------------------------------------------------------------------



| | · | prescribe a maximum consumer price for 95 octane gasoline;
| | - | ----------------------------------------------------------



| | · | impose anti-trust prohibitions under the Antitrust Law, including with respect to price setting
and exclusive long term (over three years) supply agreements between gas supply companies, such as Dor Alon, and filling stations
(which are not owned by such companies);
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | impose restrictions on the operation of filling stations and convenience stores on the Jewish Sabbath
(Saturday) and regarding a permit to employ Jewish workers on Saturday. Dor Alon does not possess such a permit. Most of Dor Alon’s
filling stations and convenience stores are open during the Jewish Sabbath. Under Israeli law, employment of workers in violation
of the law is subject to a fine or imprisonment of up to a month, or both. The convenience stores in the AM:PM chain of stores
also operate during the night and on Saturdays. On the basis of information obtained from Dor Alon, in the cities in which AM:PM
operates there are municipal regulations restricting their activity during the night and on Saturdays. Most of the AM:PM stores
have obtained permits to operate at night; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



58







| | · | set provisions pertaining to safety in the marketing and supply of fuel and LPG.
| | - | --------------------------------------------------------------------------------



In July 2012, a draft
proposed law entitled the “Fuel Industry Law - 2012” was circulated. The proposed law stipulates, among other things,
the following: requirement of a license from the Fuel and Gas Administration for a period of three years which must be extended
at the end of each term; prohibition on the possession of more than one refinement license by one company or its controlling shareholders;
restriction on the possession of refinement licenses together with marketing licenses under the same license; imposition of fees
and additional payments as a condition for granting a license; limitations on transferring or pledging the license and the rights
thereunder without prior consent of the Fuel and Gas Administration; obligation to hold operational and emergency inventory; prohibition
on running a public filling station without registering with the filling station registrar and the requirement for both a valid
business license and building permit for the filling station; broad criminal liability, including personal liability of officers
and a monetary sanctions; and prohibition on unreasonable refusal to provide service by a licensed fuel provider to any person
under the same circumstances and similar terms provided to another person.



For additional information
regarding government regulations relating to our Filling Stations and Convenience Stores segment, please see “General Government
Regulation” below.



59







Fueling and Commercial
Sites Strategies



Our
strategies in our filling station and convenience stores segment is to continuously expand our filling station coverage in Israel
and expand our convenience stores, both as part of our filling stations and on a standalone basis. To achieve this goal, we intend
to pursue a number of operation and growth strategies, which include:



| | · | expanding our national presence of filling stations and commercial retail centers, while giving
preference to developing filling complexes and public filling stations in urban areas (including small stations);
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | strengthening and expanding the various services and products offered to customers in the filling
and commerce complexes, as well as improve the quality of those services and observing environmental regulations;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | increasing sales in the convenience store sector in order to increase its relative market share
in this sector by expanding convenience store chain in the existing filling and commerce complexes, in new complexes, and through
independent convenience stores (under the brands AM:PM, Alonit in kibbutzim, and Alonit in moshavim);
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | expanding the “Si” coffee shop chain and launching new services;
| | - | ----------------------------------------------------------------



| | · | increasing our stores which operated under franchise;
| | - | -----------------------------------------------------



| | · | initially operating a few of our convenience stores by franchises, and if such action will succeed,
to operate additional convenience stores by franchises;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | entering into city centers in which the number of filling stations of Dor Alon is relatively small;
| | - | ---------------------------------------------------------------------------------------------------



| | · | combining parallel activity of building and operating convenience stores in three segments (urban,
village, and roadside complexes) in order to provide Dor Alon the basis for a national chain in the Fueling and Commercial Sites
segment;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | sales goal of above NIS 1 billion annually at the convenience stores and coffee shops;
| | - | --------------------------------------------------------------------------------------



| | · | expanding the fleet customers base;
| | - | -----------------------------------



| | · | preserving and nurturing the Dor Alon brand as a leader in the fueling sector;
| | - | ------------------------------------------------------------------------------



| | · | preserving Dor Alon’s status as a leader in the computerized fueling sector for drivers of
heavy vehicles, by various road services which are given to these customers in the filling stations and commercial sites, such
as resting areas, showers, and more;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | broadening Dor Alon’s presence and activities of the “YOU” club in its filling
stations and commercial retail centers; in addition Dor Alon will cooperate in the development and promotion of “Meshek 1”
club in cooperation with Kibutzim, Diners Israel and Mega Retail;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



60







| | · | in the direct marketing sector, maintaining Dor Alon’s growth in the scope of sales, subject
to maintaining profitability and proper diversification of its types of customers;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | diversifying Dor Alon’s fuel supply sources, including the importation of fuels;
| | - | --------------------------------------------------------------------------------



| | · | expanding the marketing of Dor Alon’s private brand in the lubricant oil sector – “Doroil”,
while at the same time leveraging its international brands (“Texaco”, “Chevron” and “Aral”)
in order to increase its market share in the oils marketing sector;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | continuing to take part in tenders for the supply of petroleum distillates, which are mostly published
by institutional bodies, subject to specific economic examination of each tender;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | expanding Dor Alon’s fuel distribution suppliers in additional terminals;
| | - | -------------------------------------------------------------------------



| | · | entering into the sector of marketing natural gas for industry, which is subject to establishment
of distribution systems by local franchises; In addition, the company will monitor the possibility of using natural gas for transportation
and will prepare accordingly;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | maintaining the joint operation with the international company Chevron in the jet fuel sector along
with its continuing operations with Ben Gurion International Airport;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | in the power plants sector, maintaining operation in the private electricity sector and examining
development of additional projects;
| | - | -------------------------------------------------------------------------------------------------------------------------------------



| | · | evaluating options to expand operations in the chemistry field together with partners in Israel
and worldwide. and
| | - | ------------------------------------------------------------------------------------------------------------------



| | · | continuing to invest in human resources while encouraging innovation, devotion, teamwork and improvement
of administrative abilities.
| | - | -------------------------------------------------------------------------------------------------------------------------------------



The following table
provides certain information regarding our filling stations and convenience stores in the Fueling and Commercial Sites segment
as of December 31, 2013:



|Filling stations       | Owned (including leases exceeding 25 years) | 34 
|---------------------- | ------------------------------------------- | ---
|                       | Leased (leases of up to 25 years)           | 136
|                       | Supply agreements                           | 36 
|                       |                                             | 206
|                       |                                             |    
|                       | Internal stations (1)                       | 160
|                       |                                             |    
|Convenience Stores (2) | Operated                                    | 211
|                       | Franchised                                  | 4  
|                       |                                             | 215
|                       |                                             |    
|                       | Sites In Development (3)                    | 46 
|                       |                                             |    
|Total                  |                                             | 627



61














| | Typically, our stations
are in kibbutzim and Moshavim which are used by defined populations.
| | --------------------------------------------------------------------------------------------



| | Convenience
                                         Stores: 169 Alonit stores are adjacent to filling stations and 31Alonit stores and 46
                                         AM:PM stores are stand alone stores.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





Non-Food



General



As of December 31,
2013, we operated, through our subsidiaries and franchisees, a total of 131 non-food stores under the Naaman, Vardinon and Dr.
Baby chains, of which 16 stores were owned and operated by franchisees.



Through our wholly
owned subsidiary, Bee Group Retail Ltd. (“Bee Group”), we operate in the non-food segment, which is concentrated into
two activities: (i) houseware and home textile, concentrated in our Naaman and Vardinon stores and wholesale sales; and (ii) baby
and young children products and wholesale sales, concentrated in our Dr. Baby stores. The chain operates under a number of different
brand names: (i) “Naaman”, which sells houseware products; (ii) “Vardinon”, which sells home textile products
and accompanying accessories; and (iii) Dr. Baby, which sells baby and young children accessories; The stores of our “Naaman”,
“Vardinon” and “Dr. Baby” chains are primarily owned and operated by us. In addition to these stores, we
have established houseware departments within most of our large supermarket stores. The Company is also in process of merging Bee
Group and Mega.



As of December 31,
2013, Bee Group owned approximately 77.51% of the outstanding shares of Naaman Group (N.V.) Ltd., a company traded on the Tel Aviv
Stock Exchange. Naaman is one of Israel’s major branded houseware retailers which imports and markets various houseware products,
such as kitchen utensils, cutlery and dinner sets. As of December 31, 2013, Naaman had its own chain of 65 houseware stores and
200 sale points within our supermarkets. Naaman also sells its products to wholesale customers, including privately owned stores,
retail chains, institutional customers, employee committees and sales promotion companies.



Vardinon products are
distributed by its chain of retail stores (49 stores as of December 31, 2013) and by wholesale to customers that include other
wholesalers, retail chains, employee committees and catalogues.



On December 31, 2012,
the board of directors of Naaman approved the merger agreement between Naaman and Sheshet Chain of Stores for Household Utensils
Ltd. (“Sheshet”), pursuant to which Sheshet is to merge into Naaman and cease to exist. On June 30, 2013, Naaman and
Sheshet completed the merger, and following the merger, we converted 18 of our Sheshet stores into Naaman stores and closed the
remaining Sheshet stores until the end of 2013.



62







Additionally, as of
December, 31, 2013, our non-food segment included 83 Non-Food outlets operated by Kfar Hasha’asuim under the brand names
“Kfar Hasha’ashuim” and “All For A Dollar”, which sold toy and leisure products. In February 2014,
we completed the sale of 65 percent of our holdings in Kfar Hasha’ashuim.



Industry Overview



The Non-Food retail
sales of houseware in Israel include houseware departments in large retail chains, do-it-yourself retail chains, and private specialty
stores and boutiques. The sale of these products through catalogs and internet sales sites has increased in recent years. We do
not have enough information to assess our market share in this market, as most of our competitors are privately owned companies.



There are also many
companies and distributors that market and sell home textile products to wholesale customers. We do not have any formal information
about the size of the home textile market and the market share of the various competitors in this market; however, we estimate
that our “Vardinon” chain is one of the leading retailers in the mid to premium home textile market.



The non-food retail
sales of baby products and toys in Israel include mainly smaller privately owned stores. We do not have enough information to assess
our market share in these markets, as most of our competitors are privately owned companies.



Competition



In addition, due
to our sale of other “Near-Food” and “Non-Food” products in our supermarkets and in our stand alone non-food
stores, and our controlling interests of “Non-Food” chains, Vardinon and Naaman, we also face competition in the non-food
market. In recent years, this competition has increased primarily due to the entry of retail chains and stores outside the food
industry, such as Office Depot, do-it-yourself chains such as Home Center and ACE (a franchisee of Ace Hardware), household stores,
home textile stores, such as Golf & Co. Ltd., Fox Home and Kitan Textile Industries Ltd., houseware stores, electricity appliances
stores, and also due to the expansion of the houseware and home textile departments in supermarkets. This competition affects the
sales prices of our products and our sales. Increased competition may adversely affect our sales and our profitability.



In addition, the
barriers of entry are low in some of the markets in which our non-food segment competes due to the price and availability of products
from overseas suppliers, although the establishment of a network of stores throughout the country together with the required import
and marketing of products requires a high level of investment. The entrance of new competitors may reduce our market share and
may reduce the sale prices of our products and lead to a reduction in our profitability.



63







The merchandise we
sell in our non-food business is varied, and we therefore compete in several different markets.



In the houseware
market, in which our “Naaman” stores compete, there has been a consistent increase in competition, both due to the
entry of the do-it-yourself chains, such as Home Center and ACE, and due to the expansion of houseware departments within the supermarket
chains, such as Shufersal, and the entry of other new competitors, such as Fox Home, and specialized stores. The sale of these
products through catalogs and internet sales sites has also increased in recent years. We do not have enough information to assess
our market share in this market, as most of our competitors are privately owned companies.



The home textile
and accompanying accessories market in Israel in which our “Vardinon” stores compete is highly competitive. Vardinon’s
competitors in this market include home textile departments in large chains, department stores and privately owned stores and new
competitors, such as Fox Home and Kitan Textile. In addition, there are also many companies and distributors that market and sell
home textile products to wholesale customers. We do not have any formal information about the size of the home textile market and
the market share of the various competitors in this market, however, we estimate that our “Vardinon” chain is one of
the leading retailers in the mid to premium home textile market.



Non-Food Operations



The following table
provides certain information regarding our non-food stores as of December 31, 2013:



|Non-Food Properties |  |                    |  | Number |     |  | Square meters | 
|------------------- |  | ------------------ |  | ------ | --- |  | ------------- | 
|Stores              |  | Leased             |  |        | 97  |  |               | 
|                    |  | Franchise operated |  |        | 18  |  |               | 
|                    |  | Franchises         |  |        | 16  |  |               | 
|Offices             |  | Leased             |  |        | 1   |  |               | 
|Warehouses          |  | Leased from BSRE   |  |        | 1   |  |               | 
|                    |  | Leased             |  |        | 1   |  |               | 
|Total               |  |                    |  |        | 137 |  |               | 



Purchasing and
Distribution



Naaman acquires its
products and accompanying accessories which it markets from numerous suppliers in Israel and abroad, mainly from the Far East.
The overseas suppliers are generally manufacturers. Vardinon purchases its home textile products either as finished products or
through subcontractors, each of which is generally responsible for a certain part of the manufacturing process. Vardinon has many
suppliers and subcontractors in Israel and abroad, mainly the Far East, India and Turkey, and they may vary from season to season
based on various factors.



64







Our distribution
and logistics center in Beer Tuvia, which is 100% held by BSRE, is used for storage and distribution of Non-Food and Near-Food
products for our Non-Food chains and our supermarket stores. The distribution center is operated on an approximately 24,000 square
meter site and is currently leased to Bee Group by BSRE.As of March 31, 2014, the distribution center was not fully occupied, and
therefore was not operating in full effectiveness. The Company is currently searching for additional tenants for the distribution
center.



Marketing



Our main marketing
channels for our Non-Food products are (i) the non-food stores operating under various brand name chains, (ii) non-food departments
in our supermarkets and (iii) direct sales to wholesalers and institutional customers.



Our Naaman chain
markets its products to privately owned stores, retail chains, institutional customers, employee committees and sales promotion
companies. Our Vardinon chain markets its products through stores that are owned and operated by Vardinon that are located primarily
in shopping centers, as well as to other customers, including wholesalers, retail chains, employee committees and catalogues. Our
marketing activities include advertisements for the media, such as television and newspaper.



Government Regulation



Non-Food



Our non-food business
is subject to Israeli laws relating to imports, customs, labeling of products and consumer protection laws, as well as to labor
laws and license and permit laws as they apply to the operation of our network of stores.



Our sales activities
are subject to general laws such as the Liability for Defective Products Law, 1980, pursuant to which, under certain circumstances,
we may be liable for personal injuries resulting from defects in products that we market. We are also subject to the Consumer
Protection Law, 1981, which is described below under “ – General Government Regulation”. We are also subject
to the Supervision of Products and Services Law, 1957, and orders promulgated pursuant to such law.



Houseware Products



We are subject to
safety tests, quality control and certification by the Standards Institution of Israel. These are primarily related to the release
of metals from ceramic appliances/wares, marking of wares/dishes, pressure cookers, lighters and plasticware used for food and
drink.



Business Permits



Some of our non-food
stores do not have permits according to the requirements of the Business Permits Law, 1968. A lack of such permits by any
store would be considered a breach of the tenancy agreement for such store, which would allow the landlord to annul the lease agreement.
As of March 31, 2014, none of the landlords had made use of this right.



65







For additional information
regarding government regulations relating to our Non-Food segment, please see “General Government Regulation” below.



Seasonality



Our business is subject
to fluctuations in quarterly sales and profits. These fluctuations are primarily attributable to increased sales and higher operating
income in the holiday seasons occurring in different quarters from year to year. Thus, for example, in our “Naaman”
and “Vardinon” chains increased sales attributable to Passover, which occurs in either March or April, may be
realized in either the first or the second quarter, and sales attributable to the Jewish New Year, which occurs in either September or
October, may be realized in our financial reports in either the third or the fourth quarter. Generally, purchases for a particular
holiday occur during the two-week period prior to the commencement of that holiday. However, the timing of the holidays does not
affect our semiannual results.



Many of our expenses
are unrelated to the level of sales, and therefore a relatively modest increase or decrease in sales, whether or not related to
the timing of holidays, tends to have a disproportionately large impact on our profitability.



Non-Food Strategies



Please
see the sections entitled “Business Overview- Our Strategies” and “Supermarkets – Supermarkets Strategies”
above for a description of our strategies in our Non-Food segment.



Real Estate



Most of our real
estate is currently used in connection with the retail operation of our stores.



Recent Activities in Real
Estate Sector



Wholesale Market
Companies



On May 31, 2012,
BSRE, , completed the purchase of long term lease rights to a property in the wholesale market site in Tel Aviv (the “Wholesale
Market Project”) for the purpose of building and marketing on the property an apartment buildings complex and a shopping
mall from the municipality of Tel Aviv and the Wholesale Market for Agricultural Produce in Tel Aviv Company Ltd. (the “Wholesale
Market Company”). As of December 31, 2013, BSRE owned 49.5% of the company that owns the residential building rights and
50% of the company that owns the commercial building rights. Within the framework of the approved plan, the Wholesale Market Project
will include 10 buildings, each consisting of 14 floors. The Wholesale Market Project will also include 722 residential units for
sale and 54 units which will be leased in accordance with certain criteria determined by the Municipality of Tel Aviv and the Purchasers.
It is contemplated that the Wholesale Market Project will contain approximately 34,000 square meters leased space for commercial
use. As of January 7, 2014, building permits for all 722 of the residential units had been granted as well as permits for the commercial
space.



66







On June 26, 2013,
the Residence Company and the Mall Company entered into a financing agreement with banks pursuant to which the banks would extend
financing and credit facilities to the Residence Company in the amount of NIS 2 billion for granting guarantees and financing and
credit lines of up to NIS 450 million to the Mall Company for completing the construction of the mall basements and foundation.
The credit lines are payable on March 31, 2016 (the final payment date). The Mall Company may repay the entire credit by an early
payment subject to the conditions stated in the financing agreement. To secure the liability of the Residence Company, BSRE provided
a constant guarantee of NIS 25 million, and to secure the liability of the Mall Company, BSRE provided a constant guarantee of
NIS 50 million. On August 8, 2013, the financing agreements became effective, and the Residence Company repaid a loan provided
by the bank against release to the Residence Company of advances which had been received from apartment purchasers in an amount
equal to the full amount of the loans and were held in deposits until effectiveness of the financing agreement.



For more information
on the transaction with the Wholesale Market Company, see “Item 7. Major Shareholders and Related Party Transactions –
B. Related Party Transactions – Agreement with the Wholesale Market Company.”





Investment
in Comverse Building (Ra’anana)



On May 13, 2012,
BSRE signed a memorandum of understanding with a third party (the “Lessee”), pursuant to which BSRE agreed to build
a 23,000 square-meter office building on real property it owns in Ra’anana and to construct a 3,500 square-meter basement
and 900 parking spaces (the “structure”), most of which will be leased to the Lessee for a period of 10 years for annual
rental fees of approximately NIS 20 million linked to the CPI, with a renewal option for an additional 5 years, during which the
rental fees would increase by 7.5% (the “Comverse Building Project”). In addition, BSRE has undertaken to erect a surrounding
structure at an estimated cost of NIS 200 million and to perform all of the finishing work, if requested by the Lessee, which is
estimated at a cost of NIS 75 million, and BSRE will be entitled to receive 7.5% of the cost in addition to the rental fees. As
of the date of filing of this Annual Report, BSRE has obtained all of the necessary building permits to erect the building and
the construction work has begun. As of March 24, 2014, and in according with the Lessee’s request to reduce the leased space
and BSRE’s completion of the work, the projected monthly lease proceeds for the first period is expected to be NIS 1.8 million.
The Comverse Building Project is expected to be completed during the fourth quarter of 2014.



67







On January 21, 2013,
BSRE and several subsidiaries of Harel Insurance Investments & Financial Services Ltd. (collectively, “Harel Investments”)
entered into an agreement pursuant to which Harel Investments acquired half of the BSRE’s rights in the Ra’anana property
and the Comverse Building Project in consideration for approximately NIS 51 million (including Harel Investments’ portion
of the Comverse Building Project’s establishment expenses). Pursuant to the agreement, BSRE will be entitled to additional
consideration for the additional 2,500 square-meter building rights that have yet to be used by BSRE within the Comverse Building
Project’s framework. Pursuant to the agreement, BSRE will have sole ownership of any future additional building rights granted
on the property, and Harel Investment will have the option to purchase half of such future rights at a consideration to be determined
according to the value of the rights.



Description of Real Estate
Properties



Most of our real
estate is owned by our 74.71% subsidiary, BSRE, and includes commercial areas, distribution centers and offices which are mainly
designated for the use of our supermarket segment and our non-food segment, a 50% holding in Hadar Mall and Kiryat Hasharon, small
commercial sites, office buildings, logistics sites, our holdings in the Wholesale Market Companies and additional undeveloped
properties for use as commercial areas, office buildings, and logistics centers.



As of December 31,
2013, the total square meters of developed property that we (including jointly controlled entities) owned was approximately 275,000
square meters, the total square meters of property in development that we owned was approximately 44,500 and the total square meters
of unutilized building rights that we owned was approximately 149,000 square meters. In addition, BSRE has the building rights
for 3,000 apartments in Point Wells and 722 apartments in the Wholesale Market Project.



The following table
provides certain details regarding our real estate properties held for use or rent of which we are the legal owner (including through
long-term leases from the Israel Land Authority), as of December 31, 2013:



|                                                                                                   |  | Number of properties for use or rent |     |  | Area in square meter for leasing (property space) |  |         | Occupancy rate | 
|-------------------------------------------------------------------------------------------------- |  | ------------------------------------ | --- |  | ------------------------------------------------- |  | ------- | -------------- | 
|Commercial areas, including supermarket stores                                                     |  |                                      | 105 |  |                                                   |  | 190,500 |                | 
|                                                                                                   |  |                                      |     |  |                                                   |  |         |                | 
|Warehouses and Logistics Centers                                                                   |  |                                      | 6   |  |                                                   |  | 64,300  |                | 
|                                                                                                   |  |                                      |     |  |                                                   |  |         |                | 
|Offices(1)                                                                                         |  |                                      | 5   |  |                                                   |  | 20,200  |                | 
|                                                                                                   |  |                                      |     |  |                                                   |  |         |                | 
|Total Developed property(2)                                                                        |  |                                      | 116 |  |                                                   |  | 275,000 |                | 
|                                                                                                   |  |                                      |     |  |                                                   |  |         |                | 
|Total property in development-commercial areas, logistics centers and the Wholesale Market Project |  |                                      | 3   |  |                                                   |  | 44,500  |                | 
|                                                                                                   |  |                                      |     |  |                                                   |  |         |                | 
|Total unutilized building rights                                                                   |  |                                      |     |  |                                                   |  | 149,000 |                | 



68









(1)
Not including an area of 14,000 square meters of an office building in Petah Tikva, which was held
for sale and the sale agreement for which was canceled in the first quarter of 2014.

(2) Not including an area of
45,000 square meters of parking lots adjacent to commercial and office areas.



Below is a short description
of a number of these properties:



Commercial areas, including supermarket
stores



The properties designated
for supermarkets are individual units or integrated units in buildings in industrial, residential or commercial areas. Some of
the properties have parking lots and operational areas that are not included in the square meters calculated for lease. The majority
of the supermarkets properties are leased to Mega Retail. For more information, see “Item 7. Major Shareholders and Related
Party Transactions – B. Related Party Transactions – Agreements Between Alon Blue Square and Various Subsidiaries.”
Below are additional commercial areas not designated for supermarkets that BSRE owns:



| | · | Rechasim –During the fourth quarter of 2013, BSRE completed the construction of a
neighborhood commercial center for trade and clinics in Rechasim in an area of approximately 2,600 square meters.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Hadar Shopping Mall -BSRE owns 50% of the property, which is located in the Talpiot industrial
area in Jerusalem, and the other 50% is held by a third party. The lease from the Israel Land Authority ends in 2021 with an option
to extend the lease for an additional 49 years, subject to a fee. The mall includes 25,606 square meters of commercial space. In
addition, there are 1,064 parking spaces at the mall. The space is leased to third parties, including 4,700 square meters to Mega
Retail. As of March 23, 2014, the occupancy rate of the mall is 91%. The property is managed by a joint management company.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On June 5, 2012, BSRE entered
into a loan agreement with a group of institutional companies to finance the building of the addition to the Hadar Mall, which
has been completed. The lenders have extended an amount of NIS 125 million over a period of 10 years during which an aggregate
of NIS 42.5 million will be repaid in 17 bi-annual payments commencing on the 18th month subsequent to the date of the
loan, and the remaining sum will be repaid in a one-time payment at the end of the loan term. BSRE has the option to obtain an
additional loan of NIS 40 million upon the completion of the construction. The loan is linked to the CPI and bears annual interest
of 4.1%. As collateral for the repayment of the loan, BSRE placed a charge on its rights in the Hadar Mall.



Offices



BSRE is the owner
of the following major office building and properties designated for office building construction:



69







| | · | Comverse Building, Ra’anana –Pursuant to a memorandum of understanding signed
with a third party, BSRE has undertaken to erect a 23,000 square-meter office building on real property it owns in Ra’anana
and to construct a 3,500 square-meter basement and 900 parking spaces, most of which will be leased to the third party for a period
of 10 years. For more information see “Item 4. Information on the Company – B. Business Overview – Real Estate
– Investment in Comverse Building (Ra’anana).”
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Warehouses and Logistics Areas



Below is a short
description of the logistics areas owned by BSRE:



Kibbutz Eyal- BSRE and
Eyal Microgal Ltd. (“Eyal Microgal”) signed an agreement for the development of
a 57 dunam property for storage and logistics usage. Pursuant to the agreement, BSRE and Eyal Microgal jointly hold in equal parts
a new company, Eyal Baribua Ltd. (“Eyal Baribua”), to which Kibbutz Eyal transferred the property in February 2011.
In addition, pursuant to this agreement in February 2011, BSRE transferred to Eyal Baribua an amount based on the purchasing costs,
development costs and an additional cost. Upon these transfers, the parties entered into a statement of work for the development
project, pursuant to which, among other things, BSRE was issued 200 shares in the new company, which as of March 24, 2014 represented
50% of the issued and outstanding shares of Eyal Baribua. The Israel Land Authority has approved the allocation of only 41.5 dunam
for Eyal Baribua. A building permit has been obtained, and the joint company is in the process of constructing the logistics center
in an area of 28,000 square meters. Construction is expected to be completed by the end of 2014.



BSRE and Mega Retail are party
to a lease agreement, pursuant to which BSRE is constructing the logistics center in Kibbutz Eyal to be leased by Mega Retail.
The lease is for a period of 15 years from the beginning of use of the property with an option to renew for additional three year
periods (but not to exceed a total renewal period of 24 years) for an annual payment equal to 8.7% to 9% of the total investment
made by the joint new company in acquiring and building the logistic center, according to the calculation mechanism and orders
provided for in the lease agreement.



Eyal Baribua has a credit facility
from a bank in the amount of approximately 90 million. Eyal Baribua created liens in favor of the bank, including a lien on all
of its rights in the land, a floating charge on the project, a pledge and assignment by way of pledge of BSRE’s rights under
the lease agreement with Mega Retail. Additionally, BSRE provided a guarantee to secure the obligations of Eyal Baribua (the other
shareholder of Eyal Baribua provided a similar guarantee). As of March 24, 2014, Eyal Baribua utilized approximately NIS 76 million
of the credit facility. At the end of the credit facility period, the bank will offer Eyal Baribua a loan for period of 15 years
in the amount of the credit facility.



70







As of the date of this report,
BSRE estimates that the cost of this project will be approximately NIS 101 million.



Property in development



| | · | Wholesale Market Company - On May 31, 2012, BSRE, Gindi Investments 1 Ltd. and an additional
entity controlled by Moshe and Yigal Gindi completed the purchase of long term lease rights to a property in the wholesale market
site in Tel Aviv for the purpose of building and marketing on the property an apartment building complex and a shopping mall from
the municipality of Tel Aviv and the Wholesale Market Company Ltd. The final agreements were signed on June 3, 2010 and received
the approval of the Minister of the Interior on July 11, 2010. For more information, see “Item
7. Major Shareholders and Related Party Transactions – B. Related Party Transactions – Agreement with Wholesale Market
Company.”
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Properties with development potential



As of December 31,
2013, BSRE had rights to build a total of 149,000 square meters (132,000 square meters mainly for commercial purposes and 17,000
square meters for residential purposes). Because the utilization of building rights is dependent on economic feasibility, satisfaction
of various conditions, payment of costs and other factors, it is not clear if and when BSRE will utilize these building rights.



Point Wells,
Washington



On June 1, 2010, BSRE
completed the acquisition of an approximately 240-dunam parcel (approximately 59 acres) of property in Point Wells, near Seattle,
Washington, which serves primarily as a plant for storage and distribution of fuel and oils. BSRE purchased the property through
a special purpose entity established in the United States, BSRE Point Wells, LP, which entered into a purchase agreement, dated
May 7, 2010, with Paramount of Washington LLC (“POW”) for the property and into a development agreement, dated June
1, 2010, with POW and Paramount Petroleum Corporation (“PPC”). PPC leases the property from POW and operates and maintains
it. POW and PPC are wholly owned subsidiaries of Alon USA Energy Inc., a public company whose shares are traded on the NYSE (“Alon
USA”) and is controlled by our indirect controlling shareholder, Alon.



Upon the closing of
the transaction, BSRE Point Wells, LP granted to POW and PPC a right of use of the property, for a consideration of approximately
$440 thousand per quarter commencing July 1, 2010, for a period commencing on June 2, 2010 and terminating upon the earlier of:
(i) June 2, 2020 or (ii) the time of sale of the property, after the enhancement thereof, to a third party in accordance with the
development agreement (the “License Period”). In the event BSRE sells the land, POW will have the right to participate
in the consideration net of costs as defined in the agreement.



71









The present land
use designation of the property was changed to urban center zoning from its original land use designation, which was heavy industrial.
On May 12, 2010, the local Snomish County Council (the “Local Council”) adopted (a) an ordinance approving the new
Urban Center Code and (b) and ordinance to change the zoning designation of Point Wells to Urban Center, both of which became effective
on May 29, 2010. In March 2011, BSRE, through BSRE Point Wells, LP, submitted a detailed plan to the Local Council, which included
plans for the building of three residential areas, including approximately 3,000 residential units, and public areas as well as
development plans (the “Plan”), and in November 2011, the court determined that a building permit will be provided
only after completion of all the required adjustments pursuant to the local law and the aforementioned ordinances. BSRE is working
to give legal effect to the detailed plan. Based on a report submitted by BSRE Point Wells, the Local Council approved new regulations
pursuant to which the land use designation was defined as urban village and approved the plans for 2,700 residential units. On
January 7, 2013, the court of appeals determined that BSRE Point Wells is permitted to continue with the development of the property
despite the new regulations. Opponents to the detailed plan appealed to the Supreme Court of the State Washington to allow a further
hearing regarding the court of appeals decision. Such hearing occurred on October 24, 2013, in the Washington State Supreme Court.



On April 10, 2014,
the State of Washington Supreme Court upheld that BSRE has a vested right to the development of the land under the designation
of "urban center", which shall include the construction of 3,000 housing units, public areas and development programs.
As of the date of this report, the Company is unable to estimate the exact duration of time it will take to receive the approval
of the competent authorities for exercising the construction rights under the plan which determined the designation of land as
an “urban center”.



According to the development
agreement signed between the parties, BSRE Point Wells, LP will take action to initiate a detailed plan for approving the construction
of at least 2,000 residential units on the property. All of the expenses connected with the approval of the change of zoning, including
the initiation and preparation of a detailed plan, will be borne by BSRE Point Wells, LP. BSRE assesses that these expenses will
amount to approximately $4 million to $5 million. If the detailed plan is not approved and/or if it does not contain at least 2,000
residential units, BSRE Point Wells, LP will bear no responsibility to POW and/or PPC. In consideration for PPC’s right to
participate in the development of the property and in the proceeds that will be received from the sale of the property to a third
party after the enhancement thereof, PPC will pay BSRE Point Wells, LP quarterly participation fees in a sum of $438,750, which
will be paid commencing from July 1, 2010 and throughout the entire License Period.





The development agreement
further stipulates provisions regarding a division of the consideration that will be received from the sale of the property to
a third party after the change of zoning and enhancement of the property.





72







Givon Parking



In July 2010, Gindi
was awarded a tender to Build Operate and Transfer (“BOT”) a parking lot in Tel Aviv (“Givon Parking”)
for approximately 1,000 parking spaces adjacent to the Wholesale Market Project. In August 2010, BSRE joined Gindi in this project
as a 50% joint venture partner. On October 11, 2011, BSRE received a notice from Tel Aviv municipality that all of the conditions
to approve the BOT agreement of “Givon Parking” in Tel Aviv had been satisfied. In return for constructing the parking
lot, BSRE and its partners will be entitled to operate and collect rental fees for parking for a period of 23 years from delivering
the authority for use of property. On November 13, 2011 BSRE received the right to use the property for constructions work. BSRE
estimates that construction will be completed during the third quarter of 2014. The total cost for establishing the parking lot,
including related costs, is estimated at NIS 144 million ($41.5 million), and the share of BSRE is approximately NIS 72 million
($20.7 million). On December 12, 2011, BSRE and its partners signed an agreement with the bank for the funding of approximately
80% of the parking lot construction’s costs, and the credit lines provided for financing the project were in the aggregate
amount of NIS 115 million (approximately US $33 million). As of December 31, 2013, BSRE and its partners had utilized NIS 30 million
(approximately US $8.6 million) of the credit line. BSRE and its partners determined material issues regarding the construction
and the management of the parking lot in which an unanimously decision is required, and principles regarding dilution of each of
the parties’ rights in the event that one of the parties will not invest the amounts that such party obligated to invest.



During 2013, BSRE
invested a total amount of NIS 89 million, including investments in rental offices and land in areas used for commercial and industrial
development. Additionally, BSRE jointly controlled entities which invested NIS 85 million during 2013.



Industry Overview



The yield-generating
real estate market in Israel includes the development, promotion, planning, construction, marketing and operating of real estate
properties intended for leasing primarily for the purpose of commercial, industrial, office space, parking and warehouse use. The
yield-generating real estate market is affected by the growth or slowdown in the Israeli economy, and by changes in the demand
and the available supply of commercial areas, as well as the construction of additional commercial areas. The real estate market
is also affected by governmental, municipal and tax authority policies regarding planning, building, marketing and taxation of
land.



73







A slowdown in the
Israeli yield-generating real estate market as occurred in Israel beginning in the fourth quarter of 2008 and until 2010, could
adversely affect our real estate business. In addition, a continuation of the public protest which began in July 2011 with regard
to high housing costs in Israel could lead to a slowdown in the Israeli yield-generating real estate market and cause a decline
in the demand for real estate due to the anticipation that real estate prices will decrease as a result of the public protest.
If the economic conditions in Israel were to deteriorate, there may be a decline in demand for commercial real estate, a reduction
in rental fees, a decline in the fair value of our real estate assets and an increase in the cost and availability of financing
from Israeli banks, which could adversely affect our real estate business. In addition, we can identify greater caution on behalf
of companies and potential investors to new projects which has resulted, among others, from directives of The Bank of Israel with
respect to the amount of leverage permitted in the real estate market and requirements from banks to a higher occupancy rate prior
to construction. As a result, we estimate that the availability of yield generating properties will be reduced or remain stable
due to lack of new projects or their delay.





In addition, it
is expected that there will be an increase in the supply of office space in Israel in the short and medium term, reflecting the
increase in the number of building starts and their anticipated completion in the upcoming years, which may result in a slight
decline in occupancy rates in offices in the medium term. In shopping centers, the occupancy rate is high and even rose in 2013.



With respect to the
residential building sector in Israel, a recession may cause a decrease in the scope of marketing and sales and a decrease in the
prices of apartments. In addition, government policies may affect the availability and value of real estate designated for building
and may also affect the prices of apartments. Moreover, since 2010, we entered the field of promotion and planning of residential
real estate. There are different risks in this sector including: exposure to changes in the demand for residential properties as
a result of changes in the economy, especially as a result of a recession or a significant deterioration in the economy; the speed
at which local planning authorities and cities approve the building projects; changes in and increases to the stringency of building
and planning laws and regulations, which may require the Company to incur additional expenses; lack of human resources in the building
sector, as a result of the government’s policy for employing foreign workers, or ‘closures’ for security reasons
as well as delays or continuing lack of raw materials, for example as a result of the closure of Israel’s ports, that may
affect the Company’s ability to meet the original timetables as well as its originally contemplated costs; and changes in
the government’s policies for the granting of mortgages, which affect the level of demand for residential properties.



Competition



The yield-generating
real estate market in Israel is highly competitive and is characterized by a large number of competitors. The main factor affecting
competition in this market is geographic location of property. There are properties in close proximity to some of our properties
that are similar in purpose and use, which has the effect of increasing competition for the leasing of those properties as well
as reducing the rental rates for those properties. Other factors affecting competition are the leasing price, the physical condition
of the properties, the finishing of the properties and the level of the management services provided to tenants. Furthermore, economic
and financial conditions may further increase competition, leading to a reduction of rental fees and a decline in demand for properties.
BSRE’s portion in the office space rental market is small, and we are therefore only slightly affected by the trends and
changes in the competition of this specific field. In the commercial centers sector, there was a consistent increase in rental
fees during the last three years. In addition, many mergers and acquisitions occurred in the sector of shopping malls sector in
recent years, creating centralization and control by a limited number of companies, redacting the competition in the yield-generating
real estate market, and affecting rental and management fees.





74













Government Regulation



Environmental
Laws Related to Real Estate



As the owner or long-term
lessee of real estate property, we may be held liable for any violation of law, including of environmental laws, which takes place
on real estate property that we either own or lease pursuant to a long term lease, and we may be required to bear the costs associated
with compliance with such laws.



Due to the fact that
most of our real estate properties are leased to commercial businesses, which are not polluting factories, and in light of the
division of liabilities between us and the lessees, we do not anticipate material exposure in the area of environmental law with
respect to our real estate properties.



In addition, pursuant
to authorization agreements with cellular companies, we allow cellular companies to place and operate cellular communication devices
in certain locations on our properties. Under such agreements, the cellular companies have agreed to operate and use the devices
in accordance with the standards of the Ministry of Environmental Protection and the commissioner of radiation, and in accordance
with the provisions of any other law.



Planning and Construction
Law, 1965



The
Planning and Construction Law and the regulations promulgated thereunder determine the regulatory and supervisory scheme,
among other things, in matters relating to construction permits, licensing, and rights, changes in the designated uses of real
estate property and betterment taxes levied on improved properties. In addition, under the Planning and Construction Law,
the owner of real estate may be held criminally liable for an offense committed by a lessee on such property.



In
addition, the field of residential construction and selling of residential units is subject to the Sale (Apartments) Law,5733-1973
and to the Sale (Apartments) (Assurance ofInvestments of Persons Acquiring Apartments) Law, 5735-1974, and the regulations
promulgated thereunder. In June 2008, these laws were respectively amended to obligate a seller, among other things, to keep a
dedicated project bank account for each project, as well as providing a guarantee to the buyer for payments already received by
the seller for the residential unit (without which a buyer will not be obligated to pay any amount above 7% of the price for the
unit). In March 2011, these laws were additionally amended to broaden the sellers’ responsibilities toward the buyers, among
others, regarding the examination period and its terms, compensation in the event of late delivering of the occupancy on the apartment,
and obligations to register a house as condominium.





75







Regulations for
Equal Rights for Persons with Disabilities (accommodations for accessibility in a public place which is an existing building)



On November 3, 2011, the Regulations for
Equal Rights for Persons with Disabilities (accommodations for accessibility in a public place which is an existing building),
2011 was approved and published. For additional information, see “Item 4. Information on the Company - B. business overview
- Additional Business Information Relating to Alon Blue Square - General Government Regulation.”



BSRE’s Strategies



Our strategy in our
real estate activities is to become a substantial owner of yield-generating properties and developer of commercial real estate
through our subsidiary, BSRE. To achieve this goal, we intend to pursue a number of operating and growth strategies, which include:



| | · | management
                                         and lease of rental properties, development and improvement of existing properties and
                                         building rights. BSRE’s rental properties are leased to companies in Alon Blue
                                         Square group and to third parties;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | locating
                                         and initiating real estate investments in Israel and abroad while expanding and diversifying
                                         BSRE’s asset portfolio;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | rental
                                         of properties owned by BSRE;
| | - | ----------------------------------------------------------------------------



| | · | cautiously
                                         examining the expansion of activities abroad; and
| | - | -----------------------------------------------------------------------------------------------------



| | · | focusing
                                         on rental property designated as trading, logistics and offices.
| | - | ------------------------------------------------------------------------------------------------------------------



Additional Business Information Relating
to Alon Blue Square



Related Businesses



Diners Israel



We own 49% (36.75%
Alon Blue Square and 12.25% Dor Alon) of the shares of capital stock of Diners Club Israel Ltd. (“Diners Israel”).
The remaining 51% is owned by Credit Card for Israel Ltd (“CAL”), a credit card company in Israel which itself is
a subsidiary of Israel Discount Bank Ltd.



76







Under the original
agreement with CAL from 2005, Alon Blue Square and Dor Alon were entitled to share with CAL the net income of Diners Israel in
connection with the activities of the credit cards bearing the “You” name based on our respective ownership interests
in Diners Israel, and a share of the net income of Diners Israel in connection with the activities of the credit cards not bearing
the “You” name based on certain thresholds set in the original agreement. In addition, Diners signed an agreement
with CAL pursuant to which Loyalty Plan members are to be issued Mastercard “You” credit cards in addition to Diners
“You” credit cards. On May 25, 2011, our management agreed to an amendment to the agreement of principles between
CAL, Diners Israel, Alon Blue Square, Dor Alon, and the Alon Blue Square-Dor Alon Joint Loyalty Plan Partnership, and in July
2011, all suspending conditions set forth in the agreement were completed, and the amendment to the agreement came into effect.
Pursuant to the amendment, Alon Blue Square and Dor Alon has the right to 49% of the profits of Diners Israel Ltd., both related
to the “You” bearing credit cards, and to all other credit cards issued by Diners, effective as of January 1st,
2011 (with the exception of certain activities the profits of which is allocated to the parties per their respective holdings
from July 1st, 2011). Alon Blue Square and Dor Alon repaid the non-recourse loan granted to them by CAL for the purchase
of the shares, in the amount of NIS 36 million (the amount includes accrued interest). Additionally, the amendment sets the terms
as to the business relationship between the parties and extends the agreement until December 31, 2015, following which the agreement
will be extended for additional three-year terms based on the terms and conditions set forth in the amendment to the agreement.
The amendment also includes a calculation method for the purchase of the 49% of Diners owned by us and by Dor Alon in the event
the agreement between Diners and the Loyalty club will not be extended. The Company and Dor Alon handled their financial statements
by an agreement to buy Diners as option for purchasing stock options and recorded in the period income before taxes from revaluation
of approximately NIS 102 million ($27.5 million). As of December 31, 2013, the total number of credit cards issued by Diners Israel
was approximately 269,000. See “Item 7. Major Shareholders and Related Party Transactions - B. Related Party Transactions”
for more information on the agreement with CAL and Diners Israel.



Alon Cellular



In March 2011, Alon
Cellular received a MVNO license from the Israeli Ministry of Communications, which enabled Alon Cellular to add cellular services
to the services that the Company offers to its customers. In December 2011, Alon Cellular entered into an agreement with Partner
Communications Ltd. for launching cellular services in an MVNO model. The Company launched its cellular activity in 2012. In December
2013, Alon Cellular entered into an agreement with Pelephone Communications Ltd. for the use of its cellular network. For additional
information, see “Item 4. Information on the Company - A. History and Development of Alon Blue Square.”



General
Government Regulation



The Law for Increasing
the Enforcement of Labor Law, 5771-2011



The law establishes
a mechanism of enforcement and warning, both in the criminal and civil levels, imposes direct liability to execute legal requirements
even on the Chief Executive Officer, and provides the Israel Industry, Trade and Employment Office the authority to impose sanctions
towards companies which receive services from contractors in three different industries: (i) security services; (ii) cleaning
services; and (iii) food supply. The law became effective on June 19, 2012. The law may affect the manner of hiring employees
and also may impose on the Company great liability towards independent contractors providing these services.



77







Consumer
Protection Laws



We are obligated to
label prices on our products on the basis of The Consumer Protection Law, 1981. Contravention of the law constitutes a
criminal offense. In 2009, new regulations under the Consumer Protection Law became effective under which we are obligated to
indicate on the shelf the price per measurement unit with respect to most of our products. Said regulations impose additional
costs and could increase the risk for discrepancies between the prices that appear on the products, the prices that appear on
the shelf and the prices charged by the cash register. Claims regarding violation of the Consumer Protection Law are filed
against the Company from time to time. These claims are usually settled in plea bargain proceedings. In addition, the Company
may be subject to criminal liability in connection with future claims under the Consumer Protection Law. These discrepancies
are the result of human error by personnel responsible for labeling our products and circumstances beyond the Company’s
control. We are making efforts to minimize these errors, including directing store management to charge the lower price in situations
where a discrepancy is found between the price on a product and the price appearing at the cash register.



We are also obligated
under these laws to advertise and conduct our business in a manner that is not misleading to our customers. Our obligations include,
among other things, ensuring that our advertised prices are the prices that are actually charged by the cash registers in our
stores, and ensuring that our coupons may be used in our stores as advertised. In December 2005, the applicability of the Consumer
Protection Lawwith respect to the prohibition of misleading conduct was expanded to apply also to conduct following the completion
of the transaction between the consumer and the supplier.



In addition, under
the Consumer Protection Law, we are obligated to post our merchandise return policy in our stores. The law and regulations
promulgated thereunder impose various requirements regarding the location, details, size and shape of the notice of such policy.



In addition, under
theConsumer Protection Law, a remedy of exemplary (punitive) damages may be provided to plaintiffs for specific violations
of the law under certain circumstances.



78







Regulations under
the Consumer Protection Law also regulate the warranty and post-sale services of certain electrical appliances. Under the
regulations, sellers of new electrical appliances (priced in excess of NIS 400) to the end user consumer are required to assume
the responsibilities of the manufacturer(s) of the appliances in the event such manufacturer cannot be located. In addition, sellers
must deliver to consumers a manufacturer warranty certificate with the delivery of the products.



On December 14, 2010,
the Regulations of Consumer Protection (Abolition of Transaction),came into effect pursuant to which a consumer is allowed
to cancel purchase agreements of certain goods and receive a full refund on condition that the consumer returns the goods unused
and undamaged. These regulations apply to certain goods over the price of NIS 50.



The Class Actions
Law (the “Law”) codified prior existing class actions arrangements, including under the Consumer Protection Law,
by among other things, substantially extending the causes of action under which one can bring a class action, alleviating the
prerequisites for certifying and maintaining a class action and lowering the eligibility requirements for a class action representative.
The Law is not unique to the line of business in which we engage; however, the expansion of the availability of the Law to potential
claimants increases our exposure to potential lawsuits.



In
addition, A Bill for the Consumer Protection Law (Amendment no. 35) (Redeeming Gift Cards),
5772-2012was adopted on January 2014, and will become effective July 1, 2014. The new
law establishes a minimum mandatory validity period of a gift card of five years, and that the amount stated in the gift card
must be uniform to all businesses subscribing to the gift card. In addition,the new law
grants the Minister of Economy the right to enact additional regulations prohibiting the limit of use of the gift certificates.
This legislation may adversely affect our profitability from gift certificates, by increasing their cost and increasing competition
in the market.



Product Liability



We market various
products, including foods and cleaning and hygiene products, which may affect consumer health, and, as such, we are subject to
legislation and supervision (for example, Liability for Defective Products Law, 1980) relating to these areas, including
orders of the Ministry of Health relating to the import and sale of food and cleaning and hygiene products, as well as veterinary
supervision of the marketing of meats. In addition, many laws and regulations govern the rights of persons that may have been
injured by products that we manufacture, assemble, store, market or sell. Under certain circumstances, the Company may be responsible
for damages as a result of defects in the products marketed and sold by the Company.



79







Regulations for
Equal Rights for Persons with Disabilities



On November 3, 2011,
the Regulations for Equal Rights for Persons with Disabilities (accommodations for accessibility in a public place which is an
existing building), 2011, were approved and published. The regulations require public service providers to make necessary modifications
at their own expense to ensure that their services are accessible to people with disabilities until November 1, 2017. The provision
of public services is defined, among other things, as services provided in a public place. According to the Equal Rights for Persons
with Disabilities Law, 1998, supermarkets are considered public places. The regulations include various requirements to increase
accessibility for people with disabilities in public places to be implemented within the timeframe provided in the proposed regulations,
such as modifying passages between fixtures in public places, modifying procedures, proceedings and customs, modifying signposts
and public address and loudspeaker systems, installing aids and accessories to ensure accessibility and to provide services to
aid in ensuring the accessibility of services for people with disabilities, publicizing the accommodations made to ensure accessibility
of, appointment of a coordinator to ensure accessibility, among others.



In April 2013, the
Regulations for Equal Rights for Persons with Disabilities (improving access to service), 2013, were approved and published. Under
these regulations, any entity that provides a public service must adapt its practices to ensure the provision of independent and
safe service to people with disabilities. The regulations provide for gradual adjustments to be completed until November 1, 2017.



Manufacturing
and Import Standards



We are required to
comply with certain manufacturing standards in connection with our manufacturing activities, and specifically those activities
that relate to the manufacturing of our private label products. We endeavor to ensure that that the products that are manufactured
on our behalf comply with any relevant standards and legal requirements.



In addition, we must
comply with import standards relating to the sale of imported products, including obtaining a general import license from the
Ministry of Health for importing food products that we sell, as well as requirements relating to electrical appliances.



| | C. | Organizational Structure
| | -- | ------------------------



We operate our Fueling
and Commercial Sites segment through our 78.43% subsidiary, Dor Alon, which is listed on the TASE. Dor Alon is one of the four
largest fuel retail companies in Israel based on the number of filling stations and a leader in the field of convenience stores.
Dor Alon operates a chain of 206 filling stations and 215 convenience stores in different formats in Israel.



We operate 201 of
our supermarkets through our wholly-owned subsidiary, Mega Retail and twelve supermarkets are owned and operated by our 51% subsidiary,
Eden Teva. Mega Retail leases from BSRE and third parties the real estate underlying the stores that it operates.



We operate all of
our “Non-Food” outlets through our wholly owned subsidiary Bee Group, which in turn held, as of March 31, 2014, approximately
77.51% of the outstanding shares of Naaman Group (N.V.) Ltd. The shares of Naaman are traded on the Tel Aviv Stock Exchange.



80







We operate our Real
Estate segment through our TASE traded 74.712% subsidiary, BSRE, which owns, leases and develops yield generating commercial properties
and projects. Below is a chart indicating our holdings in our material subsidiaries as of March 31, 2014:







81







* Listed on the Tel
Aviv Stock Exchange.



**We have also resolved
to merge Bee Group with Mega Retail in order to reduce costs and improve efficiency.



Mega Retail, Dor Alon,
BSRE, Bee Group and each of our subsidiaries has its own board of directors. We appoint all or a majority of the board of directors
of each of these companies and typically our appointee serves as the chairman of the board of directors of each of these companies.
Although we appoint all or most of the board of directors of each of Mega Retail, Dor Alon, BSRE, Bee Group and Bee Group’s
subsidiaries, each company’s board of directors has independent fiduciary obligations to all of its shareholders and to
the company itself. Alon Blue Square is obligated to deal with its partially owned subsidiaries at “arm’s-length.”
Moreover, in the case of BSRE, Dor Alon, and Naaman which are publicly traded on the Tel Aviv Stock Exchange, the board of directors
must include at least two external directors appointed under Israeli law. These external directors must satisfy all the requirements
of external directors under the Israeli Companies Law, 1999, referred to as the Israeli Companies Law.



Alon Blue Square owned
all of the outstanding shares of Mega Retail as of March 31, 2014. Mega Retail, in turn is the owner of our interests in a number
of its other subsidiaries and affiliates.



Alon Blue Square owned
74.71% of the outstanding shares of BSRE as of March 31, 2014. The balance of BSRE’s outstanding shares is publicly held
and traded on the Tel Aviv Stock Exchange. Alon Blue Square receives fees from BSRE as payment for the management services it
provides to BSRE for the Chairman of the board of directors services, financial and accounting management services (including
bookkeeping), computer management and maintenance service, legal consulting and corporate secretary services, office space and
related office services, and internal audit services.



82







Alon Blue Square owned
78.43% of the outstanding shares of Dor Alon as of March 31, 2014.



See “Item 7.
Major Shareholders and Related Party Transactions - B. Related Party Transactions” for a description of the agreements relating
to the fees Alon Blue Square receives from its subsidiaries and services that Dor Alon receives from Alon. For information concerning
the flow of funds between Alon Blue Square and its direct and indirect subsidiaries, see also “Item 5. Operating and Financial
Review and Prospects - Liquidity and Capital Resources.”



Set forth below is
a list of our significant holdings as of March 31, 2014. The companies marked with an asterisk (*) are not consolidated in our
financial statements.



|Company(1)                                |  | Operations                                                     |  | %
                                         OwnershipHeld by AlonBlue Square
|----------------------------------------- |  | -------------------------------------------------------------- |  | ---------------------------------------------------------------------------
|                                          |  |                                                                |  |                                                                            
|Mega
    Retail Ltd.(2)                   |  | Supermarkets and baby and young children
    products          |  | 100                                                                        
|                                          |  |                                                                |  |                                                                            
|Bee Group Retail Ltd.(3)                  |  | Retail and wholesale of houseware and home textile and leisure |  | 100                                                                        
|Dor
    Alon Energy in Israel (1988) Ltd. |  | Filling stations and convenience stores                        |  | 78.43                                                                      
|Blue
    Square Real Estate Ltd.(4)       |  | Real estate                                                    |  | 74.71                                                                      
|                                          |  |                                                                |  |                                                                            
|Diners
    Club Israel Ltd.* (5)          |  | Credit cards                                                   |  | 49                                                                         



| | (1) | All companies are incorporated
under Israeli law.
| | --- | -------------------------------------------------



| | (2) | As of March 31, 2014, Mega Retail
                                         Ltd., held approximately 51% of the outstanding shares of Eden Briut Teva Market Ltd.
                                         and 100% of Dr. Baby.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | In
                                         October 2010, we increased our holding in Bee Group Retail Ltd. to 100%. As of March
                                         31, 2014, Bee Group Retail Ltd., held approximately 77.51% of the outstanding shares
                                         of Naaman Group (N.V.) Ltd., which is traded on
                                         the Tel Aviv Stock Exchange.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | As of March 31, 2014, BSRE held
                                         approximately 50% of the outstanding shares of Tel Aviv City Mall Ltd., and 49.5% of
                                         the outstanding shares of Tel Aviv Towers Ltd. The remaining shares of BSRE are held
                                         by the public and institutional investors and traded on the Tel Aviv Stock Exchange.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (5) | The remaining shares of Diners
                                         Club Israel Ltd are held by Credit Cards for Israel Ltd. (51%), a subsidiary of Israel
                                         Discount Bank Ltd. See “Item 7. Major Shareholders and Related Party Transactions
                                         - B. Related Party Transactions” for information with respect to our rights as
                                         a shareholder of Diners Israel.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



83







| | D. | Property, Plants and Equipment.
| | -- | -------------------------------



For details regarding
the properties that we and our subsidiaries own and/or lease, see “Item 4. Information of the Company – B. Business
Overview – Supermarkets – Our Operations,” “Item 4. Information of the Company – B. Business Overview
– Fueling and Commercial Sites – Our Strategies,” “Item 4. Information of the Company – B. Business
Overview – Non-Food – Non-Food Operations,” and “Item 4. Information of the Company – B. Business
Overview – Real Estate.”



In 2013, Mega Retail
closed three supermarkets with a total area of 12,600 square meters and also opened approximately four supermarkets with a total
area of 4,000 square meters of store space in localities whose populations are currently under-served by supermarkets or in localities
in which we do not have sufficient market presence. Through March 2013, we have not opened any additional supermarket stores.



During 2013, we spent
more than NIS 62.2 million (or $17.9 million at the exchange rate as of December 31, 2013) on the acquisition and development
of new supermarkets and the remodeling of our existing supermarkets.



Generally, franchisees
of our non-food chains lease their own store space directly. However, there are a few franchisees that either sublease their stores
from the relevant subsidiary, or lease their stores jointly with such subsidiary. All our non-food stores that are operated directly
by our subsidiaries and not by franchisees, lease their own store space.



In 2014 and 2015,
we plan to open approximately seven to ten additional filling stations. For additional information, see “Item 4. Information
of the Company – B. Business Overview – Fueling and Commercial Sites.”



For further information
regarding our real estate, including the transfer of the Company’s real estate to BSRE and the transfer of Mega Retail’s
real estate to BSRE, please see “Item 4. Information on The Company - B. Business Overview - Our Real Estate” and
“Item 7. Major Shareholders – B. Related Party Transactions.”



| | ITEM 4A. | UNRESOLVED STAFF COMMENTS
| | -------- | -------------------------



Not applicable.



| | ITEM 5. | OPERATING AND FINANCIAL
REVIEW AND PROSPECTS
| | ------- | --------------------------------------------



The following discussion
and analysis should be read together with “Item 3. Key Information - A. Selected Financial Data” and our consolidated
financial statements and notes included elsewhere in this Annual Report. This discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements
as a result of certain factors, including, but not limited to, those set forth in “Item 3. Key Information - D. Risk Factors.”



84







General



Most of our activities
are located and operated in Israel. We operate in four reporting segments. As of December 31, 2013, we were the largest retail
company in Israel based on the number of stores. In our Supermarkets segment, we are the second largest food retailer in the State
of Israel. In our Fueling and Commercial Sites segment, we operate a chain of filling stations and convenience stores in different
formats in Israel, and we are considered to be one of the four major gas companies in Israel. In our Non-Food segment, we sell
“Non-Food” items both in standalone retail outlets and in our supermarkets. In our Real Estate segment, we own, lease
and develop yield-generating commercial properties and projects. Activities that do not meet quantitative thresholds in order
to constitute a separate segment consist of the cellular activity and the Company’s share in Diners Club Israel (issuance
and clearance of credit cards activity) and are presented under Other Activities. Virtually all of the Company’s activities
are located in Israel.



We are exposed to
trends and developments in the Israeli economy in general, and in the food and non-food products, fuel and real estate industries
in Israel in particular. An economic slowdown could cause a decline in demand for our products, impacting negatively on our profitability
and exposing us to customer credit risks. According to the Central Bureau of Statistics and The Bank of Israel, from the second
quarter of 2012, the Israeli economy displayed signs of a slowdown, among others, due to the global financial crisis, especially
in Europe. In 2013, the economic growth in Israel was approximately 3.3% compared to 3.4% in 2012. We cannot predict the duration
of the uncertainty in the global economy in general, and particularly in regards to Israel.



In July 2011, a public
protest began in Israel with regard to high housing costs. This protest evolved into a wide scale public demonstration encompassing
many other issues, including claims that the cost of living has increased out of control and must be regulated. In response to
these protests, the Knesset has raised the priority of reducing the cost of living in Israel and has began in the process of enacting
legislation, including by way of establishment of government committees, in order to address this issue. These developments may
have a material impact on the Israeli economy in general as well as the industries in which we compete. See “Item 3. Key
Information – D. Risk Factors Risks Related To Our Supermarkets – The enactment of new laws and regulations, including
the legislation in favor of “Promoting Competition in the Food Industry”, may materially adversely affect our sales
and profits, including limiting our ability to purchase additional stores or obligate us to sell some of our stores”, and
“Item 3. Key Information – D. Risks Related To Fueling and Commercial Sites - Dor Alon is exposed to risks associated
with the reduction of the marketing margin of gasoline under price control, which may influence the financial results of Dor Alon”
for more information.



85







Supermarket Segment



In 2013, a slowdown
in the growth of the Israeli economy affected consumer confidence. According to the Nielsen Company ("Nielsen") “Summary
year 2013 in the consumption of goods market in Israel”, the quantity of food, beverages, home products and near food products
purchased by consumers in Israel declined by 1% in 2013 as compared to 2012. This trend has continued in the beginning of 2014
according to a report by Nielsen issued in March 2014. In addition, supermarket chains of our competitors continued to expand.
Other supermarket chains continued to aggressively increase their market share and expanded their presence in locations throughout
Israel, often geographically beyond their original locations, increasing competition in an already difficult market. The low barriers
of entry, including the relatively low cost of establishing a new smaller supermarket, has contributed to the increase in number
and expansion of smaller supermarket chains in recent years. In addition, in recent years other supermarket chains have transitioned
from competing only in the local neighborhood markets to competing on a national scale with a joint private label which competes
with the private labels of the large supermarket chains. Both the economic slowdown and the increased competition affected our
sales and profitability in the supermarket segment in 2013.



We own approximately
51% of the holdings of Eden Teva, which operates organic/health food supermarkets and cater to the growing local demand for organic,
natural and health food. We are solidifying and expanding our market share in organic/health food market with the goal of establishing
Alon Blue Square as a leader of Israel’s emerging organic/health food market. By the end of 2013, we operated 21Eden Teva stores, 9of them in Mega stores, with Alon Blue Square the clear leader
of Israel’s organic/health food sector.



We are maintaining
and strengthening our market position by rebranding our store formats, renovating and improving existing stores, evaluating the
strategic positioning of some of our stores, adjusting the format of some of our stores, all in order to meet the needs of our
customers. Our new operating model is focused on our customers’ needs by implementing policies and an organizational structure
to suit customers’ needs.



We currently operate
our supermarket stores under three main categories: Discount chains, Quality and Service chains and Mega@Internet website. In
order to meet the needs of our customers, both the Discount chains and Quality and Service chains have regional stores and local
neighborhood stores. The Discount chains include the regional store brands “You”, “Mega Bool” and “ZolBeShefa”
and the local neighborhood store brand “You Neighborhood Store”. The Quality and Service chains include the regional
store brand “Mega”, the local neighborhood store brand “Mega in Town” and the organic, natural and health
product store brand “Eden Teva”. In planning the mix of our stores, we have taken a regional view, with the goal of
bringing our store brands within the shopping range of every Israeli consumer.



We are working to
improve our operating efficiency by, among other things, reducing store space and improving our distribution and supply capabilities,
including self distribution and the launch of a new distribution center. We are also working to expand the products and services
that we offer to our customers.



86







As part of our strategy
to improve our competitive position, during 2013, we continued working to increase our sales of our “Mega” line of
private label goods that are sold in our supermarkets. Private label products provide customers with an attractive alternative
selection of products that are comparable in quality to name brand products. We believe that our private label products enhance
customer loyalty, differentiate our stores from those of our competitors and provide a competitive product to those offered by
our suppliers. In addition, usually average gross profit from private label products is higher than the average gross profit from
other products.



Fueling and Commercial
Sites Segment



Dor Alon is one of
the four largest fuel retail companies in Israel based on the number of filling stations and is a leader in the convenience stores
sector. In recent years, the Fueling and Commercial Sites segment has been characterized by fierce competition. This competition
is reflected in price wars, improvement in credit terms in direct marketing, and improvement in the quality of services offered
at fueling sites.



In an effort to improve
our competitive position in this segment, we anticipate opening and operating approximately seven to ten additional filling stations
during 2014 and 2015 as well as investing additional capital to renovate our existing filling stations and convenience stores.
In addition, we intend to expand the chain of convenience stores outside of our filling stations, as well as the activities of
our countryside stores.



The price of gasoline
95 octane is subject to government-imposed price controls, and in September 2011, the Fuel and Gas Administration reduced the
fuels market margin, which is subject to government-imposed price controls. In the fourth quarter of 2011 and in 2012, Dor Alon
took steps to mitigate its effect by, among other things, reducing discounts at its filling stations and to its fleet customers
and reducing expenses. These actions significantly reduced the impact resulting from the reduction in marketing margins.



Non-Food Segment



As of March 31, 2014,
through Bee Group Retail Ltd. (“Bee Group”), we held approximately 77.51% of the outstanding shares of Naaman Group
(N.V) Ltd. (“Naaman”), one of Israel’s major branded houseware retailers and wholesalers, which imports and
markets various houseware products, such as kitchen utensils, cutlery and dinner sets, which as of such date held 100% of the
share capital of Vardinon.



In February 2014,
we completed the sale for NIS 13 million of 65% of our holdings in Kfar Hasha’shuim, which had not been synergetic with
our Supermarkets segment. As of December 31, 2013, Kfar Hashashuim operated 83 retail outlets, mostly through franchisees under
the brand names “Kfar Hasha’ashuim” and “All For A Dollar”, which sold toy and leisure products.
As part of the sale, we granted the purchaser a call option to purchase the remaining 35 percent Kfar Hasha’shuim for a
period of two years from consummation of the transaction. The purchaser granted the Company a put option to sell the purchaser
the Company’s remaining 35 percent in Kfar Hasha’shuim for a period of six months following the lapse of two years
from consummation of the transaction.



87







We will continue to
provide in favor of Bank Hapoalim a commitment letter for the balance of the credit facility of Kfar Hasha’shuim up to a
pre-defined amount and at the same time the purchaser signed the collateral in respect of the account. In addition, the purchaser
committed to decrease every year the debt to the bank and upon the completion of the purchase of all shares by the purchaser,
the commitment letter in favor of the bank will expire.



We are working to
capitalize on potential operating synergies between our non-food and food activities. We have also resolved to merge Bee Group
into Mega Retail in order to reduce costs and improve efficiency. The merger is expected to be completed in 2014.



Real Estate Segment



Through our subsidiary
BSRE, we are engaged in generating yield from commercial centers, logistics centers and offices, land for capital appreciation
and deriving long-term yield as well as developing projects, which include tens of thousands of square meters of construction
rights in different stages of design and construction, such as a partnership in a mall (50% ownership), residential (49.5% ownership)
and parking lot (50% ownership) projects in the wholesale market complex in Tel Aviv, expanding the Hadar Shopping Mall (50% ownership)
andproperty designated for a offices in Ra’anana (50% ownership), and the purchase of property in Point Wells, Washington
while changing the land use designation from a heavy industrial area to a residential area.As of December 31, 2013, BSRE
had rights to build a total of 149,000 square meters at different stages of construction (including the projects mentioned above).



We are currently
in the process of examining acquisitions of additional commercial real estate and yield-generating assets in Israel in light of
market conditions, while diversifying our real estate property base.



Other activities



Alon Cellular



Our subsidiary,
Alon Cellular (100% ownership), operates our cellular activity as an MVNO in Israel under the brand name YouPhone. As part of
our work to capitalize on potential synergies, we are marketing and selling our cellular services in our supermarkets and convenience
stores and offer those customers who purchase in our supermarkets and filling stations the opportunity to enjoy our cellular services
at discount prices or free of charge.



Diners



We hold 49% of Diners
Club Israel Ltd., which engages in issuing and clearing Diners credit cards in Israel. Diners Club Israel Ltd. is a franchisee
of Diners Club International until 2017. In addition, we are offering our clients credit cards for the You customer loyalty program.



88







Operating Results



The following table
sets forth certain statement of income data as a percentage of sales for the periods indicated:



|                                                                                                     |  |  | 2012*  |   |  |  | 2013   |  
|---------------------------------------------------------------------------------------------------- |  |  | ------ | - |  |  | ------ | -
|Continuing Operations                                                                                |  |  | %      |   |  |  | %      |  
|Sales                                                                                                |  |  | 100.00 |   |  |  | 100.00 |  
|Gross profit                                                                                         |  |  | 21.7   |   |  |  | 22.0   |  
|Selling, general and administrative expenses                                                         |  |  | 20.3   |   |  |  | 21.2   |  
|Operating profit before other gains and losses and changes in fair value of investment property, net |  |  | 1.4    |   |  |  | 0.8    |  
|Operating profit                                                                                     |  |  | 2.2    |   |  |  | 1.3    |  
|Taxes on income                                                                                      |  |  | 0.0    |   |  |  | (0.1   | )
|Net income for the year from continuing operation                                                    |  |  | 0.4    |   |  |  | (0.7   | )
|                                                                                                     |  |  |        |   |  |  |        |  
|Discontinued Operations                                                                              |  |  |        |   |  |  |        |  
|Net loss from discontinued operation                                                                 |  |  | (0.2   | ) |  |  | (0.3   | )



*The
results of 2012 are restated due to retrospective application of certain accounting policies, see note 38 to the financial statements.



Year Ended December 31, 2013 compared
with year ended December 31, 2012



The
statements of income, including comparative figures, have been restated to separate the results of discontinued operations from
continuing operations and presented them separately after the income from continued operations. Operating segment reporting presents
the segments’ results from continued operations before taxes.



Gross revenues.Revenues (including
government levies) amounted to NIS 14,860.9 million (US$ 4,281.4 million) in 2013 as compared to revenues of NIS 15,640.3 million
in 2012, a decrease of 5.0% mainly from decrease in fuel prices in the Commercial and Fueling sites segment.



Net revenues.Net revenues amounted
to NIS 11,886.3 million (US$ 3,424.5 million) compared to revenues of NIS 12,685.2 million in 2012, a decrease of 6.3%.





Revenues of the Fueling and
Commercial Sites segment –amounted in 2013 to NIS 5,140.5 million (US$ 1,481.0 million) as compared to NIS 5,773.4 million
in the corresponding period last year, a decrease of 11.0%. The main decrease was due to decrease in fuel prices and discontinued
sales to the Palestinian Authority as a result of a decision of the Palestinian Authority to discontinue its commitment with the
Company with regarding to the supply of fuel to Gaza strip.



Revenues of the Supermarkets
segment– amounted in 2013 to NIS 6,329.5 million (US$ 1,823.5 million) as compared to NIS 6,552.9 million in the corresponding
period last year. The decrease in sales derived from a 4% decline in store space as a result of closing branches and from a decrease
of 1.0% in the same store sales (SSS) as compared to the corresponding period last year.



89











Revenues of the Non-Food
segment – amounted this year to NIS 333.7 million (US$ 96.1 million) compared to NIS 321.1 million in 2012, an increase
of 3.9%. The increase in revenues was mainly due to an increase in sales in the home activity as a result of the transition from
franchise to self-operation in Sheshet stores and their conversion to Naaman stores.



Revenues of the Real Estate
segment – amounted this year to NIS 38.4 million (US$ 11.1 million) compared to NIS 30.6 million in 2012. The increase
in rental income in this period mainly derived from an increase in rented spaces to external parties.



Gross profit. Gross profit in 2013
amounted to NIS 2,617.5 million (US$ 751.1 million) (22.0% of revenues) as compared to gross profit of NIS 2,752.5 million (21.7%
of revenues) in 2012. The decrease in the gross profit was mainly due to the decrease in the gross profit in the Supermarkets
segment.



In the Fueling and Commercial
sites segment, gross profit amounted to NIS 788.6 million (US$ 227.2 million), (15.3% of revenues) compared to NIS 797.0 million
in 2012 (13.8% of revenues). The decrease in the gross profit mainly derived from discontinued sales to the Palestinian Authority
and increased competition in the fueling and commercial site segment and was partly offset from the increased profitability of
the convenience stores.



In the Supermarkets segment,
gross profit amounted to NIS 1,644.7 million (U.S. $473.9 million), (26.0% of revenues) compared to NIS 1,788.6 million in 2012
(27.3% of revenues), a decrease of 8.0%. The decrease in the gross profit was due to the actions taken by the Company to reduce
prices and retain market share and from a decrease in store space.



In the Non Food
segment,gross profit amounted to NIS 149.3 million (U.S. $43.0 million), (44.7% of revenues) compared to NIS 148.3
million in 2012 (46.2% of revenues), an increase of 0.7% that mainly derived from an increase in sales and was partly offset
from a reduction of the gross profit margin resulting from low margin sales intended to decrease Sheshet inventory and from a
decrease in sales in Vardinon stores.



Selling, general and administrative
expenses. Selling, general, and administrative expenses amounted to NIS 2,516.9 million (U.S. $725.2 million), (21.2% of revenues)
in 2013, net of NIS 22 million (US$ 6.3 million), a one-time amount received by the Company in 2013 as a result of a legal claim
for reimbursement and compensation for costs incurred by the Company in previous years, compared to expenses of NIS 2,576.8 million
(20.3% of revenues) in 2012.



90







In the Fueling and Commercial
sites segment, selling, general and administrative expenses amounted to NIS 653.9 million (US$ 188.4 million) compared to
NIS 651.5 million in 2012, an increase of 0.4%.



In the Supermarkets segment,selling,general and administrative expenses amounted to NIS 1,584.3 million (US$ 456.5 million) compared to expenses
of NIS 1,662.4 million in the corresponding period, a decrease of 4.7% in expenses that mainly derived from efficiency measures
and a decrease in selling spaces.



In the Non Food segment,selling, general and administrative expenses amounted to NIS 169.3 million (US$ 48.8 million) compared to NIS 160.4 million
in 2012, an increase of 5.5%, which mainly derived from the transition from franchise stores to self-operated stores and from
an increase in marketing and advertising expenses and was partly offset by efficiency measures.



In the Real Estate segment,
selling, general and administrative expenses amounted to NIS 19.8 million (US$ 5.7 million) compared to NIS 13.4 million in 2012
principally resulted from an increase in activities of the segment.



Operating profit (before other gains
and losses). Operating profit in 2013 amounted to NIS 100.7 million (US$ 29.0 million) (0.7% of revenues) as compared to NIS
175.7 million (1.4% of revenues) in 2012, a decrease of 42.7%. The decrease in the operating profit was mainly due to the Supermarkets
segment.



In the Fueling and Commercial
sites segment, operating profit (before other gains and losses) this year amounted to NIS 134.8 million (US$ 38.8 million)
compared to operating profit of NIS 145.5 million in 2012, a decrease of 7.4%. The decrease in operating profit mainly derived
from an increased competition in the Fueling and Commercial Sites.



In the Supermarkets segment,operating profit (before other gains and losses) in 2013 amounted to NIS 60.4 million (US$ 17.4 million) compared to operating
profit of NIS 126.2 million in 2012, a decrease of 52.1%. The decrease in operating profit derived from actions taken by the Company
to reduce prices and retain market share and from a decrease in sales and was partly offset from decrease in selling, general
and administrative expenses.



In the Non Food segment,operating loss (before other gains and losses) amounted to NIS 20.0 million (US$ 5.8 million), as compared to an operating
loss of NIS 12.1 million in 2012. The increase in operating loss derived from transition from Sheshet stores to self-operated
stores and their conversion to Na’aman stores and low margin sales intended to decrease Sheshet inventories.



In the Real Estate segment,
the operating profit (before other gains and losses) in 2013 amounted to NIS 18.6 million (US$ 5.4 million) compared to NIS 17.2
million in 2012, an increase of 8.1%. The increase in the operating profit derived from an increase in rental income and was partly
offset from increase in selling, general and administrative expenses.



91







Changes in fair value of investment
property, in 2013, the Company recorded a profit in the amount of NIS 47.6 million (US$ 13.7 million) compared to a profit
of NIS 16.9 million in 2012.The main change in value was recorded in projects in development promoted by the Company.



Other income (expenses), netother expenses in 2013 amounted to NIS 21.5 million (US$ 6.2 million) compared to other income of NIS 4.3 million in 2012.
Other expenses in the current period mainly derived from closing branches and reducing of our store space in our Supermarkets
segment following the implementation of Mega Retail’s strategic plan.



Share in gains of associatesthis year amounted to NIS 27.2 million (US$ 7.8 million) compared to NIS 87.1 million in 2012. The decrease in gains compared
to 2012, derived from the revaluation of the Tel Aviv Mall in 2012 upon the completion of the real estate purchase.



Operating profitin 2013
amounted to NIS 153.9 million (US$ 44.3 million) (1.3% of revenues) as compared to operating profit of NIS 283.9 million (2.2%
of revenues) in 2012, a decrease of 45.8%.



Finance costs, net in 2013 amounted
to NIS 254.0 million (US$ 73.2 million) compared to finance costs of NIS 241.9 million in 2012, an increase of 5% principally
as a result of an increase in the Israeli consumer price index.



Taxes on income tax benefit in
2013 amounted to NIS 12.7 million (US$ 3.7 million) as compared to tax benefit of NIS 2.9 million in 2012 due to increase of our
loss before taxes.



Income (loss) from continuing operations
in this period loss amounted to NIS 87.4 million (US$ 25.2 million) compared to an income of NIS 44.8 million in 2012. The loss
from continuing operations in 2013 attributed to the Company’s shareholders amounted to NIS 115.7 million (US$ 33.3 million)
or NIS 1.75 per share (US$ 0.50) and the income from continuing operations attributed to non-controlling interests amounted to
NIS 28.3 million (US$ 8.2 million) principally due to the decrease of our operating profit in the supermarket segment.



Net loss from discontinued operations
in this period amounted to NIS 30.0 million (US$ 8.6 million) or NIS 0.45 per share (US$ 0.13) compared to a loss of NIS 22.5
million in 2012, which attributed in its entirely to the Company’s shareholders. This increase is principally due to a goodwill
impairment of NIS 14 million related to our investment in Kfar Hasha’asuim.



92







Segment Information Analysis

Segment Information Analysis for the
year 2013



Fueling and Commercial Sites segment



|                                                                    |  | For the year 
    ended December 31 |       |   |      |  |       | Convenience translation for
    the year ended December 31 | 
|------------------------------------------------------------------- |  | ----------------------------------- | ----- | - | ---- |  | ----- | ---------------------------------------------------------- | 
|                                                                    |  | 2013                                |       |   | 2012 |  |       | %  Change                                                  | 
|                                                                    |  | NIS in millions                     |       |   |      |  |       | U.S. $                                                     | 
|Segment Revenues                                                    |  |                                     | 5,140 |   |      |  | 5,773 |                                                            | 
|Segment operating profit                                            |  |                                     | 138.6 |   |      |  | 149.5 |                                                            | 
|                                                                    |  |                                     |       |   |      |  |       |                                                            | 
|Segment operating profit (loss) as a percentage of segment revenues |  |                                     | 2.7   | % |      |  | 2.6   | %                                                          | 



The operating profit for the Fueling and
Commercial Sites segment in the year 2013 amounted to NIS 138.6 million (US$ 39.9 million) (2.7% of segment revenues) compared
to the segment operating profit of NIS 149.5 million (2.6% of segment revenues) in the corresponding period in 2012. The decrease
in operating profit mainly derived from increased competition in the Fueling and Commercial Sites and discontinued sales to the
Palestinian Authority.



Supermarkets Segment



|                                                             |  | For the year ended December 31 |       |   |      |  |       | Convenience translation for
    the year ended December 31 | 
|------------------------------------------------------------ |  | ------------------------------ | ----- | - | ---- |  | ----- | ---------------------------------------------------------- | 
|                                                             |  | 2013                           |       |   | 2012 |  |       | %  Change                                                  | 
|                                                             |  | NIS in millions                |       |   |      |  |       | U.S. $                                                     | 
|                                                             |  |                                |       |   |      |  |       |                                                            | 
|Segment Revenues                                             |  |                                | 6,329 |   |      |  | 6,553 |                                                            | 
|                                                             |  |                                |       |   |      |  |       |                                                            | 
|Segment operating profit                                     |  |                                | 44    |   |      |  | 137   |                                                            | 
|                                                             |  |                                |       |   |      |  |       |                                                            | 
|Segment operating profit as a percentage of segment revenues |  |                                | 0.7   | % |      |  | 2.1   | %                                                          | 



93







|                                           |  | For the year ended
    December 31 |         |    | Convenience translation  for
    the year ended December 31 | 
|------------------------------------------ |  | ---------------------------------- | ------- | -- | ----------------------------------------------------------- | 
|                                           |  | 2013                               |         |    | 2012                                                        | 
|                                           |  | NIS                                |         |    | U.S. $                                                      | 
|                                           |  | (Unaudited)                        |        
|                                           |  |                                    |         |    |                                                             | 
|Decrease in same store sales*              |  |                                    | (1.0    | %) |                                                             | 
|                                           |  |                                    |         |    |                                                             | 
|Number of stores at end of period          |  |                                    | 213     |    |                                                             | 
|Stores opened during the period            |  |                                    | 4       |    |                                                             | 
|Stores closed during the period            |  |                                    | 3       |    |                                                             | 
|                                           |  |                                    |         |    |                                                             | 
|Total square meters at end of period       |  |                                    | 360,000 |    |                                                             | 
|                                           |  |                                    |         |    |                                                             | 
|Square meters added during the period, net |  |                                    | (8,549  | )  |                                                             | 
|                                           |  |                                    |         |    |                                                             | 
|Sales per square meter                     |  |                                    | 17,169  |    |                                                             | 
|                                           |  |                                    |         |    |                                                             | 
|Sales per employee (in thousands)          |  |                                    | 812     |    |                                                             | 

* Compared with the same period in the
prior fiscal year.



Operating profit for the Supermarkets
segment in the year 2013 decreased by 67.9% to NIS 44 million (US$ 13 million) (0.7% of segment revenues) compared to the segment
operating profit of NIS 137 million (2.1% of segment revenues) in the corresponding period last year. The decrease in operating
profit derived from actions taken by the Company to reduce prices and retain market share and from a decrease in sales and was
partly offset from decrease in selling, general and administrative expenses.



Non Food Retail and Wholesale Segment

|                                                 |  | For the year ended December 31 |      |    |      |  |      | Convenience translation
    for the year ended December 31 | 
|------------------------------------------------ |  | ------------------------------ | ---- | -- | ---- |  | ---- | ---------------------------------------------------------- | 
|                                                 |  | 2013                           |      |    | 2012 |  |      | %  Change                                                  | 
|                                                 |  | NIS in millions                |      |    |      |  |      | U.S. $                                                     | 
|Segment Revenues                                 |  |                                | 334  |    |      |  | 321  |                                                            | 
|                                                 |  |                                |      |    |      |  |      |                                                            | 
|Segment operating loss                           |  |                                | (21  | )  |      |  | (15  | )                                                          | 
|Segment loss as a percentage of segment revenues |  |                                | (6.4 | %) |      |  | (4.8 | %)                                                         | 



The operating loss for
the Non Food Retail and Wholesale segment in the year 2013 amounted to NIS 21 million (US$ 6.1 million) (6.4% of segment revenues)
compared to the segment operating loss of NIS 15 million (4.8% of segment revenues) in the corresponding period in 2012. The increase
in loss derived from transition from Sheshet stores to self-operated stores and their conversion to Na’aman stores and low
margin sales intended to decrease Sheshet inventories.



94







Real Estate Segment



|                                                             |  | For the year 
    ended December 31 |     |   |      |  |     | Convenience translation for
    the year ended December 31 | 
|------------------------------------------------------------ |  | ----------------------------------- | --- | - | ---- |  | --- | ---------------------------------------------------------- | 
|                                                             |  | 2013                                |     |   | 2012 |  |     | %  Change                                                  | 
|                                                             |  | NIS in millions                     |     |   |      |  |     | U.S. $                                                     | 
|Segment Revenues                                             |  |                                     | 38  |   |      |  | 31  |                                                            | 
|Appreciation of Investment Property                          |  |                                     | 48  |   |      |  | 17  |                                                            | 
|Segment operating profit                                     |  |                                     | 75  |   |      |  | 99  |                                                            | 
|Segment operating profit as a percentage of segment revenues |  |                                     | 196 | % |      |  | 325 | %                                                          | 



In the year 2013, the Real Estate segment
recorded a profit in the amount of NIS 47.6 million (U.S. $13.7 million) compared to a profit of NIS 16.9 million in 2012. The
main change in value was recorded in projects in development promoted by the Company.

Operating profit for the Real Estate segment
in the year 2013 decreased by 24% to NIS 75 million (U.S. $22 million) compared to the segment operating profit of NIS 99 million
in the corresponding period. The decrease in the segment operating profit was due to an increase in selling, general and administrative
expenses.



Discontinued Operations



The following are the operating results
of discontinued operations for the years ended December 31, 2013 and 2012:



|                                      |  | Year ended      |      
|------------------------------------- |  | --------------- | -----
|                                      |  | December 31     |      
|                                      |  | 2013            |      
|                                      |  | NIS in millions |      
|Revenues                              |  |                 | 114.8
|Gross profit                          |  |                 | 23.8 
|Operating loss                        |  |                 | (8.4 
|Net loss from discontinued operations |  |                 | (29.9



95







Year Ended December 31, 2012 compared
with year ended December 31, 2011



The
statement of income for the year ended December 31, 2011, has not been restated as a result of the Company’s decision to
adopt the relief of IFRS 11 “Joint Arrangements”. The results of 2012 are presented without the impact of IFRS 11
in order to allow a proper comparison of annual results. Regarding the effect of the application of IFRS 11, see note 38
to the financial statements.



|                                                                                                         |  | Year Ended December 31, |       
|-------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------
|                                                                                                         |  | 2011                    |       
|                                                                                                         |  | %                       |       
|Continuing Operations                                                                                    |  |                         |       
|Sales                                                                                                    |  |                         | 100.00
|Gross profit                                                                                             |  |                         | 23.5  
|Selling, general and administrative expenses                                                             |  |                         | 21.2  
|Operating profit before other gains and losses and changes in fair value of investment property,
    net |  |                         | 2.4   
|Operating profit                                                                                         |  |                         | 2.6   
|Taxes on income                                                                                          |  |                         | 0.4   
|Net income for the year from continuing operation                                                        |  |                         | 0.8   
|                                                                                                         |  |                         |       
|Discontinued Operations                                                                                  |  |                         |       
|Net loss from discontinued operation                                                                     |  |                         | (0.2  



Gross revenues.Revenues (including
government levies) amounted to NIS 15,805.5 million in 2012 as compared to revenues of NIS 15,159.4 million in 2011, an increase
of 4.3%. The main reason for the increase in revenues was an increase in the revenues of Dor Alon compared to the corresponding
period last year.



Net revenues.Net revenues amounted
to NIS 12,850.4 million compared to revenues of NIS 12,345.8 million in 2011, an increase of 4.1%.



Revenues of the Fueling and
Commercial Sites segment – in 2012 amounted to NIS 5,935.2 million as compared to NIS 5,301.9 million in 2011, an increase
of 11.9%. The primary reason for the increase was an increase in the prices of petrol, quantity sales and increase in retail revenues
(NIS 39 million) in the convenience stores.



Revenues of the Supermarkets
segment – a decrease of 2.5% in revenues from NIS 6,723.8 million in 2011 to NIS 6,552.9 million in 2012. The primary
reason for the decrease was a reduction in the same store sales (SSS) at a rate of 2.6%.



Revenues of the Non-Food
segment – an increase in revenues by 11.1% from NIS 289.0 million in 2011 to NIS 321.1 million in 2012. The increase
in revenues was primarily due to an increase in revenues at houseware stores and in stores transferred from franchise to self-operation.



96







Revenues of the Real Estate
segment – an increase in rental income of 9.4% from NIS 31.0 million in 2011 to NIS 33.9 million in 2012. The increase
was primarily due to an increase in leased space and from the effect of the increase of CPI.



Gross profit. Gross profit amounted
to NIS 2,842.3 million (22.1% of revenues) in 2012 as compared to gross profit of NIS 2,903.8 million (23.5% of revenues) in 2011.
The main reason for the decrease in gross profit was due to the decrease in sales of the Supermarkets segment.



In the Fueling and Commercial
Sites segment, gross profit amounted to NIS 883.5 million (14.9% of revenues), compared to NIS 876.0 million in 2011 (16.5% of
revenues). The 0.9% increase in gross profit compared to the corresponding period on 2011 derived from an increase in the activity
of convenience stores and an increase in quantitative sales net of the impact changes in the petrol prices on the value of inventory
between periods.



In the Supermarkets segment,
gross profit amounted to NIS 1,788.6 million (27.3% of revenues), compared to NIS 1,850.8 million in 2011 (27.5% of revenues),
a decrease of 3.4% which resulted from the decrease in sales and erosion in gross profit.



In the Non Food segment,
gross profit amounted to NIS 148.3 million, (46.2% of revenues) compared to NIS 145.9 million in 2011 (50.5% of revenues) an
increase in gross profit that was due to an increase in revenues.



Selling, general and administrative
expenses. Selling, general, and administrative expenses amounted to NIS 2,658.2 million (20.7% of revenues) in 2012, compared
to selling, general, and administrative expenses of NIS 2,611.8 million (21.2% of revenues) in 2011, an increase of 1.8%. The
majority of the increase was recorded in the Non-Food segment from the transfer to self-operated stores and from costs relating
to launching “YouPhone” activity.



In the Fueling and Commercial
Sites segment, selling, general and administrative expenses amounted to NIS 718.7 million compared to NIS 702.4 million in 2011,
an increase of 2.3%, mainly deriving from the opening new fueling sites, partially offset by efficiency measures beginning from
the fourth quarter of 2011.



In the Supermarket segment,
selling, general and administrative expenses amounted to NIS 1,659.7 million, a decrease of 0.8%, resulting from closing stores
and efficiency measures taken at the Company’s headquarters.



In the Non Food segment, selling,
general and administrative expenses amounted to NIS 160.4 million, a decrease of 3.2% compared to NIS 165.8 million in 2011. The
decrease derived from a decrease in allowance for doubtful accounts.



97







In the Real Estate segment,
selling, general and administrative expenses amounted to NIS 28.3 million compared to NIS 15.6 million in 2011. The increase in
expenses resulted from a provision for management fees in the mall company building the mall in the wholesale market complex,
from an increase in marketing expenses and from the branding of Tel Aviv Mall relating to the fashion week that took place in
December.



Operating profit
(before other gains and losses and changes in fair value of investment property). Operating profit amounted to NIS 184.1 million
(1.4% of revenues) in 2012 as compared to NIS 292.0 million (2.4% of revenues) in 2011, a decrease of 36.9%. The decrease in the
operating profit was primarily due to the decrease in sales in the Supermarket segment and from expenses in Alon Cellular in connection
with the commencement of its activity.



In the Fueling
and Commercial Sites segment, operating profit decreased from NIS 173.7 million in 2011 to NIS 164.8 million in 2012 due to the
reduction of marketing margins and the impact of petrol prices on the value of inventory, and this was partially offset by efficiency
measures.



In the Supermarkets
segment, operating profit decreased from NIS 177.3 million in 2011 to NIS 129.0 million due to a decrease in sales, partially
offset by efficiency measures as mentioned above and the closing during the fourth quarter of 2012 of seven stores.



In the Non
Food segment, operating loss decreased from NIS 19.8 million in 2011 to NIS 12.1 million in 2012 due to an increase in revenues
and decrease in allowance for doubtful accounts.



In the Real
Estate segment, operating profit decreased from NIS 15.4 million in 2011 to operating profit of NIS 5.6 million in 2012 due to
an increase in the selling, general and administrative expenses as mentioned above.



Changes in fair value of investment
property. In 2012, the Company recorded a profit in the amount of NIS 106.4 million compared to NIS 41.9 million in 2011.
The profit in 2012 includes NIS 87.6 million from the revaluation of the commercial section in the wholesale market complex in
Tel Aviv.



Other income (expenses), net. In
2012, other income amounted to NIS 23.4 million compared to other expenses of NIS 16.9 million in 2011. Other income in 2012 included
a profit in the amount of NIS 19.6 million from the decrease in holding rate and loss of control in the residential company in
the wholesale market complex in Tel Aviv.



Operating profit. Operating profit
amounted to NIS 313.9 million in 2012 as compared to operating profit of NIS 317.0 million in 2011, a decrease of 1.0%.



98







Net finance costs. Net finance
costs amounted to NIS 245.8 million in 2012 as compared to net finance costs of NIS 171.9 million in 2011. The increase derived
from a decrease in finance income compared to 2011, which included revenues from the revaluation of the option to purchase shares
of Diners in the amount of NIS 101 million.



Taxes on income. Taxes on income
totaled NIS 16.6 million (an effective tax rate of 21% as compared to the statutory tax rate of 25%) in 2012 as compared to NIS
48.5 million (an effective tax rate of 32.0% as compared to the statutory rate of 24%) in 2011. The effective tax rate in 2012
was affected by a profit from a decrease in our holdings of a proportionately consolidated company resulting in loss of control
in respect of which the Company did not record deferred taxes.



Net income from continuing operations.
Net income from continuing operations amounted to NIS 63.6 million in 2012 as compared to net income of NIS 102.3 million in 2011.
The net profit from continuing operations in 2012 attributable to equity holders of the Company amounted to NIS 19.3 million,
or NIS 0.29 per share, and the part attributable to the non-controlling interests amounted to NIS 44.4 million.



Net loss from discontinued operations.In 2012, net loss from discontinued operations amounted to NIS 22.5 million, or NIS 0.34 per share, compared to a loss of
NIS 18.6 million in 2011 attributed in its entirety to the company’s shareholders.



Segment Information Analysis

Segment Information Analysis for the
year 2012



Fueling and Commercial Sites segment





|                                                                    |  | For the year 
    ended December 31 |       |   |      | 
|------------------------------------------------------------------- |  | ----------------------------------- | ----- | - | ---- | 
|                                                                    |  | 2012                                |       |   | 2011 | 
|                                                                    |  | NIS in millions                     |       |   |      | 
|Segment Revenues                                                    |  |                                     | 5,935 |   |      | 
|Segment operating profit                                            |  |                                     | 164.7 |   |      | 
|                                                                    |  |                                     |       |   |      | 
|Segment operating profit (loss) as a percentage of segment revenues |  |                                     | 2.8   | % |      | 





The operating profit for the Fueling and
Commercial Sites segment in the year 2012 amounted to NIS 164.7 million (2.8% of segment revenues) compared to the segment operating
profit of NIS 173.6 million (3.3% of segment revenues) in the corresponding period in 2011. The decrease in the segment operating
profit derived mainly from the reduction of marketing margins and the impact of petrol prices on the value of inventory and was
partially offset by efficiency measures.



99







Supermarkets Segment



|                                                             |  | For the year ended December 31 |       |   |      | 
|------------------------------------------------------------ |  | ------------------------------ | ----- | - | ---- | 
|                                                             |  | 2012                           |       |   | 2011 | 
|                                                             |  | NIS in millions                |       |   |      | 
|Segment Revenues                                             |  |                                | 6,553 |   |      | 
|                                                             |  |                                |       |   |      | 
|Segment operating profit                                     |  |                                | 140   |   |      | 
|                                                             |  |                                |       |   |      | 
|Segment operating profit as a percentage of segment revenues |  |                                | 2.1   | % |      | 



|                                           |  | For the year ended
    December 31 |        
|------------------------------------------ |  | ---------------------------------- | -------
|                                           |  | 2012                               |        
|                                           |  | NIS                                |        
|                                           |  |                                    |        
|                                           |  |                                    |        
|Decrease in same store sales*              |  |                                    | (2.6   
|                                           |  |                                    |        
|Number of stores at end of period          |  |                                    | 212    
|Stores opened during the period            |  |                                    | 10     
|Stores closed during the period            |  |                                    | 9      
|                                           |  |                                    |        
|Total square meters at end of period       |  |                                    | 369,000
|                                           |  |                                    |        
|Square meters added during the period, net |  |                                    | (7,090 
|                                           |  |                                    |        
|Sales per square meter                     |  |                                    | 17,180 
|                                           |  |                                    |        
|Sales per employee (in thousands)          |  |                                    | 812    

* Compared with the same period in the
prior fiscal year.



Operating profit for the Supermarkets
segment in the year 2012 decreased by 17.7% to NIS 140 million (2.1% of segment revenues) compared to the segment operating profit
of NIS 170 million (2.5% of segment revenues) in the corresponding period last year. The decrease in the segment operating profit
was due to the effects of an intensification of competition in the segment which impaired the sales.



100







Non Food Retail and Wholesale Segment



|                                                 |  | For the year ended December 31 |      |    |      | 
|------------------------------------------------ |  | ------------------------------ | ---- | -- | ---- | 
|                                                 |  | 2012                           |      |    | 2011 | 
|                                                 |  | NIS in millions                |      |    |      | 
|Segment Revenues                                 |  |                                | 321  |    |      | 
|                                                 |  |                                |      |    |      | 
|Segment operating loss                           |  |                                | (15  | )  |      | 
|Segment loss as a percentage of segment revenues |  |                                | (4.8 | %) |      | 



The operating loss
for the Non Food Retail and Wholesale segment in the year 2012 amounted to NIS 15 million (4.8% of segment revenues) compared
to the segment operating loss of NIS 29 million (10.0% of segment revenues) in the corresponding period in 2011. The decrease
in the segment operating loss was mainly due to an increase in the revenues in the houseware stores and in stores transferred
from franchise to self-operation and a decrease in expenses derived from a decrease in allowance for doubtful accounts.



Real Estate Segment



|                                                             |  | For the year ended December 31 |     |   |  |     
|------------------------------------------------------------ |  | ------------------------------ | --- | - |  | ----
|                                                             |  | 2012                           |     |   |  | 2011
|                                                             |  | NIS in millions                |     |   |  |     
|Segment Revenues                                             |  |                                | 34  |   |  |     
|Appreciation of Investment Property                          |  |                                | 106 |   |  |     
|Segment operating profit                                     |  |                                | 126 |   |  |     
|Segment operating profit as a percentage of segment revenues |  |                                | 371 | % |  |     



In the year
2012, the Real Estate segment recorded a gain from appreciation of investment property in the amount
of NIS 106 million including NIS 87.6 million from revaluation of the commercial section in the wholesale market in Tel Aviv compared
to NIS 41.9 million in 2011, which including NIS 18.4 million in Kiryat Hasharon and NIS 7.5 million from revaluation of “Hadar
Mall” in Jerusalem in the corresponding period of the previous year.



Operating profit for the Real Estate segment
in the year 2012 increased by 120% to NIS 126 million compared to the segment operating profit of NIS 57 million in the corresponding
period. The increase in the segment operating profit was due to the increase in leased premises net of the gain from appreciation,
as described above.



Discontinued Operations



The following are the operating results
of discontinued operations for the years ended December 31, 2012 and 2011:



101







|                                      |  | Year ended      |      
|------------------------------------- |  | --------------- | -----
|                                      |  | December 31     |      
|                                      |  | 2012            |      
|                                      |  | NIS in millions |      
|Revenues                              |  |                 | 115.2
|Gross profit                          |  |                 | 23.3 
|Operating loss                        |  |                 | (11.5
|Net loss from discontinued operations |  |                 | (22.5



Quarterly Fluctuations



Our business is subject
to fluctuations in quarterly sales and profits. These fluctuations are primarily attributable to increased sales and higher operating
income in the holiday seasons occurring in different quarters from year to year. Thus, for example, in our supermarkets and in
our “Naaman”, “Vardinon” and “Sheshet” chains increased sales attributable to Passover, which
occurs in either March or April, may be realized in either the first or the second quarter, and sales attributable to the
Jewish New Year, which occurs in either September or October, may be realized in either the third or the fourth quarter.
In our filling stations, there is an increase in activity during vacations and holidays.



Many of our expenses
are unrelated to the level of sales, and therefore a relatively modest increase or decrease in sales, whether or not related to
the timing of holidays, tends to have a disproportionately large impact on our profitability.



The following table
sets forth certain quarterly information.



|               |  | Net revenues   |            |  | Operating profit before other gains and
    losses and changes in fair value of investment property | 
|-------------- |  | -------------- | ---------- |  | --------------------------------------------------------------------------------------------------- | 
|               |  | NIS            |            |  | Percentage of 
    Full Year                                                                        | 
|               |  | (In thousands) |            |  |                                                                                                     | 
|2013           |  |                | 11,886,340 |  |                                                                                                     | 
|First quarter  |  |                | 3,089,268  |  |                                                                                                     | 
|Second quarter |  |                | 2,950,099  |  |                                                                                                     | 
|Third quarter  |  |                | 3,010,031  |  |                                                                                                     | 
|Fourth quarter |  |                | 2,836,942  |  |                                                                                                     | 
|               |  |                |            |  |                                                                                                     | 
|2012           |  |                | 12,685,177 |  |                                                                                                     | 
|First quarter  |  |                | 3,108,318  |  |                                                                                                     | 
|Second quarter |  |                | 3,263,187  |  |                                                                                                     | 
|Third quarter  |  |                | 3,236,071  |  |                                                                                                     | 
|Fourth quarter |  |                | 3,077,601  |  |                                                                                                     | 



102







Exchange Rates



At December 31, 2013,
the representative rate of exchange of the NIS to the dollar, as published by The Bank of Israel, was NIS 3.471= $1.00. On March
31, 2014, the representative rate of exchange of the NIS to the dollar, as published by The Bank of Israel, was NIS 3.487 = $1.00.
The table below sets forth, for the periods and dates indicated, certain information concerning the representative exchange rate
of the NIS to the dollar, as published by The Bank of Israel for the years ended December 31, 2009 through 2013:



|Year EndedDecember 31, |  | Period End |      |     | Average Rate(1) |  |      | High |  |  | Low  | 
|---------------------- |  | ---------- | ---- | --- | --------------- |  | ---- | ---- |  |  | ---- | 
|                       |  |            |      |     | (NIS per $1.00) |  |      |      |  |  |      | 
|                       |  |            |      |     |                 |  |      |      |  |  |      | 
|2009                   |  |            | 3.77 | (2) |                 |  | 3.92 |      |  |  | 4.26 | 
|2010                   |  |            | 3.55 | (2) |                 |  | 3.73 |      |  |  | 3.89 | 
|2011                   |  |            | 3.82 | (2) |                 |  | 3.58 |      |  |  | 3.82 | 
|2012                   |  |            | 3.73 | (2) |                 |  | 3.86 |      |  |  | 4.08 | 
|2013                   |  |            | 3.47 | (2) |                 |  | 3.61 |      |  |  | 3.79 | 



(1)	The average of the daily exchange
rates in each year.

(2)	During 2009, 2010, 2011, 2012 and
2013, the US dollar depreciated in value vis-à-vis the NIS by 0.7%, 6%, (7.6%), 2.3% and 7.0%, respectively.



The following table
sets forth certain information concerning the representative exchange rate of the NIS to the dollar, as published for the months
October 2013 through March 2014:



|Month    |  | Period End |      |  | Average Rate(1) |  |      | High |  |  | Low  | 
|-------- |  | ---------- | ---- |  | --------------- |  | ---- | ---- |  |  | ---- | 
|         |  |            |      |  | (NIS per $1.00) |  |      |      |  |  |      | 
|October  |  |            | 3.52 |  |                 |  | 3.54 |      |  |  | 3.57 | 
|November |  |            | 3.52 |  |                 |  | 3.54 |      |  |  | 3.57 | 
|December |  |            | 3.47 |  |                 |  | 3.51 |      |  |  | 3.53 | 
|January  |  |            | 3.50 |  |                 |  | 3.49 |      |  |  | 3.51 | 
|February |  |            | 3.50 |  |                 |  | 3.52 |      |  |  | 3.55 | 
|March    |  |            | 3.49 |  |                 |  | 3.48 |      |  |  | 3.50 | 



(1) The average of the daily exchange rates.



Impact of Inflation and Currency
Fluctuations





Inflation in Israel
increases some of our expenses, which, because of competitive pressures, are generally not offset, fully or as quickly, by increases
in our selling prices and revenues. See “Item 3. Key Information - D. Risk Factors – Risks Related to Our Business
As a Whole - Fluctuations of inflation may adversely affect our financial expenses and operating income” and “Item
3. Key Information - D. Risk Factors – Risks Related to Our Business As a Whole - Related to Our Business As a Whole - Currency
fluctuations might affect our operating results and translation of operating results.”





103







Dor Alon is exposed
to fluctuations in the US dollar - NIS exchange rate due to credit that Dor Alon obtains from its suppliers (mostly from Oil Refineries
Ltd., which is linked to the US dollar). In addition, any devaluation of the NIS against various non-Israeli currencies in which
we or our suppliers pay for imported goods has the effect of increasing the selling price of those products which we sell in Israel
in NIS and affects our operating results. In particular, a devaluation of the NIS against the Chinese currency could significantly
increase the cost of production of our non-food products at our Bee Group stores and the selling price of those products to our
customers. An increase in price of imported goods by our suppliers can usually be offset by an increase in the consumer price
of such goods. This devaluation would have a greater effect on our non-food retail business because a higher proportion of the
goods that we sell in our Bee Group stores is acquired from suppliers overseas. This devaluation would also cause an increase
in our expenses as recorded in our NIS denominated financial results even though the expenses denominated in non-Israeli currencies
will remain unchanged. Changes in interest rates, in the Israeli consumer price index and in the US dollar - NIS exchange rate
could materially adversely affect our financial results.In addition, we have loans and debentures in NIS, some
of which are subject to floating interest rates and some are linked to the Israeli consumer price index. Due to these loans and
to the consumer price index linked debentures issued by us, we are exposed to changes in bank interest rates and in the Israeli
consumer price index. We also have rent expenses and other operating expenses which are linked to the Israeli consumer price index.
Due to these expenses, we are exposed to the changes inthe Israeli consumer price index.



In addition, because
our financial results are denominated in NIS and are translated into US dollars for the convenience of US investors, currency
fluctuations of the NIS against the US dollar may impact our US dollar translated financial results.



Political Conditions



We and all of our
subsidiaries are incorporated under Israeli law and our principal offices and operations are located in the State of Israel. Political,
economic, security and military conditions in Israel directly affect our operations. Since the establishment of the State of Israel
in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors. A state of hostility, varying from
time to time, in intensity and degree, has led to security and economic problems for Israel. Israel signed a peace treaty with
Egypt in 1979 and a peace treaty with Jordan in 1994. Israel has not entered into any peace agreements with Syria and Lebanon.
In the last few years, the establishment of a Hamas government in Gaza has created additional unrest and uncertainty in the region
and has increased hostilities between Israel and the Palestinians. These hostilities have included terrorist acts in Israel and
military operations in the West Bank and Gaza. During the last decade, there has been a high level of violence between Israel
and the Palestinians, including missile strikes by Hamas against Israel.



The future of Israel’s
relations with its Arab neighbors and the Palestinians is uncertain and several countries, companies and organizations continue
to restrict business with Israel and with Israeli companies. We believe that in the past, these practices have not had a material
adverse effect on us. However, we could be adversely affected by adverse developments in Israel’s relationships with its
Arab neighbors and the Palestinians, or by restrictive laws, policies or practices directed towards Israel or Israeli businesses.
In addition, ongoing violence between Israel and its Arab neighbors and Palestinians may have a material adverse effect on the
Israeli economy, in general, and on our business, financial condition or results of operations. In particular, in recent conflicts,
missile attacks have occurred on civilian areas, which could cause substantial damage to our infrastructure network, reducing
our ability to continue serving our customers as well as our overall network capacity. In addition, in the event recent political
unrest and instability in the Middle East, including changes in some of the governments in the region, causes investor concerns
in a reduction in the value of the shekel, our expenses in non-shekel currencies may increase, with a material adverse affect
on our financial results.



104









Most of Bee Group’s
imports during 2012 and 2013 were from suppliers located in China. Because most of the products sold by the Bee Group are manufactured
overseas and imported from China, its activity may be affected by changes in the political and economic conditions in China. In
addition, because the Bee Group acquires most of its products from suppliers outside of Israel, and most of its products are imported
via the sea, a prolonged general strike, shutdown or a disruption of any of the Israeli ports for an extended period of time,
including as a result of a military conflict, would affect our ability to import such products or increase their prices. In addition,
since the peak selling season of some of our Bee Group stores is during the holidays, disruptions in the ports during or adjacent
to such holiday seasons may adversely affect our sales and financial results.



Economic Conditions



All of our supermarket
sales are made in Israel and we acquire a substantial majority of the goods that we sell from Israeli suppliers. Consequently,
our financial performance is dependent to a significant extent on the economy of Israel. During 2011 and 2012, Israel’s
Gross Domestic Product rose by 4.6% and 3.4%, respectively. Reports of the Israeli Central Bureau of Statistics indicate that
during 2013 Israel’s Gross Domestic Product rose by 3.3%. We believe that, despite the economic growth in 2012 and
in 2013, our customers continue to be cautious in their buying patterns and continue to choose to make their purchases at low-price
and hard discount stores, which have a lower profit margin. As a result, we have continued to expand our low-price and hard discount
store formats. According to Nielsen “Summary year 2013 in the consumption of goods market in Israel”, the quantity
of food, beverages, home products and near food products purchased by consumers in Israel declined by 1% in 2013 as compared to
2012. This trend has continued in the beginning of 2014 according to a report by Nielsen issued in March 2014.



The slowdown in
the growth of the Israeli economy has affected our non-food retail business by causing a slowdown in the growth of private consumption,
which could affect the growth of our houseware, home textile and baby and young children accessories businesses.



Trade Agreements



Israel is a member
of the United Nations, the International Monetary Fund, the International Bank for Reconstruction and Development, the International
Finance Corporation, and the Organization for Economic Co-operation and Development, also known as, OECD. Israel is a signatory
to the General Agreement on Tariffs and Trade, which provides for reciprocal lowering of trade barriers among its members. In
addition, Israel has been granted preferences under the Generalized System of Preferences from the United States, Australia, Canada
and Japan. These preferences allow Israel to export the products covered by these programs either duty-free or at reduced tariffs.
In addition, Israel, the EU (known as the European Union), and the European Free Trade Association have a free trade agreement.



105







Corporate Tax Rate



We and our subsidiaries
are subject to corporate tax in Israel at a flat rate of 26.5% in 2014 (up from 25% in 2013).



For further tax information,
see “Item 10. Additional Information - E. Taxation -Israeli Tax Considerations.”



Critical Accounting Policies and Estimates



We have chosen accounting
policies that we believe are appropriate to accurately and fairly report our operating results and financial position, and we
apply those accounting policies in a consistent manner. Our significant accounting policies are summarized in Note 4 to the Consolidated
Financial Statements.



We base our estimates
on historical experience, where applicable, and on other assumptions that we believe are reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and could
have a material impact on our reported results.



We believe that the
following accounting policies are the most critical in the preparation of our financial statements because they involve the most
difficult, subjective or complex judgments about the effect of matters that are inherently uncertain.



Impairment of non financial
assets



We review at each
statement of financial position date whether any events have occurred or changes in circumstances have taken place which might
indicate that there has been an impairment of property and equipment and identifiable intangibles. When such indicators of impairment
are present, we evaluate whether the carrying value of the asset in our accounts can be recovered from the cash flows anticipated
from that asset, and, if necessary, record an impairment provision necessary to adjust the carrying amount to the recoverable
amount.



When it is not possible
to assess whether an impairment provision is required for an individual asset which does not generate independent cash flows,
the need for such a provision is assessed in relation to the recoverable value of the cash-generating unit to which that asset
belongs. For a cash-generating unit to which goodwill has been allocated, any impairment loss relating to that unit initially
reduces the goodwill and the balance reduces the carrying amount of the other assets.



106







We evaluate impairment
separately for each store or the cash-generating unit to which the store belongs when the cash inflows of one store are dependent
on the cash inflows of another store in the same geographic area. In evaluating impairment, we consider corporate assets relating
to the stores or other cash-generating units as well as indirect costs that are directly attributable, or that can be reasonably
and consistently allocated, to the stores or cash generating units.



The recoverable amount
of an asset is the higher of the net selling price of the asset’s fair value less cost to sell and its value in use. These
calculations require the use of estimates. In calculating the impairment for the reported years, based on discounted expected
future cash flows, we used a discount rate before tax for each cash-generating unit (CGU). For discount rates used by the Company,
see note 17b to the Consolidated Financial Statements.



In 2013, we recorded
impairment provisions resulting in the net amount of NIS 4.5 million. In 2012, there were no impairment provisions. In 2011, we
recorded impairment provisions resulting in the net amount of NIS 6.1 million. Impairment provisions or the reversal of such provisions
are included in the income statement within Other gain or losses.



Application of alternative
assumptions and definitions, such as reviewing long-lived assets for impairment at a different organizational level, could produce
significantly different results.



Goodwill



Goodwill is tested
annually for impairment and when circumstances indicate that the carrying value may be impaired, goodwill is carried at cost less
any accumulated impairment losses. Impairment losses on goodwill are not reversed.



Goodwill is allocated
to cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which
the goodwill arose.



Goodwill is allocated
to six identified groups of cash-generating units (“CGUs”). Those groups of CGUs are embedded within three reportable
segments – Supermarkets (1 group of CGUs), Non-Food Retail and Wholesale (two groups of CGUs), and Fueling and Commercial
Sites (three CGUs).



107







The amounts of goodwill
allocated to the CGU are as follows:



|                                            |  | December 31      |        
|------------------------------------------- |  | ---------------- | -------
|                                            |  | 2012             |        
|                                            |  | NIS in thousands |        
|Supermarkets                                |  |                  | 159,113
|Non - Food retail and wholesale:            |  |                  |        
|Houseware                                   |  |                  | 111,179
|Leisure(1)                                  |  |                  | -      
|Fueling and Commercial Sites:               |  |                  |        
|Filling Stations and Convenience
    Stores |  |                  | 500,065
|Direct Marketing                            |  |                  | 18,000 
|Jet Fuel                                    |  |                  | 14,000 
|                                            |  |                  | 802,357



| | (1) | As of December 31, 2013, the goodwill
                                         is included in group of assets held for sale, and the recoverable amounts are an examined
                                         for all the group assets.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The recoverable amount
of a CGU is determined based on value-in-use calculations. These calculations use pre-tax cash flow projections based on financial
budgets approved by management and management estimation covering a five-year period. Cash flows beyond the five-year period are
extrapolated using the estimated growth rates stated below. The growth rate does not exceed the long-term average growth rate
for the business in which the CGU operates.



The key assumptions
used for value in-use calculations are as follows:



|Segment               |  | Supermarkets |      |  | Non - Food retail
    and wholesale | 
|--------------------- |  | ------------ | ---- |  | ----------------------------------- | 
|CGU                   |  | Supermarkets |      |  | Houseware                           | 
|                      |  | %            |     
|December 31, 2013:    |  |              |      |  |                                     | 
|Expected gross margin |  |              | 26.9 |  |                                     | 
|Growth rate (1)       |  |              | 0    |  |                                     | 
|Discount rate (2)     |  |              | 10.3 |  |                                     | 
|                      |  |              |      |  |                                     | 
|December 31, 2012:    |  |              |      |  |                                     | 
|Expected gross margin |  |              | 27.0 |  |                                     | 
|Growth rate (1)       |  |              | 0.25 |  |                                     | 
|Discount rate (2)     |  |              | 9.7  |  |                                     | 



|Segment                   |  | Fueling and commercial sites  |    
|------------------------- |  | ----------------------------- | ---
|CGU                       |  | Filling and convenience sites |    
|                          |  | %                             |    
|December 31, 2013:        |  |                               |    
|Expected operating profit |  |                               | 3  
|Growth rate (1)           |  |                               | 2  
|Discount rate (2)         |  |                               | 9.5
|                          |  |                               |    
|December 31, 2012:        |  |                               |    
|Expected operating profit |  |                               | 3.6
|Growth rate (1)           |  |                               | 2.0
|Discount rate (2)         |  |                               | 9.4



108







| | (1) | Weighted average growth rate used to
                                         extrapolate cash flows beyond the budget management estimates covering a five-year period.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Pre-tax discount rate applied to cash
                                         flow projections.
| | --- | ------------------------------------------------------------------------------------------------



These assumptions
have been used for the analysis of each CGU.



The key assumptions
used for the sensitivity analysis regarding the impairment testing were the discount rate, utilizing the weighted average cost
of capital (WACC) and the growth rate of the CGU. The WACC for each CGU was determined based on the data derived from a number
of public Israeli companies that are active in those fields (fuel selling, supermarkets and non food) including the cost of capital
and debt-raising relevant for each kind of activity. The growth rate was determined based on historical growth rate within the
industries and based on the Company’s own history, taking into account the growth of the Israeli population.



The annual impairment
review requires the extensive use of accounting judgments and financial estimates. Application of alternative assumptions
and definitions, such as reviewing goodwill for impairment at a different organizational level, could produce significantly different
results. Similar to our policy on impairment of long-lived assets, the cash flow projections embedded in our goodwill impairment
reviews can be affected by several items, such as inflation, business valuations in the market, the economy and market competition.



We performed a sensitivity
analysis for the key assumption used in our annual goodwill impairment test and determined that an increase in the pre-tax discount
rate of 1.0% and a 1% decrease in the growth rate would result in the estimated recoverable amount of Houseware CGU falling below
its carrying amount by NIS 18 million and NIS 12 million, respectively, beyond an impairment of NIS 4.5 million included in our
results. The recoverable amount of our other CGUs are substantially higher than the carrying value.



Investment property
and investment property under development



Under IAS 40 “Investment
Property,” investment property is initially valued at cost, including costs directly attributable to the acquisition. Thereafter,
IAS 40 allows us to measure the value of our investment property (i) at cost less depreciation and impairment or (ii) at fair
value. We measure the value of investment property at fair value. Gains or losses arising from changes in fair value of our investment
property are recognized in profit or loss when they arise. Accordingly, such changes can have a significant impact on our profit
or loss. Investment properties are not systematically depreciated.



109







Fair value of vacant
plots of land is measured using valuation techniques such as the comparative method described below, while the valuation model
is based on the net price per square meter of comparable properties deriving from observable transactions in an active market,
including various adjustments such as size, location and other factors.



Investment property
under construction is presented at fair value, on the date fair value can be reliably measured. So long as investment property
cannot be valued, investment property under construction will be presented at costs invested in the project. Valuation is based
on the estimate of the investment property fair value after construction is complete, net of the present value of the estimated
construction costs expected to be incurred for the purpose of its completion while taking into account the capitalization rate
adjusted to the relevant and typical risks of the property on the date construction is complete. Construction cost per square
meter varies among the various projects according to the designated use, finish level and other factors. As of December 31, 2013,
substantially all of our investment property under development was measured at fair value.



Fair value of investment
property was determined by independent appraisers for the year ended December 31, 2013. Fair value of investment property and
investment property under development, is determined by the appraisers and based on market conditions using either



| | (1) | The Comparative Method (i.e. based
                                         on comparison data for similar properties in the vicinity with similar uses, including
                                         required adjustments for location, size or quality),
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | The Discounted Cash Flow Method
                                         (less cost to complete and developer profit in the case of investment property under
                                         development, also referred to as Residual Method) or
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | The Income Capitalization Method.
| | --- | ---------------------------------



When using the Comparative
Method we and the external valuation experts rely on market prices, applying necessary adjustments, to the extent that such information
is available. However, when such information is not available, we use valuation techniques (DCF including Residual Method, or
Income Capitalization) based on current market yields to which necessary adjustments are applied. In order to estimate future
cash flows and the appropriate discount rate, the Discounted Cash Flow Method requires assumptions regarding the required yield
rates on our properties, future rental prices, occupancy levels, renewal of leases, probability of lease of vacant space, property
operating expenses, the financial strength of tenants and any cash outflow that would be expected in respect of future maintenance.
Changes in the assumptions that are used to measure the investment property may lead to a change in the fair value. See Note 4(2)
to our audited consolidated financial statements included elsewhere in this Annual Report for a sensitivity analysis regarding
changes in the discount rates used in our fair value estimates.



110







Provisions for claims



The provisions for
legal claims are recorded based on the estimates of our management (after consulting with legal counsel) as to the likelihood
that cash flows will be required to settle these liabilities and as to the discounted amounts of such cash flows.



Our assessments are
based on the Company’s history in these cases, on the stage of these claims and on the experience of the Company’s
legal advisers. The outcome of the legal cases in court could be different from our assessments.



Income taxes and deferred
taxes



There are many transactions
and calculations for which the ultimate tax determination is uncertain. We recognize liabilities for anticipated tax issues based
on estimates as to whether additional taxes will be due. Where the final outcome of these matters differs from the amounts that
were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period
in which such determination is made.



In addition, we recognize
deferred tax assets and tax liabilities based on the difference between the carrying value of such assets and liabilities and
their amount for tax purposes. We continually assess the recoverability of deferred tax assets based on historical taxable income,
expected taxable income, the expected timing of the reversals of temporary differences and the application of tax planning strategies.
If we are unable to generate sufficient future taxable income or actual results differ from our other assumptions, we might be
required to reduce our deferred tax assets or to increase our deferred tax liabilities, which will increase our effective tax
rate, and negatively affect our results.



Property, plant and
equipment



Property, plant and
equipment also represent a significant proportion of the Company’s total assets. Therefore the estimates and assumptions
made to determine their carrying value and related depreciation are critical to our financial position and performance.



The charge in respect
of periodic depreciation is derived after determining an estimate of an asset’s expected useful life and the expected residual
value at the end of its life. Increasing an asset’s expected life or its residual value would result in a reduced depreciation
charge in the income statement.



The useful lives of
our assets are determined by management at the time the asset is acquired and reviewed at least annually for appropriateness.
The lives are based on historical experience with similar assets as well as anticipation of future events, which may impact their
life, such as changes in technology.



Recently
issued accounting pronouncements



For information
on recently issued accounting pronouncements, see note 2ae to our consolidated financial statements.



111







Liquidity and Capital
Resources



Sources and Uses
of Cash



Sources.



Our principal source
of liquidity is the cash generated by our operations. Both Alon Blue Square and its significant subsidiaries have generally generated
sufficient cash from their operations to satisfy their respective operating requirements. The available cash resources of Mega
Retail, Dor Alon, BSRE, Bee Group and their subsidiaries have historically been used, and are expected to continue to be used,
to finance the expansion of these companies. We believe our working capital is sufficient for our present requirements.



Cash generated by
operations was approximately NIS 604.7 million, or $174.2 million, in 2013, an increase of 20.4% compared with approximately NIS
502.2 million in 2012. The main increase derived from a decrease in working capital needs following measures taken to reduce days
sales outstanding and reduction of inventories in the amount of NIS 212.0 million (US$ 61.1 million) and from tax refunds in 2013
of NIS 44.3 million (US$ 12.8 million) compared to tax refunds of NIS 18.7 million in 2012 offset by a decrease in operating profit
of NIS 135.0 million (US$ 38.9 million).



In 2013, approximately
35% of our sales were paid for with cash, checks and gift certificates issued by the Company at the point-of-sale, and approximately
65% of our sales were paid for with credit cards.



During 2013, the average
time period that we held inventory was 22 days and the average time period within which our accounts receivable were paid was
34 days. By contrast, as of such date the average time period for payment of our accounts payable was 43 days. Accordingly, increased
capital resources are not required to support an increase in our receivables or inventories because we generally sell our products
before we pay our suppliers.



Other
sources of liquidity are long-term and short-term borrowing from banks, issuance of debentures and others. During 2013, we received
long-term loans from banks in the amount of NIS 392.0 million, or $112.9 million and issuance of debentures of NIS 732.2 million
or $210.9 million. For information regarding outstanding balances and repayment information see “Item 5. Operating and Financial
Review and Prospects – Business Combinations – Long-Term Loans from Banks and other Financial Institutions”
and “– Debentures.”



The principle sources
of liquidity of Alon Blue Square are dividends from subsidiaries and inter company balances with subsidiaries, management fees
received from subsidiaries in consideration for management services performed by Alon Blue Square, long-term and short-term borrowing
from banks, issuance of debentures and others. During 2013, Alon Blue Square issued debentures in the amount of NIS 162.6 million
or $46.8 million.



112







Uses.



During 2013, we
repaid long-term loans in the amount of NIS 263.2 million, or $75.8 million, debentures in the amount of NIS 601.1 million, or
$173.2 million, short-term borrowing from banks in the amount of NIS 301.8 million or $86.9 million and interest in the amount
of NIS 250.4 million, or $72.1 million.



In recent years, we
funded our renovation, remodeling and expansion programs primarily mainly from cash generated by our operations and from long
and short-term loans from banks, issuance of debentures and others. During 2013, we invested approximately NIS 243.6 million,
or $70.2 million, in property and equipment, intangible assets, investment property and payments on account of real estate, a
10.6% decrease from our 2012 investment of NIS 272.4 million. Of our investment in property and equipment, intangible assets
and investment property in 2013, we invested NIS 88.8 million, or $25.6 million, in land and buildings, including land that
we leased and investment property, as compared with NIS 62.0 million in 2012. During 2013 and 2014, we intend to open approximately
seven to ten filling stations at a cost of approximately NIS 4 million to NIS 6 million per filling station. We intend to finance
our store development, renovation, modeling, expansion and acquisitions mainly from cash generated by our operations and from
borrowings from banks and others.



Business combinations



In September 2008,
we acquired an additional 25% of the shares of Bee Group for NIS 35.4 million, or $9.8 million (at that time), and in October
2010, we acquired the remaining 15% of the shares of Bee Group for approximately NIS 24.5 million, or $6.8 million (at that time).



In November 2008,
pursuant to a cash tender offer, we completed the acquisition of the Mega Retail shares that were not previously held by us, for
NIS 150.7 million, or $40.2 million (at that time).





In October 2010, we
acquired approximately 80% of the outstanding shares of Dor Alon in exchange for the issuance of 20,327,710 ordinary shares. For
further information, see “Item 7 – Major Shareholders – B. Related Party Transactions - Arrangements between
Alon Blue Square and Alon - Acquisition of Controlling Share in Dor-Alon Energy In Israel (1988) LTD.”





In November 2011,
Bee Group issued a full tender offer to purchase 4.8 million shares of Naaman that were not held by the group for NIS 6.53 ($1.8)
per share. Bee Group received acceptance notices for 1.48 million shares (10.2%) for NIS 9.7 million ($2.6 million).



As of March 31, 2014,
Bee Group held approximately 77.51% of the outstanding shares of Naaman.



113







Dividends



The following table
sets forth dividends paid by the Company from January 1, 2009 until the date of this Annual Report:



|Date of payment   |  | Amount per share  |  | Total amount(1)                               
|----------------- |  | ----------------- |  | ----------------------------------------------
|December 29, 2011 |  | NIS 1.13 ($0.30)  |  | NIS 75 million (approximately $20.2 million)  
|October 18, 2010  |  | NIS 12.31 ($3.39) |  | NIS 800 million (approximately $220.5 million)
|February 25, 2010 |  | NIS 1.70 ($0.45)  |  | NIS 75 million (approximately $19.8 million)  



| | (1) | In accordance with
                                         the representative rate of exchange of the NIS to the dollar as of the date of the payment
                                         of the dividend.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Pursuant to the Israeli
Companies Law, dividend distributions are limited to the greater of retained earnings or earnings generated over the previous
two years, according to our then last reviewed or audited financial statements, provided that the date of the financial statements
is not more than six months prior to the date of the distribution, or we may distribute dividends that do not meet such criteria
only with court approval. As of December 31, 2013, the Company does not have any earning to distribute as dividends.



The financial covenants
in our subsidiaries’ loan agreements do not restrict our subsidiaries from transferring funds to Alon Blue Square in the
form of cash dividends, loans or advances, subject to any legal limitations, except for Bee Group, which is restricted from transferring
funds to the Company in the form of dividends; however Bee Group is not a significant subsidiary. As of December 31, 2013, we
did not have any earnings to distribute as a dividend.



Dividends paid
by BSRE until the date of this Annual Report:



In March 2011, the
Board of Directors approved a decision to adopt a policy for the years 2011 and 2012, according to which BSRE will distribute
dividends in the amount of no less than 25% and not higher than 75% of the net profits of BSRE in each year, without taking into
account revisions in the net fair value of real estate for investment. Such distributions are subject to the “profit test”
under the Israeli Companies Law at the relevant dates and to other decisions of BSRE’s board of directors, including decisions
designating a different use of BSRE’s profits and/or a change in the BSRE dividend policy. In March 2013, the Board of Directors
approved a decision to extend the dividend policy for the years 2013 and 2014.



114







The following table
sets forth dividends paid by BSRE from January 1, 2009 until the date of this Annual Report



|Date of payment   |  | Amount per share |  | Total amount(1) (2)                             
|----------------- |  | ---------------- |  | ------------------------------------------------
|October 28, 2013  |  | NIS3.18 ($0.9)   |  | NIS 40 million (approximately $11.3
    million)
|April 23, 2013    |  | NIS 3.98 ($1.1)  |  | NIS 50 million (approximately $13.8 million)    
|December 25, 2011 |  | NIS 2.71 ($0.71) |  | NIS 34 million (approximately $9.0 million)     
|April 13, 2011    |  | NIS 3.82 ($1.1)  |  | NIS 47.8 million (approximately $14.0 million)  
|March 31, 2010    |  | NIS 4.6 ($1.3)   |  | NIS 57.6 million (approximately $15.5 million)  
|April 20, 2009    |  | NIS 1.35 ($0.32) |  | NIS 16.8 million (approximately $4.0 million)   



| | (1) | In accordance with
                                         the representative rate of exchange of the NIS to the dollar as of the date of the payment
                                         of the dividend.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Alon Blue Square’s
                                         share in the distribution of the dividends was approximately between 74.71% - 80%.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------



Buy Back by BSRE



In February 23, 2014,
BSRE completed a buyback by way of tender offer on a pro rata basis of an aggregate 979,220 of its ordinary shares, representing
7.8% of the outstanding shares and voting rights in BSRE for an aggregate amount of NIS 160 million. The tender offer was responded
by shareholders holding 99.2% of BSRE shares, including the Company. The Company’s share in the purchase offer’s consideration
was NIS 120 million. The holding of the Company in BSRE, after the purchase offer, is 74.71%.



Dividends paid
by Dor Alon since the time Alon Blue Square acquired Dor Alon and until the date of this Annual Report:



|Date of payment   |  | Amount per share |  | Total amount(1) (2)                         
|----------------- |  | ---------------- |  | --------------------------------------------
|October 28, 2013  |  | NIS 1.74 ($0.49) |  | NIS 25 million (approximately $7.1 million) 
|April 9, 2013     |  | NIS 1.39 ($0.38) |  | NIS 20 million (approximately $5.5 million) 
|December 19, 2011 |  | NIS 2.08 ($0.55) |  | NIS 30 million (approximately $7.9 million  
|April 14, 2011    |  | NIS 1.73 ($0.5)  |  | NIS 25.0 million (approximately $7.2 million



| | (1) | In accordance with
                                         the representative rate of exchange of the NIS to the dollar as of the date of the payment
                                         of the dividend.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Alon Blue Square’s
                                         share in the distribution of the dividends was approximately 80%.
| | --- | -----------------------------------------------------------------------------------------------------------------------------



115







Short-Term
Credit from Banks and Others



The following table
sets forth the principal terms of our short-term credit from banks and others:



|                                      |  | December 31      |          
|------------------------------------- |  | ---------------- | ---------
|                                      |  | 2012             |          
|                                      |  | NIS in thousands |          
|                                      |  |                  |          
|Bank overdrafts                       |  |                  | 4,934    
|Bank loans                            |  |                  | 1,036,755
|Commercial paper                      |  |                  | 87,837   
|Current maturities of long-term loans |  |                  | 247,581  
|                                      |  |                  | 1,377,107



The
short term credit described in the table above includes NIS 270.4 million of short term credit undertaken by the Alon Blue Square
in the aggregate amount of NIS 288.1 million as of December 31, 2013 and NIS 255.7 million as of December 31, 2012.



Long-Term Loans from
Banks and other Financial Institutions



The following table
sets forth the principal terms of our long-term loans from banks and other financial institutions:



|                                                           |  | December 31      |           |  | Annual Interest Rate | 
|---------------------------------------------------------- |  | ---------------- | --------- |  | -------------------- | 
|                                                           |  | 2012             |           |  | 2013                 | 
|                                                           |  | NIS in thousands |           |  | %                    | 
|In Israeli currency:                                       |  |                  |           |  |                      | 
|Linked to the Israeli CPI bearing a fixed interest rate    |  |                  | 669,258   |  |                      | 
|Linked to the Israeli CPI bearing a variable interest rate |  |                  | 211,218   |  |                      | 
|Unlinked and bearing a fixed interest rate                 |  |                  | 86,804    |  |                      | 
|Unlinked and bearing a variable  interest rate             |  |                  | 414,737   |  |                      | 
|                                                           |  |                  |           |  |                      | 
|Total                                                      |  |                  | 1,382,017 |  |                      | 
|                                                           |  |                  |           |  |                      | 
|Less - current maturities                                  |  |                  | 247,581   |  |                      | 
|                                                           |  |                  | 113,436   |  |                      | 



(1) Weighted
average rate as of December 31, 2013.



116









The loans
described in the table above include loans undertaken by Alon Blue Square in the aggregate amount of approximately NIS 159.6
million. The loan agreements contain undertakings by Bee Group and its subsidiaries, Dor Alon and its subsidiaries and BSRE
to meet certain financial covenants. The financial covenants in Bee Group’s loan agreements include a limitation on Bee
Group and its subsidiaries’ ability to distribute dividends to Alon Blue Square. As of December 31, 2013, Bee Group and
its subsidiaries did not meet the financial covenants in respect of its loans amounting to NIS 70 million (out of which
NIS 50 million are presented among non-current liabilities). Waivers were granted by the bank lenders, during the fourth
quarter, in respect of these balances. BSRE’s loan agreements in the amount of NIS 197.5 million include a
financial covenantthat the maximum ratio between the outstanding debt and the rent
income from BSRE’s charged properties does not exceed 7.7. As of December 31, 2013, BSRE had met these financial
covenants contained in its loan agreements. A loan agreement in the amount of NIS 94.1 million with a subsidiary of Dor Alon
includes financial covenantsthat the maximum ratio between the outstanding debt and the
EBITDA shall not exceed 5.0, that the minimum equity of such subsidiary will not be less than NIS 47 million and that the
EBITDA of such subsidiary will not be less than NIS 19 million. As of December 31, 2013, such subsidiary of Dor Alon had met
the financial covenants contained in its loan agreements.



Debentures



The following table
summarizes debentures outstanding as of December 31, 2012 and 2013 issued by (i) the Company, (ii) BSRE, of which we owned 74.71%
of the shares as of March 31, 2014, and (iii) Dor Alon, of which we owned 78.43% of the shares as of March 31, 2014:



|                            |  | December 31      |          
|--------------------------- |  | ---------------- | ---------
|                            |  | 2012             |          
|                            |  | NIS in thousands |          
|Convertible debentures:     |  |                  |          
|Issued by BSRE              |  |                  | 119,560  
|Less - current maturities   |  |                  | 29,158   
|                            |  |                  | 90,402   
|                            |  |                  |          
|Non-convertible debentures: |  |                  |          
|Issued by the Company       |  |                  | 259,820  
|Issued by BSRE              |  |                  | 1,575,182
|Issued by Dor Alon          |  |                  | 740,857  
|                            |  |                  | 2,575,859
|                            |  |                  |          
|Less - current maturities   |  |                  | 527,030  
|                            |  |                  | 2,048,829



117







Alon Blue Square
Debentures



In August 2003,
we issued to institutional investors NIS 400 million in aggregate principal amount of unsecured 5.9% debentures, half of which
(Series B) were convertible into our ordinary shares and were fully converted or repaid until August 2011. All the debentures
are linked (principal and interest) to the Israeli CPI, but in the event the Israeli CPI is less than the base index (index known
at date of issuance), the amount of the debentures will not be adjusted below the base index.



Alon Blue
Square Series A Debentures



The principal of
the Series A Debentures is repayable in three equal annual installments on August 5 of each of the years 2012 to 2014, and the
interest is payable semi-annually. Notwithstanding the above, under the terms of the Debentures, on August 5 of each of the years
2006, 2008 and 2010, the holders of the Series A Debentures were entitled to early redemption of the principal provided that on
each of such dates we do not repay more than one third of the par value of the Series A Debentures outstanding as of that date.



Other terms of
the Alon Blue Square Series A Debentures



The terms of the
Series A debentures provide that in the event that our ordinary shares are delisted from trading on the Tel Aviv Stock Exchange,
or TASE, and/or in the event that our ordinary shares are no longer held by the public and/or in the event that S&P-Maalot
reduces our rating to BBB or lower, then within three months from one of the abovementioned events we, subject to the then prevailing
law, will offer to acquire the debentures at a price equivalent to the price of debentures of the same type reflecting a return
of 2.5% in excess of the return on Israeli Government debentures with an average life similar to the remaining average life of
the debentures of that series as of the date of the offer, but in no event will the price exceed the adjusted carrying value of
the debentures of that series.



Alon
Blue Square Series C Debentures



In November 2010,
we issued NIS 100 million in aggregate principal amount of Series C CPI linked debentures bearing annual fixed interest of 2.5%
payable in two semi-annual payments on May 4 and November 4 in each of the years 2011 to 2022. The principal will be repaid in
12 equal payments on November 4 of each of the years 2011 to 2022 (inclusive). The debentures were issued at a discount of 3.2%
and for a consideration of NIS 96.8 million. All the debentures are linked (principal and interest) to the Israeli CPI, but in
the event the Israeli CPI is less than the base index (index known at date of issuance), the amount of the debentures will not
be adjusted below the base index.



On April 11, 2012,
we issued additional Series C debentures in the framework of a private placement in the aggregate amount of NIS 35 million for
an aggregate amount of NIS 31.3 million.



118







On July 10, 2013,
we issued additional Series C debentures in the framework of a private placement in the aggregate amount of NIS 100 million for
an aggregate amount of NIS 99.3 million.



On November 15,
2013, we issued additional Series C debentures in the framework of a private placement in the aggregate amount of NIS 62 million
for an aggregate amount of NIS 63.9 million.





On April 3, 2014,
the Series C debentures series was expanded by a private offering of NIS 150 million for an aggregate amount of NIS 151.9 million.





Ratings of Alon
Blue Square Debentures



On January 25, 2012,
Midroog, an Israeli rating agency and 51% subsidiary of Moody’s Investors Services Inc., decreased the rating of Series
A and C Debentures from “A1” rating to “A2/Stable”. In addition, Midroog applied the rating of “A2/Stable”
for potential future issuances of up to NIS 200 million Series C Debentures by way of expansion of the current Series C Debentures.



On each of June
26, 2013 and November 14, 2013, Midroog announced that it had affirmed the “A2”/negative outlook rating for an issuance
of debentures of up to NIS 100 million in principal amount through the expansion of the Series C Debentures.



In
March 18, 2014, Midroog ratified the rating of P1 for commercial securities of the Company and also lowered the rating of Series
A and C Debentures of the Company to A3 stable.



BSRE Debentures



In August 2006, BRSE
issued 2.5 million BRSE ordinary shares of NIS 1 par value each, together with NIS 100 million par value of registered
BRSE Series A debentures, which are convertible into BRSE ordinary shares, and NIS 650 million par value of registered BRSE
Series B debentures. In September 2008, BSRE completed the issuance of an additional NIS 125 million in principal amount of unsecured
non-convertible (Series B) debentures to institutional investors. The terms of these debentures are identical to the terms of
the non-convertible (Series B) debentures issued by BSRE in August 2006. In October 2009, BSRE issued NIS 300 million par value
of registered Series C debentures. In July 2010, BSRE issued NIS 110 million par value of registered BSRE Series D debentures.
On January 4, 2012, BSRE completed the issuance of an additional NIS 150 million in principal amount of Series D debentures to
institutional investors in Israel, in consideration for 98.5% of its par value, reflecting proceeds of 5.8%. The terms of these
debentures are identical to the terms of the Series D debentures issued by BSRE on May 20, 2009. On August 28, 2012, BSRE completed
the issuance of an additional NIS 49 million in principal amount of Series D debentures to institutional investors in Israel in
consideration for 98.0% of its par value, reflecting proceeds of 6.0%. The terms of these debentures are identical to the terms
of the Series D debentures issued by BSRE on May 20, 2009. On November 19, 2012, BSRE completed the issuance of an additional
NIS 110 million in principal amount of Series D debentures to institutional investors in Israel in consideration for 107% of its
par value, reflecting proceeds of 4.8%. The terms of these debentures are identical to the terms of the Series D debentures issued
by BSRE on May 20, 2009. From May to August, 2013, BSRE issued additional Series D debentures in the aggregate principal amount
of NIS 276 million for an aggregate consideration in the amount of NIS 324 million. On October 30, 2013, BSRE issued new Series
E Debentures in the aggregate face amount of NIS 120 million for aggregate consideration of NIS 121.7 million. On January 27,
2014, BSRE completed the exchange of NIS 200 million par value of Series B debentures (recorded in the books at a liability value
of NIS 238 million) pursuant to a partial exchange tender offer against an expansion of Series E Debentures at a par value of
NIS 265 million.



119







BSRE Series A Debentures



The BSRE Series
A debentures are to be redeemed in four equal annual installments on August 31 of each of the years 2013 to 2016. The Series A
debentures are linked (principal and interest) to the known Israeli CPI and bear interest at an annual rate of 6.25%, which is
payable semi-annually. The Series A debentures are convertible into BSRE ordinary shares from the date that they are first listed
for trade on the stock exchange through August 16, 2016, except during the periods from August 17 through August 31 in each of
the years 2013 to 2015. The conversion rate is subject to adjustments in the event of distribution of cash dividends. Until August
31, 2008, the conversion was effected at the rate of NIS 96.83 par value of registered Series A debentures (following adjustments
due to distributions of cash dividends) for each ordinary share of NIS 1 par value; since that date and through August 16,
2016, the conversion rate is NIS 233.23 par value of registered Series A debentures (following adjustments due to distributions
of cash dividends) for each ordinary share of NIS 1 par value.



BSRE Series B Debentures



The BSRE Series
B debentures are to be redeemed in four equal annual installments on August 31 of each of the years 2013 to 2016. The Series B
debentures are linked to the known CPI and bear interest at an annual rate of 4.7%, which is payable semi-annually.



If, at the time
of making any redemption/payment on account of the principal and of interest of the Series A or Series B debentures, it is found
that the payment index is less than the base index (the CPI for July 2006), BSRE is required to make such payment according to
the base index.



120







BSRE Series C Debentures



The BSRE Series
C debentures are to be redeemed in eight non-equal annual installments on October 31 of each of the years 2011 to 2018, of which
six installments each in the amount of 7.5% of the debentures’ principal amount are to be redeemed on October 31 of each
of the years 2011 to 2016, and two installments each in the amount of 27.5% of the debentures’ principal amount are to be
redeemed on October 31 of each of the years 2017 to 2018. The Series C debentures are linked to the known CPI and bear interest
at an annual rate of 4.2% which is payable semi-annually on April 30 and October 31 of each of the years 2010 to 2018.



If, at the time
of making any redemption/payment on account of the principal and of interest of the Series C debentures, it is found that the
payment index is less than the base index (the CPI for August 2009), BSRE is required to make such payment according to the base
index.



BSRE Series D Debentures



The BSRE Series
D Debentures are linked (principal and interest) to the Israeli CPI and bear fixed interest of 4.5%. The Debenture principal is
to be redeemed in four equal annual payments, on June 30 in each of the years 2017 to 2020 (inclusive). The Debenture interest
is payable in semi-annual payments on June 30 of each of the years 2011 to 2020 (inclusive) and December 31 of each of the years
2010 to 2019 (inclusive).



The terms of the
debentures determine that in case Midroog or another rating agency were to reduce the Company’s rating to A3, the annual
interest rate will increase by 0.35%. If the rating were to be reduced further, then the annual interest rate will increased by
0.35% multiplied by the number of notches that the Company’s rating is reduced below A3.



BSRE Series E Debentures



The BSRE Series E
debentures are to be redeemed in six non-equal annual installments on May 31 of each of the years 2018 to 2023, of which four
installments each in the amount of 7.5% of the debentures’ principal amount are to be redeemed on May 31 of each of the
years 2018 to 2021, and two installments each in the amount of 35% of the debentures’ principal amount are to be redeemed
on May 31 of each of the years 2022 to 2023. The Series E debentures are linked (principal and interest) to the Israeli CPI and
bear fixed interest of 3.3% which is payable semi-annually on May 31 and November 31 of each of the years 2014 to 2023. BSRE committed
to comply with various financial covenants and not to create a current charge on any of its assets in favor of any third party
to secure any debt or liability without the consent of the Series E Debenture holders or unless the charge is created also in
favor of the debenture holders at the same ranking.



Rating of BSRE
Debentures



On December 26, 2013,
Midroog ratified the A1 rating on the debentures (series A to E) issued by BSRE, while changing outlook from negative to stable.
In addition, Midroog granted A1 rating with stable outlook for debentures up to NIS 100 million par value which BSRE intends to
issue by expanding one of its existing series. On February 18, 2014, Midrog inserted BSRE Debentures into credit review with negative
implications.



121







Dor Alon Debentures





In October 2004 a
subsidiary of Dor Alon, Dor Energy Debenture Issue 1 Ltd. (“Dor Debenture”), issued debentures with a principal amount
of NIS 74 million to institutional investors at their par value. In May 2005, a subsidiary of Dor Alon, Dorgas Batuchot Ltd. issued
debentures with a par value of NIS 98 million. During 2005, Dor Alon issued approximately NIS 325 million principal amount of Series
A convertible debentures (redeemed in full in May 2011) and NIS 200 million principal amount of Series B debentures. During 2006,
Dor Alon issued an additional issuance of NIS 385 million principal amount of Series B debentures, which represented an increase
of the Series B issue, and its terms are identical to the terms of the original Series B issue listed on the Tel Aviv stock exchange.
In September 2009, Dor Alon completed a public issuance of a principal amount of NIS 81 million (before issuance costs) of Series
C debentures and of a principal amount of NIS 139 million (before issuance costs) of Series D debentures.



On February 15,
2012, Dor Alon completed the issuance of an additional NIS 119.9 million in principal amount of Series D debentures to institutional
investors in Israel in consideration for 100.95% of its par value, reflecting proceeds of 6.9%. On August 20, 2012, Dor Alon completed
the issuance of an additional NIS 46 million in principal amount of Series D debentures to institutional investors in Israel in
consideration for 101.08% of its par value, reflecting proceeds of 6.9%. On January 31, 2013, Dor Alon completed the issuance
of an additional NIS 129 million in principal amount of Series D debentures to institutional investors in Israel, in consideration
for 103.8% of its par value, reflecting proceeds of 5.2%. The terms of all these debentures are identical to the terms of the
Series D debentures issued by Dor Alon in September 2009. On January 31, 2013, Dor Alon completed the issuance of an additional
NIS 21 million in principal amount of Series C debentures to institutional investors in Israel, in consideration for 97.95% of
its par value, reflecting proceeds of 5.3%. The terms of these debentures are identical to the terms of the Series C debentures
issued by Dor Alon in September 2009.



Dor Alon Series
B Debentures



The Dor Alon Series
B Debentures are linked (principal and interest) to the Israeli CPI. The interest of 5% per annum is repayable in semi-annual
installments on May 31 and November 30 until May 2015.



The difference between
the consideration that was related to the liability component at the time of issue, after the reduction of issue costs and the
principal amount of the issue, reflecting the discount, is amortized over the term of the debentures using the effective interest
rate basis. The total issue costs for the debentures amounted to NIS 8,034 thousand. The effective interest rate of the debentures,
taking the above issue costs into account, is an annual rate of 6.65%.



122







Dor Alon Series
C Debentures



The Dor Alon Series
C Debentures bear the interest rate of Israeli government bonds (No. 817) plus 2.25%. The interest is paid in quarterly installments
up to December 2017. The principal is repayable in semi-annual installments on June 1 and December 1 over five years starting
2013.



Dor Alon Series
D Debentures



Dor Alon Series
D Debentures bear a fixed annual interest rate of 6.65%, payable in quarterly installments up to December 2016. The principal
is repayable in equal semi-annual payments on June 1 and December 1 from 2013 to 2016.



Dorgas Batuchot
Ltd. Debentures



These debentures
with a par value at the date of issue of NIS 96 million are linked (principal and interest to the Israeli CPI). The debentures
bear a fixed rate of annual interest of 4.95%. The interest and principal is repayable in quarterly installments up to June 2020.
Dorgas Batuchot debentures include a financial covenant requiring that the ratio between adjusted net income over the last 12
months from the liquefied petroleum gas activity and the quarterly payments of principal and interest on the debentures will be
less than 1.05. As of December 31, 2013, Dor Debentures Dorgas Batuchot met the financial covenants relating to these debentures.



Dor Debentures



Dor Debentures issued
two series of debentures to institutional investors:



Series 1 with a
par value at the date of issue of NIS 13 million, which are linked (principal and interest) to the Israeli CPI. The debentures
bear a fixed rate of annual interest of 6.45%. The interest and principal repaid in semi-annual equal payments on April 20 and
October 20 up to 2016 (inclusive). As of December 31, 2013, Dor Debentures did not meet the financial covenants relating to the
series 1 debenture. At the request of the trustee, the Company provided a bank guarantee of NIS 6.6 million that was valid up
to January 31, 2014 and was extended to July 2014.



123







Series 2 with a
par value at the date of issue of NIS 62 million are linked (principal and interest) to the Israeli CPI. The debentures bear a
fixed rate of annual interest of 6.45% for a period of 15 years, of which NIS 27 million in principal amount is payable in 15
annual payments on April 20 in the years 2005 to 2019 (inclusive) and the balance of NIS 35 million in principal amount is payable
in one payment on October 20, 2019. The interest on the principal amount of NIS 27 million is payable annually in the years 2005
to 2019 (inclusive) on April 20, and interest on the principal amount of NIS 35 million is payable semi-annually on April 20 and
October 20 for the years 2005 to 2019 (inclusive). Dor Debentures series 2 debentures include financial covenants requiring that
(i) the ratio between the EBITDA of 17 joint ventures and their financial expenses will not be less than 1.1, (ii) the ratio between
adjusted net cash flow of 17 filling stations held by joint ventures and the financial expenses on loans from parent companies
will not be less than 1.2, and (iii) the ratio between income of the Dor Debentures and the annual payments of principal and interest
on the debentures will not be less than 1.09. As of December 31, 2013, Dor Debentures met the financial covenants relating to
the series 2 debenture.



Rating of Dor Alon
Debentures



As of December 31,
2013, Dor Alon’s Series B Debentures were unrated and Series C and D Debentures were rated A2 with a stable outlook, Dorgas
Batuchot Debentures were rated Aa2, and the Dor Debentures were rated A2.



For additional information
on charges pertaining to the collateralized long-term loans, see note 35 to our consolidated financial statements.



Commitments for Capital Expenditures



As of December 31,
2013, we had entered into agreements for investments in real estate, investment property, land and buildings, constructions work,
fixtures, equipment and leasehold improvements in the total amount of approximately NIS 215 million, or $61.9 million. We intend
to finance these investments from cash generated by our operations and from loans from banks or other financial institutions.



C.
      Research and Development, Patents and Licenses.



Not applicable.



D.       Trend Information.



Supermarkets



Based on data published
by the Israeli Central Bureau of Statistics of the retail sales of food, drinks and tobacco in Israel, we estimate that approximately
31.5% of the total retail sales of food, beverages and tobacco in Israel in 2013 was made by the two large chains and approximately
31.3% of the estimated retail sales made by supermarkets, groceries and mini-markets in Israel in 2013 was made by the two large
chains.



The food retailing
industry has been subject to increased competition in recent years. We estimate that our market share of the total retail market
of food, beverages and tobacco decreased to 11.4% in 2013 from 11.94% in 2012. The market share of our largest competitor, Shufersal,
based on its financial reports, was approximately 20.1% of the total retail market of food, beverages, and tobacco in 2013, compared
to 20.2% in 2012 (this calculation is based on the estimate of the Central Bureau of Statistics of the total retail market for
food, beverages and tobacco, and our estimate for market growth of 3.5% in 2013). In 2013, very low-priced other supermarket chains
continued to aggressively increase their market share and expand their presence in locations throughout Israel, often geographically
beyond their original location. The increased competition has led to increased downward pressure on prices.



124







Additionally, according
to Nielsen, the quantity of food, beverages, home products and near food products purchased by consumers in Israel declined by
1% in 2013 as compared to 2012. This trend has continued in the beginning of 2014 according to a report by Nielsen issued in March
2014.



In 2013, we opened
four new supermarket stores to compete in selective areas in which we did not believe we had sufficient market presence. In addition,
as part of our efficiency strategy, during 2013, we reduced by approximately 12,600 square meters our supermarket store space
as a result of stores sold to third parties and the reduction of store space.



In recent years
we have witnessed a global trend of supermarkets specializing in organic and health products. We own approximately 51% of the
holdings of Eden Teva, which operates organic/health food supermarkets and cater to the growing local demand for organic, natural
and health food. We are solidifying and expanding our market share in organic/health food market with the goal of establishing
Alon Blue Square as a leader of Israel’s emerging organic/health food market.



Commercial
and Fueling Sites



Dor Alon is the
fourth leading company in Israel for the distribution of petroleum products, with 206 filing stations. The three largest companies
in Israel distributing petroleum products have an aggregate of 755 filing stations. In addition, there are 144 filing stations
operated by other smaller companies.



Dor Alon anticipates
opening and operating an additional seven to ten commercial and filling stations during 2014 and 2015. Dor Alon has plans and
agreements to plan, establish and operate additional filling stations, and these stations are currently in different stages of
authorization and establishment.



Dor Alon intends
to expand its holding in marketing section to natural gas industry. Dor Alon has entered into an agreement to purchase natural
gas from Tamar Partnership in order to provide the energy requirements of Sugat. For further information see “Item 4. Information
on the Company – B. Business Overview – Fueling and commercial sites – other activities.” In addition,
Dor Alon plans to expand its independent convenience stores chain outside of the filling stations.



125







Real Estate



The shopping centers
industry is more moderately affected by macroeconomic changes, but is not immune to changes in the dynamic environment. There
is currently a high demand for existing space in malls and shopping centers; however a slowdown in the economic growth and an
increase in living costs may reduce the demand for new commercial space. In addition, shopping centers are considered to be immune
because they have a large dispersion of tenants, are a preferred alternative for recreation and leisure time for families and
there is a low impact of the store income on rent payments therefore there is stability in proceeds.



The average occupancy
in shopping centers in 2013 remains high and increased to approximately 95% from 89.5% in 2012. In addition, there was an increase
in the income of stores in malls and an increase in the income of commercial real estate companies, which led to an increase in
the value of assets.



The change in the
tenant mix in shopping centers which is characterized by the exit of food chains and entry of international fashion chains lead
to an increase in the operating profit, while maintaining high occupancy rates.



Beginning as of
the last quarter of 2012 and through 2013, there was an increase in shopping centers, resulting in a downward pressure on prices.
Additionally, there is an increase in the rate of building starts, especially in the periphery of Israel and not only in the center
of Israel. In the coming years, a number of new shopping malls are planned to be opened, which will enhance competition. Moreover,
new neighborhood commercial centers are expected to be built and serve as an anchor for local commercial activities. BSRE expects
that the sturdiness of the shopping centers sector will remain strong compared to a relative weakness in the offices industry.



E.        Off-Balance
Sheet Arrangements.



None.



F.        Tabular
Disclosure of Contractual Obligations.



The following table
sets forth certain information concerning our obligations and commitments to make future payments under contracts, such as debt
and lease agreements:



|                                                               |  | 2014 |           |  | 2015 |  |           | 2016 |  |  | 2017    |  |  | 2018 |         |  | 2019 |  |         | 2020 and thereafter |  |  | Total   | 
|-------------------------------------------------------------- |  | ---- | --------- |  | ---- |  | --------- | ---- |  |  | ------- |  |  | ---- | ------- |  | ---- |  | ------- | ------------------- |  |  | ------- | 
|                                                               |  |      |           |  |      |  |           |      |  |  |         |  |  |      |         |  |      |  |         |                     |  |  |         | 
|Long term loans from  banks (1)                                |  |      | 251,089   |  |      |  | 334,388   |      |  |  | 198,595 |  |  |      | 220,325 |  |      |  | 100,917 |                     |  |  | 67,421  | 
|Non Convertible Debentures issued by the   Company
    (2) (3) |  |      | 109,060   |  |      |  | 26,674    |      |  |  | 26,674  |  |  |      | 26,674  |  |      |  | 26,674  |                     |  |  | 26,674  | 
|Non-Convertible  Debentures issued by BSRE  (4)                |  |      | 252,674   |  |      |  | 252,674   |      |  |  | 252,675 |  |  |      | 275,595 |  |      |  | 284,716 |                     |  |  | 196,734 | 
|Convertible   Debentures issued by BSRE
    (4)                |  |      | 29,715    |  |      |  | 29,715    |      |  |  | 31,771  |  |  |      | -       |  |      |  | -       |                     |  |  | -       | 
|Non-Convertible   Debentures issued
    by Dor Alon (5)        |  |      | 212,868   |  |      |  | 213,130   |      |  |  | 141,122 |  |  |      | 31,126  |  |      |  | 11,163  |                     |  |  | 56,413  | 
|Loan from related party                                        |  |      | -         |  |      |  | 9,250     |      |  |  | -       |  |  |      | -       |  |      |  | -       |                     |  |  | -       | 
|Loan from others                                               |  |      | -         |  |      |  | -         |      |  |  | -       |  |  |      | -       |  |      |  | -       |                     |  |  | -       | 
|Short term credit from banks (6)                               |  |      | 709,409   |  |      |  | -         |      |  |  | -       |  |  |      | -       |  |      |  | -       |                     |  |  | -       | 
|Commercial paper (7)                                           |  |      | 120,403   |  |      |  | -         |      |  |  | -       |  |  |      | -       |  |      |  | -       |                     |  |  | -       | 
|Purchase Obligations                                           |  |      | 36,905    |  |      |  | -         |      |  |  | -       |  |  |      | -       |  |      |  | -       |                     |  |  | -       | 
|Purchase Obligations – BSRE                                    |  |      | 34,905    |  |      |  | -         |      |  |  | -       |  |  |      | -       |  |      |  | -       |                     |  |  | -       | 
|Non-cancelable Long term leases
    (8)                        |  |      | 353,078   |  |      |  | 318,205   |      |  |  | 282,410 |  |  |      | 250,775 |  |      |  | 207,100 |                     |  |  | 151,304 | 
|Total contractual cash obligations                             |  |      | 2,110,106 |  |      |  | 1,184,036 |      |  |  | 933,247 |  |  |      | 804,495 |  |      |  | 690,570 |                     |  |  | 498,546 | 



126







| | (1) | The table above does not include
                                         payments of interest on our long-term loans because the actual interest payments on most
                                         of the loans are dependent on variable parameters, such as changes in the Israeli CPI,
                                         or variable interest rates which cannot be predicted at the date of this report. Without
                                         taking into account any changes in the Israeli CPI or changes in foreign currency rates
                                         and assuming the relevant variable interest rate will remain at its level as it was as
                                         of December 31, 2013 (3.86% per annum), interest payments on the long-term loans (in
                                         thousands) would be, NIS 58,418 in 2014, NIS 48,722 in 2015, NIS 35,809 in 2016, NIS
                                         28,139 in 2017, NIS 19,631 in 2018, NIS 15,734 in 2019 and NIS 13,130 in 2020 and beyond.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | These debentures bear interest
                                         at an annual rate of 5.9% and are linked (principal and interest) to the Israeli CPI,
                                         but in the event the Israeli CPI is less than the base index (index known at date of
                                         issuance), the amount of debentures will not be adjusted below the base index. Without
                                         taking into account any changes to the Israeli CPI, interest payments on the Non-Convertible
                                         Debentures (in thousands) would be NIS 4,861 in 2014. The table above does not include
                                         payments of interest on our debentures because the actual interest payments on these
                                         debentures will depend on changes in the Israeli CPI, which cannot be predicted at the
                                         time of this report.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | These debentures bear interest
                                         at an annual rate of 2.5% and are linked (principal and interest) to the Israeli CPI
                                         but in the event the Israeli CPI is less than the base index (index known at date of
                                         issuance), the amount of debentures will not be adjusted below the base index. Without
                                         taking into account any changes to the Israeli CPI, interest payments on the Non-Convertible
                                         Debentures (in thousands) would be NIS 6,002 in 2014, NIS 5,335 in 2015, NIS 4,668 in
                                         2016, NIS 4,001 in 2017, NIS 3,334 in 2018, NIS 2,667 in 2019 and NIS 4,001 in 2020 and
                                         beyond. The table above does not include payments of interest on our debentures because
                                         the actual interest payments on these debentures will depend on changes in the Israeli
                                         CPI, which cannot be predicted at the time of this report. The principal is repayable
                                         in twelve equal annual installments on November 4 of each of the years 2011 to 2022 (inclusive).
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | The Non-Convertible Debentures
                                         and the Convertible Debentures (Series A, Series B Series C, Series D and E) bear interest
                                         at an annual rate of 6.25%, 4.7%, 4.2%, 4.5 % and 3.3%, respectively, and are linked
                                         (principal and interest) to the Israeli CPI, but in the event the Israeli CPI is less
                                         than the base index (index known at date of issuance), the amount of debentures will
                                         not be adjusted below the base index. Without taking into account any changes to the
                                         Israeli CPI, interest payments on the Non-Convertible Debentures (in thousands) would
                                         be NIS 80,441 in 2014, NIS 68,686 in 2015, NIS 56,930 in 2016, NIS 45,174 in 2017, NIS
                                         33,036 in 2018, NIS 20,597 in 2019 and NIS 11,854 in 2020 and beyond. Without taking
                                         into account any changes to the Israeli CPI, based on the principal amount of the Convertible
                                         Debentures as of December 31, 2013 and assuming no additional conversion of debentures,
                                         interest payments on the Convertible Debentures (in thousands) would be NIS 5,700 in
                                         2014, NIS 3,843 in 2015, and NIS 1,986 in 2016. The table above does not include payments
                                         of interest on our debentures because the actual interest payments on these debentures
                                         will depend on changes in the Israeli CPI, which cannot be predicted at the time of this
                                         report.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (5) | The Non-Convertible Debentures
                                         and the Convertible Debentures (Series B, Series C, Series D, DorGas and Dor Debentures)
                                         bear interest at an annual rate of 5%, 4.1%, 6.65%, 4.95% and 6.45%, respectively, and
                                         Series B linked (principal and interest) to the Israeli CPI, but in the event the Israeli
                                         CPI is less than the base index (index known at date of issuance), the amount of debentures
                                         will not be adjusted below the base index and Series C bears interest of government bonds+2.25%.
                                         Without taking into account any changes to the Israeli CPI and interest of government
                                         bonds, interest payments on the Non-Convertible Debentures (in thousands) would be NIS
                                         39,118 in 2014, NIS 26,814 in 2015, NIS 14,494 in 2016, NIS 5,769 in 2017, NIS 4,356
                                         in 2018, NIS 3,757 in 2019 and NIS 240 in 2020 beyond.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (6) | The table above does not include
                                         interest on our short term credit from banks (2013: 3.75%- per year).
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------



127







| | (7) | On June 30, 2009, the Company
                                         issued commercial paper to institutional investors in an amount of NIS 40 million for
                                         a period of four years. The commercial paper bears annual interest at a variable rate
                                         equal to the Bank of Israel Interest Rate plus 1.5%, payable semi-annually beginning
                                         on December 30, 2009. The commercial paper was redeemed in full in July, 2013. In August
                                         2012 the Company issued commercial paper to institutional investors in an amount of NIS
                                         71 million for a period of five years. The commercial paper bears annual interest at
                                         a variable rate equal to the Bank of Israel Interest Rate plus 1.85%, payable quarter-annually
                                         beginning on November 2012. The average annual interest rate for the three months ended
                                         December 31, 2013 was 2.8%. Therefore, the table above does not include the amount of
                                         interest on commercial paper. The principal of the commercial paper is redeemable every
                                         three months at the demand of one of the parties, but in any event, the last redemption
                                         date of the principal was July 2012. In addition, in June 2013 the Company issued commercial
                                         paper to institutional investors in an amount of NIS 45 million for a period of five
                                         years. The commercial paper bears annual interest at a variable rate equal to the Bank
                                         of Israel Interest Rate plus 1.80%, payable quarter-annually beginning on November 2012.
                                         The average annual interest rate for the three months ended December 31, 2013 was 2.8%.
                                         Therefore, the table above does not include the amount of interest on commercial paper.
                                         The principal of the commercial paper is redeemable every three months at the demand
                                         of one of the parties, but in any event, the last redemption date of the principal will
                                         be July 2017.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (8) | Includes mainly apartment lease
                                         arrangements.
| | --- | --------------------------------------------------------------------------------------



| | * | The table above does not include severance payment obligations because the actual severance payments will
depend on the dates of payment, which cannot be predicted at the time of this report. As of December 31, 2013, the Company had
severance payment obligations in an amount of NIS 534 million and a severance payment fund in an amount of NIS 463 million.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ** | The table above does not include
                                         a provision for uncertain tax positions in the amount of 9.4 million.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------



| | ITEM 6. | DIRECTORS,
                                         SENIOR MANAGEMENT AND EMPLOYEES
| | ------- | -----------------------------------------------------------------------------------



| | A. | Directors and Senior Management.
| | -- | --------------------------------



The
following table lists the name, age and position of the directors and senior management of Alon Blue Square and four officers
of our subsidiaries as of March 31, 2014.



|Name                     |  | Age |  | Position                                                                       
|------------------------ |  | --- |  | -------------------------------------------------------------------------------
|Yitzhak Bader            |  | 67  |  | Chairman of the Board of Directors and Director                                
|David Wiessman           |  | 59  |  | Chief Executive Officer, Chief Operating Decision Maker (CODM)
    and Director
|Shlomo Even              |  | 57  |  | Director                                                                       
|Diana Bogoslavsky        |  | 55  |  | Director                                                                       
|David Alphandary (1) (2) |  | 78  |  | Director                                                                       
|Uzi Baram (1) (2) (3)    |  | 76  |  | Director                                                                       
|Avraham Meron (1) (3)    |  | 74  |  | Director                                                                       
|Mordehay Ventura         |  | 59  |  | Director                                                                       
|Limor Ganot              |  | 41  |  | Co- Chief Executive Officer                                                    
|Yehuda van der Walde     |  | 42  |  | Chief Financial Officer                                                        
|Ortal Klein              |  | 45  |  | Corporate Secretary & Legal Counsel                                            
|                         |  |     |  |                                                                                
|Daniel Garabagi          |  | 50  |  | Head of Information Technology Division                                        
|Motti Keren              |  | 50  |  | Chief Executive Officer of Mega Retail                                         
|Zeév Stein               |  | 60  |  | Chief Executive Officer of Blue Square Real Estate Ltd.                        
|Israel Yaniv             |  | 67  |  | Chief Executive Officer of Dor Alon                                            
|Raviv Brookmayer         |  | 57  |  | Chief Executive Officer of Naaman Group                                        



(1) Member of the Compensation Committee.Audit
Committee and Compliance Committee.

(2) External director.

(3) Member of the Corporate Governance
Committee.



128







Yitzhak Baderhas served as our Chairman of our Board of Directors since January 2013 and as a director since June 2003. Mr. Bader is currently
Chief Executive Officer of Granot, a purchasing organization of the kibbutzim. He is also Chairman of the board of directors of
Alon Israel Oil Company Ltd. and Joint Chairman of Dor-Alon Energy In Israel (1988) LTD., and a director in the following companies:
Alon Retail, Mega Retail, Alon Natural Gas Explorations Ltd., Dor Alon Retail Sites Management Ltd., Dor Alon Gas Technologies
Ltd., Alon USA Energy, Inc., Alon Partners GP, Alon USA Operating, Inc., Alon USA GP, LLC, Alon USA Capital Inc., Alon Assets
Inc., Alon USA Inc., BSRE, Pri-Gat Ltd., Rimon Counseling and Management of Services Ltd., Meiram Water and Infrastructures Ltd.,
various entities under control of Granot, One Technologies Software (ASD) Ltd., Gat Givat Haim Cooperative Society for Preservation
of Agricultural Products Ltd., and Tnuva Central Cooperative for the Marketing of Agriculture Produce in Israel Ltd.



David
Wiessman has served as our Chief Executive Officer since January 2013 and as CODM since April 2011. Mr. Wiessman served as
our Executive Chairman of the Board of Directors from November 2005 until January 2013. Mr. Wiessman is also the Chairman of the
board of directors of Mega Retail since March 12, 2007 and the Chairman of the board of directors of BSRE since December 21, 2005.
In addition, Mr. Wiessman is currently the President and Chief Executive Officer of Alon Israel Oil Company Ltd. and President
and Active Joint Chairman of the Board of Directors of Dor-Alon Energy In Israel (1988) LTD., Chief Executive Officer of Bielsol
Investments (1987) Ltd., Chairman of the board of directors of Alon
Retail, Executive Chairman of Alon U.S.A. Energy, Inc. and Alon USA Partners GP, LLC, Director of Alon Natural Gas Explorations
Ltd and Rosebud Real Estate Ltd., and holds director and/or officer positions in other companies affiliated with the foregoing
Alon entities, both in Israel and the United States. In addition, Mr. Wiessman also serves as a director in other companies not
affiliated with Alon Israel Oil Company Ltd., or with Alon USA Inc.



Shlomo Evenhas served as our director since June 2003. Mr. Even is currently a certified accountant and partner of the accounting firm
of Tiroshi Even, and a director of the following companies: Super Sol Bielsol Investments Ltd., Alon Israel Oil Company Ltd.,
Dor-Alon Energy In Israel (1988) LTD., Rosebud Real Estate Ltd., Dor Alon Retail Sites Management Ltd., Alon USA Energy Inc.,
Alon USA Operating Inc., Alon USA GP LLC, Alon USA Capital Inc., Alon Assets Inc. and Alon USA Inc. Mr. Even holds a B.A. degree
in Accounting and Economics from Bar-Ilan University.



Diana Bogoslavskyhas served as our director since March 2006. She has served as the Chief Executive Officer of Mishkei Emek Hayarden and the
Regional Plants since 2005. From 1996 to 2004, Ms. Bogoslavsky served as Manager of the Economic Department of Brit Hapikuach
(the Supervision Alliance). From 2000 to 2004, Ms. Bogoslavsky also served as a member of the management of Brit Hapikuach and
as the Chairman of the board of directors of Jenny Company, a subsidiary of Brit Hapikuach. From 1993 to 1996, Ms. Bogoslavsky
served as Bank Mizrahi representative in Argentina. Ms. Bogoslavsky currently serves as a director in the Union of the Kibbutzim
Industry, in Dor-Alon Energy In Israel (1988) LTD, Dor Alon Retail Sites Management Ltd. and Alon Natural Gas Explorations Ltd.
and in several others companies. Ms. Bogoslavsky holds a Masters degree in Economics and Business Management (specializing in
financing) and B.A. in Economics and Administration from Midreshet Rupin in the Hefer Valley in Israel.



129







David Alphandaryhas served as our external director since March 2006. He currently serves as an independent consultant to the retail industry.
From 1991 to 1999, Mr. Alphandary served as President and Chief Executive Officer of Shufersal Ltd. and from 1982 to 1991 as Vice
President to Shufersal. From 1976 to 1982, Mr. Alphandary served as President of Carmel Carpeting Industry in Ceasaria, Israel.
He currently serves as a director of Yafora Tavori Ltd. Mr. Alphandary holds a degree in Public Administration from the Hebrew
University in Jerusalem. Mr. Alphandary is a member and the Chairman of the Audit Committee of Alon Blue Square.



Uzi Baramhas
served as our external director since March 2006. He served as a member of Israel’s parliament, the Knesset, from1977
to 2001.He served asthe Minister of Tourism of Israel from 1992 to 1996, and from February 1993 to August 1995
he served as the Minister of Interior Affairs of Israel. He currently serves as a director of Master Plan, a company for strategic
communication consulting, and of Bank Otsar Ha-Hayal. Mr. Baram holds a degree in Political Sciences and Sociology from the Hebrew
University in Jerusalem. Mr. Baram is a member of the Audit Committee and the Compensation Committee of Alon Blue Square.



Avraham Meronhas served as our director and member of the audit committee since August 20, 2007. Mr. Meron is currently an independent
advisor and is an external director in Africa Israel Properties Ltd., a director in Discount Mortgage Bank Ltd., a member of the
investments committee in Clal Finance group, and a director in A.I. America Israel Investments Ltd. For a period of 13 years,
until October 2005, Mr. Meron served as senior vice president-financeof Africa Israel Investments
Ltd. Mr. Meron also served as a director of Africa Israel’s subsidiaries, including Alon Oil Company group, the controlling
shareholder of Alon Blue Square. Mr. Meron is a CPA and holds a degree in Accounting from the Hebrew University of Jerusalem.



Mordehay Venturahas served as our director since March 22, 2012. Mr. Ventura has served as Chief Executive Officer of the Mishkey Hadarom
Aguda Haklait Shitufit Ltd. (Mishkey Hadarom) since 2004, and currently serves as a director in Oil Holdings (Founded by the Kibbutzim
Organizations) Ltd., Alon Israel Oil Company Ltd., Dor Alon Energy in Israel (1988) Ltd., Dor Alon Retail Sites Management Ltd.,
Gan Smuel Mazon Ltd., Ganir (1992) Ltd., Hadarey Nitzanim Aguda Haklait Shitufit Ltd., Sivey Hadarom (S.D.) Ltd., Hanegev Aguda
Haklait Shitufit Transport Company Ltd., Megadley Drom Yehuda Aguda Haklait Shitufit Ltd., Shkedey Drom Yehuda Aguda Haklait Shitufit
Ltd., Zeitey Drom Yehuda Aguda Haklait Shitufit Ltd., Hazera (1939) Ltd., Megadley Zraim Ltd., the Egg and Poultry Board, Amal
Darom Aguda Haklait Shitufit Ltd., Marbek Services and assets (2002) Ltd., Mishkey Dan Partnership, Dana Finance Services Ltd.,
Amber Machon Letaarovet Aguda Haklait Shitufit Merkazit Ltd., Alon USA Partners LP and Tnuva Holdings. Mr. Ventura holds a B.A.
degree in Economics and Business Administration from the Rupin Academic Center in the Hefer Valley in Israel.



130







Limor Ganothas
served as our Co-Chief Executive Officer since April 2013. Pursuant to her employment agreement with Alon Israel Oil Company Ltd.,
Ms. Ganot is to spend two-thirds of her working time as Co-CEO of Alon Blue Square and one-third of her time working with other
companies in the Alon Group.Ms. Ganot has served in different positions in Alon Israel Oil
Company Ltd., from 2004, and in her last position served as Vice President Business Development and Mergers and Acquisitions at
Alon Israel Oil Company Ltd. Ms. Ganot holds a BA in Accounting and Economics from the Tel Aviv University and is a certified
accountant in Israel. Ms Ganot serves as a director in Mega Retail Ltd., Dor Alon Retail Sites Management Ltd., Bee Group Retail
Ltd., Naaman Group (N.V.) Ltd., Diners Club Israel Ltd., Blue Square Dor Alon Customers Club LP, Kfar Hashashuim Toy Chain stores
Ltd., several subsidiaries of Blue Square Real Estate Ltd. related to the Tel Aviv Wholesale Market Project, and the Givon Parking
Lot project, and other companies in the Alon Blue Square group. Ms Ganot serves as chairman of the board of Alon Cellular Ltd.



Yehuda van der
Walde has served as our Chief Financial Officer since November 2013. Mr. van der Walde has also served as the Chief Accounting
Officer from June 2012 to November 2013. From December 2007 until June 2012, Mr. van der Walde has served as controller of the
Company and Mega Retail. Mr. van der Walde holds a B.A degree in Accounting and Economy and an M.A in Accounting, both from Bar
Ilan University and is a Certified Public Accountant in Israel.



Ortal Klein,
Adv.has served as our Corporate Secretary since March 2011. Ms. Klein has also served as the General Counsel and Corporate
Secretary of Alon Israel Oil Company since May 1997 and the General Counsel and Corporate Secretary of Dor Alonand its
subsidiaries since 2000. Ms. Klein holds a LLB from Tel Aviv University and a LLM in commercial Law from Bar Ilan University.



Daniel Garabagihas served as our Vice President and head of the Information Technology Division since April 2012. Mr. Garabagi served as
Vice President of Information Technology in Strauss Group, one of the largest food companies in Israel, from 2004 to 2012. Prior
to that, he served as manager of Information Technology in Strauss Group from 2000 to 2004. Mr. Garabagi holds a B.A. in Mathematics
and Computer Science from the Haifa University.



Motti Keren
has served as the Chief Executive Officer of Mega Retail since January 2013. From 2011to 2012, Mr. Keren served as the President
of Unilever Central Europe. From 2005 to 2010, Mr. Keren served as the CEO and Chairman of Unilever Israel, and from 2001 to 2004
Mr. Keren served as the Supply VP of Unilever Israel. Mr. Keren holds a BA in Economics and an MBA from Tel Aviv University in
marketing and finance.



Zeév
Steinhas served as the Chief Executive Officer of BSRE, since July 2006. Mr. Stein also serves as a director in various companies
affiliated with Alon Group. Mr. Stein holds a B.Sc. degree in Civil Engineering and a degree in Architecture and Urban Design
Planning from the Technion (Israel Institute of Technology) in Haifa.



131







Israel Yanivhas served as the Chief Executive Officer of Dor Alon since 2000. Mr. Yaniv holds a BSc and MSc in Chemical Engineering from
the Technion in Haifa.



Raviv Brookmayerhas served as the Chief Executive Officer of Naaman Group since, September2012. Mr. Brookmayer served asChief
Executive Officer of Home Center (DIY) Ltd. Prior to that, he served as Chief Executive Officer of Ten Petroleum Company Ltd.
from 2007-2009. Mr. Brookmayer holds a B.A. in Business and Administration and an MBA from Derby University.



Termination of
Office



Dror Moran served
as our Vice President and Chief Financial Officer and the General Manager of “You” Club until the second half of 2013.
Asher Ben-Shoshan served as our head of the Human Resources Division until October 31, 2013.



Arrangements for the Election of
Directors



As of March 31, 2014,
Alon, directly and indirectly through Alon Retail, owned approximately 72.71% of our outstanding ordinary shares. So long as Alon
continues to own beneficially more than 50% of our outstanding ordinary shares and voting power, it will be able to control the
outcome of matters requiring shareholder approval that do not require a special majority, including the election of all Alon Blue
Square directors, other than Alon Blue Square’s two external directors. The election of the external directors requires
that at least a majority of the votes of the shareholders who are not controlling shareholders and do not have a personal interest
in the appointment (excluding a personal interest which did not result from the shareholder’s relationship with the controlling
shareholder) who participate in the vote, vote for their nomination (without taking into account abstentions), or that the total
number of shares voted against the proposal by shareholders who are not controlling shareholders and do not have a personal interest
does not exceed two percent of the aggregate voting rights in the Company.



B.	     Compensation



The following table
sets forth the aggregate compensation we paid or accrued on behalf of all persons who served as Alon Blue Square directors or
senior management for services they rendered Alon Blue Square and its subsidiaries, for the year ended December 31, 2013. The
table also includes compensation to individuals who ceased to serve as directors or executive officers during the year.





|                                                                    |  | Salaries, fees, expenses, directors’fees, commissions and bonuses |  | Pension, retirementand similar benefits
|------------------------------------------------------------------- |  | ----------------------------------------------------------------- |  | ---------------------------------------
|                                                                    |  | (in millions)                                                     |  | (in millions)                          
|All directors, senior management and
    Acting Chairman as a group |  | $4.1(NIS 14.3)                                                    |  | $0.4 (NIS 1.4)                         





132











In April 2008, we agreed
to pay to each director (including our external directors and expert external directors) other than the Chief Executive Officer,
the sum of NIS 97,500 per year and a meeting attendance fee of NIS 3,660, which amounts are equivalent to the amounts allowed to
be paid to external directors of companies of comparable size under the second, third and fourth supplements to the Companies Regulations.
The fees referred to above are adjusted from time to time based on changes to the Israeli Consumer Price Index in the same manner
as the fees described in the Regulations are adjusted. The directors would also be entitled to reimbursement of expenses incurred
by them in connection with their service as directors.





We also agreed to pay
David Wiessman, our Chief Executive Officer,Chief Operating Decision Maker and a director
and our former Executive Chairman of the Board, a monthly payment of NIS 42,456 plus VAT commencing from November 15, 2005, the
date Mr. Wiessman became Executive Chairman of the board of directors. The compensation is linked to changes in Israel’s
CPI since November 2005, and is updated every three months (therefore the currently monthly amount is NIS 50,943). No additional
fees are paid to Mr. Wiessman for attending meetings of the board of directors or any committee of the board of directors. Mr.
Wiessman is also entitled to reimbursement of actual expenses (upon submission of receipts) incurred by him in connection with
his service as Chief Executive Officer and Chief Operating Decision Maker. In September 2013 the shareholders re-approved this
arrangement following the approval of our compensation committee and board of directors.



We also agreed to
pay Limor Ganot, our Co-Chief Executive Officer, a monthly payment of NIS 45,000 commencing from January 1, 2013. The
compensation is linked to changes in Israel’s CPI since January 2013. Ms. Ganot is also entitled to social benefits and
reimbursement for actual expenses (upon submission of receipts) incurred by her in connection with her service as Co-Chief
Executive Officer. Ms. Ganot entitled to a vehicle, a cellular phone and a cellular line. In September 30, 2013 the
shareholders approved this arrangement following the approval of our compensation committee and the board of directors.



Under the terms of
the employment agreement, Ms. Ganot may concurrently work for Alon or a company related to Alon in a part-time capacity not exceeding
thirty-three percent (33%) of full-time working capacity so long as such other positions do not conflict with Ms. Ganot’s
position with the Company.   The Chief Executive Officer and Chief Operating Decision Maker will at the end of each calendar
year recommend whether Ms. Ganot will receive an annual bonus and the terms of such bonus in accordance with the terms of the Compensation
Policy approved by the Company shareholders and on the basis of criteria established therein and will be approved as required by
law. In addition, subject to the Compensation Policy, if the Board of Directors approves the adoption of an option plan, Ms. Ganot
may participate in such plan, subject to any approvals required by law.







BSRE incurred compensation
costs of approximately NIS 1,868,000 for its CEO, Mr. Zeev Stein, for the year 2013 (including a severance payment payable by Dor
Alon in connection with his former employment with Dor Alon) plus an annual bonus of NIS 540,000 to be paid subject to shareholder
approval. Under his employment agreement, Mr. Stein is entitled to a salary and customary fringe benefits, including a car lease
and social benefits. In addition, Mr. Stein is entitled to severance compensation in excess of that which is required under law
(200% of required severance in the case of dismissal and 175% of required severance in case of voluntary termination by Mr. Stein).
Mr. Stein hold 0.21% of BSRE’s issued and outstanding shares, following the exercise of options granted to him under BSRE’s
option plan.





133









Dor Alon incurred compensation
costs of approximately NIS 1,712,000 for its CEO, Mr. Israel Yaniv, for the year 2013 plus an annual bonus of NIS 623,000 on account
of 2012. Under his employment agreement, Mr. Yaniv is entitled to an annual bonus equal to no more than eight monthly salaries,
at the discretion of Dor Alon’s board of directors. In the event of termination of Mr. Yaniv’s employment with Dor
Alon, he is entitled to a notice period of 10 months and to a severance package equal to one and a half months’ salaries
for every year of employment, other than in those situations where Dor Alon would not be required to pay severance under the law.



Naaman Group agreed
to pay its CEO, Mr. Raviv Brookmayer a monthly payment of NIS 83,000 plus an extra monthly salary. Under his employment agreement,
Mr. Brookmayer is entitled to a salary and customary fringe benefits, including a car lease, cell phone, a home phone line at the
expense of Naaman Group up to a cap set in the employment agreement, social benefits and reimbursement of actual expenses incurred
by him in connection with his service as CEO. Mr. Brookmayer will also be entitled as of 2013 to an annual bonus of up to NIS 850,000
for every calendar year of employment and subject to Naaman Group financial results targets, which were not met for 2013. In the
event of termination of employment, Mr. Brookmayer’s is entitled advance notice of 90 days, severance pay as required by
law, and three to six months of “garden leave,” subject to the terms and conditions set forth in his employment agreement.



During 2010, our
controlling shareholder, Alon, granted an option to D.B.W Investments Ltd. a company controlled by Mr. David Wiessman, our Chief
Executive Officer,Chief Operating Decision Maker and a director and our former Executive
Chairman of the Board, to purchase 1,308,808 of our shares held by Alon. The option is exercisable in five equal portions at the
end of each calendar year from 2010 until 2014 and for a period of 18 months from the time each portion vests. In addition, Alon
granted Mr. Wiessman an option to convert his direct holdings in Alon (2.71% of outstanding shares) into 1.06% of the outstanding
ordinary shares of Alon Blue Square. In December 2012, Mr. Wiessman exercised the option, pursuant to which he holds approximately
1.06% of the outstanding shares of Alon Blue Square as of March 31, 2014.



On September 30,
2013, our shareholders approved the adoption of a compensation policy applicable to Company officers and directors. For further
information, see “Item 10. Additional Information – B. Memorandum and Articles of Association – Compensation
Policy”





C.           Board
Practices



Appointment of Directors and Terms
of Officers



Our directors, other
than our external directors, are elected by our shareholders at an annual general shareholders’ meeting and hold office until
the next annual general shareholders’ meeting which is required to be held at least once in every calendar year, but not
more than fifteen months after the last preceding annual general shareholders’ meeting. Until the next annual general shareholders’
meeting, the board of directors or shareholders may elect new directors to fill vacancies on, or increase the number of, members
of the board of directors in a special meeting of the shareholders. Our board of directors may appoint any other person as a director.
Any director so appointed may hold office until the first general shareholders’ meeting convened after the appointment and
may be re-elected.



134







Pursuant to the Israeli
Companies Law, 1999, one may not be elected and may not serve as a director in a public company if he or she does not have the
required qualifications and the ability to dedicate an appropriate amount of time for the performance of his duties as a director
in the company, taking into consideration, among other things, the special needs and size of the company. In addition, a public
company may convene an annual general meeting of shareholders to elect a director, and may elect such director, only if prior to
such shareholders meeting, the nominee declares, among other things, that he or she possess all of the required qualifications
to serve as a director (and lists such qualifications in such declaration) and that he or she has the ability to dedicate an appropriate
amount of time for the performance of his or her duties as a director of the Company.



Under the Israeli Companies
Law, the entering by a public company into a contract with a non-controlling director as to the terms of his office, including
exculpation, indemnification or insurance, requires the approval of the compensation committee, the board of directors and the
shareholders of the Company.





The appointment and
terms of office of all our officers, other than directors and the general manager (Chief Executive Officer), are determined by
the general manager, subject to the approval of our board of directors and our compensation committee and subject to our Compensation
Policy approved by our shareholders.



We and our subsidiaries
have no service contract with any of our directors that provide for benefits upon termination of their employment as directors.



Substitute
Directors



Our Articles of Association
provide that any director may appoint another person to serve as a substitute director and may cancel such appointment. The identity
of a substitute director requires the approval of the board of directors. Under the Israeli Companies Law, a person who is not
himself qualified to be appointed as a director, a person who is already serving as a director or a person who is already serving
as a substitute director for another director, may not be appointed as a substitute director. Nevertheless, a director who is already
serving as a director may be appointed as a substitute director for a committee of the board of directors so long as he or she
is not already serving as a member of such committee, and if the substitute director is to replace an external director, he or
she is required to qualify as an external director and to have either “financial and accounting expertise” or “professional
expertise”, depending on the qualifications of the external director he or she is replacing. Otherwise, a substitute director
cannot be appointed as an external director.



The term of appointment
of a substitute director may be for one meeting of the board of directors or until notice is given of the cancellation of the appointment.
To our knowledge, no director currently intends to appoint any other person as a substitute director, except if the director is
unable to attend a meeting of the board of directors.



135







Independent and External Directors



Israeli Companies
Law Requirements



We
are subject to the provisions of the Israeli Companies Law. The Israeli Minister of Justice has adopted regulations exempting companies,
like Alon Blue Square, whose shares are traded outside of Israel, from some provisions of the Israeli Companies Law.



Under the Israeli Companies
Law, companies incorporated under the laws of Israel whose shares are either (i) listed for trading on a stock exchange or (ii)
have been offered to the public in or outside of Israel, and are held by the public (Public Company) are required to appoint at
least two external directors. The Israeli Companies Law provides that a person may not be appointed as an external director if
the person is a relative of the controlling shareholder or if the person or the person’s relative, partner, employer, someone
to whom he is subordinated directly or indirectly or any entity under the person’s control, has, as of the date of the person’s
appointment to serve as external director, or had, during the two years preceding that date, any affiliation with us, our controlling
shareholder, any relative of our controlling shareholder, as of the date of the person’s appointment to serve as external
director, or any entity in which, currently or within the two years preceding the appointment date, the controlling shareholder
was the company or the company’s controlling shareholder; and in a company without a controlling shareholder or without a
shareholder holding 25% or more of the voting rights in the company – any affiliation to the chairman of the board of directors,
to the general manager (Chief Executive Officer), to a shareholder holding 5% or more of the company’s shares or voting rights,
or to the chief officer in the financial field as of the date of the person’s appointment. The term “affiliation”
includes:



an employment relationship;



a business or professional
relationship maintained on a regular basis;



control; and



service as an office
holder, other than service as a director who was appointed in order to serve as an external director of a company when such company
was about to make an initial public offering.



Under the Israeli
Companies Law, an “office holder” is defined as a general manager, chief business manager, deputy general manager,
vice-general manager, any person filing any of these positions in a company even if he holds a different title, director or any
manager directly subordinate to the general manager.



Without derogating
from the above, a person may not serve as an external director if the person or the person’s relative, partner, employer,
someone to whom he is subordinated directly or indirectly or any entity under the person’s control has business or professional
relationship with an entity which an affiliation with is prohibited as detailed above, even if such relationship are not on a regular
basis (excluding negligible relationship). In addition, a person who received compensation other than the compensation permitted
by the Israeli Companies Law, may not serve as an external director.



136







Regulations under the
Israeli Companies Law, provide for various instances and kinds of relationships in which an external director will not be deemed
to have “affiliation” with the public company for which he or she serves, or is a candidate for serving as an external
director.



No person can serve
as an external director if the person’s positions or other businesses create, or may create, a conflict of interests with
the person’s responsibilities as a director or may impair his or her ability to serve as a director. In addition, a person
who is a director of a company may not be elected as an external director of another company if, at that time, a director of the
other company is acting as an external director of the first company. Until the lapse of two years from termination of office,
a company, its controlling shareholder, or a company controlled by its controlling shareholder may not engage an external director,
or his spouse, or his child to serve as an office holder in the company or in any entity controlled by the controlling shareholder
and cannot employ or receive professional services for consideration from that person, and may not grant such person any benefit
either directly or indirectly, including through a corporation controlled by that person. The same restrictions above apply to
relatives other than a spouse or a child, but such limitations shall only apply for one year from the date such external director
ceased to be engaged in such capacity. In addition, if at the time an external director is appointed all the current members of
the board of directors, who are neither controlling shareholders nor relatives of controlling shareholders, are of the same gender,
then the external director to be appointed must be of the other gender.



Under the Companies
Law, a public company is required to appoint as an external director, a person who has “professional expertise” or
a person who has “financial and accounting expertise,” provided that at least one of the external directors must have
“financial and accounting expertise”. Under regulations, a director having financial and accounting expertise is a
person who, due to his or her education, experience and qualifications is highly skilled in respect of, and understands, business-accounting
matters and financial reports in a manner that enables him or her to understand in depth the company’s financial statements
and to stimulate discussion regarding the manner in which the financial data is presented. Under the regulations, a director having
professional expertise is a person who has an academic degree in either economics, business administration, accounting, law or
public administration or other academic degree or has completed other higher education studies, all in an area relevant to the
main business sector of the company or in a relevant area for the board position, or has at least five years experience in one
of the following or at least five years of aggregate experience in two or more of the following: a senior management position in
the business of a corporation with a substantial scope of business, in a senior position in the public service or a senior position
in the main field of the company’s business.



137







Under the Companies
Law, each Israeli public company is required to determine the minimum number of directors with “accounting and financial
expertise” that such company believes is appropriate in light of the company’s type, size, the scope and complexity
of its activities and other factors. Once a company has made this determination, it must ensure that the necessary appointments
to the board are made in accordance with this determination. Our board of directors determined that two directors with “accounting
and financial expertise” is appropriate for the Company. Our board of directors currently has at least two directors with
such “accounting and financial expertise”.



External directors
are to be elected by a majority vote at a shareholders’ meeting, provided that either (1) the majority of shares voted
at the meeting, including at least a majority of the votes of the shareholders who are not controlling shareholders (as defined
in the Israeli Companies Law) and do not have a personal interest in the appointment (excluding a personal interest which did not
result from the shareholder’s relationship with the controlling shareholder), vote in favor of the election of the director
without taking abstentions into account; or (2) the total number of shares of the abovementioned shareholders voted against
the election of the external director does not exceed two percent of the aggregate voting rights in the company.



The initial term of
an external director is three years and may be extended for two additional three-year terms under certain circumstances and conditions.
Nevertheless, Regulations under the Israeli Companies Law provide that companies, like Alon Blue Square (whose shares are listed
for trading both on the Tel Aviv Stock Exchange and on the New York Stock Exchange), may appoint an external director for additional
three-year terms, under certain circumstances and conditions. An external director may be removed only in a general meeting, by
the same percentage of shareholders as is required for his or her election, or by a court, and in both cases only if the external
director ceases to meet the statutory qualifications for his or her appointment or if he or she violates his or her duty of loyalty
to the company. Each committee authorized to exercise any of the powers of our board of directors is required to include at least
one external director and our audit committee and compensation committee are required to include all of our external directors.



An external director
is entitled to compensation and reimbursement of expenses in accordance with regulations promulgated under the Israeli Companies
Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with serving as a
director except for certain exculpation, indemnification and insurance provided by the company.



David Alphandary
and Uzi Baram currently serve as Alon Blue Square external directors.



New York Stock Exchange
Requirements



See below “Audit
Committees - New York Stock Exchange Requirements” for a description of the independence requirements for audit committee
members under applicable NYSE rules.



138







Audit Committees



Israeli Companies
Law Requirements



Under the Israeli Companies
Law, the board of directors of a public company must appoint an audit committee, comprised of at least three directors including
all of the external directors.



The majority of the
members of the audit committee, as well as the majority of members present at audit committee meetings, must be “independent”
(as such term is defined below) and the chairman of the audit committee must be an external director. In addition, the following
are disqualified from serving as members of the audit committee: the chairman of the board of directors, the controlling shareholder
and his relatives, any director employed by the company or by its controlling shareholder or by an entity controlled by the controlling
shareholder, a director who regularly provides services to the company or to its controlling shareholder or to an entity controlled
by the controlling shareholder, and any director who derives most of its income from the controlling shareholder.



An “Independent
Director” is defined as an external director or a director who meets the following conditions: (i) satisfies certain conditions
for appointment as an external director (as described above) and the audit committee has determined that such conditions have been
met and (ii) he or she has not served as a director of the company for more than nine consecutive years, with any interruption
of up to two years in his or her service not being deemed a disruption in the continuity of such service.



The role of the audit
committee is to examine flaws in our business management, in consultation with the internal auditor or our independent accountants
and suggest appropriate course of action in order to correct such flaws. In addition, the approval of the audit committee is required
to effect specified actions and related party transactions.



Additional functions
to be performed by the audit committee include, among others, the following: determination whether certain related party actions
and transactions are “material” or “extraordinary” for purposes of the requisite approval procedures; to
assess the scope of work and compensation of the company’s independent accountant; to assess the company’s internal
audit system and the performance of its internal auditor and if the necessary resources have been made available to the internal
auditor considering the company’s needs and size; to determine arrangements for handling complaints of employees in relation
to flaws in the business management of the company and the protection for such employees; and to determine whether certain related
party actions and transactions are “material” or “extraordinary” for the purpose of the requisite approval
procedures under the Companies Law, whether certain transactions with a controlling shareholder will be subject to a competitive
procedure (regardless of whether or not such transactions are deemed extraordinary transactions) and to set forth the approval
process for transactions that are “non-negligible” (i.e. transactions with a controlling shareholder that are classified
by the audit committee as non-negligible, even though they are not deemed extraordinary transactions), as well as determining which
types of transactions would require the approval of the audit committee, optionally based on criteria which may be determined annually
in advance by the audit committee.



139







New York Stock Exchange
Requirements



Under New York Stock
Exchange rules, Alon Blue Square is required to maintain an audit committee consisting only of independent directors.



The independence requirements
of Rule 10A-3 of the Securities Exchange Act of 1934 Act implement two basic criteria for determining independence: (i) audit committee
members are barred from accepting directly or indirectly any consulting, advisory or other compensatory fee from the issuer or
an affiliate of the issuer, other than in the member’s capacity as a member of the board of directors and any board committee,
and (ii) audit committee members may not be an “affiliated person” of the issuer or any subsidiary of the issuer apart
from his or her capacity as a member of the board and any board committee.



The Securities and
Exchange Commission (“SEC”) has defined “affiliate” for non-investment companies as “a person that
directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the
person specified.” The term “control” is intended to be consistent with the other definitions of this term under
the Securities Exchange Act of 1934, as “the possession, direct or indirect, of the power to direct or cause the direction
of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.”
A safe harbor has been adopted by the SEC, under which a person who is not an executive officer or 10% shareholder of the issuer
would be deemed not to have control of the issuer. The SEC has also provided certain limited exceptions for an audit committee
member, who also sits on the board of directors of an affiliate to a listed issuer, so long as, except for being a director on
such board of directors, the audit committee member otherwise meets the independence requirements for each entity.



The role of the audit
committee for New York Stock Exchange purposes includes assisting the board of directors in fulfilling its responsibility for oversight
of the quality and integrity of the accounting, auditing and reporting practices of Alon Blue Square.



Corporate Governance Practices



Internal Auditor



Under the Israeli Companies
Law, the board of directors must also appoint an internal auditor proposed by the audit committee. The role of the internal auditor
is, among others, to examine whether our actions comply with the law and orderly business procedure. Under the Israeli Companies
Law, the internal auditor may not be an interested party, an office holder, a relative of an interested party, or an office holder,
nor may the internal auditor be our independent accountant or its representative. We comply with this requirement. Mr. Gershon
Lewinsky serves as our internal auditor.



140







Duties of Office Holders and Approval
of Specified Related Party Transactions Under Israeli Law



Fiduciary Duties
of Office Holders



The Israeli Companies
Law imposes a duty of care and a duty of loyalty on all office holders of a company, including directors and executive officers.
The duty of care requires an office holder to act with the level of care, according to which a reasonable office holder in the
same position would have acted under the same circumstances.



The duty of care
includes a duty to use reasonable means to obtain information on the appropriateness of a given action brought for his approval
or performed by him by virtue of his position and all other important information pertaining to the previous actions.



The duty of loyalty
requires an office holder to act in good faith and for the benefit of the company, and includes a duty to: (i) refrain from any
action involving conflict of interest between the performance of his duties in the company and his personal affairs; (ii) refrain
from any activity that is competitive with the company’s business; (iii) refrain from usurping any business opportunity
of the company to receive a personal gain for himself or others; and (iv) disclose to the company any information or documents
relating to a company’s affairs which the office holder has received due to his position as an office holder.



Under the Israeli Companies
Law, directors’ compensation arrangements require Compensation committee approval, board of directors’ approval and
shareholder approval.



The Israeli Companies
Law requires that an office holder of a company promptly and, in any event, not later than the first board meeting at which the
transaction is discussed, disclose any personal interest that he may have and all related material fact or document known to him,
in connection with any existing or proposed transaction by the company. A personal interest of an office holder includes a personal
interest of his relative, of a company in which the office holder or his relative is, a shareholder which holds 5% or more of company’s
share capital or its voting rights, a director or a general manager, or in which he or she has the right to appoint at least one
director or the general manager. A personal interest also includes a personal interest of a person who votes according to a proxy
of another person, even if the other person has no personal interest, and a personal interest of a person who gave a proxy to another
person to vote on his behalf – all whether the discretion how to vote lies with the person voting or not. In the case of
an extraordinary transaction, the office holder’s duty to disclose applies also to a personal interest of the office holder’s
relative.



Under Israeli law,
an extraordinary transaction is a transaction which is not in the ordinary course of business, not on market terms or which is
likely to have a material impact on the company’s profitability, assets or liabilities.



Under the Israeli Companies
Law, once an office holder complies with the above disclosure requirement, the board of directors may approve an ordinary transaction
between the company and an office holder, or a third party in which an office holder has a personal interest, unless the articles
of association provide otherwise. A transaction that is adverse to the company’s interest cannot be approved.



141







If the transaction
is an extraordinary transaction, both the audit committee and the board of directors, in that order, must approve the transaction.
Under specific circumstances, shareholders approval may also be required. Whoever has a personal interest in a matter, which is
considered at a meeting of the board of directors or the audit committee, may not be present at this meeting or vote on this matter.
However, if the chairman of the board of directors or the chairman of the audit committee has determined that the presence of such
person is required to present a matter to the meeting, such officer holder may be present at the meeting. Notwithstanding the foregoing,
if the majority of the directors have a personal interest in a matter, a director who has the personal interest in this matter
may be present at this meeting or vote on this matter, but the board of directors’ decision requires the shareholder approval.



Controlling Shareholder
Transactions and Actions



Under the Israeli Companies
Law, the disclosure requirements which apply to an office holder also apply to a controlling shareholder of a public company and
to a person who would become a controlling shareholder as a result of a private placement. A controlling shareholder includes a
person who has the ability to direct the activities of a company, other than if this power derives solely from his/her position
on the board of directors or any other position with the company. In addition, for such purposes a controlling shareholder includes
a shareholder that holds 25% or more of the voting rights in a public company if no other shareholder owns more than 50% of the
voting rights in the company.



Extraordinary transactions
with a controlling shareholder or in which a controlling shareholder has a personal interest, including a private placement in
which a controlling shareholder has a personal interest; and the terms of engagement of the company, directly or indirectly, with
a controlling shareholder or his or her relative (including through a corporation controlled by a controlling shareholder), regarding
the company’s receipt of services, and if such controlling shareholder is also an office holder of the company or an employee,
regarding his or her terms of office and employment, require the approval of the audit committee or the compensation committee
(in case of terms of employment), the board of directors and the shareholders of the company, in that order. The shareholders approval
must include either:



| | · | a majority of the shareholders who have no personal interest
in the transaction and who are participating in the voting, in person, by proxy or by written ballot, at the meeting (votes abstaining
shall not be taken into account); or
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the total number of shares voted against the proposal
by shareholders without a personal interest does not exceed two percent (2%) of the aggregate voting rights in the Company.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



142







In addition, any such
transaction whose term is more than three years, requires the abovementioned approval every three years, unless (with respect to
transactions not involving receiving of services or compensation) the audit committee approves that a longer term is reasonable
under the circumstances.



However, under Regulations,
promulgated pursuant to the Israeli Companies Law, certain transactions between a company and its controlling shareholder(s) (or
the controlling shareholder’s relative) do not require shareholder approval.



For information concerning
the direct and indirect personal interests of certain of our office holders and principal shareholders in certain transactions
with us, see “Item 7. Major Shareholders – B. Related Party Transactions.”



The Israeli Companies
Law requires that every shareholder that participates, either by proxy or in person, in a vote regarding a transaction with a controlling
shareholder indicate whether or not that shareholder has a personal interest in the vote in question, the failure of which results
in the invalidation of that shareholder’s vote.



The Israeli Companies
Law further provides that an acquisition of shares in a public company must be made by means of a tender offer if as a result of
the acquisition the purchaser would become a holder of 45% of the voting rights of the company, unless there is a holder of more
than 45% of the voting rights of the company or would become a holder of 25% of the voting rights unless there is another person
holding 25% of the voting rights. This restriction does not apply to: (i) an acquisition of shares in a private placement, if the
acquisition had been approved in a shareholders meeting under certain circumstances; (ii) an acquisition of shares from a holder
of at least 25% of the voting rights, as a result of which a person would become a holder of at least 25% of the voting rights;
and (iii) an acquisition of shares from a holder of more than 45% of the voting rights, as a result of which the acquirer would
become a holder of more than 45% of the voting rights in the company.



Regulations under the
Israeli Companies Law provide that the Israeli Companies Law’s tender offer rules do not apply to a company whose shares
are publicly traded outside of Israel, if, pursuant to the applicable foreign laws or stock exchange rules, there is a restriction
on the acquisition of any level of control of the company, or if the acquisition of any level of control of the company requires
the purchaser to make a tender offer to the public shareholders. It is the view of the Israeli Securities Authority, that U.S.
securities laws and stock exchange rules do not impose the required restriction on the acquisition of any level of control of a
company, and therefore the Israeli Companies Law’s special tender offer rules would apply to a company whose shares are publicly
traded in the United States.



The Israeli Companies
Law further provides that a shareholder has a duty to act in good faith towards the company and other shareholders when exercising
his rights and duties and shall refrain from oppressing other shareholders, including in connection with the voting at a shareholders’
meeting on: (i) any amendment to the articles of association; (ii) an increase in the company’s authorized share capital;
(iii) a merger; or (iv) approval of certain transactions with control persons and other related parties, which require shareholder
approval. In addition, any controlling shareholder, any shareholder who knows that it possesses power to determine the outcome
of a shareholder vote and any shareholder who, pursuant to the provisions of a company’s Articles of Association, has the
power to appoint or prevent the appointment of an office holder in the company, or has any other power over the company, is under
a duty to act with fairness towards the company. Under the Companies Law, the laws that apply to a breach of a contract will generally
also apply to a breach of duty of fairness.



143







Exemption, Insurance and Indemnification
of Directors and Officers



Office Holder
Exemption



Under the Israeli
Companies Law, a company may not exempt an officer or director (each, an “Office Holder”) from liability with respect
to a breach of his duty of loyalty, but may exempt in advance an Office Holder from his liability to the company, in whole or in
part, with respect to a breach of his duty of care (except in connection with a prohibited distribution made by the company) if
so provided in its articles of association. Our Articles of Association so provide.



Following approval
by our audit committee and board of directors, on June 12, 2008 our shareholders approved a resolution exempting the Company’s
directors and officers, including any of the Company’s controlling shareholders who serve as directors or officers of the
Company, to the fullest extent permitted by law, from liability towards the Company with respect to any damage caused or that will
be caused to the Company by its directors and officers as a result of a breach of their duty of care toward the Company or following
a bona fide action taken by them in the connection with their position in the Company, including actions taken while serving as
directors or officers in another company, in connection with their position in the Company.



BSRE previously approved
a prospective (in advance) exemption to BSRE’s directors and officers from liability for damage resulting from a breach of
his duty of care towards BSRE in connection with actions taken in good faith in their capacity as a director and/or officer of
BSRE or in their capacity as an officer of another company at the request of BSRE.



Office Holder Insurance



The Israeli Companies
Law and our Articles of Association provide that, subject to the provisions of the Israeli Companies Law, we may enter into a contract
for the insurance of the liability of any of our Office Holders for any act performed by him in his capacity as an Office Holder
with respect to any of the following:



| | · | a breach of such Office Holder’s duty of care to the Company or to another person;
| | - | ----------------------------------------------------------------------------------



| | · | a breach of such Office Holder’s duty of loyalty to the Company, provided that the Office
Holder acted in good faith and had reasonable cause to assume that his act would not prejudice the Company’s interests;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

144







| | · | a financial liability imposed upon such Office Holder in favor of another person; or
| | - | ------------------------------------------------------------------------------------



| | · | a breach of any duty or any other obligation, to the extent insurance may be permitting by law.
| | - | -----------------------------------------------------------------------------------------------



Pursuant to resolutions
adopted by our shareholders in March 2011, we participate in a directors’ and officers’ liability insurance policy
acquired by Alon. The extension of the directors’ and officers’ liability insurance was approved for each of the years
2012, 2013 and 2014 by our Audit Committee and by the Board of directors. As extended, the insurance policy is for a period beginning
on January 1, 2014, and ending on December 31, 2014 covering the Company and affiliated entities, including Dor Alon and its subsidiaries,
BSRE and its subsidiaries, Naaman and its subsidiaries and Alon and its subsidiaries (collectively, the “Group”). Such
policy would cover a total liability of US $50 million (for each claim and in the aggregate) for the Company, including legal fees,
and US $30 million (for each claim and in the aggregate), including legal fees, for each of the other members of the Group, excluding
the Company, provided that in any event the maximum aggregate coverage of liability for the entire Group would be US $50 million.
Our audit committee, board of directors and shareholders have also approved any renewal of the insurance policy or the
participation by the Company in future directors’ and officers’ liability insurance policies covering the Company and
all or some members of the Group, under substantially the same terms and conditions as the original insurance, upon its expiration,
for a period of up to an additional four years from the end of the term of the original insurance policy. The participation in
any future insurance policies would be subject to the following conditions: (i) the determination by the audit committee and board
of directors that there will be no substantive changes between the original insurance policy and the future insurance policies;
a change to the scope of coverage under the future insurance policies will not be deemed to be substantive so long as the premium
paid by the Group for such future insurance policies will be as described in section (ii) below; and (ii) the premium paid for
the future insurance policies will not increase by more than the greater of (A) 25% over the cost of the premium paid for the insurance
policy of the previous year; or (B) 25% over the cost of the premium paid for the original insurance policy (in each case plus
the rate of depreciation of the NIS in relation to the US dollar, to the extent such a depreciation occurred).



Indemnification
of Office Holders



The Israeli Companies
Law provides that a company may indemnify an Office Holder for the following liabilities or expenses imposed on him as a result
of an act performed in his capacity as an Office Holder of the company, provided the company’s articles of association include
the following provisions with respect to indemnification:



145







| | · | a provision authorizing the company to indemnify an Office Holder for future events with respect
to a monetary liability imposed on him in favor of another person pursuant to a judgment (including a judgment given in a settlement
or an arbitrator’s award approved by the court), so long as such indemnification is limited to types of events which, in
the board of directors’ opinion, are foreseeable at the time of granting the indemnity undertaking in view of the company’s
actual business, and in such amount or standard as the board of directors deems reasonable under the circumstances. Such undertaking
must specify the events that, in the board of directors’ opinion, are foreseeable in view of the company’s actual business
at the time of the undertaking and the amount or the standards that the board of directors deemed reasonable at the time;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | a provision authorizing the company to indemnify an Office Holder for future events with respect
to reasonable litigation expenses, including counsel fees, incurred by an Office Holder or which he is ordered to pay by a court,
in proceedings that the company institutes against him or instituted on behalf of the company or by another person, or in a criminal
charge from which he was acquitted, or a criminal charge in which he was convicted for a criminal offense that does not require
proof of criminal intent;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | a provision authorizing the company to indemnify an Office Holder for future events with respect
to reasonable litigation fees, including attorney’s fees, incurred by an Office Holder in consequence of an investigation
or proceeding filed against him by an authority that is authorized to conduct such investigation or proceeding, and that resulted
without filing an indictment against him and without imposing on him financial obligation in lieu of a criminal proceeding, or
that resulted without filing an indictment against him but with imposing on him a financial obligation as an alternative to a criminal
proceeding in respect of an offense that does not require the proof of criminal intent or in connection with a monetary sanction;
and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | a provision authorizing the company to retroactively indemnify an Office Holder.
| | - | --------------------------------------------------------------------------------



On June 12, 2008,
following approval of our audit committee and board of directors, our shareholders approved amendments to our Articles of Association
pertaining to indemnification of directors and officers that reflect the provisions of the Israeli Companies Law described above.



Our Articles of Association
provide that we may undertake to indemnify an Office Holder for obligations or expenses imposed on him as a result of an act done
in his capacity as an Office Holder in the Company or as a result of being an Office Holder, in another company in which the Company
holds shares or has interests, as specified above.



Our Articles of Association
further provide that the aggregate amount of indemnification (in addition to any insurance proceeds received) shall not exceed 25%
of the shareholders’ equity of the Company, as set forth in the Company’s most recent consolidated financial statements
prior to the applicable payment of indemnification.



146







Limitations
on Insurance, Exemption and Indemnification



The Israeli Companies
Law and our Articles of Association provide that a company may not exempt or indemnify an Office Holder nor enter into an insurance
contract, which would provide coverage for any monetary liability incurred as a result of any of the following:



| | · | a breach by the Office Holder of his duty of loyalty, except for insurance and indemnification
where the Office Holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | a breach by the Office Holder of his duty of care if the breach was done intentionally or recklessly
(except if the breach was solely as a result of negligence);
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | any act or omission done with the intent to derive an illegal personal benefit; or
| | - | ----------------------------------------------------------------------------------



| | · | any fine, civil fine, monetary sanctions, or forfeit imposed on the Office Holder.
| | - | ----------------------------------------------------------------------------------



In addition, under
the Israeli Companies Law, exemption of, indemnification of, and procurement of insurance coverage for, our Office Holders must
be approved by our compensation committee and board of directors and, in specified circumstances, by our shareholders.



Letters of Indemnification



On June 12, 2008,
following approval of our audit committee and board of directors, our shareholders approved the grant of indemnification and exemption
letters to the Company’s directors and officers (and to those who will serve as its directors and officers from time to time).
The aggregate amount of the indemnification (in addition to any insurance proceeds received) may not exceed 25% of the Company’s
equity as set forth in the Company’s most recent consolidated financial statements prior to the applicable payment of indemnification.



Under the indemnification
letters, the Company undertook to indemnify its directors and officers for obligations or expenses that may be imposed on them
as a result of their actions in their capacity as an Office Holder in the Company or as a result of actions in their capacity as
an Office Holder or the holder of any other position in another company in which the Company holds rights or is an interested party
therein (unless fulfilling the position in the other company is not in connection with their function in the Company or at its
request), as permitted by the Company’s Articles of Association. For further information, see above “Indemnification
of Office Holders”.



Under the indemnification
letters, the Company undertook to indemnify its directors and officers prospectively and retroactively with respect to following
events:



147







| | · | Issue of securities, including, an offering of securities to the public pursuant to a prospectus,
private placement, tender offer or offering of securities in any other manner;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | An event connected with the making of an investment by the Company before, during and after the
effecting of the investment, in the course of negotiations, contractual arrangement, signature, development and monitoring the
investment, including actions performed on behalf of the Company as an officer, employee or observer in the corporation in which
the investment is made;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | A transaction or arrangement, including a transfer, sale or purchase of assets or liabilities,
and including, goods, real estate, securities, or rights, or the giving or receiving of a right in any one of them and any action
connected, directly or indirectly with such transaction, and including a tender offer of any sort and another transaction in securities
which the Company has issued, whether or not the Company is a party thereto;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | A report or notice filed or submitted according to any law, including, an event arising from the
fact of the Company being a public company or arising from the fact of its securities having been offered to the public, or arising
from the fact of its securities being traded on a stock exchange, and including, a report or notice in accordance with the Companies
Law - 1999 or the Securities Law - 1968, or the tax laws including regulations or directives made pursuant thereto, or in accordance
with laws or provisions that apply outside of Israel or a report or notice lodged or submitted in accordance with rules, directives
or instructions customarily practiced on the stock exchange in Israel or abroad and/or failure to submit such report or notice;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | An act in connection with voting rights in investee companies;
| | - | --------------------------------------------------------------



| | · | An act in connection with the management of market risks.
| | - | ---------------------------------------------------------



| | · | A change in the structure of the Company or its reorganization or any resolution relating thereto,
including, a merger, split, alteration of the capital of the Company, setting up of subsidiaries, winding-up or sale thereof.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Action connected directly or indirectly with employer-employee relationships in the Company and/or
the commercial relations of the Company, including employees, external contractors, customers, suppliers and service providers,
including negotiations, entering into and implementation of personal employment agreements or collective bargaining agreements,
benefits to employees, including the issue of securities to employees.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | An act in connection, directly or indirectly, with the sale of products, purchase of products,
import of products, operation of stores and sites of the Company, safeguarding of public health and safety instructions and provisions.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



148







| | · | An act in connection with the issue or non-issue of licenses and permits for the Company’s
activities.
| | - | ------------------------------------------------------------------------------------------------------



| | · | The preparation and approval of financial statements, including the approval of resolutions regarding
the application of accounting standards and restatement in the financial statements.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | An act in connection with a distribution, including, for a repurchase by the Company of its own
securities.
| | - | -----------------------------------------------------------------------------------------------------------



| | · | The transfer of information that is required or permissible for transfer according to law between
the Company and/or the other companies and interested parties in any of them.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Remarks, statements including the expression of a position or opinion made in good faith by the
officer in the course of performing his function and by virtue of his function, and including in the framework of meetings of the
board of directors or any of its committees.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | An act or deed on matters of planning and building, work safety, the environment and recycling,
public health, consumer protection.
| | - | -----------------------------------------------------------------------------------------------------------------------------------



Pursuant to the indemnification
letters, upon their issuance, all previous indemnification letters previously issued to each director or officer by the Company
were cancelled, effective as of the date of approval of the indemnity resolution. Notwithstanding, such revocation will not prejudice
or derogate from the validity of previous indemnification letters issued to such director or officer by the Company, to the extent
that such undertaking is valid according to law and applies to actions with respect to the period preceding the approval of the
indemnity resolution, and provided that such entitlement to indemnity in respect of such liability and/or expense will only be
in accordance with one of the indemnification letters.



Committees



Our board of directors
has established an audit committee, a compensation committee, a Compliance Committee and a Corporate Governance Committee.



Compensation
Committee



Under a recent amendment
to the Companies Law, the board of directors of a public company must establish a compensation committee consisting of at least
three directors and including all of the external directors. The remaining members must be qualified to serve on the audit committee,
pursuant to Companies Law requirements described above. The compensation committee chairman shall be an external director. Any
persons disqualified from serving as a member of the compensation committee may not be present at the compensation committee meetings,
unless the chairman of the compensation committee has determined that the presence of such person is required to present a matter
to the meeting or if such person qualifies under an available exemption in the Companies Law.



149







The provisions of the
Companies Law that govern the compensation and reimbursement terms of external directors also apply to members of the compensation
committee who are not external directors. Under New York Stock Exchange rules, listed companies must maintain a compensation consisting
of only independent directors. The role of the compensation committee for New York Stock Exchange purposes includes making recommendations
to the board with respect to executive officer compensation and incentive-compensation and equity-based plans that are subject
to board approval. Our compensation committee, which consists of Uzi Baram, David Alphandary and Avraham Meron, administers issues
relating to employee compensation for senior management.



Audit Committee



Our audit committee,
which consists of David Alphandary, Uzi Baram and Avraham Meron, has the powers as described above. The audit committee also assists
the board of directors in overseeing the quality and integrity of our accounting, auditing and reporting practices and in the approval
of our financial statements. For more information regarding the role of our audit committee see also “Item 6. Directors,
Senior Management and Employees - C. Board Practices - Audit Committees.”



Compliance Committee



Our Compliance Committee,
which consists of David Alphandary, Avraham Meron and Uzi Baram convenes semi-annually to examine the internal compliance plan
of the Company and the management’s compliance with the plan. If case of a significant breach of the Company’s internal
compliance plan, the Compliance Committee will convene.



Corporate Governance
Committee



Our Corporate Governance
Committee, which consists of Uzi Baram and Avraham Meron, convenes periodically to discuss the improvement of corporate governance
in the Company, including with regard to regulatory, environmental protection, marketing, labor and other issues.



D.           Employees.



As of December 31,
2013, Mega employed 7,454 employees (including employees of Eden Teva), counting multiple employees sharing a single position as
a single employee, including 1,477 temporary employees. 849 of our employees were employed in central management and administration
and in our logistics center and 6,605 in our stores. As of December 31, 2012, Mega employed 7,240 employees (including employees
of Eden Teva), counting multiple employees sharing a single position as a single employee, including 1,780 temporary employees.
746 of our employees were employed in central management and administration and in our logistics center and 6,494 in our stores.



150









As of December 31,
2013, Dor Alon employed 2,713 employees, 108 of Dor Alon’s employees were employed in central management and administration
and in Dor Alon’s logistics center and 2,605 in Dor Alon’s direct marketing sector and filling stations and convenience
stores. As of December 31, 2012, Dor Alon employed 2,628 employees, 107 of Dor Alon’s employees were employed in central
management and administration and in Dor Alon’s logistics center and 2,521 in Dor Alon’s direct marketing sector and
filling stations and convenience stores.



As of December 31,
2013, our non-food segment employed 753 employees, 149 of our non-food segment’s employees were employed in central management
and administration and in its logistics center and 604 in our non-food stores. As of December 31, 2012, our non-food segment employed
935 employees, 344 of our non-food segment’s employees were employed in central management and administration and in its
logistics center and 501 in our non-food segment’s stores.



As of December 31,
2013, BSRE employed ten employees, not including six members of BSRE’s senior management who provide services to the Company
under the services agreement with the Company. See “Item 7. Major Shareholders and Related Party Transactions - B. Related
Party Transactions - Arrangements between Alon Blue Square and Various Subsidiaries.” As of December 31, 2012, BSRE employed
ten employees.



As of December 31,
2013, Alon Cellular employed 35 employees. As of December 31, 2012, Alon Cellular employed 33 employees.



We are subject to labor
laws and regulations in Israel. Most of Mega Retail’s employees are subject to collective bargaining labor agreements. Under
a Special Collective Bargaining Agreement, referred to as the Special Agreement, from May 1996, among the Co-Op, Alon Blue
Square, the Histadrut (General Federation of Labor in Israel) (Histadrut), the National Committee of the Co-Op Union Employees
and the Co-Op Union, all the Co-Op employees became employees of Alon Blue Square. The collective bargaining agreements in effect
as of that date apply to Alon Blue Square as if Alon Blue Square and these employees were originally parties to these agreements.
Alon Blue Square became responsible for the payment of all employee benefits that had been accrued in respect of these employees
during the term of employment of these employees with the Co-Op, to the extent these benefits were recorded on the Co-Op’s
records. Since 1996, we entered into new labor agreements with the Histadrut and the Co-Op union, which determine our employees
wages structure, the employment conditions of new employees and a wage increase to the existing employees. The above applies to
Mega Retail employees. On January 1, 2011, substantially all of the employees of Alon Blue Square assigned to Mega Retail’s
supermarkets were transferred to Mega Retail.





151









Israeli law generally
requires the payment by employers of severance pay upon the retirement or death of an employee or upon termination of employment
by the employer or, in some circumstances, by the employee. We currently fund ongoing severance obligations by making monthly payments
to pension funds, employee accounts in a provident fund and insurance policies. In addition, Israeli employees and employers are
required to pay specified amounts to the National Insurance Institute, which is similar to the U.S. Social Security Administration.
Since January 1, 1995, these amounts also include payments for national health insurance payable by employees. Most of our
employees are covered by a pension fund. Our senior employees are covered by general and/or individual life and pension insurance
policies providing customary benefits to employees, including retirement and severance benefits.





E.           Share
Ownership.





As of March 31, 2014
other than indirect ownership through Alon or Alon Retail and David Wiessman’s ownership of 1.06%, none of our directors
or officers owned more than 1% of our outstanding equity securities.





On January 21, 2008,
we adopted a share option plan (the “Plan”) for officers and employees of Alon Blue Square and/or its subsidiaries
and/or affiliated companies.



The Plan expired in
March 2011. As of December 31, 2013, there were no outstanding options under the Plan.



| | ITEM 7. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
| | ------- | -------------------------------------------------



A.    Major
Shareholders.



The following table
sets forth certain information regarding the beneficial ownership of our ordinary shares as of March 14, 2014, by each person or
entity known to own beneficially 5% or more of our outstanding ordinary shares based on information provided to us by the holders
or disclosed in public filings with the Securities and Exchange Commission. Our major shareholders do not have voting rights different
from the voting rights of our other shareholders.



|Name                                                    |  | Number of Ordinary Shares Beneficially Owned |            |  | Percentage of Outstanding Ordinary Shares(1) | 
|------------------------------------------------------- |  | -------------------------------------------- | ---------- |  | -------------------------------------------- | 
|Alon Israel Oil Company Ltd.(2)                         |  |                                              | 47,957,264 |  |                                              | 
|                                                        |  |                                              |            |  |                                              | 
|Alon Retail Ltd.(3)                                     |  |                                              | 30,604,303 |  |                                              | 
|                                                        |  |                                              |            |  |                                              | 
|Menorah Mivtachim Holdings Ltd.(4)                      |  |                                              | 5,200,622  |  |                                              | 
|                                                        |  |                                              |            |  |                                              | 
|Directors and Officers of the Company as a group (5)(6) |  |                                              | 699,117    |  |                                              | 



152














| | (1) | The percentage of outstanding ordinary shares is based on 65,954,427 ordinary shares outstanding
as of March 14, 2014 (excluding 207,433 ordinary shares held by Alon Blue Square as treasury shares).
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Alon may be deemed to beneficially own all of the shares held directly and indirectly by Alon Retail
Ltd. due to the ownership structure of Alon Retail described in footnote (3); accordingly, the number of shares listed as owned
by Alon includes all the shares that are listed as owned by Alon Retail Ltd.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | Alon Retail Ltd. is a wholly owned subsidiary of Nissan Alon Retail Holdings Ltd., which is a wholly
owned subsidiary of the Nissan Dor Chains Ltd., which is a wholly owned subsidiary of Dor Food Chains Holdings Ltd., a wholly owned
subsidiary of Alon. To the Company’s best knowledge, Alon is owned approximately 48.21% (excluding shares held by Alon as
treasury shares) by eight collective acquisition entities of kibbutzim in Israel and approximately 51.79% (excluding shares held
by Alon as treasury shares) are held by Bielsol Investments (1987) Ltd. To the Company’s best knowledge, the shareholders
of Bielsol Investments (1987) Ltd. consist of Shibag Ltd. (whose shareholders are Advocate Shraga Biran, and Gara, Boaz and Iftah
Biran, and which is controlled by Advocate Shraga Biran who holds all of the voting rights in Shibag Ltd. through a direct holding
in 85% of the shares that grant voting rights in Shibag Ltd. (“Voting Shares in Shibag”) and through a power of attorney
relating to voting rights for the other 15% of the Voting Rights in Shibag held by Mr. Boaz Biran), holding 79.4% of the capital
and voting rights of Bielsol Investments; D.B.W Investments Ltd. (a company owned and controlled by Mr. David Wiessman), holding
19.8% of the capital and voting rights of Bielsol Investments; Shibago Ltd. (whose partners are Shibag Ltd. (75%) and a company
owned and controlled by David Wiessman (25%)), holding 0.8% of the capital and voting rights of Bielsol Investments.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | The shares are held by subsidiaries of Menora Mivtachim Holdings Ltd. (“Menora Holdings”),
as follows: Menora Mivtachim Insurance Ltd., Menora Mivtachim Pensions and Gemel Ltd., Shomera Insurance Company Ltd, and Menora
Mivtachim Mutual Funds Ltd. To the Company’s best knowledge, Menora Holdings is a publicly traded Israeli company (listed
on the Tel Aviv Stock Exchange). Approximately 61.9% of Menora Holdings outstanding shares are held by Najaden Establishment and
Palamas Establishment, foreign corporations, incorporated in Vaduz, Liechtenstein. These corporations are held in trust, and the
heirs by will of the deceased Mr. Menachem Gurevitch are the sole beneficiaries. The remaining of the outstanding shares is held
by the public. Menora Mivtachim Insurance Ltd., Menora Mivtachim Pensions and Gemel Ltd., Menora Mivtachim Finance Ltd. and Shomera
Insurance Company Ltd. are wholly owned subsidiaries of Menora Holdings. Menora Mivtachim Mutual Funds Ltd. is a wholly owned subsidiary
of Menora Mivtachim Finance Ltd. (which is wholly owned by Menora Holdings). Part of the shares reported as owned by Menora Holdings
via Menora Mivtachim Insurance Ltd., Menora Mivtachim Pensions Ltd., Menora Mivtachim Gemel Ltd. and Menora Mutual Funds Ltd. are
held on behalf of members of the public (customers on behalf of whom the above-mentioned companies invest) through various financial
instruments, such as, among others - provident funds, mutual funds, pension funds and insurance policies. Each of the above-mentioned
companies makes independent voting and investment decisions.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (5) | Represents shares owned by Mr. David Wiessman, the Company’s Chief Executive Officer,
Chief Operating Decision Maker and director.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------



| | (6) | Does not take into account Ordinary Shares that directors of the Company may be deemed to beneficially
own by virtue of their interest in, or relationship with, Alon Israel Oil Company Ltd. or Alon Retail Ltd.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of March 20, 2014,
Alon Blue Square had approximately 55 shareholders of record with a United States address. As of March 20, 2014, these United States
record holders held approximately 1,406,751 ordinary shares in the form of ADSs, representing approximately 2.13% of our then outstanding
share capital.



153







In October 2010, following
the sale by Alon of its approximately 80% interest in Dor Alon to Alon Blue Square, Alon’s direct and indirect ownership
in Alon Blue Square increased to approximately 78.35% of the outstanding share capital of Alon Blue Square from approximately 68.62%
of the outstanding share capital of Alon Blue Square.



B.     Related
Party Transactions.



Agreement with
the Wholesale Market Company



On June 3, 2010, BSRE,
Gindi Investments 1 Ltd. and an additional entity controlled by Moshe and Yigal Gindi (together with Gindi Investments 1 Ltd.,
“Gindi”) (the “Purchasers”) signed agreements with the Municipality of Tel Aviv and the Wholesale Market
Company (collectively, the “Sellers”) to acquire rights to a long term lease of property in the wholesale market site
in Tel Aviv (the “Property”). As of December 31, 2013, BSRE owned 49.5% of the company that owns the residential building
rights and 50% of the company that owns the commercial building rights. One of the Sellers was Tnuva, and
to our knowledge, some of the collective acquisition entities of kibbutzim in Israel that hold shares of Alon, our controlling
shareholder, hold 23% of the shares of Tnuva. In addition, our director, Yitzhak Bader, also serves as a director on the board
of directors of Tnuva. On June 2, 2010, the shareholders of BSRE approved the signing of the final agreements. The agreements
were approved by the Israeli Minister of the Interior in July 2010.



The long term lease
on the Property is until August 31, 2099, and the Purchasers, including BSRE, intend to plan, build and market on such Property
an apartment buildings complex and a shopping mall. The Property consists of building rights of approximately 97,460 square meters,
of which approximately 62,640 square meters are designated for residential use, approximately 10,320 square meters are designated
for mixed use (including for residential, office and/or retirement home use), and approximately 24,500 square meters are designated
for commercial use, part of which would be located on the ground floor of the residential buildings.



The Purchasers were
required to pay the Sellers a purchase price of NIS 950 million payable in three installments. In addition to the purchase
price, the Sellers may be entitled to additional consideration calculated as a percentage of the sale price of apartments that
are sold in the apartment buildings complex, as described in the agreement. On May 31, 2012, the Purchasers completed the purchase
of the Property and paid the Sellers the balance of the consideration in the aggregate amount of approximately NIS 730 million
plus VAT.



The Purchasers plan
to build (i) 10 buildings, each building consisting of 14 floors, (ii) 722 residential units for sale and 54 units which will be
leased in accordance with certain criteria determined by the Municipality of Tel Aviv and the Purchasers, and (iii) 35,000 square
meters leased space for commercial use. As of January 7, 2014, the building permits for all 722 of the residential units have been
granted as well as permits to for the commercial space. The Sellers are to bear the expense of building buildings for public use,
such as sport center, school and other neighborhood public facilities, and are to pay the Purchasers a fee (linked to the Building
Index) calculated as cost plus 10% plus VAT, based on certain milestones detailed in the agreement, up to a maximum of approximately
NIS 84 to 102 million. Any expenses that exceed this limit are to be borne by the Purchasers. The Purchasers also committed to
build an additional 40 parking spaces and to develop, at their own expense, an open public space within the area of the Wholesale
Market Project on an area of nine dunam, which would remain under the exclusive ownership of the municipality of Tel Aviv.



154







Gindi is to provide
management services for the Wholesale Market Project in exchange for a management fee to be paid by the Purchasers and calculated
as 16% of the profits from the Wholesale Market Project, all subject to various terms of the agreement of principles between the
parties. In addition, they determined material issues regarding the construction and the management of the parking lot in which
an unanimously decision is required, and principles regarding dilution of each of the parties’ rights in the event that one
of the parties will not invest the amounts that such party obligated to invest.



In order to pay the
balance of the consideration, the Purchasers received loans in the amount of NIS 730 million from a bank at an annual interest
rate of prime plus 2% for a 18 month term. The principal is due in one sum at the end of the term and interest is payable quarterly.
The bank also provided the Purchasers with a two-month loan in the amount of NIS 120 million to pay the VAT (which has since been
repaid). To secure the loan BSRE granted a lien to the bank on its shares in the Purchasers, and the lien was charged in favor
of the bank.



During the third quarter
of 2012, the excavation and reinforcement works in the Wholesale Market Project were completed and the performance of skeleton
work commenced. On July 3, 2012, the Purchasers signed an agreement with a contractor to perform all skeleton work of the parking
lots, the commercial part, public structures and other finishing work. The Purchasers will pay the contractor for the work an estimated
amount of NIS 286 million, with BSRE’s portion amounting to NIS 143 million.



As
of march 23, 2014, 677 sale agreements had been signed and advance payments in the aggregate amount of NIS 962 million (including
vat) had been received from the purchasers.For more
information on the loan, see“item 4. Information on the company – A. history
and development of Alon Blue Square - our real estate segment.”



Purchase of Property
in Point Wells, Washington from Indirect Subsidiary of Alon



On June 1, 2010, BSRE
completed the acquisition of an approximately 240-dunam parcel (approximately 59 acres) of property in Point Wells, near Seattle,
Washington, which serves primarily as a plant for storage and distribution of fuel and oils. BSRE purchased the property through
a wholly owned special purpose entity, BSRE Point Wells, LP, which had entered into a purchase agreement, dated May 7, 2010, with
POW for the property and into a development agreement, dated June 1, 2010, with POW and PPC. PPC leases the property from POW and
operates and maintains it. POW and PPC are wholly owned subsidiaries of Alon USA and is controlled by our indirect controlling
shareholder, Alon Israel Oil Co. Ltd. In the event BSRE sells the land, POW will have the right to participate in the consideration
net of costs as defined in the agreement. For more information on the purchase and development agreements, see “Item 4. Information
On The Company – B. Business Overview – Real Estate.”



155







Arrangements between
Alon Blue Square and Alon



Acquisition of
Controlling Share in Dor-Alon Energy In Israel (1988) LTD.



Alon Blue Square and
Alon, Alon Blue Square’s controlling shareholder, entered into a Share Purchase Agreement, which was completed on October
3, 2010, that provided for the acquisition by Alon Blue Square of Alon’s entire equity interest in Dor Alon (constituting
approximately 80% of the outstanding shares of Dor Alon (not including treasury shares)), or the Transferred Shares, at the closing
of the Acquisition. These shares constituted approximately 73.5% of the outstanding Dor Alon ordinary shares on a fully diluted
basis as of the closing date of the acquisition.



Under the terms of
the Share Purchase Agreement, in consideration for each share held by Alon in Dor Alon, Alon Blue Square issued to Alon 1.8 ordinary
shares of Alon Blue Square, and in exchange for all the Transferred Shares, Alon Blue Square issued to Alon 20,327,710 ordinary
shares of Alon Blue Square, or the Issued Shares. Immediately following the Acquisition, Alon beneficially owned in the aggregate,
directly and indirectly, approximately 78.44% of the outstanding ordinary shares of Alon Blue Square (as opposed to approximately
68.62% of the outstanding shares immediately prior to the Acquisition), and all other Alon Blue Square shareholders owned approximately
21.56% of the outstanding ordinary shares of Alon Blue Square (as opposed to approximately 31.38% of the outstanding ordinary shares
immediately prior to the Acquisition). Upon completion of the Acquisition, Dor Alon became a majority-owned subsidiary of Alon
Blue Square and its shares have continued to trade on the TASE.



As a condition to the
closing of the Share Purchase Agreement, Alon Blue Square paid to its shareholders on October 18, 2010 an aggregate cash dividend
of NIS 800 million, or approximately US $223.4 million (based on the representative rate of exchange on October 18, 2010), which
represented a dividend of approximately NIS 12.31, or approximately US $3.44 (based on the representative rate of exchange on October
18, 2010), per Alon Blue Square ordinary share (after taking into account the shares to be issued to Alon in the acquisition, or
the Dividend Distribution. The Dividend Distribution was made following the issuance of Alon Blue Square ordinary shares to Alon
pursuant to the Share Purchase Agreement and was conditioned thereon. The Dividend Distribution was approved by the Israeli District
Court.



Alon agreed to compensate
and indemnify Alon Blue Square and/or Dor Alon for various damages and/or losses and/or expenses that may be caused to Alon Blue
Square or Dor Alon, provided that the accumulated amount of indemnification to be paid will be no more than the product of (i)
the number of Issued Shares and (ii) the closing price of Alon Blue Square shares on the TASE on the date of the issuance of the
Issued Shares. Alon’s indemnification obligation will apply only to damages in an aggregate amount of over ten million NIS
(NIS 10,000,000). However if the accumulated amount of damages to Alon Blue Square or Dor Alon exceeds this amount, then Alon’s
indemnification obligation will apply to the full amount of damages.



156







In connection with
the proposed acquisition, Alon and Alon Blue Square obtained a pre-ruling from the Israeli Tax Authority. The pre-ruling is subject
to various conditions and provides, among other things, that the cost basis and the purchase date of the shares of Dor Alon for
tax purposes in the possession of Alon Blue Square following the acquisition will be the original price and acquisition date, respectively,
as they had been for Alon prior to the acquisition. Alon has clarified to Alon Blue Square that, in connection with the payment
of tax at the time of any future sale by Alon Blue Square of all or part of its shares in Dor Alon, if any, to a third party, Alon
will pay that portion of any applicable tax payable in an amount equal to the amount of tax deferred by the Tax Authority in its
pre-ruling (i.e., the amount of tax that would have been payable by Alon in connection with the acquisition had the acquisition
not been tax exempt according to the pre-ruling).



Management Services
Agreement with Alon



In March 2014, Alon
and Dor Alon renewed their management services agreement, dated as of December 2010 (“Management Services Agreement”),
for an additional period of three (3) years effective from January 1, 2014, by which Alon shall provide the following services
and rights to Dor Alon (the “Services”): (i) various management services, including those related to the chairman of
the board and president of Dor Alon, day to day management of Dor Alon, strategy and business development, financial management,
supplementary legal counsel, corporate secretary services provided by Alon’s in-house counsel, and (ii) the right to use
the “Alon” and “Alonit” brand names.



In consideration
for the Services, since 2011, the quarterly management fees paid by Dor Alon to Alon equaled to the aggregate of 3% of Dor Alon’s
EBITDA profits according to Dor Alon’s quarterly consolidated financial statements, but not more than NIS 1,250 thousand
on a quarterly basis, linked to the consumer price index dated December 2004. Beginning as of January 1, 2014, the quarterly management
fees to be paid by Dor Alon to Alon shall equal the aggregate of 3% of Dor Alon’s EBITDA profits according to Dor Alon’s
quarterly consolidated financial statements, but not more than NIS 1,375 thousand on a quarterly basis, linked to the consumer
price index published on February 2004. In 2012 and 2013, Alon received approximately NIS 5.9 million and NIS 6.0 million, respectively
for the Services.



Directors and
Officers Insurance



We participate in
a directors’ and officers’ liability insurance policy acquired by Alon. For further information see “Item 6.
Directors, Senior Management and Employees – C. Board Practices – Exemption, Insurance and Indemnification of Directors
and Officers – Office Holder Insurance.”



157







Arrangements between Alon Blue Square
and various subsidiaries



Arrangements
with Dor Alon



Dor Alon Deposit
of Cash Balances Agreement



Pursuant to the agreement
entered into in May 2005, and subsequently extended on January 6, 2011 until January 2016, such extension re-approved by Dor Alon’s
audit committee on December 22, 2013, Dor Alon may, from time to time, deposit funds with Alon and receive in return funds on ON
CALL terms (on an on-demand basis). The amount of funds lent from each party to the other party may not exceed NIS 150 million
at any time (linked to the prime rate less 1.25%). Against the deposits, the depositor is entitled to require the recipient party
to provide her /or third parties bank guarantees or letters of credit. Each party is entitled to redeem or require redemption of
the balance by giving notice of three banking business days. Either party may terminate the agreement by providing three-month
prior written notice.



Procurement Agreement
with Dor Alon Management



Dor Alon Retail Sites
Management Ltd., a subsidiary of Dor-Alon (hereinafter: “Dor Alon Management”), operates convenience stores in fuel
service stations and also in a number of cities in Israel that sell various food and “Non-Food” products. Under the
terms of the agreement between Mega Retail and Dor Alon Management, we agreed to procure products that will be supplied to the
convenience stores, either directly from suppliers or from our distribution center. In consideration of the procurement of products,
Dor Alon Management has agreed to pay Mega Retail (i) for products sent directly from suppliers, an amount equal to the cost of
such products to Mega Retail as determined under the Procurement Agreement plus 2%, and (ii) for products sent from Mega Retail
distribution center, an amount equal to the cost of such products to Mega Retail as determined under Procurement Agreement plus
2.75% plus distribution costs, in each case plus VAT. The cost of the products to Mega Retail will be audited by our independent
public accountants. In the event that Mega Retail’s revenues generated from the Procurement Agreement minus related expenses
from the sale of products to Dor Alon Management is less than NIS 1 million linked to the Israeli consumer price index in any year
without VAT, Dor Alon Management will pay Mega Retail additional amounts in order that Mega Retail’s income from such year
will reach such NIS 1 million amount. To secure Dor Alon Station’s payment and other obligations to us under the Procurement
Agreement, Dor Alon agreed to provide Mega Retail with a floating lien or pledge, unlimited in amount, on all inventory in the
convenience stores, subject to any legal prevention, and Dor-Alon and Alon Israel Oil Company Ltd, the controlling shareholders
of Dor Alon Management, will guarantee all obligations of Dor Alon Management under the agreement.



The term of the Procurement
Agreement is for five years commencing from May 1, 2004, and is automatically extended for additional one-year periods unless either
party gives notice to the other party of its desire to terminate the Procurement Agreement 90 days prior to the expiration of the
term of the Procurement Agreement or such year, as the case may be.



158







In addition, with respect
to convenience stores located in Dor Alon fuel service stations that are operated by third parties, Mega Retail have agreed that
upon Dor Alon’s request, it may enter into separate agreements with respect to such stores with the third party operators
of such stores on substantially similar terms as the Procurement Agreement described above. Dor-Alon and Alon Israel Oil Company
Ltd. would also guarantee the obligations of such third party operators and Dor Alon Stations, under these related separate agreements.



Transactions with
Dor Alon in Connection with Establishment of a Joint Loyalty Plan



On November 29, 2005,
Alon Blue Square entered into the following agreements with Dor-Alon:



(i) an agreement establishing
a joint loyalty plan for the benefit of Alon Blue Square’ and Dor Alon’s customers, formed as a partnership to be held
75% by Alon Blue Square (now held by Mega Retail) and 25% by Dor Alon (the “Loyalty Plan”). The agreement established,
among other things, the formation of the partnership, its management and the arrangements for providing the benefits to the Loyalty
Plan customers;



(ii) an agreement under
which Alon Blue Square and Dor Alon purchased 49% (36.75% Alon Blue Square and 12.25% Dor Alon) of the shares of capital stock
of Diners Israel from CAL for a total consideration of NIS 21.3 million (of which NIS 15.6 million was paid by Alon Blue Square).
The consideration was funded through a non-recourse loan granted by CAL to Alon Blue Square and Dor Alon.



On May 25, 2011, we
agreed to an amendment to the agreement of principles between CAL, Diners Israel, Alon Blue Square, Dor Alon, and the Alon Blue
Square-Dor Alon Joint Loyalty Plan Partnership, and in July 2011, all suspending conditions set forth in the agreement were completed,
the amendment to the agreement came into effect. Pursuant to the amendment, Alon Blue Square and Dor Alon would have the right
to the profits of Diners Israel Ltd. in accordance with their holdings (49% of Diners Israel Ltd.), both related to the “You”
bearing credit cards, and to all other credit cards issued by Diners, effective as of January 1st, 2011. Additionally,
the amendment sets the terms as to the business relationship between the parties, including cancellation mechanism in the event
the Loyalty Plan is cancelled by the purchasers and specific provisions regarding distribution of dividends, and the ongoing relationship
between Diners and the Loyalty Club and Diners management. During July 2011, the Company and Dor Alon exercised their option to
purchase the shares and repaid the loan to CAL.



159







Arrangements
with Bee Group



Supply Agreement
with Bee Group



Mega
Retail is a party to a supply agreement with Bee Group and Fifo Babies Ltd. (collectively, the “Supplier”) through
January 2, 2015. Pursuant to the agreement, Mega Retail purchases the Supplier’s products, including, among others, toys,
houseware, electrical appliances and market the products in Alon Blue Square stores. The Supplier sells its products to Mega Retail
at a discount to the list price of such products. Pursuant to an amendment to the Israeli Companies Law, on November 10, 2011,
the audit committee of Naaman determined that the period of this agreement (ten years from January 3, 2005 to January 2, 2015)
is reasonable under the specific circumstances.



Arrangements between
Alon Blue Square and BSRE



Pursuant to the Transfer
Agreement and Split Agreement entered into by the Company and BSRE, as described in “Item 4. Information on The Company -
B. Business Overview - Real Estate”, Alon Blue Square transferred assets with a total book value as of December 31, 2005
of approximately NIS 1.1 billion and liabilities with a total book value as of December 31, 2005 of approximately NIS 759.3 million.
In consideration, BSRE issued to the Company 22,642 ordinary shares.



In addition, in connection
with the transfer of Company real estate assets to BSRE, and in addition to the agreements between the Company and BSRE, the Company
and BSRE also entered into the following agreements:



Agreements with
Respect to Supermarket Stores



The Company and BSRE
entered into a lease agreement on August 13, 2006 (effective as of January 1, 2006) with respect to the 52 supermarket stores that
were operated directly by the Company prior to December 31, 2005 (plus one property for offices purposes). Under this agreement,
the Company leases from BSRE these properties for an initial period of at least 10 years beginning as of January 1, 2006. The agreement
will automatically be extended for an additional five-year term unless terminated by the Company no less than 24 months prior to
the end of the initial term. The annual rent for the initial period will be equal to the higher of 2% of the annual turnover of
that store or 9% of the amount invested in that store by the Company (as calculated in accordance with the agreement), which amount
is linked to changes in Israel’s consumer price index from the date of such investment. The agreement provides for these
additional provisions:



| | · | Upon 12 months’ notice, at the time of the extension of the agreement the Company may reduce
the number of the leased properties, provided that the rental payments for such properties (according to the average rental payments
for the two years preceding the extension date) does not exceed 15% of the total rent payments for all leased properties on average
for the two years preceding the extension date.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Additional properties may be leased by the Company under the same terms and conditions under the
lease agreement provided that (i) the term of any such new lease agreement entered into during the initial ten-year period commencing
on January 1, 2006 will be for up to 10 years from the date such new leased property is open for business to the public, and (ii)
the aggregate properties that BSRE leases to the Company may not exceed 60,000 square meters. Additional properties added may not
be included in the leased properties reduced in the manner described in the preceding paragraph.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



160







| | · | The Company may terminate the lease of some of the leased properties prior to the end of the lease
term by giving 12 months’ prior notice; however, such termination is limited to a number of leased properties which have
an aggregate area of no more than 5% of the total area of the properties that were leased as of January 1, 2006.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | BSRE may shorten or temporarily stop (suspend) the lease of three properties identified in the
agreement to the extent required to develop or build on the land where such properties are located by giving 12 months’ prior
notice and subject to obtaining a building permit for such development or building at the time the Company must vacate the premises.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | BSRE may shorten or temporarily stop (suspend) the lease of any seven additional properties (five
during the lease term and two during the extension term) to the extent required to develop or build on the land where such properties
are located by giving 12 months’ prior notice and subject to obtaining a building permit for such development or building
at the time the Company must vacate the premises and on the condition that BSRE must bear the costs of vacating the premises and
provide a substitute store at the location with similar characteristics at its own expense within 24 months of the Company vacating
the premises.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On January 1, 2009,
as part of the reorganization of the Company’s supermarket retail activities, the Company transferred all of its supermarket
retail activities to Mega Retail and assigned all of its rights and obligations under this agreement to Mega Retail.



As a result of the
transfer by Mega Retail of the real estate that it holds to BSRE, the lease agreement was extended to a term of up to ten years
commencing on March 31, 2009. In addition, at the end of the term there is an option to extend for an additional term of five years
under the same terms. Due to an amendment to the Companies Law, on November 16, 2011, the audit committee of BSRE determined that
the period of the lease agreement, which exceeds three years, is reasonable under circumstances and in light of the nature of the
transaction.



Agreements with Respect to
Properties Operated by Mega Retail.



On June 23, 2006,
the Company entered into a lease agreement with Mega Retail pursuant to the lease agreement provisions of the general services
framework and expenses allotment agreement which the Company entered into with Mega Retail on October 11, 2005 (the “Lease
Agreement”). The Company assigned to BSRE all of its rights and obligations under the Lease Agreement. The underlying properties
(23 supermarket stores) were also transferred by the Company to BSRE. See below –“Item 7. Major Shareholders and Related
Party Transactions - B. Related Party Transactions - Arrangements between Alon blue square and various subsidiaries -Transfer of
Real Estate Assets from Mega Retail to BSRE.”



161







The Lease Agreement
provided that the annual rent for property used for stores is to be equal to the higher of 2% of the annual turnover of that store
or 9% of the amount invested in that store (as calculated in accordance with the agreement), which amount is linked to changes
in Israel’s consumer price index from the date of such investment. The annual rent for property not used for stores is 9%
of the amount invested by the Company which amount is linked to changes in Israel’s consumer price index from the date of
such investment. The term is for up to ten (10) years from September 1, 2005, and rent payments are charged on an annual basis.



Under the Lease Agreement,
new lease agreements by Mega Retail are to be entered into on the basis of the terms set forth above, provided that (i) the audit
committee and the board of directors will approve each new lease agreement, (ii) the term of any such new lease agreement entered
into within the ten year period commencing on September 1, 2005 will be for a period of up to 10 years from the date such new lease
agreement is executed for a particular property, and (iii) the aggregate properties that BSRE leases to Mega Retail may not exceed
80,000 square meters.



The forgoing lease
agreements are “net lease” that is, the lessee pays all applicable payments and charges for the possession of the leased
property and the usage during the lease period.



At BSRE’s request
to clarify the implementation of lease agreements dated June 23, 2006 and August 13, 2006 between Mega Retail and BSRE, Mega Retail
confirmed that in the event of a sale or lien of any of the transferred assets, the following would apply:



(i)          BSRE
would assign to the buyer all of BSRE’s rights and commitments towards Mega Retail under the lease agreements and the following
would apply:



| | · | Mega Retail would enter into a separate lease agreement with the buyer of the transferred asset,
the terms of which would reflect the terms that appear in the BSRE-Mega Retail lease agreements, with the necessary adjustments.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The base rent ascribed to the transferred asset in the separate lease agreement will be in the
amount that was determined by BSRE, as recommended by an independent assessor, linked to the CPI from January 1, 2006, plus 9%
of the amount invested by BSRE in the transferred asset from January 1, 2006 and thereafter. The rent paid by Mega Retail to the
buyer would be deducted from the lease payment paid by Mega Retail to BSRE under their lease agreement.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



(ii) The rent paid for
the transferred asset would be deducted (commencing from the day of initial payment to the buyer) from the rent paid by Mega Retail
to BSRE for all leased properties by Mega Retail prior to any of sale or lien of assets in a manner that as a result of any sale
or lien of an asset, there would be no change in the amount of the rent paid by Mega Retail for all assets leased to Mega Retail.



162







Transfer of Real
Estate Assets from Mega Retail to BSRE



In September 2009,
Alon Blue Square reorganized its real estate activities pursuant to which Mega Retail transferred all of the real estate held by
it to BSRE. The transfer was completed on September 13, 2009, and, pursuant to the approval of the Israeli Tax Authority, the transfer
was effective as of March 31, 2009.



As part of the transaction,
all real estate property (and related leases) held by Mega Retail and Mega Retail’s subsidiaries were transferred to BSRE.
All real estate property owned by Mega Retail prior to the transfer was leased back by BSRE to Mega Retail for its retail activities
under terms similar to existing lease agreements between BSRE and Mega Retail and existing lease agreements between BSRE and Alon
Blue Square for properties that were previously transferred to Mega Retail, as described below. The periods of the existing lease
agreements were extended to match the period of the new lease agreement, i.e., 10 years from the effective date of the transfer
of the Mega Retail real estate assets to BSRE, with an additional option period of five years exercisable by Mega Retail.



The lease agreements
between BSRE and Mega Retail after the September 2009 transfer contain terms similar to the other lease agreements between BSRE
and Mega Retail, which provide for annual rent for property used for supermarkets to be the higher of 2% of the annual turnover
of that store or 9% of the amount paid by BSRE to purchase the underlying real estate of that store (excluding consideration paid
for certain unused building rights), plus amounts invested by BSRE in the asset, reduced by certain costs and payments and increased
according to Israel’s CPI. The annual rent for property not used for stores is equal to 9% of the amount paid by BSRE, linked
to increases in Israel’s CPI. Due to the recent amendment to the Companies Law, on November 16, 2011, the audit committee
of BSRE determined that the period of the Lease Agreement, which exceeds three years, is reasonable under the circumstances.



The sale of Mega
Retail’s real estate property (and related leases) to BSRE was for an aggregate consideration of approximately NIS 463 million.
As part of the consideration for the transaction, BSRE assumed Mega Retail’s financial liabilities to a bank in an amount
of approximately NIS 390 million that were attributed to the transferred properties and paid the Company the balance of NIS 68
million, representing the difference between the value of the transferred properties (less certain expenses associated with the
transfer) and the assumed liabilities. BSRE financed the assumption of the liabilities by paying a bank NIS 140 million and entering
into a loan agreement with the bank for a 15-year loan for the remaining amount of NIS 250 million. Pursuant to the loan agreement,
BSRE must comply with certain financial terms and covenants. As of March 31, 2014, BSRE met these covenants. In addition, BSRE
has pledged 13 of the transferred properties (including income from the lease agreements with Mega Retail) as collateral for the
loan, and agreed that it will not grant any floating charge on its assets without prior consent from the bank.



163







Management Services
Agreement



Pursuant to an agreement
renewed in January 1, 2014, replacing an agreement entered in August 2006 and extended on December 27, 2010, the Company provides
to BSRE (directly or through its subsidiaries) the following services: Chairman of the board of directors services, financial and
accounting management services (including bookkeeping), guidance concerning financing and fundraising, payments and collection,
guarantees and collateral management, computer management and maintenance service, legal consulting and corporate secretary services,
office space and related office services, internal audit services, consulting services with regards to the capital market, management
consulting services regarding strategic moves, human resource services, payroll accounting services, car fleet management and security
consulting. In consideration for these services, BSRE will pay the Company an annual amount of NIS 5 million. The consideration
was based on an estimate of the Company total costs for these services attributable to BSRE. The consideration is linked to changes
to the Israeli CPI (since December 2013) plus VAT. In addition, BSRE may have request maintenance services subject to additional
consideration for such services in the amount of the direct costs to the Company plus 2%.



This agreement replaced
a substantially similar agreement entered in August 2006, effective as of January 1, 2006, and extended on December 27, 2010, effective
as of January 1, 2011 In consideration for these services, BSRE paid the Company an annual amount of NIS 4.2 million. In addition,
BSRE may have requested maintenance services for additional consideration equal to amount of the direct costs to the Company plus
2%.



The consideration was
based on an estimate of the Company total costs for these services attributable to BSRE. The consideration was linked to changes
to the Israeli CPI (since December 2005). The consideration is increased each year by an amount equal to 0.2% of the difference
between (x) the cost of BSRE assets (prior to depreciation and amortization) (“BSRE Asset Cost”) which are classified
as yield-generating real estate in accordance with BSRE’s consolidated financial statements at the end of the preceding year
and (y) the BSRE Asset Cost as of the end of the preceding year, linked to changes to the Israeli CPI plus VAT. In 2013, the Company
received approximately NIS 5.1 million for the services.



Agreement with respect
to the Allocation of Various Insurance Expenses



Pursuant to an agreement
entered into on August 13, 2006, insurances obtained by BSRE, such as: elementary insurance including, structure insurance, insurance
for independent contractors, funds insurance, third party liability insurance and employers liability insurance will be obtained
within the group policy of the Alon Blue Square group. The insurance costs and expenses are allocated between the parties in accordance
with different ratios determined by the parties depending on the insurance involved. Pursuant to an amendment to the Israeli Companies
Law, on December 13, 2011, the audit committee of the Company determined that this agreement is not an extraordinary agreement
and does not have a material influence on the Company’s profitability, and therefore reapproved this agreement for additional
three years.



164







Deposit of Cash
Balances Agreement





Pursuant to an agreement
effective February 28, 2014, extending an agreement entered in August 2006, BSRE may, with the Company’s consent from time
to time, deposit funds with the Company and receive in return funds on ON CALL terms (on an on-demand basis). The amount of funds
lent from each party to the other party may not exceed NIS 150 million at any time. In case BSRE shall deposit funds with the Company
as an ON CALL deposit, the Company shall grant collateral to BSRE which shall be comprised of BSRE shares in a market value which
is to be be examined each quarter in order that the Company retains a 2:1 ratio between the market value of the collateral and
the amounts deposited by BSRE with the Company. The interest paid by each party for funds received according to this arrangement
will be at a rate equivalent to the rate that the Company is charged by banks in such month for ON CALL credit (short-term loans)
on a monthly weighted average basis. The deposits will be deposited for periods of not exceeding one year and will be renewed from
time to time. The agreement was renewed for a period of three years from February 28, 2014. The agreement may be terminated by
either party upon seven days’ prior notice. Prior to the extension the amount of funds to be lent from each party to the
other party may have not exceeded NIS 200 million at any time and no collateral was granted in exchange for deposited funds.





In addition, the Company
and BSRE entered into an agreement with respect to transfer of employees from the Company to BSRE.



Ordinary
Course Transactions



From time to time,
Alon Blue Square, or its subsidiaries, enter into agreements and engage in transactions in the ordinary course of business with
its subsidiaries and affiliates, such as for the purchases of merchandise, gasoline purchase agreements, including in connection
with the operation of our gasoline station(s) and gas supply agreements with the Alon Group, joint sales and marketing promotions
and legal consulting. Some subsidiaries enter into agreements and engage in transactions with other subsidiaries and affiliates
of Alon Blue Square.



The terms and conditions
of all of these agreements and transactions are at “arm’s-length.” We intend to enter into similar agreements
and to engage in similar transactions in the future. In addition to ordinary course agreements and transactions, Alon Blue Square
and certain of its affiliates have entered into other agreements and transactions.



165







Kibbutz
Eyal





BSRE and Eyal Microgal
Ltd. (“Eyal Microgal”) signed an agreement for the development of a 57 dunam property for storage and logistics usage.
Pursuant to the agreement, BSRE and Eyal Microgal jointly hold in equal parts a new company, Eyal Baribua Ltd. (“Eyal Baribua”),
to which Kibbutz Eyal transferred the property. In addition, pursuant to this agreement BSRE transferred to Eyal Baribua an amount
based on the purchasing costs, development costs and an additional cost. In the event that the costs exceed $100,000 per dunam,
BSRE will have the right to terminate the Agreement. On July 11, 2011, following the approval of BSRE’s audit committee and
board of directors, BSRE’e shareholders approved entering into a lease agreement with Mega Retail, pursuant to which BSRE
will construct the logistics center in Kibbutz Eyal to be leased by Mega Retail. For more information, see “Item 4. Information
of the Company – B. Business Overview – Real Estate – Warehouses and Logistics Areas.”



Agreements with
Respect to Properties Operated by Mega Retail



As part of the Real
Estate Transfer, all of the real estate property used by Mega Retail prior to the Real Estate Transfer is leased back by BSRE to
Mega Retail for Mega Retail’s retail activities under terms similar to existing lease agreements between BSRE and Mega Retail
and existing lease agreements between BSRE and Alon Blue Square that were previously transferred to Mega Retail.



Pursuant to the agreement,
Mega Retail leases from BSRE 16 supermarket stores, the Company’s distribution and logistics center and warehouses in Rishon
Letzion and an office building used by the Company, which includes one supermarket store (the “Properties”). Mega Retail
leases the Properties for an initial period (the “Initial Lease Period”) of at least 10 years commencing on March 31,
2009. The agreement will automatically be extended for an additional five-year term unless terminated by written notice, by Mega
Retail, no less than 24 months prior to the end of the Initial Lease Period. Due to the recent amendment to the Companies Law,
on November 16, 2011, the audit committee of BSRE determined that the period of the lease agreement, which exceeds three years,
is reasonable under circumstances and in light of the nature of the transaction. The annual rent for the Initial Lease Period of
the supermarkets will be equal to the higher of 2% of the annual turnover of that store or 9% of the amount invested in that store
by BSRE (as calculated in accordance with the agreement) (the “Amount of the Investment”), which amount will be linked
to changes in Israel’s consumer price index. The annual rent during the Initial Lease Period for assets that are not used
for supermarkets will be 9% of the amount invested in the property by BSRE which amount will be linked to changes in Israel’s
consumer price index.



The agreement provides for these additional
provisions:



| | · | Upon 12 months’ notice, at the time of the extension of the agreement, Mega Retail may reduce
the number of the Properties subject to the agreement, provided that the rental payments for such properties (according to the
average rental payments for the two years preceding the extension date) does not exceed 15% of the total rent payments for all
leased properties.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Upon 12 months’ notice, Mega Retail may terminate the lease of some of the leased properties
prior to the end of the Initial Lease Period, provided that the aggregate area of such properties does not exceed 5% of the total
area of the properties that were leased to Mega Retail as of the beginning of the Initial Lease Period. However, in any event,
such right of termination does not include the right to terminate the lease agreement of the distribution and logistics center
and warehouses in Rishon Letzion. As of March 31, 2014, Mega Retail gave notice of termination in connection with one property.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



166







| | · | Upon 12 months’ prior notice, BSRE may shorten or temporarily suspend the lease of certain
Properties (specified in the agreement) to the extent required to develop or build on the land on which such Properties are located,
or to the extent required to sell the land on which such Properties are located. Such right to shorten or temporarily suspend the
lease of such Properties is subject to the condition that, as of the date on which Mega Retail must vacate the premises, BSRE must
have obtained a building permit for such development or building and/or BSRE must have signed an agreement to sell such property,
as the case may be.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Upon 12 months’ prior notice, BSRE may shorten or temporarily suspend the lease of any four
Properties (three during the Initial Lease Period and one during the extension term) to the extent required to develop or build
on the land on which such Properties are located, subject to the conditions that (i) as of the date on which Mega Retail must vacate
the premises, BSRE must have obtained a building permit for such development or building, and that (ii) BSRE must bear the costs
of vacating the premises and provide a substitute store, at the same location, with similar characteristics at its own expense
within 24 months of Mega Retail vacating the premises.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Mega Retail will be entitled to sub-lease any of the Properties, subject to the condition that
Mega Retail will remain liable for the fulfillment of all the provisions of the agreement, jointly and severally with the substitute
tenant.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | BSRE is entitled to add building areas on each of the Properties to the extent permitted by the
town planning schemes which apply and/or may apply in the future. In the event that, pursuant to this provision, BSRE plans to
add building areas on the property on which the Company’s distribution and logistics center in Rishon Letzion is located,
such additional building is subject to the prior consent of Mega Retail. In addition, in the event that BSRE adds buildings to
the property on which the Company’s offices in Rosh Ha’ayin are located, then, upon six months’ notice from the
date on which it receives notice from BSRE about BSRE’s intention to build on such property, Mega Retail may notify BSRE
of Mega Retail’s intention to lease the additional buildings under the same terms as the existing lease agreement, with the
ten year term beginning on the date on which the new buildings are transferred to Mega Retail’s possession.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Mega Retail is solely responsible for obtaining any permits or licenses required under law to operate
the Properties.
| | - | ---------------------------------------------------------------------------------------------------------------------



| | · | Unless otherwise agreed by the parties, the lease agreement will be a “net lease” such
that Mega Retail shall bear any and all payments and costs that arise in connection with the possession and use of the Properties
during the lease period.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



167









On December
31, 2010, a BSRE subsidiary had a loan in an amount of NIS 74.5 million to finance the establishment of a logistics center in Beer
Tuvia. A first ranking lien on the property and the accompanying rights was registered in favor of the bank. As of December 31,
2013, the loan amounted to NIS 68.9 million.



Arrangements
between Bee Group and Naaman



On August
15, 2011, Naaman and Vardinon entered into a Supply and Consignment Agreement (the “Supply Agreement”) with Bee Group,
pursuant to which Naaman and Vardinon will supply to Bee Group several products (the “Products”) to be sold on a future
website to be established by Bee Group. Under the Supply Agreement, Bee Group will pay Vardinon and/or Naaman, as applicable, for
the Products to be sold by Bee Group based on Naaman’s and/or Vardinon’s price list, as applicable, previously approved
between the parties. The term of the Supply Agreement is for a period of three years, from until August 14, 2014. The Supply Agreement
will be extended for additional three year periods, subject to the required approvals under applicable law. Each party may terminate
the Supply Agreement by the delivery of a three months prior written notice to the other party. Following the merger between Naaman
and Vardinon on December 30, 2012, all rights and obligation of Vardinon under the Supply Agreement, were transferred to Naaman.



Arrangements
between Mega Retail and Eden Teva and Naaman



Mega has arrangements
with Eden Teva, according to which Eden Teva sells its products in certain Mega stores (store in store format), and Mega receives
a certain percentage of the sales of Eden Teva products. Mega has a similar arrangement with Naaman.



Arrangement
between Dor Alon and Alon



Natural gas purchase
agreement between the partners of Tamar Partnership and a subsidiary of Dor Alon



On December 9, 2012,
Dor Alon Energy Centers, a limited partnership under the control of a subsidiary of Dor Alon (55%) and a third party (45%) (the
“Partnership”) signed a natural gas purchase agreement with the partners of Tamar Partnership, for the operation of
existing facilities and a power plant, if established, aimed to provide Sugat’s energy requirements. Pursuant to the agreement,
Tamar Partnership is to supply the Partnership with natural gas in the amount of up to 1.68 BCM in accordance with the terms of
the Supply Agreement. For more information, see “Item 4. Information on the Company – B. Business Overview –
Fueling and Commercial Sites – Other Activities – Establishment of a Power Plant.”



On November 19, 2013,
Dor Alon entered into an agreement, through a subsidiary, for purchasing natural gas from the partners in Tamar partnership in
the amount of U.S. $85 million (0.36 BCM) over seven years while committing to a minimum annual quantity. The agreement is subject
to the approval of the anti-trust authority.



168







Arrangements with Tnuva



We
purchase most of our dairy, fresh produce and poultry products from the Tnuva corporation, which holds a leading position in the
domestic dairy and poultry markets. To our knowledge, some of the collective acquisition entities of kibbutzim in Israel that hold
shares of Alon, our controlling shareholder, hold23% of
the shares of Tnuva. In addition, our director, Yitzhak Bader, also serves as a director on the board of directors of Tnuva. In
2013, Tnuva’s products accounted for approximately12%
of all the products sold at our supermarkets. These arrangements are in the ordinary course of our business, and the terms and
conditions of these arrangements are at “arm’s-length”.



Arrangements with David Wiessman, our
Chief Executive Officer



See “Item 6.
Directors, Senior Management and Employees - B. Compensation.”



Employment Agreement with Moran Wiessman



Beginning in January
2009, Ms. Moran Wiessman has been employed by our wholly-owned subsidiary Bee Group as the manager of the Bee Group internet sites.
Ms. Wiessman is the daughter of Mr. David Wiessman, our Chief Executive Officer. As of December 31, 2013, Ms. Wiessman receives
a monthly salary of NIS 16,000, a cell phone at the expense of Bee Group, and Bee Group assigned a car to Ms. Wiessman as is customary
in Bee Group for employees at the same level. In addition, Ms. Wiessman is entitled to standard social allocations by Bee
Group (5% for provident fund, 8.33% for severance payments and 1% for disability insurance) and other social benefits that are
standard for an employee in her position.



Salary increases or bonuses shall be granted as is customary in Bee Group based on the
professional performance of Ms. Wiessman. Ms. Wiessman’s monthly salary may be increased up to 20%
annually. Bee Group management is entitled to grant Ms. Wiessman an annual bonus as is customary in Bee Group of only up to six
monthly salaries a year. The grant requires the approval of our audit committee that will confirm that the bonus was given according
to the grant’s policy in Bee Group.



C.     Interests
of Experts and Counsel.



Not applicable.



169









| | ITEM 8. | FINANCIAL INFORMATION
| | ------- | ---------------------



A.       Consolidated
Statements and Other Financial Information.



The financial statements
required by this item are found at the end of this Annual Report, beginning on page F-1.



Board Resolution on Dividend Distributions



Alon Blue Square’s
board of directors has resolved that Alon Blue Square would not distribute dividends in any quarter if the ratio of our net financial
obligations to EBITDA for any quarter exceeds 6.0. Alon Blue Square’s board of directors also resolved that Alon Blue Square
would not distribute dividends in any quarter if the ratio of the unencumbered fixed assets (net of depreciation) and investment
property as set forth in our financial statements to financial obligations for any quarter is below 120%.



The ratio of net financial
obligations to EBITDA is to be calculated by deducting from the net financial obligations Alon Blue Square’s debt which is
related by the company to real estate that is not in use by Alon Blue Square (which is equal to 75% of the investment property
as recorded on the balance sheet). As of December 31, 2013, we did not have any earnings to distribute as a dividend.



Legal Proceedings



Governmental Proceedings



We are subject to
legal proceedings in connection with tax assessments



In January 2012 the
Company received a demand from the National Insurance for additional payments, related to certain benefits granted to employees
in the Company’s branches in the amount of NIS 27.5 million for the years 2001-2004. The Company's appeal was rejected by
the National Insurance. In August 2013 the Company filed an appeal to the Labor Court.



In December 2013, the
Company received a demand from the National Insurance for additional payments with respect to years 2005 – 2006 in the sum
of approximately NIS 2 million, and in January 2014 the company filed an appeal with regard to this demand.



In the opinion of the
Company, based on the opinion of its legal advisers, the chances that the Company's position will be accepted are higher than them
of being rejected. Accordingly, the Company did not make any provision in its financial statements for the years 2001-2006.



Dor Alon received claims
for additional retroactive municipality taxes for four of its fueling stations by the Hof Hasharon district Council (“the
Council”). For one of the stations, the claim was significantly reduced as a result of an agreement reached between Dor Alon
and the Council. The other claims amount to approximately NIS 17 million. Dor Alon appealed the Council's Municipal Tax claims.
In the opinion of the Company, based on the opinion of its legal advisers, the chances that the claim will be rejected exceed 50%.
Accordingly, the Company did not make any provision for this claim in its financial statements.



170







We are subject to
legal proceedings in connection with business licenses



The operation of the
Company’s stores in Israel requires permits from several authorities including the Health Ministry and the Police and Fire
Departments. In the event that the Company is unable to obtain or maintain the required permits, it may be required to close the
affected stores or departments or take other action. However, the Company does not anticipate that not obtaining the necessary
permits will have a material adverse effect on its business. From time to time the Company and some of its directors and managers
are indicted in connection with business licenses and planning and building regarding of the Company’s stores. As of the
date of this Report, there are provisional closure orders pending against some of the Company’s stores or departments. The
Company is working towards obtaining the required permits and at the same time delaying the effectiveness of the provisional orders
until such required permits are obtained. Management estimates that these matters will not have a material adverse effect on the
Company’s operations.



Legal Proceedings
Related to our Supermarkets



In December 2010, a
claim and a request to recognize it as a class action was filed against the Company and Mega Retail Ltd. (“Mega”) relating
to the sale of different cheese and butter products in the supermarkets operated by Mega. According to the claimant, the Company
sells surrogate cheese and butter products as if they were real cheese and milk products, and in that way misleads the customers.
The claimant quantifies his damage at approximately NIS 700 and estimates the damage to the group of claimants for the purpose
of the claim at NIS 456 million. In the opinion of the Company, based on the opinion of its legal
advisers, the chances that the claim will be rejected exceed 50%. Accordingly, the Company did not make any provision for this
claim in its financial statements.



In August, 2010 the
Company and subsidiaries were served with a claim in which it is being sued by a former supplier of fruits and vegetables
claiming that the company breached the agreements between the parties regarding the supply of fruits and vegetables, a breach that
allegedly resulted in damages assessed by the plaintiff at approximately NIS 178 million. As mentioned in the claim, due to court
fees, it was filed for the sum of NIS 100 million. In September 2013 the court gave its judgment, according to which, Mega paid
the plaintiff approximately NIS 3 million. Both sided have filed an appeal to the Supreme Court.



In October 2011, a
letter of claim and a motion for approval of action as a class action was filed against the Company, alleging that the Company
does not deduct the weight of the package in which it sells different products, such as various meat and poultry products, fruit
and vegetables. If the claim is approved as a class action, the approximate claim is estimated by the plaintiff at approximately
NIS 181 million. In the opinion of the Company, based on the opinion of its legal advisors, the chances that the claim will be
rejected exceed 50%. Accordingly, the Company did not make any provision for this claim in its financial statements.



On July 26, 2012, a
letter of claim and motion for approval as a class action was filed against Mega, for an aggregate amount of approximately NIS
18 million. The Plaintiff claims that Mega failed to properly mark certain delicatessen and bakery products, which are baked and
packed prior to sale within Mega's supermarket stores, with information regarding their ingredients, nutrition facts, expiry date,
etc. In the opinion of the Company, based on the opinion of its legal advisers, the chances that the claim will be rejected exceed
50%. Accordingly, the Company did not make any provision for this claim in its financial statements.



171







In March 2013, a letter
of claim and motion for approval as a class action was filed against Mega. The Plaintiff alleges that Mega overcharged certain
dairy products which are subject to price control regulation. The claim does not state the amount sought if it is approved as a
class action. In the opinion of the Company, based on the opinion of its legal advisers, the chances that the claim will be rejected
exceed 50%. Accordingly, the Company did not make any provision for this claim in its financial statements.



In July 2013 a claim
and a request to recognize it as a class action was filed against Mega and other supermarket chains, in the sum of NIS 42 million.
The claim alleges that a certain cheese named “Gush Chalav” should have been sold for the same price as a cheese named
“Emek”, which is subject to price control regulation, since practically, as alleged, they are the same product. In
the opinion of the Company, based on the opinion of its legal advisers, the chances that the claim will be rejected exceed 50%.
Accordingly, the Company did not make any provision for this claim in its financial statements.



In July 2013 a claim
and a request to recognize it as a class action was filed against Mega, Kfar Hash'ashuim Toy Stores Chain and other store chains,
with regard to special sales that offer reduced prices for the second item bought. It is claimed that when purchasing 4 items (1+1
and 1+1), the reduction is always made from the lowest prices of all four. The claim does not state the amount sought if it is
approved as a class action. The Company is currently reviewing the Claim and denying all allegations. However, at this time, given
this matter is preliminary in nature, our financial statements currently do not provide for any amount. We will continue to assess
this matter as the request for the class action develops.



In August 2013 a claim
and a request to recognize it as a class action was filed against Mega, in the sum of NIS 5 million. It is claimed that certain
milk containers were sold for a price exceeding the maximum price imposed by price control regulation for a similar product. The
Company is currently reviewing the Claim and denying all allegations. However, at this time, given this matter is preliminary in
nature, our financial statements currently do not provide for any amount. We will continue to assess this matter as the request
for the class action develops.



In August 2013 a claim
and a request to recognize it as a class action was filed against Mega and other defendants, in the total sum of NIS 30.6 million,
out of which NIS 20 million were referred to Mega, alleging the Mega failed to publish in its supermarkets a list of products which
are subject to price control regulation. The Company is currently reviewing the Claim and denying all allegations. However, at
this time, given this matter is preliminary in nature, our financial statements currently do not provide for any amount. We will
continue to assess this matter as the request for the class action develops.



In September 2013 a
claim and a request to recognize it as a class action was filed against Mega, in the sum of NIS 110 million, alleging that Mega
failed to mark prices per measurement unit in its supermarkets. The Company is currently reviewing the Claim and denying all allegations.
However, at this time, given this matter is preliminary in nature, our financial statements currently do not provide for any amount.
We will continue to assess this matter as the request for the class action develops.



172







In October 2013 a claim
and a request to recognize it as a class action was filed against Mega, in the sum of approx. NIS 5.4 million. The claim is with
regard to the sale of a certain cookie product in one of Mega's supermarkets, a year and five months after its expiry date. The
Company is currently reviewing the Claim and denying all allegations. However, at this time, given this matter is preliminary in
nature, our financial statements currently do not provide for any amount. We will continue to assess this matter as the request
for the class action develops.



In November 2013 a
claim, and a request to recognize the claim as a class action, was filed against the Company and Mega and other defendants, in
the total sum of NIS 15.3 million, out of which NIS 4.5 million were referred to the Company and Mega. The claim alleges that the
use of the words “cocoa” or “chocolate” on the packaging of cookies and biscuits with a dark color makes
it appear as if the dark color of the product is due to a cocoa or chocolate ingredient, when it is instead a result of food coloring.
The Company is currently reviewing the Claim and denying all allegations. However, at this time, given this matter is preliminary
in nature, our financial statements currently do not provide for any amount. We will continue to assess this matter as the request
for the class action develops.



In December 2013 a
claim, and a request to recognize the claim as a class action, was filed against Mega, in the sum of approx. NIS 161 million. The
claim alleges that Mega failed to comply with regulation requirements with respect to verifying the accuracy of weighing instruments
in its supermarkets. The Company is currently reviewing the Claim and denying all allegations. However, at this time, given this
matter is preliminary in nature, our financial statements currently do not provide for any amount. We will continue to assess this
matter as the request for the class action develops.



In January 2014, a
claim, and a request to recognize the claim as a class action, was filed against the Company and Mega, in the sum of approx. NIS
70 million. The claim is with respect to purchase vouchers, which are exercised in “Mega” supermarkets for 90% of their
value, and which are can not be exercised in “You” supermarkets. The Company is currently reviewing the Claim and denying
all allegations. However, at this time, given this matter is preliminary in nature, our financial statements currently do not provide
for any amount. We will continue to assess this matter as the request for the class action develops.



In January 2014, a
claim, and a request to recognize the claim as a class action, was filed against Mega, in the sum of approx. NIS 29.4 million.
The claim is with respect to the alleged lack of chilled drinking water facilities in the company's supermarkets, as required by
law. The Company is currently reviewing the Claim and denying all allegations. However, at this time, given this matter is preliminary
in nature, our financial statements currently do not provide for any amount. We will continue to assess this matter as the request
for the class action develops.



173







In January 2014, a
claim, and a request to recognize the claim as a class action, was filed against the Company and several other defendants, in the
total sum of NIS 36 million, out of which NIS 4.5 million were referred to the Company. The claim is with respect to alleged misleading
in the sale of pickles under the Mega private label, by the use of acetic acid instead of vinegar as required by relevant regulatory
standards. The Company is currently reviewing the Claim and denying all allegations. However, at this time, given this matter is
preliminary in nature, our financial statements currently do not provide for any amount. We will continue to assess this matter
as the request for the class action develops.



In February 2014, a
claim, and a request to recognize the claim as a class action, was filed against Mega and other food retailers, in the total sum
of approx. NIS 13 million. The claim is with respect to the unlawful use of the term “Tuna Chunks”. The Company is
currently reviewing the Claim and denying all allegations. However, at this time, given this matter is preliminary in nature, our
financial statements currently do not provide for any amount. We will continue to assess this matter as the request for the class
action develops.



In March 2014, a claim
and a request to recognize it as a class action was filed against Mega and other defendants, in the sum of NIS 124 million. The
claim is with regard to the alleged lack of marking of expiry date, ingredients and nutritional facts on delicate food products.
The Company is currently reviewing the Claim and denying all allegations. However, at this time, given this matter is preliminary
in nature, our financial statements currently do not provide for any amount. We will continue to assess this matter as the request
for the class action develops.



In March 2014, a claim
and a request to recognize it as a class action was filed against Mega and other defendants, in the total sum of NIS 657 million,
with regard to the alleged breach of price control regulation in the sale of certain salt products. The Company is currently reviewing
the Claim and denying all allegations. However, at this time, given this matter is preliminary in nature, our financial statements
currently do not provide for any amount. We will continue to assess this matter as the request for the class action develops.



In July 2013 a claim
and a request to recognize it as a class action was filed against Eden Teva Market, in the sum of NIS 35.7 million. The claim alleges
that Eden charged higher prices than those that were marked on a certain product. The Company is currently reviewing the Claim
and denying all allegations. However, at this time, given this matter is preliminary in nature, our financial statements currently
do not provide for any amount. We will continue to assess this matter as the request for the class action develops.



In July 2013 a claim
and a request to recognize it as a class action was filed against Eden Teva Market, in the sum of NIS 20 million, with regard to
alleged misleading in the marking of prices per measurement unit. The Company is currently reviewing the Claim and denying all
allegations. However, at this time, given this matter is preliminary in nature, our financial statements currently do not provide
for any amount. We will continue to assess this matter as the request for the class action develops.



In November 2013, a
claim and a request to recognize it as a class action was filed against Eden Teva Market, in the sum of approx. NIS 1.1 million.
The claim alleges that the method used for reducing the amount equivalent to VAT in certain special sales is misleading. The Company
is currently reviewing the Claim and denying all allegations. However, at this time, given this matter is preliminary in nature,
our financial statements currently do not provide for any amount. We will continue to assess this matter as the request for the
class action develops.



174









As part of the ordinary
course of business the Company receives claims relating to its activities. In the opinion of management, based on the opinion of
the legal advisers handling the claims and in light of the relevant circumstances, the provisions included in the financial statements
are sufficient to cover the potential liabilities and none of claims, individually or in the aggregate, will have a material negative
effect on the Company's activities, its financial condition or its results.



We are subject to
legal proceedings in connection with business licenses





The operation of the
Company’s supermarkets in Israel requires permits from several authorities including the Health Ministry and the Police and
Fire Departments. Some of these permits are currently in the name of the Co-Op Blue Square Services Society, or the Co-Op, our
former controlling shareholder, and entities other than the Company, and have not yet been transferred or re-issued to the Company.
In addition, as a result of the reorganization of the Supermarket and Real Estate operations conducted by the Company, such permits
are to be transferred to the name of Mega Retail. In the event that the Company is unable to obtain or maintain the required permits,
it may be required to close the affected stores or take other action. However, the Company does not anticipate that not obtaining
the necessary permits will have a material adverse effect on its business.



Legal proceedings
which ended prior to the date of this annual report



In September 2011,
a lawsuit was filed against Mega and Shufersal along with a request to be approved as a class action in relation to the issuance
and sale of purchase vouchers. The action consists of two claims: 1. The designation of an expiration date to the vouchers constitutes
a “depriving condition” in a standard contract and is therefore invalid; and 2. The voucher provision that a consumer
who uses vouchers to pay for his purchase can be given change only in vouchers redeemable in the same store constitutes a “depriving
condition” and is therefore invalid. The claimant asked for declaratory relief that these provisions are invalid, as well
as for damages calculated by the court, taking into account all holders of vouchers and/or shoppers who have used the vouchers
over the past 7 years. In September 2013, the court approved a settlement agreement that was reached by the parties in a mediation
process. Under the settlement agreement, the Company undertook to replace purchase vouchers that have expired since September 2004
with new vouchers. In the opinion of the Company and its advisors, the provisions included in the Company's financial statements
are sufficient to cover the potential liabilities.



175







In March 2012, a
claim and a request to recognize it as a class action were filed against the Company, alleging that it misleads its customers in
special sales it holds regarding food products that are sliced or cut to the customers request, and are priced per weight. The
plaintiff claims that the Company does not give full and correct details regarding the terms of the special sales, violating requirements
of law in connection with product marking and price display. The plaintiff claims, among other claims, that customers choosing
to buy such products under special sales in accordance with the Company's advertisements are required to purchase not willingly
an extra weight of the product, for the full price. If the Claim is approved as a class action, the approximate claim is estimated
by the plaintiff at approx. NIS 72 million. The plaintiff further requests court to issue a decree ordering the Company to fulfill
the requirements of the law. In April 2013, the court accepted the plaintiff's request to withdraw the claim.



On September 24,
2012, a letter of claim and motion for approval as a class action was filed against a subsidiary of Mega Dr. Baby Marketing and
Distribution (888) Ltd., Company's subsidiary Bee Group Retail Ltd, and a manufacturer of baby products, for an aggregate amount
of approximately NIS 135 million. The plaintiff claims that baby mattresses sold by the defendants as bearing a safety certificate
issued by the Standards Institution of Israel, never received any such approval. In October 2013, the court approved the plaintiff's
request to withdraw the claim.



In January 2013,
a letter of claim and motion for approval as a class action was filed against Mega for an aggregate amount of approximately NIS
9 million. The Plaintiff alleges that the description of certain products sold at Mega's internet site for online shopping,
containing words such as “Fresh”, “Natural” and/or “Without Sugar” is misleading and does not
meet standards required by law. In August 2013, the court approved the plaintiff's request to withdraw the claim.



In June 2013 a claim
and a request to recognize it as a class action was filed against Mega, in the sum of NIS 2.7 million. The claim alleges that Mega
sold certain cheese products for a price higher than the price advertised. In December 2013, the court approved the plaintiff's
request to withdraw the claim.



In June 2013 a claim
and a request to recognize it as a class action was filed against Mega and Shufersal, in the sum of NIS 6.2 million. The claim
alleges that Mega and Shufersal sold certain popcorn products which were marked in a way that the words “Parve Kosher”
were in big letters and the words “for Foreign Milk consumers only” were in small letters. In February 2014 the court
approved the plaintiff's request to withdraw the claim.



In August 2013 a
claim and a request to recognize it as a class action was filed against the Company, Mega, and other retailers and suppliers, in
the total sum of NIS 27.8 million, out of which NIS 3.5 million is referred to the Company and Mega. The claim alleges that a certain
cocoa product is intentionally not marked in accordance with the relevant regulation requirements. In December 2013, the court
approved the plaintiff's request to withdraw the claim against the Company and Mega.



176







In September 2013
a claim and a request to recognize it as a class action was filed against Mega, in the sum of NIS 10 million, alleging that Mega
failed to mark certain products with a warning of choking hazard. In December 2013, the court accepted the plaintiff's request
to withdraw the claim.



In September 2013
a claim and a request to recognize it as a class action was filed against Mega, in the sum of NIS 110 million. The claim is with
regard to the size of plastic bags for sandwich wrapping, claiming that there are differences between the size stated on the packing
and the actual size of the bags. In February 2014 the court approved the plaintiff's request to withdraw the claim.



In July 2013 a claim
and a request to recognize it as a class action was filed against Eden Teva Market, in the sum of NIS 2.8 million. The claim alleges
the false labeling of certain products as “Natural” or “100% Natural”, while such products do not meet
the required regulatory standards for such terms. In December 2013, the court approved the plaintiff's request to withdraw the
claim.



In February 2014,
a claim, and a request to recognize the claim as a class action, was filed against Mega and third parties, in the sum of approx.
NIS 10 million. The claim is with respect to the alleged failure to mark certain products with a choking hazard warning. In March
2014, the court approved the plaintiff's request to withdraw the claim.



Legal Proceedings
related to our Fueling and Commercial Sites



On December 3, 2003
a claim was filed in the amount of NIS 450 against the gas companies (including a subsidiary of Dor Alon) alleging that the defendants
were parties to a cartel, which they entered into beginning in 1994 (and even prior thereto) and up to 2003, in the course of which
the Restrictive Practices Authority gave notice of a recommendation to file charges against the gas companies and their managers
in connection with the existence of a cartel, as stated. The plaintiff contends that by means of the alleged cartel the gas companies
collected unfair and unreasonable prices. A request for certification of the claim as a class action pursuant to the Restrictive
Practices Law, the Consumer Protection Law and Rule 29 of the Rules of Civic Procedure (1984), was filed together with the claim.
The amount of the class action was set by the requesting party at an amount of at least NIS 1 billion, along with punitive damages.
The subsidiary of Dor Alon has submitted its response to the request for certification of the claim as a class action. The parties
twice reached a compromise agreement that was submitted to Court's approval. However, the Court rejected the two compromise agreements
and therefore the legal procedures continue. In any case, in the opinion of the Company, based on the opinion of its legal advisers,
the chances that the claim will be rejected exceed 50%. Accordingly, the Company did not make any provision for this claim in its
financial statements.



177







A class action was
lodged against a subsidiary of Dor Alon and other fuel companies in December 2007. The total amount of the claim is NIS 132 million
(the subsidiary's share in this amount is NIS 8.8 million). The claimant asserts that the defendants charged each customer NIS
2 for fueling on Saturdays and on holidays. In February 2013 the claim was rejected by court. In April 2013 the Claimant filed
an appeal to the Supreme Court. In the opinion of the Company, based on the opinion of its legal advisers, the chances that the
claim will be rejected exceed 50%. Accordingly, the Company did not make any provision for this claim in its financial statements.



In October 2009, Dor
Alon received a statement of claim and an application for approval of the claim as a class action; the claim was lodged against
Dor Alon and other fuel companies. The claimant claims payment of damages of NIS 124 million (Dor Alon's share in the said claim
amount as per the statement of claim is NIS 21.9 million). According to the claimant, the defendants overcharged him for fuel when
filling up his car. According to the claimant, after passing his credit card but before starting to fill up, the payment meter
started operating without the provision of fuel. The overcharge has allegedly amounted at times to several Agorot and at times
to several NIS. The parties have reached a compromise that was rejected by court and the court asked the parties to file their
pleadings before the compromise agreement is filed. In the event the parties will not reach a compromise agreement, the Company
believes, based on the opinion of its legal advisers, the chances that the claim will be rejected exceed 50%. Accordingly, the
Company did not make any provision for this claim in its financial statements.



On August 22, 2011,
Dor Alon received a letter of claim and a motion for approval of action as class action against Dor Alon and the three other gasoline
companies for a total of NIS 1 billion (of which Dor Alon's share is NIS 167 million). The claimants argue that the gasoline companies
inflated the “marketing expense item” which is incorporated into the calculation of the maximum price of gasoline 95
octane by adding expenses unrelated to the sale of gasoline, thus misleading the regulator and enabling themselves to sell gasoline
95 octane at a higher price than the price that should be charged. The claimants assert that this is violation of legislated provisions
in the Supervision Order on Goods and Services (Maximum Prices in Gasoline Stations) – 2002; the Consumer Protection Law
– 1981; and the Damage Ordinance (new version) – 1968. In the opinion of the Company, based on the opinion of its legal
advisers, the chances that the claim will be rejected exceed 50%. Accordingly, the Company did not make any provision for this
claim in its financial statements.



On June 24, 2012, a
letter of claim and motion for approval as a class action was filed against Dorgas, at an aggregate amount of approximately NIS
42 million. The plaintiff claims that Dorgas is in breach of the Arrangements in the State Economy Regulations that require that
at the time of termination of a contract between a gas supplier and a client that the deposit payments be returned linked to the
Israeli Consumer Prices Index. In the opinion of the Company, based on the opinion of its legal advisers, the chances that the
claim will be rejected exceed 50%. Accordingly, the Company did not make any provision for this claim in its financial statements.



On September 3, 2012,
a letter of claim and motion for approval as a class action was filed against Dor Alon and a subsidiary of Dor Alon, for an aggregate
amount of NIS 50 million. The plaintiff claims that Dor Alon failed to comply with law requirements regarding sanitarian standards
of lavatories at its petrol stations, particularly cleaning requirements and intactness of facilities In the opinion of the Company,
based on the opinion of its legal advisers, the chances that the claim will be rejected exceed 50%. Accordingly, the Company did
not make any provision for this claim in its financial statements.



178







On September 6, 2012,
a letter of claim and motion for approval as a class action was filed against Dor Alon, for an aggregate amount of NIS 43.2 million.
The plaintiff claims that as a customer of the Dor Alon “Spidomat” arrangement for car fueling at reduced prices, she
discovered that her reduction was less than the regular discount given to all other customers at the station. As result, the Plaintiff
claims she suffered financial damages from being a member of the “Spidomat” arrangement. In the opinion of the Company,
based on the opinion of its legal advisers, the chances that the claim will be rejected exceed 50%. Accordingly, the Company did
not make any provision for this claim in its financial statements.



On September 13, 2012,
a letter of claim and motion for approval as a class action was filed against a subsidiary of Dor Alon and other defendants, for
an aggregate amount of NIS 77 million. The letter of claim states that the defendants have breached the provisions of the product
and service regulation order (maximum prices in gas stations – 2002 (herein, “the Order”) as regards conditions
for collection of extra charge on full service, nighttime service and rest days service, as well as the provisions of article 3(D)
of the of the product and service regulation order (maximum prices in gas stations) (amendment) – 2006 (herein, “the
Amended Order”) as regards the signage of self-service fuelling pumps. The claimants argue that the order has set criteria
for a minimum rate of self-service pumps in the gas stations out of the total number of pumps in the gas station, and that whenever
the criterion is not met, it is prohibited to collect service fee in that station. The claimants further allege that according
to the Amended order, whenever a pump is not marked in accordance with the Order, it cannot be regarded as a self-service pump.
As a result, the Defendants did not meet the criterion stipulated in the Order in certain stations and are therefore prohibited
from collecting service fee in those gas stations. In the opinion of the Company, based on the opinion of its legal advisers, the
chances that the claim will be rejected exceed 50%. Accordingly, the Company did not make any provision for this claim in its financial
statements.



On September 13, 2012,
a letter of claim and motion for approval as a class action was filed against a subsidiary of Dor Alon, for an aggregate amount
of NIS 3 million. It is claimed that prices are not marked on cigarette products in AM:PM stores. In the opinion of the Company,
based on the opinion of its legal advisers, the chances that the claim will be rejected exceed 50%. Accordingly, the Company did
not make any provision for this claim in its financial statements.





In October 2013 a letter
of claim and motion for approval as a class action was filed against a subsidiary of Dor Alon, together with other defendants including
oil companies and credit card companies. It is claimed that there is an agreement between the oil companies and the credit card
companies, according to which extra charging is made for a limited period of time, when paying with certain credit cards at gas
filling stations, without prior notification to the client. The Company is currently reviewing the claims and denying all allegations.
However, at this time, given the fact that this matter is in a preliminary stage, our financial statements currently do not provide
for any provision. We will continue to assess this matter as the request for the class action develops.



179







In November 2013 two
letters of claim and motions for approval as a class action were filed against a subsidiary of Dor Alon, one in the sum of NIS
7 million, and the other in the amount of NIS 306 million. It is alleged in both claims that the subsidiary, Alon Intrade Coffee
Shops Ltd., replaced labels of the production dates of sandwiches, in a way that appeared as if the sandwich had been produced
no later than in the last 24 hours from the time it was bought. In the opinion of the Company, based on the opinion of its legal
advisers, the chances that the claims will be rejected exceed 50%. Accordingly, the Company did not make any provision for these
claims in its financial statements.



In March 2014, a letter
of claim and motion for approval as a class action was filed against a subsidiary of Dor Alon, in the sum of NIS 3.5 million. The
claim is with regard to the sale of products in “Alonit” stores located at filling stations, during the night hours.
It is claimed that sale of products during the night is made through a window, without enabling the customers to access the store,
and without displaying a price catalogue. The Company is currently reviewing the Claims and denying all allegations. However, at
this time, given this matter is preliminary in nature, our financial statements currently do not provide for any amount. We will
continue to assess this matter as the request for the class action develops.



Several bills of indictment
and verdicts are pending against Dor Alon and its subsidiaries for operating fueling stations or convenience stores without a business
license and non-compliance with permits. In addition, closing orders have been issued regarding public fueling stations and convenience
stores that operated without a business license. The closing orders are pending and Dor Alon is making efforts to get the required
business licenses. Bills of indictment have been filed against a subsidiary for operating convenience stores without a business
license. In the opinion of the Company, the closure of one or more of the filling stations and / or convenience stores that were
issued closure orders would not have a material effect on Dor Alon's results of operations.



As part of the ordinary
course of business Dor Alon receives claims relating to its activities. In the opinion of management, based on the opinion of the
legal advisers handling the claims and in light of the relevant circumstances, the provisions included in the financial statements
are sufficient to cover the potential liabilities and none of claims, individually or in the aggregate, will have a material negative
effect on the Company's activities, its financial condition or its results.



Legal proceedings
which ended prior to the date of this annual report



In December 2010 an
indictment was issued in the local court in Tel Aviv against Dor Alon, a subsidiary of Dor Alon, two officers of Dor Alon and an
employee a claim by the Environment Ministry claiming they did not perform checks of the leakage of fuel tanks and pipes in a number
of Dor Alon's fueling stations and claiming that they did not pass the results of their waterproofness checks to the person in
charge of the prevention of water contamination by fuels in the Environment Ministry (as described above), claiming omission of
reporting of an oil leak, non-treatment of a facility that was not waterproof and the non-installation of a piezometer, in accordance
with 1959 Water Law and the 1977 (prevention of water contamination regulations)(fueling stations) Regulations. The relevant period
for performing the waterproofing checks in the statement of claim was between 2000 and 2004. In September 2013, the court approved
a plea bargain agreement under which Dor Alon had been convicted and fined in the sum of approx. NIS 510,000.



180







On June 27, 2010, a
statement of claim and a request to approve the claim as a class action and as a derivative claim was lodged against Dor Alon,
members of the Board of Directors of Dor Alon and Alon. The claim was lodged by holders of Series A debentures of Dor Alon that
wish to represent the holders of Series A Dor Alon debentures as of February 7, 2010, who did not convert the debentures into Dor
Alon shares. In their claim, the plaintiffs claim that the distribution (on February 9, 2010) of the shares of Alon Natural Gas
Exploration Ltd. to Dor Alon's shareholders was an unlawful distribution. The plaintiffs also claim that Dor Alon should have adjusted
the Series A debentures' conversion rate following the distribution of shares as above. The plaintiffs request that the Court would
oblige Alon and the members of Dor Alon's Board of Directors to return to Dor Alon the shares that were distributed as above; alternatively,
the plaintiffs request that Dor Alon will be required to adjust the conversion rate of the debentures to the “Ex rate”
subsequent to the distribution; alternatively, the plaintiffs seek damages for non-adjustment of the conversion rate. In May 2013,
all claims were rejected by the court.



In February 2011 a
claim and an application for approval of the claim as a class action was filed against Dor Alon and other fuel companies. The issue
in the claim is differences between the temperature of the LPG and the energy it provides as a result of burning. In April 2013
the plaintiff's request to withdraw the claim was approved by the court.



Legal Proceedings
related to our Non-Food Segment



In July 2013 a claim
and a request to recognize it as a class action was filed against Mega, Kfar Hash'ashuim Toy Stores Chain and other store chains,
with regard to special sales that offer reduced prices for the second item bought. It is claimed that when purchasing 4 items (1+1
and 1+1), the reduction is always made from the lowest prices of all four. The claim does not state the amount sought if it is
approved as a class action. The Company is currently reviewing the Claim and denying all allegations. However, at this time, given
this matter is preliminary in nature, our financial statements currently do not provide for any amount. We will continue to assess
this matter as the request for the class action develops.



Legal proceedings
which ended prior to the date of this annual report



In January 2012, a
claim and a request to recognize it as a class action were filed against the Company, regarding the sale of toy and other products
by its “Kfar Hashashuim” chain of stores. The claim alleges that the company fails to mark in Hebrew required details
such as identifying details of the importer of the products, the manufacturer, supplier, country of manufacturing, as well as the
range of ages the product is designated for, and certain warnings required by law. If the Claim is approved as a class action,
the approximate claim is estimated by the plaintiff at approximately NIS 18 million. The plaintiff further requests court to issue
a decree ordering the Company to fulfill the requirements of the law and mark its products accordingly. In May 2013, the plaintiff's
request to withdraw the claim was approved by the court.



181







Contingencies
related to the YOU customer club



Legal proceedings
which ended prior to the date of this annual report



In December 2010, a
claim and a request to recognize it as a class action was filed against the YOU, claiming that discounts for filling the car with
petrol at Dor Alon petrol stations, which the club supposedly promised were not given. If the claim were to be accepted as a class
action, the claimant assesses his claim at NIS 894 million. In August 2013, the court approved a settlement agreement reached by
the parties, according to which, the Company paid an immaterial amount to the claimant.



In November 2010, a
claim and a request to recognize it as a class action was filed against YOU, claiming that discounts for filling the car with diesel
at Dor Alon petrol stations, which the club supposedly promised as well as wrongly advertised were not given in reality. If the
claim were to be accepted as a class action, the claimant assesses his claim at NIS 54 million. In December 2013 the court approved
the plaintiff's request to withdraw the claim.



In November 2011, a
letter of claim and a motion for approval of action as a class action was filed against Mega, alleging that Mega is misleading
its “YOU” card holder customers, by charging prices higher than advertised for products offered within its customers'
loyalty plan. If the claim is approved as a class action, the approximate claim is estimated by the plaintiff at approximately
NIS 10 million. In January 2014, the court approved the plaintiff's request to withdraw the claim.



On November 1, 2012,
a letter of claim and motion for approval as a class action was filed against Mega, the You Customer Club, Diners Club Israel Ltd.,
and Credit Cards for Israel Ltd., for an aggregate amount of approximately NIS 120 million. The Plaintiff claims that the
defendants mislead the holders of a certain You credit card named “CalChoice.” The You credit card “CalChoice”
enables its holders to obtain extra credit by way of charging a minimum of NIS 200 for every NIS 5,000 spent. The remaining balance
is postponed and is charged in the next month, while the holder of the card can provide each month the amount he would like to
pay out of such balance. The Plaintiff alleges that the defendants do not properly notify the client of the interest rate to be
charged, and that such interest rate is significantly higher than interest rates charged at bank accounts or other competing credit
cards. The plaintiff further claims that the defendants do not properly notify the card holder of his option to determine the amount
to be charged each month, while automatically charging the minimum required. In January 2014, the court approved the plaintiff's
request to withdraw the claim.



Legal Proceedings
Related to Alon Cellular



In October 2013 a claim
and a request to recognize it as a class action was filed against Alon Cellular together with all the recently established cellular
companies in Israel, in the total sum of approx. NIS 160 million, out of which NIS 11 million is referred to Alon Cellular. The
claim alleges that the cellular companies failed to comply with regulatory requirements in connection with accessibility of their
services to people with disabilities. The Company is currently reviewing the Claim and denying all allegations. However, at this
time, given this matter is preliminary in nature, our financial statements currently do not provide for any amount. We will continue
to assess this matter as the request for the class action develops.



182







Legal proceedings
which ended prior to the date of this annual report



In June 2013 a claim
and a request to recognize it as a class action was filed against Alon Cellular, in the sum of NIS 23.6 million, alleging that
Alon Cellular should provide access to certain content services. In August 2013, the plaintiff's request to withdraw the claim
was approved by the court.



General



We are involved in
various other legal or other proceedings incidental to the ordinary course of our business. We do not believe that any of these
proceedings, individually or in the aggregate, will have a material adverse effect on our business, financial position or operating
results.



Independent Accountants



On February 4, 2014,
Alon Blue Square’s shareholders approved the reappointment of Kesselman & Kesselman as our auditors for the year ending
December 31, 2013. Kesselman & Kesselman has no relationship with us or with any affiliate of us, except as auditors.



| | B. | Significant Changes.
| | -- | --------------------



Except as otherwise
disclosed in this Annual Report, no significant change has occurred since December 31, 2013.



|ITEM 9. | THE OFFER AND LISTING
|------- | ---------------------



| | A. | Offer and Listing Details.
| | -- | --------------------------



ADSs



The following table
sets forth the annual high and low closing prices for Alon Blue Square ADSs for the five most recent full financial years as reported
by the New York Stock Exchange.



|Year |  | High |      |  | Low |  
|---- |  | ---- | ---- |  | --- | -
|2009 |  | $    | 11.2 |  |     | $
|2010 |  | $    | 14.9 |  |     | $
|2011 |  | $    | 10.6 |  |     | $
|2012 |  | $    | 4.3  |  |     | $
|2013 |  | $    | 4.7  |  |     | $



183







The following table
sets forth the quarterly high and low closing prices for Alon Blue Square ADSs for each quarter of the two most recent full financial
years and the subsequent quarterly period, as reported by the New York Stock Exchange.



|Year           |  | High |     |  | Low |  
|-------------- |  | ---- | --- |  | --- | -
|               |  |      |     |  |     |  
|2012           |  |      |     |  |     |  
|First quarter  |  | $    | 4.3 |  |     | $
|Second quarter |  | $    | 3.9 |  |     | $
|Third quarter  |  | $    | 2.3 |  |     | $
|Fourth quarter |  | $    | 3.0 |  |     | $
|               |  |      |     |  |     |  
|2013           |  |      |     |  |     |  
|First quarter  |  | $    | 3.2 |  |     | $
|Second quarter |  | $    | 4.0 |  |     | $
|Third quarter  |  | $    | 4.0 |  |     | $
|Fourth quarter |  | $    | 4.7 |  |     | $
|               |  |      |     |  |     |  
|2014           |  |      |     |  |     |  
|First quarter  |  | $    | 4.3 |  |     | $



The following table
sets forth the monthly high and low closing prices for Alon Blue Square ADSs for the last six months, as reported by the New York
Stock Exchange.



|2013     |  | High |     |  | Low |  
|-------- |  | ---- | --- |  | --- | -
|         |  |      |     |  |     |  
|October  |  | $    | 4.0 |  |     | $
|November |  | $    | 4.7 |  |     | $
|December |  | $    | 4.3 |  |     | $



|2014     |  | High |     |  | Low |  
|-------- |  | ---- | --- |  | --- | -
|         |  |      |     |  |     |  
|January  |  | $    | 4.3 |  |     | $
|February |  | $    | 3.9 |  |     | $
|March    |  | $    | 4.0 |  |     | $



Ordinary Shares



The following table
sets forth the annual high and low closing prices for Alon Blue Square’s ordinary shares for the years 2009 to 2013 as reported
by the Tel Aviv Stock Exchange. Shares are traded on the Tel Aviv Stock Exchange in NIS, and the translation of the NIS to
dollars has been made at the representative exchange rate of exchange on the last day of each period, as published by The Bank
of Israel.



|Year |  | High |      |  | Low | 
|---- |  | ---- | ---- |  | --- | 
|     |  | NIS  |      |  | $   | 
|2009 |  |      | 42.9 |  |     | 
|2010 |  |      | 50.1 |  |     | 
|2011 |  |      | 36.5 |  |     | 
|2012 |  |      | 16.2 |  |     | 
|2013 |  |      | 16.7 |  |     | 



184







The following table
sets forth the quarterly high and low closing price for Alon Blue Square’s ordinary shares for the quarters set forth below,
as reported by the Tel Aviv Stock Exchange. The translation into dollars has been made at the representative rate of exchange
on the last day of each period, as published by The Bank of Israel.



|               |  | High |      |  | Low | 
|-------------- |  | ---- | ---- |  | --- | 
|               |  | NIS  |      |  | $   | 
|2012           |  |      |      |  |     | 
|First Quarter  |  |      | 16.2 |  |     | 
|Second Quarter |  |      | 14.6 |  |     | 
|Third Quarter  |  |      | 8.9  |  |     | 
|Fourth Quarter |  |      | 10.7 |  |     | 
|               |  |      |      |  |     | 
|2013           |  |      |      |  |     | 
|First Quarter  |  |      | 11.6 |  |     | 
|Second Quarter |  |      | 15.0 |  |     | 
|Third Quarter  |  |      | 14.6 |  |     | 
|Fourth Quarter |  |      | 16.7 |  |     | 
|               |  |      |      |  |     | 
|2014           |  |      |      |  |     | 
|First Quarter  |  |      | 14.9 |  |     | 



The following table
sets forth the monthly high and low closing prices for Alon Blue Square ordinary shares for the last six months, as reported by
the Tel Aviv Stock Exchange. The translation into dollars is based on the representative rate of exchange on the last day
of each period, as published by The Bank of Israel.



|2013     |  | High |      |  | Low | 
|-------- |  | ---- | ---- |  | --- | 
|         |  | NIS  |      |  | $   | 
|         |  |      |      |  |     | 
|October  |  |      | 14.5 |  |     | 
|November |  |      | 16.7 |  |     | 
|December |  |      | 15.8 |  |     | 



|2014     |  | High |      |  | Low | 
|-------- |  | ---- | ---- |  | --- | 
|January  |  |      | 14.9 |  |     | 
|February |  |      | 14.0 |  |     | 
|March    |  |      | 14.1 |  |     | 



For additional information on our ordinary
shares, see “Item 10. Additional Information - B. Memorandum and Articles of Association - Description of Securities - Ordinary
Shares.”



| | B. | Plan of Distribution.
| | -- | ---------------------



Not applicable.



185







| | C. | Markets.
| | -- | --------



Our ADSs, each representing
one ordinary share and evidenced by an American depositary receipt, or ADR, have been traded on the New York Stock Exchange, Inc.
under the symbol “BSI” since July 1996. The ADRs were issued pursuant to a Depositary Agreement Alon Blue Square
entered into with The Bank of New York.



On November 2000,
our ordinary shares began trading also on the Tel Aviv Stock Exchange.



| | D. | Selling Shareholders.
| | -- | ---------------------



Not applicable.



| | E. | Expenses of the Issue.
| | -- | ----------------------



Not applicable.



|ITEM 10. | ADDITIONAL INFORMATION
|-------- | ----------------------



| | A. | Share Capital.
| | -- | --------------



Not applicable.



| | B. | Memorandum and Articles of Association.
| | -- | ---------------------------------------



Securities Registers



Our transfer agent
and register is The Bank of New York Mellon (f/k/a The Bank of New York) and its address is 1 Wall Street, New York, New York 10286.



Objects and Purposes



According to Section
4 of our Articles of Association the company shall engage in any legal business. Article 3 of our Articles of Association provides
that our purpose is to act pursuant to business consideration to make profit. The company may contribute a reasonable amount for
an appropriate object even if the contribution is not within the said business considerations.



Private Placements



Under Alon Blue Square’s
Articles of Association, resolutions of the board of directors regarding a private placement of Alon Blue Square’s shares
constituting, or securities convertible into, more than ten percent of our outstanding share capital require the approval of Alon
Blue Square’s shareholders. With respect to the aforesaid, securities convertible or exercisable into shares are deemed to
have been converted or exercised on the date of their issue.



186







Under the Israeli Companies
Law, if (i) as a result of a private placement a person would become a controlling shareholder or (ii) a private placement will
entitle 20% or more of the voting rights of a company before the placement, and all or part of the private placement consideration
is not in cash or in public traded securities or is not in market terms and if as a result of the private placement the holdings
of a substantial shareholder shall increase or as a result of it a person shall become a substantial shareholder, then in either
case, the allotment must be approved by the board of directors and by the shareholders of the company. A “substantial shareholder”
is defined as a shareholder that holds five percent or more of the company’s outstanding share capital, assuming the exercise
of all of the securities convertible into shares held by that person. In order for the private placement to be in “market
terms” the board of directors has to determine, on the base of detailed explanation, that the private placement is on market
terms, unless proven otherwise.



Board of Directors



Under Alon Blue Square’s
Articles of Association, resolutions by the board of directors shall be decided by a majority of votes of the directors present
(or participating, in the case of voting by media) and voting, each director having one vote.



In addition, the Israeli
Companies Law requires that certain transactions, actions and arrangements be approved as provided for in a company’s articles
of association and in certain circumstances by the audit or compensation committee and by the board of directors itself. Those
transactions that require such approval pursuant to a company’s articles of association must be approved by its board of
directors. In certain circumstances, audit or compensation committee and shareholder approval is also required. The vote required
by the audit or compensation committee and the board of directors for approval of such matters, in each case, is a majority of
the directors participating in a duly convened meeting. For further information regarding the committees see “Item 6. Directors,
Senior Management and Employees - C. Board Practices – Committees.”



The Israeli Companies
Law requires that a member of the board of directors or senior management of the company promptly and, in any event, not later
than the first board meeting at which the transaction is discussed, disclose any personal interest that he or she may have, either
directly or by way of any corporation in which he or she is, directly or indirectly, a 5% or greater shareholder, director or
general manager or in which he or she has the right to appoint at least one director or the general manager, as well as all related
material information known to him or her, in connection with any existing or proposed transaction by the company. In addition,
if the transaction is an extraordinary transaction (that is, a transaction other than in the ordinary course of business, otherwise
than on market terms, or is likely to have a material impact on the company’s profitability, assets or liabilities), the
member of the board of directors or senior management must also disclose any personal interest held by his or her spouse, siblings,
parents, grandparents, descendants, spouse’s descendants, siblings and parents, and the spouses of any of the foregoing.



187







Once the member of
the board of directors or senior management complies with the above disclosure requirement, a company may approve the transaction
in accordance with the provisions of its articles of association. Further, under Alon Blue Square’s Articles of Association,
subject to the provisions of the Companies Law, (i) a transaction between us and an officer or a person that controls us or (ii)
a transaction between us and another person in which an officer of ours or a person that controls us has a personal interest, which
transaction is not in any such case extraordinary (Ordinary Interested Transactions), will be approved by us in the following manner:



By the board of directors,
or by the audit committee, or by the Chief Executive Officer with two directors that have no personal interest in the transaction,
or by another body authorized by the board of directors, whether such body is authorized by the board of directors by means of
a specific resolution or by board practice, or whether such body is granted authority by means of a general authorization, an authorization
for a particular type of transaction or an authorization for a particular transaction.



The approval of Ordinary
Interested Transactions by the bodies or persons may be done by means of an approval of a particular type of transaction or an
approval of a particular transaction. The approval must confirm that the transaction is not adverse to the company’s interest.
Furthermore, if the transaction is an extraordinary transaction, then, in addition to any approval stipulated by the Articles of
Association, it also must be approved by the company’s audit committee and then by the board of directors, and, under certain
circumstances, by a meeting of the shareholders of the company. Under the provisions of the Israeli Companies Law, whoever has
a personal interest in a matter, which is considered at a meeting of the board of directors or the audit committee, may not be
present at this meeting or vote on this matter, unless it is not an extraordinary transaction as defined in the Israeli Companies
Law. However, if the chairman of the board of directors or the chairman of the audit committee has determined that the presence
of an office holder with a personal interest is required for the presentation of a matter, such officer holder may be present at
the meeting. Notwithstanding the foregoing, if the majority of the directors have a personal interest in a matter, they shall be
allowed to participate and vote on this matter, but an approval of the transaction by the shareholders in the general meeting shall
be required.



Alon Blue Square’s
Articles of Association provide that, subject to the Israeli Companies Law, all actions executed in good faith by the board of
directors or by a committee thereof or by any person acting as a director or a member of a committee of the board of directors
will be deemed to be valid even if, after their execution, it is discovered that there was a flaw in the appointment of these persons
or that any one of these persons was disqualified from serving at his or her office.



The Articles of Association
provide that the board of directors may delegate its powers to such committees of the board of directors as it deems appropriate,
subject to the provisions of the Israeli Companies Law, and they may from time to time widen, narrow or cancel the delegation of
such power. The Israeli Companies Law provides that certain powers of the board of directors may not be delegated by the board
of directors. See “Item 6. Directors, Senior Management and Employees - C. Board Practices - Committees.”



188







According to the Israeli
Companies Law, a contract of a company with its directors, regarding their conditions of service, including the grant to them of
exemption from liability from certain actions, insurance, and indemnification as well as the company’s contract with its
directors on conditions of their employment, in other capacities, require the approval of the audit or compensation committee,
the board of directors, and the shareholders.



Compensation Policy





A recent amendment
to the Companies Law requires that each public company must adopt a compensation policy by approval of its compensation committee,
its board of directors and shareholders (by a majority of shareholders that does not include the controlling shareholders of the
company and any shareholders interested in the approval of the compensation policy) and also that the terms of service and engagement
of the chief executive officer, directors or controlling shareholders (or a relative thereof) receive the approval of the compensation
committee, board of directors, and shareholders, subject to limited exceptions. Similarly, the terms of service and engagement
of any officer other than the CEO must receive the approval of the compensation committee and board of directors. However, shareholder
approval is only required if the compensation of such officer other than the CEO is not in accordance with the company’s
compensation policy. Under certain circumstances, the compensation committee and the board of directors may approve a compensation
policy or terms of service even if rejected the shareholders meeting.



On September 30, 2013,
our shareholders approved the adoption of a compensation policy applicable to Company officers and directors for a period of three
years. Among other things, the Compensation Policy provides the manner and basis on which the terms of office and employment of
the Company Office Holders will be established and approved. The Company’s Compensation Policy takes into account, among
other things, providing proper incentives to directors and officers, taking into account the risk management of the company, the
officer’s contribution to achieving corporate objectives and increasing profits, and the function of the officer or director.
The Company’s compensation policy was submitted to the SEC on Form 6-K on September 12, 2013.





Description of Securities



Ordinary Shares



The following is a
description of our ordinary shares. Our authorized share capital is 100,000,000 ordinary shares, par value NIS 1.0 per share.



The ordinary shares
do not have preemptive rights, preferred rights or any other right to purchase the company’s security. Neither our Articles
of Association nor the laws of the State of Israel restrict the ownership or voting of ordinary shares by non-residents of Israel,
except for subjects of countries which are enemies of Israel.



Transfer of Shares.
Fully paid ordinary shares are issued in registered form and may be freely transferred pursuant to our Articles of Association
unless that transfer is restricted or prohibited by another instrument.



189







Notices. Under
the Israeli Companies Law and our Articles of Association, we are required to publish notices in two Hebrew-language daily newspapers
at least 14 calendar days’ prior notice of a shareholders’ meeting. However, under regulations promulgated under the
Israeli Companies Law, we are required to publish notice in two daily newspapers at least 35 calendar days prior any shareholders’
meeting in which the agenda includes matters which may be voted on by voting instruments. Regulations under the Israeli Companies
Law exempt companies, like Alon Blue Square, whose shares are listed for trading both on a stock exchange in and outside of Israel,
from some provisions of the Israeli Companies Law. An amendment to these regulations exempts us from the requirements of the Israeli
proxy regulation, under certain circumstances.



According to the Israeli
Companies Law and the regulations promulgated thereunder, for purposes of determining the shareholders entitled to notice and to
vote at such meeting, the board of directors may fix the record date not more than 40 nor less than four calendar days prior to
the date of the meeting, provided that an announcement regarding the general meeting shall be given prior to the record date.



Election of Directors.
Our ordinary shares do not have cumulative voting rights in the election of directors. As a result, the holders of ordinary shares
representing more than 50% of our ordinary shares and voting power have the power to elect all of our directors, other than our
external directors, whose initial election requires, in addition to the vote of a majority of shareholders, that a majority of
the votes of the shareholders who are not controlling shareholders and do not have a personal interest in the appointment (excluding
a personal interest which did not result from the shareholder’s relationship with the controlling shareholder) who participate
in the vote, vote for their nomination (without taking into account abstentions), or that less than two percent of the disinterested
shareholders vote against their nomination. Currently, Alon Retail has the power to elect all of our directors other than our two
external directors. See Item 3. Key Information - D. Risk Factors - “Alon is able to control the outcome of matters requiring
shareholder approval.”



Dividend and Liquidation
Rights. Our profits, in respect of which a resolution was passed to distribute them as dividend or bonus shares, shall be paid
pro rata to the amount paid or credited as paid on account of the nominal value of shares held by the shareholders. In the event
of Alon Blue Square’s liquidation, the liquidator may, with the general meeting’s approval, distribute parts of the
company’s property in specie among the shareholders and he may, with similar approval, deposit any part of the company’s
property with trustees in favor of the shareholders as the liquidator, with the approval mentioned above deems fit.



Voting, Shareholders’
Meetings and Resolutions.Holders of ordinary shares are entitled to one vote for each ordinary share held on all matters
submitted to a vote of shareholders. The quorum required for an ordinary meeting of shareholders consists of at least two shareholders
present, in person or by proxy, or who has sent the company a voting instrument indicating the way in which he is voting, who hold
or represent, in the aggregate, 50% or more of the voting rights of our outstanding share capital. A meeting adjourned for lack
of a quorum is adjourned to the same day in the following week at the same time and place or any time and place as prescribed by
the board of directors in notice to the shareholders. At the reconvened meeting one shareholder at least, present in person or
by proxy constitutes a quorum subject to the provisions of section 79 of the Israeli Companies Law.



190







With the agreement
of a meeting at which a quorum is present, the chairman may, and on the demand of the meeting he must, adjourn the meeting from
time to time and from place to place, as the meeting resolves.



Annual general meetings
of shareholders are held once every year within a period of not more than 15 months after the last preceding annual general shareholders’
meeting. The meeting shall be held at the company’s registered offices, unless the board of directors has determined otherwise.
The board of directors may call special general meetings of shareholders. The Israeli Companies Law provides that a special general
meeting of shareholders may be called by the board of directors or by a request of two directors or 25% of the directors in office,
whichever is the lower, or by shareholders holding at least 5% of the issued share capital of the company and at least 1% of the
voting rights, or of shareholders holding at least 5% of the voting rights of the company.



An ordinary resolution
requires approval by the holders of a majority of the voting rights present, in person or by proxy, at the meeting and voting on
the resolution.



Modification of
Class Rights.Under Alon Blue Square’s Articles of Association, unless otherwise provided, the rights attached to any
class may be varied after a resolution is passed by general meetings of the shareholders of each class of shares separately or
after obtaining the written consent of the holders of all the classes of shares.



Allotment of Shares.
Alon Blue Square’s board of directors has the power to allot or to issue shares to any person, with restrictions and condition,
for their nominal value or with a premium, as it deems fit.



Private Placements



For information on
private placements, see “Item 10. Additional Information - B. Memorandum and Articles of Association- Private Placements.”



| | C. | Material Contracts.
| | -- | -------------------



For a summary of
other material contracts, see “Item 4. Information on The Company - B. Business Overview - General”, “Item 4.
Information on The Company - B. Business Overview – Supermarkets,” “Item 4. Information on The Company - B. Business
Overview – Fueling and Commercial Sites,” “Item 4. Information on The Company - B. Business Overview –
Non-Food,” “Item 4. Information on The Company - B. Business Overview – Real Estate,” “Item 4. Information
on The Company - B. Business Overview - Related Businesses”, “Item 5. Operating and Financial Review and Prospects
- Liquidity and Capital Resources - Debentures”, “Item 6. Directors, Senior Management and Employees - C. Board Practices
- Exemption, Insurance and Indemnification of Directors and Officers - Limitations on Insurance, Exemptions and Indemnification”,
“Item 6. Directors, Senior Management and Employees - D. Employees”, “Item 7. Major Shareholders and Related
Party Transactions - B. Related Party Transactions,” and our consolidated financial statements and notes included elsewhere
in this Annual Report.



191







| | D. | Exchange Controls.
| | -- | ------------------



Israeli law and regulations
do not impose any material foreign exchange restrictions on non-Israeli holders of our ordinary shares. In May 1998, a new
“general permit” was issued under the Israeli Currency Control Law, 1978, which removed most of the restrictions that
previously existed under the law and enabled Israeli citizens to freely invest outside of Israel and freely convert Israeli currency
into non-Israeli currencies.



Dividends, if any,
paid to holders of our ordinary shares, and any amounts payable upon our dissolution, liquidation or winding up, as well as the
proceeds of any sale in Israel of our ordinary shares to an Israeli resident, may be paid in non-Israeli currency or, if paid in
Israeli currency, may be converted into freely repatriable dollars at the rate of exchange prevailing at the time of conversion.



| | E. | Taxation
| | -- | --------



Israeli Tax Considerations



General



The following is a
summary of the current tax regime of the State of Israel, which applies to us and to persons who hold our ordinary shares or ADSs
(the “Shares”).



This discussion does
not purport to constitute a complete analysis of all potential tax consequences applicable to investors upon purchasing, owning
or disposing of our Shares. In particular, this discussion does not take into account the specific circumstances of any particular
investor (such as tax-exempt entities, Financial Institutions, certain financial companies, broker-dealers, investors that own,
directly or indirectly, 10% or more of our outstanding voting rights, or foreign companies, Israeli residents holding 25% or more
of their shares or having the right to 25% or more of their income or profit, all of whom are subject to special tax regimes not
covered under this discussion). To the extent that issues discussed herein are based on legislation which has yet to be subject
to judicial or administrative interpretation, there can be no assurance that the views expressed herein will accord with any such
interpretation in the future. This discussion is not intended and should not be construed as legal or professional tax advice and
does not cover all possible tax considerations.



Potential investors
are urged to consult their own tax advisors as to the Israeli or other tax consequences of the purchase, ownership and disposition
of the Shares, including, in particular, the effect of any foreign, state or local taxes.



General Corporate
Tax Structure in Israel



The Israeli corporate
tax rate applicable to Israeli resident companies in 2013 and 2014 is 25% and 26.5%, respectively.



192







TAXATION OF SHAREHOLDERS



Capital Gains



Capital gains tax is
imposed on the disposal of capital assets by an Israeli resident, and on the disposal of such assets by a non-Israeli resident
if those assets are either (i) located in Israel; (ii) are shares or a right to a share in an Israeli resident corporation, or
(iii) represent, directly or indirectly, rights to assets located in Israel. The Israeli Income Tax Ordinance distinguishes between
“Real Gain” and the “Inflationary Surplus”. Real Gain is the excess of the total capital gain over Inflationary
Surplus computed generally on the basis of the increase in the Israeli CPI between the date of purchase and the date of disposal.



The real capital
gain accrued by individuals on the sale of the Shares will be taxed at the rate of 25%. However, if the individual shareholder
is a “Controlling Shareholder” (i.e., a person who holds, directly or indirectly, alone or together with another, 10%
or more of one of the Israeli resident company’s means of control) at the time of sale or at any time during the preceding
12 month period, such gain will be taxed at the rate of 30%. In addition, capital gains generated by an individual claiming deduction
of financing expenses in respect of such gain will be taxed at the rate of 30%.



Individual and corporate
shareholders dealing in securities in Israel are taxed at the tax rates applicable to business income (26.5% in 2014 for corporations
and a marginal tax rate of up to 50% in 2014 for individuals, including an additional 2% tax which would be levied on individuals
whose taxable income from Israeli sources exceeds NIS 811,560 in 2014). Notwithstanding the foregoing, capital gains generated
from the sale of our Shares by a non-Israeli shareholder may be exempt from Israeli tax under the Israeli Income Tax Ordinance
provided that the following cumulative conditions are met: (i) the Shares were purchased upon or after the registration of the
Shares on the stock exchange (not applicable in respect of Shares purchased on or after January 1, 2009), (ii) the seller does
not have a permanent establishment in Israel to which the generated capital gain is attributed, and (iii) if the seller is a corporation,
less than 25% of its means of control or the rights to its profit or income are held by or attributed to Israeli resident shareholders.
In addition, the sale of the Shares may be exempt from Israeli capital gains tax under the provisions of an applicable double tax
treaty. For example, the U.S.-Israel Double Tax Treaty exempts a U.S. resident from Israeli capital gain tax in connection with
the sale of the Shares, provided that: (i) the U.S. resident owned, directly or indirectly, less than 10% of the voting power of
the company at any time within the 12 month period preceding such sale; (ii) the U.S. resident, being an individual, is present
in Israel for a period or periods of less than 183 days during the taxable year; and (iii) the capital gain from the sale was not
derived through a permanent establishment of the U.S. resident in Israel (“U.S.-Israel Double Tax Treaty”).



Either the purchaser,
the Israeli stockbroker or the financial institution through which the Shares are held are obligated, subject to the above mentioned
exemptions, to withhold tax upon the sale of Shares at a 25% tax rate for corporations and/or for individuals.



193







Upon the sale of
traded securities, a detailed return, including a computation of the tax due, must be filed and an advanced payment must be paid
to the Israeli Tax Authority on January 31 and June 30 of every tax year in respect of sales of traded securities made within the
previous six months. However, if all tax due was withheld at source according to applicable provisions of the Israeli Income Tax
Ordinance and regulations promulgated thereunder, such return must not be filed and no advance payment must be paid. A capital
gain is also reportable on the annual income tax return.



Dividends



Dividends distributed
by the Company to a shareholder who is Israeli resident individual will be generally subject to income tax at a rate of 25%. However,
a 30% tax rate will apply if the dividend recipient is a Controlling Shareholder, as defined above, at the time of distribution
or at any time during the preceding 12 month period. If the recipient of the dividend is an Israeli resident corporation, such
dividend will be generally exempt from Israeli income tax provided that the income, from which such dividend had been distributed,
derived or accrued within Israel.



Dividends distributed
by an Israeli resident company to a non-Israeli resident (either individual or corporation) is generally subject to tax on the
receipt of such dividend at the rate of 25% (30% if the dividend recipient is a Controlling Shareholder at the time of distribution
or at any time during the preceding 12 month period). These rates may be reduced under the provisions of an applicable double tax
treaty. Thus, under the U.S.-Israel Double Tax Treaty, the following tax rates will apply in respect of dividends distributed by
an Israeli resident company to a U.S. resident: (i) if the U.S. resident is a corporation which holds during that portion of the
taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least
10% of the outstanding shares of the voting stock of the Israeli resident paying corporation and not more than 25% of the gross
income of the Israeli resident paying corporation for such prior taxable year (if any) consists of certain types of interest or
dividends the tax rate is 12.5%; (ii) if both the conditions mentioned in section (i) above are met and the dividend is paid from
an Israeli resident company’s income, which was entitled to a reduced tax rate applicable to an Approved Enterprise/Benefited
Enterprise/Preferred Enterprise – the tax rate is 20% for dividends distributed from profits derived after January 1, 2014;
(iii) in all other cases, the tax rate is 25%. The aforementioned rates under the U.S.-Israel Double Tax Treaty will not apply
if the dividend income is attributed to a permanent establishment of the U.S. resident in Israel.



The Company is obligated
to withhold tax upon the distribution of dividends at the following withholding tax rates: (a) for securities registered and held
by a clearing corporation: (i) Israeli resident corporations – 0%, (ii) Israeli resident individuals – 25%, and (iii)
non-Israeli residents - 25%, unless reduced by applying the provisions of an applicable double tax treaty; (b) in all other cases:
(i) Israeli resident corporations – 0%, (ii) Israeli resident individuals – 25%/30% (the 30% tax rate shall apply if
the dividend recipient is a “Controlling Shareholder” (as defined above) at the time of the distribution or at any
time during the preceding 12 months period)), and (iii) non-Israeli residents - 25%/30% as referred to above with respect to Israeli
resident individuals, unless reduced by applying the provisions of an applicable double tax treaty.



194







Foreign Exchange
Regulations



Non-residents
of Israel who hold our Shares are able to receive any dividends, and any amounts payable upon the dissolution, liquidation and
winding up of our affairs, repayable in non-Israeli currency at the rate of exchange prevailing at the time of conversion. However,
Israeli income tax is generally required to have been paid or withheld on these amounts. In addition, the statutory framework for
the potential imposition of currency exchange control has not been eliminated, and may be restored at any time by administrative
action.



United
States Federal Income Tax Considerations



The following is a
summary of the material U.S. federal income tax consequences that apply to U.S. Holders who hold Alon Blue Square’s ADSs
or ordinary shares (together “Shares”) as capital assets for tax purposes. This summary is based on current provisions
of the Internal Revenue Code of 1986, as amended (the “Code”), current and proposed Treasury regulations promulgated
thereunder, and administrative and judicial decisions as of the date hereof and the U.S.-Israel income tax treaty, all of which
are subject to change, possibly on a retroactive basis. This summary does not address all U.S. federal income tax matters that
may be relevant to a particular perspective holder or all tax considerations that may be relevant with respect to an investment
in Alon Blue Square’s Shares.



This summary does not
address tax considerations applicable to a holder of a Alon Blue Square Shares that may be subject to special tax rules including,
without limitation, the following:



| | · | dealers or traders in securities, currencies or notional principal contracts;
| | - | -----------------------------------------------------------------------------

| | · | financial institutions;
| | - | -----------------------

| | · | insurance companies;
| | - | --------------------

| | · | real estate investment trusts;
| | - | ------------------------------

| | · | banks;
| | - | ------

| | · | investors subject to the alternative minimum tax;
| | - | -------------------------------------------------

| | · | tax-exempt organizations;
| | - | -------------------------

| | · | traders that have elected mark-to-market accounting;
| | - | ----------------------------------------------------

| | · | investors that hold Shares as part of a “straddle”, “hedge”, or “conversion
transaction” with other investments;
| | - | ----------------------------------------------------------------------------------------------------------------

| | · | regulated investment companies;
| | - | -------------------------------

| | · | investors that actually or constructively own 10 percent or more of our voting shares;
| | - | --------------------------------------------------------------------------------------

| | · | investors that are treated as partnerships or other pass through entities for U.S. federal income
purposes and persons who hold the Shares through partnerships or other pass through entities;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



195







| | · | investors whose functional currency is not the US dollar: and
| | - | -------------------------------------------------------------

| | · | expatriates or former long-term residents of the United States.
| | - | ---------------------------------------------------------------



This summary does not
address the effect of any U.S. federal taxation other than U.S. federal income taxation. In addition, this summary does not include
any discussion of state, local, or foreign taxation or the indirect effects on the holders of equity interest in a holder of the
Shares.



You are urged to
consult your own tax advisor regarding the foreign and U.S. federal, state, and local and other tax consequences of an investment
in the Shares.



For purposes of this
summary, a “U.S. Holder” means a beneficial owner of a Share that is for U.S. federal income tax purposes:



| | · | an individual who is a citizen or resident of the United States;
| | - | ----------------------------------------------------------------



| | · | a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created
or organized in the United States or under the laws of the United States or any political subdivision thereof;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | an estate, the income of which is subject to U.S. federal income tax regardless of its source;
or
| | - | -------------------------------------------------------------------------------------------------



| | · | a trust (1) if (a) a court within the United States is able to exercise primary supervision over
the administration of the trust; and (b) one or more U.S. persons have the authority to control all substantial decisions of the
trust; or (2) that has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



For purposes of this
section, a “non-U.S. Holder” is any holder who is not a U.S. Holder.



If an entity that is
classified as a partnership for U.S. federal tax purposes holds Shares, the U.S. federal tax treatment of its partners will generally
depend upon the status of the partners and the activities of the partnership. Entities that are classified as partnerships for
U.S. federal tax purposes and persons holding Shares through such entities should consult their own tax advisors.



In general, if you
hold ADSs, you will be treated as the holder of the underlying shares represented by those ADSs for U.S. federal income tax purposes.
Accordingly, no gain or loss will be recognized if you exchange ADSs for the underlying shares represented by those ADSs.



196







The U.S. Treasury has
expressed concerns that parties to whom Shares are released may be taking actions that are inconsistent with the claiming of foreign
tax credits for U.S. holders of Shares. Such actions would also be inconsistent with the claiming of the reduced rate of tax, described
below, applicable to dividends received by certain non-corporate U.S. Holders. Accordingly, the analysis of the credibility of
Israeli taxes and the availability of the reduced tax rate for dividends received by certain non-corporate U.S. Holders, each described
below, could be affected by actions taken by parties to whom the Shares are released and the positions of the U.S. Treasury.



U.S Taxation of Shares



Distributions



Subject to the discussion
under “Passive Foreign Investment Companies” below, the gross amount of any distribution, including the amount of any
Israeli taxes withheld from these distributions (see “Israeli Tax Considerations”), actually or constructively received
by a U.S. Holder with respect to Shares will be taxable to the U.S. Holder as a dividend to the extent of our current and accumulated
earnings and profits as determined under U.S. federal income tax principles. The U.S. Holder will not, except as provided by Section
245 of the Code, be eligible for any dividends received deduction in respect of the dividend otherwise allowable to corporations.
Distributions in excess of earnings and profits will be non-taxable to the U.S. Holder to the extent of, and will be applied against
and reduce, the U.S. Holder’s adjusted tax basis in the Shares. Distributions in excess of such adjusted tax basis will generally
be taxable to the U.S. Holder as capital gain from the sale or exchange of property. If we do not report to a U.S. Holder the portion
of a distribution that exceeds earnings and profits, the distribution will generally be taxable as a dividend even if that distribution
would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above. The amount of
any distribution of property other than cash will be the fair market value of that property on the date of distribution.



Under the Code, certain
dividends received by non-corporate U.S. Holders will be subject to a maximum income tax rate of 20%. This reduced income tax rate
is only applicable to dividends paid by a “qualified foreign corporation” that is not a “passive foreign investment
company” and only with respect to shares held by a qualified U.S. Holder (i.e., a non-corporate holder) for a minimum holding
period (generally 61 days during the 121-day period beginning 60 days before the ex-dividend date). We should be considered a qualified
foreign corporation because (i) we are eligible for the benefits of a comprehensive tax treaty between Israel and the U.S., which
includes an exchange of information program, and (ii) the ADSs are readily tradeable on an established securities market in the
U.S. In addition, based on our current business plans, we do not expect to be classified as a “passive foreign investment
company” (see “Passive Foreign Investment Companies” below). Accordingly, dividends paid by us to individual
U.S. Holders on shares held for the minimum holding period should be eligible for the reduced income tax rate. In addition to the
income tax on dividends discussed above, certain non-corporate U.S. holders will also be subject to the 3.8% Medicare tax on dividends
as discussed below under “Medicare Tax on Unearned Income”.



197







The amount of any distribution
paid in a currency other than US dollars (a “foreign currency”) including the amount of any withholding tax thereon,
will be included in the gross income of a U.S. Holder in an amount equal to the US dollar value of the foreign currency calculated
by reference to the exchange rate in effect on the date of the U.S. Holder’s (or, in the case of ADSs, the depositary’s)
receipt of the dividend, regardless of whether the foreign currency is converted into U.S. dollars. If the foreign currency is
converted into US dollars on the date of receipt, a U.S. Holder generally should not be required to recognize a foreign currency
gain or loss in respect of the dividend. If the foreign currency received in the distribution is not converted into US dollars
on the date of receipt, a U.S. Holder will have a basis in the foreign currency equal to its US dollar value on the date of receipt.
Any gain or loss on a subsequent conversion or other disposition of the foreign currency will be treated as ordinary income or
loss.



Dividends received
by a U.S. Holder with respect to Shares generally will be treated as foreign source income for the purposes of calculating the
holder’s foreign tax credit limitation. Subject to certain conditions and limitations, any Israeli taxes withheld on dividends
at the rate provided by the U.S.-Israel income tax treaty may be deducted from taxable income or credited against a U.S. Holder’s
U.S. federal income tax liability. The limitation on foreign taxes eligible for the U.S. foreign tax credit is calculated separately
with respect to “passive” income and “general” income. The rules relating to foreign tax credits and the
timing thereof are complex. U.S. Holders should consult their own tax advisors regarding the availability of a foreign tax credit
under their particular situation (including, in the case of a U.S. corporation that owns 10 percent or more of our voting stock,
the possible application of Section 902 of the Code).



Sale or Other Disposition
of Shares



If a U.S. holder sells
or otherwise disposes of its Shares, a gain or loss will be recognized for U.S. federal income tax purposes in an amount equal
to the difference between the amount realized on the sale or other disposition and such holder’s adjusted basis in the Shares.
Subject to the discussion below under the heading “Passive Foreign Investment Companies,” such gain or loss generally
will be a capital gain or loss and will be a long-term capital gain or loss if the holder had held the Shares for more than one
year at the time of the sale or other disposition. Long-term capital gains realized by individual U.S. Holders generally are subject
to a lower marginal U.S. federal income tax rate (currently up to 20%) than ordinary income. A U.S. Holder’s ability to deduct
capital losses is subject to limitations. In addition to the income tax on gains discussed above, certain non-corporate U.S. holders
will also be subject to the 3.8% Medicare tax on net gains as discussed below under “Medicare Tax on Unearned Income”.
Under most circumstances, any gain that a holder recognizes on the sale or other disposition of Shares will be U.S. source for
purposes of the foreign tax credit limitation and any recognized losses will be allocated against U.S. source income.



If a U.S. Holder receives
foreign currency upon a sale or exchange of Shares, a gain or loss will be recognized as described above and in addition, a gain
or loss, if any, recognized on the subsequent sale, conversion, or disposition of such foreign currency will be ordinary income
or loss, and will generally be income or loss from sources within the United States for foreign tax credit limitation purposes.
However, if such foreign currency is converted into US dollars on the date received by the U.S. Holder, the U.S. Holder generally
should not be required to recognize any gain or loss on such conversion.



198







A U.S. Holder who holds
Shares through an Israeli stockbroker or other Israeli intermediary may be subject to Israeli withholding tax on any capital gains
recognized if the U.S. Holder does not obtain approval of an exemption from the Israeli Tax Authorities or claim any allowable
refunds or reductions. U.S. Holders are advised that any Israeli tax paid under circumstances in which an exemption from (or a
refund of or a reduction in) such tax was available will not give rise to a deduction or credit for foreign taxes paid for U.S.
federal income tax purposes. U.S. Holders are advised to consult their Israeli stockbroker or intermediary regarding the procedures
for obtaining an exemption or reduction.



Medicare Tax on Unearned
Income



Certain U.S. Holders
that are individuals, estates or trusts are required to pay an additional 3.8% tax on all or a portion of their “net investment
income”, which includes, among other things, dividends on, and net gains from the sale or other disposition of Shares (other
than Shares held in a trade or business).



Passive Foreign Investment
Companies



For U.S. federal income
tax purposes, we will be considered a passive foreign investment company (“PFIC”) for any taxable year in which either
75% or more of our gross income is passive income, or at least 50% of the average value of all of our assets for the taxable year
produce or are held for the production of passive income. For this purpose, passive income includes dividends, interest, royalties,
rents, annuities, and the excess of gains over losses from the disposition of assets which produce passive income. If we were determined
to be a PFIC for U.S. federal income tax purposes, highly complex rules would apply to U.S. Holders owning Shares.



Based on our estimated
gross income, the average value of our gross assets, and the nature of our business, we do not believe that we will be classified
as a PFIC in the current taxable year. Our status in any taxable year will depend on our assets and activities in each year and
because this is a factual determination made annually at the end of each taxable year, there can be no assurance that we will not
be considered a PFIC for any future taxable year. If we determine that we have become a PFIC, we will notify our U.S. Holders and
provide them with the information necessary to comply with the qualified electing fund rules (discussed below). If we are treated
as a PFIC in any year during which a U.S. Holder owns Shares, certain adverse tax consequences could apply, as described below.
Given our current business plans, however, we do not expect that we will be classified as a PFIC in future years.



If we are treated as
a PFIC for any taxable year,



·          a
U.S. Holder would be required to allocate income recognized upon receiving certain dividends or gain recognized upon the disposition
of Shares ratably over its holding period for such Shares,



·          the
amount allocated to each year during which we are considered a PFIC other than the year of the dividend payment or disposition
would be subject to tax at the highest individual or corporate tax rate, as the case may be, and an interest charge would be imposed
with respect to the resulting tax liability allocated to each such year,



199







·          the
amount allocated to the year of the dividend payment or disposition would be taxable as ordinary income, and



·          a
U.S. Holder would be required to make an annual return on IRS Form 8621 regarding distributions received and gains realized with
respect to the Shares. Additionally, recently promulgated regulations impose an additional annual filing requirement for U.S. Holders
who are shareholders of a PFIC.



One method to avoid
the aforementioned treatment is for a U.S. Holder to make an election to treat us as a qualified electing fund. A U.S. Holder that
makes an election to treat us as a qualified electing fund (an “electing U.S. Holder”) is required for each taxable
year to include in income a pro rata share of the ordinary earnings of the qualified electing fund as ordinary income and a pro
rata share of the net capital gain of the qualified electing fund as long-term capital gain, subject to a separate election to
defer payment of taxes, which deferral is subject to an interest charge. A U.S. Holder may make a qualified electing fund election
only if we furnish the U.S. Holder with certain tax information. We have agreed to supply an electing U.S. Holder with such information
needed to report income and gain pursuant to a qualified election in the event Alon Blue Square is classified as a PFIC. Alternatively,
another method to avoid the aforementioned treatment is for a U.S. Holder to make a timely mark-to-market election in respect of
its Shares. If a U.S. Holder elects to mark-to-market its Shares, any excess of the fair market value of the Shares at the close
of each tax year over the adjusted basis in such Shares will generally be included in income. If the fair market value of the Shares
had depreciated below the adjusted basis at the close of the tax year, the U.S. Holder may generally deduct the excess of the adjusted
basis of the Shares over their fair market value at that time. However, such deductions generally would be limited to the net mark-to-market
gains, if any, that were included in income by such holder with respect to Shares in prior years. Income recognized and deductions
allowed under the mark-to-market provisions, as well as any gain or loss on the disposition of Shares with respect to which the
mark-to-market election is made, is treated as ordinary income or loss.



You are urged to
consult your own tax advisor regarding the possibility of us being classified as a PFIC and the potential tax consequences arising
from the ownership and disposition (directly or indirectly) of an interest in a PFIC.



Backup Withholding and
Information Reporting



Payments of dividends
with respect to Shares and the proceeds from the sale, retirement, or other disposition of Shares made by a U.S. paying agent or
other U.S. intermediary will be reported to the IRS and to the U.S. Holder as may be required under applicable U.S. Treasury regulations.
We, or an agent, a broker, or any paying agent, as the case may be, may be required to withhold tax (backup withholding), currently
at the rate of 28%, if a non-corporate U.S. Holder that is not otherwise exempt fails to provide an accurate taxpayer identification
number and comply with other IRS requirements concerning information reporting. Certain U.S. Holders (including, among others,
corporations and tax-exempt organizations) are not subject to backup withholding. Any amount of backup withholding withheld may
be used as a credit against your U.S. federal income tax liability provided that the required information is furnished to the IRS.
U.S. Holders should consult their tax advisors as to their qualification for exemption from backup withholding and the procedure
for obtaining an exemption.



200







Certain U.S. Holders
who are individuals may be required to report information relating to an interest in our ADSs on IRS Form 8938, subject to certain
exceptions (including an exception for shares held in accounts maintained by financial institutions). U.S. Holders are encouraged
to consult their tax advisors regarding their information reporting obligations, if any, with respect to their ownership and disposition
of our ADSs.



Backup Withholding
and Information Reporting for non U.S. Holders



Non-U.S. Holders generally
are not subject to information reporting or backup withholding with respect to dividends paid on, or upon the disposition of Shares,
provided that the non-U.S. Holder certifies to its foreign status and certain other conditions are met, or otherwise establishes
an exemption.



The amount of any backup
withholding will be allowed as a credit against a non-U.S. Holder’s United States federal income tax liability and may entitle
such holder to a refund, provided that certain required information is furnished to the IRS.



Non-U.S. Holders
are urged to consult legal and tax advisors in the countries of their citizenship, residence and domicile to determine the possible
tax consequences of holding and selling Shares under the laws of their respective jurisdictions in light of their own particular
circumstances.



| | F. | Dividends and Paying Agents.
| | -- | ----------------------------



Not applicable.



| | G. | Statement by Experts.
| | -- | ---------------------



Not applicable.



| | H. | Documents on Display.
| | -- | ---------------------



Alon Blue Square is
subject to the informational requirements of the Securities Exchange Act of 1934, as amended, applicable to foreign private issuers
and fulfills the obligation with respect to these requirements by filing reports with the Securities and Exchange Commission (SEC).
You may read and copy any document Alon Blue Square files with the SEC without charge at the SEC’s public reference room
at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of that material may be obtained by mail from the Public Reference Branch
of the SEC at such address, at prescribed rates. Please call the SEC at l-800-SEC-0330 for further information on the public reference
room. Recent reports filed by Alon Blue Square with the SEC can also be accessed at the SEC’s web site, www.sec.gov.



201







As a foreign private
issuer, Alon Blue Square is exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements,
and its officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery
provisions contained in Section 16 of the Exchange Act. In addition, Alon Blue Square is not required under the Exchange Act to
file periodic reports and financial statements with the Securities and Exchange Commission as frequently or as promptly as United
States companies whose securities are registered under the Exchange Act. A copy of each report submitted in accordance with applicable
United States law is available for public review at Alon Blue Square’s principal executive offices.



| | I. | Subsidiary Information.
| | -- | -----------------------



Not applicable.



|ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------



Interest Rate Sensitivity



The Company is exposed
to various market risks, most of them related to changes in interest rates and changes in the Israeli CPI. Loans and
Debentures in the amount of approximately NIS 2,847.8 million and marketable securities in the amount of approximately NIS 460.8
million bear interest at fixed rates, and therefore changes in the interest rates will affect the fair value of such loans and
marketable securities. Other loans set forth below bear interest at variable rates (as a result of changing interest rates or CPI
linkage), and therefore a change in the CPI or the prime interest rate will affect future cash flow and interest expenses.



202







The table below provides
information about our financial instruments as of December 31, 2013:



|                                                                                                |  | December
    31, 2013 Expected maturity (NIS in thousands) |        
|----------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------- | -------
|                                                                                                |  | 2014                                                       |        
|Long term loan from banks - linked:                                                             |  |                                                            |        
|Linked to the Israeli CPI - 3.79% (weighted average
    rate as of December 31, 2013)           |  |                                                            | 86,503 
|Long term loans from bank - unlinked:                                                           |  |                                                            |        
|Fixed annual interest rate of 6.75%                                                             |  |                                                            | 12,440 
|Variable interest (average annual rate as of December 31, 2013 of
    3.68%)                    |  |                                                            | 152,146
|Long term loans from others - unlinked:                                                         |  |                                                            |        
|Variable interest (average annual rate as of
    December 31, 2013 of 2.54%)                    |  |                                                            | -      
|                                                                                                |  |                                                            | 251,089
|Debentures- Linked to the Israeli CPI:                                                          |  |                                                            |        
|Issued by the Company - fixed rate 5.9%                                                         |  |                                                            | 82,386 
|Issued by the Company - fixed rate 2.5%                                                         |  |                                                            | 26,674 
|Issued by BSRE - fixed rate 4.7%                                                                |  |                                                            | 228,679
|Issued by BSRE - fixed rate 4.2%                                                                |  |                                                            | 23,995 
|Issued by BSRE - fixed rate 4.5%                                                                |  |                                                            | -      
|Issued by BSRE - fixed rate 3.3%                                                                |  |                                                            | -      
|Issued by Dor Alon - fixed rate 5%                                                              |  |                                                            | 72,287 
|Issued by Dor Alon - fixed rate 4.95%                                                           |  |                                                            | 8,074  
|Issued by Dor Alon - fixed rate 6.45% (weighted  average
    rate as of December 31, 2013)      |  |                                                            | 4,040  
|Debentures- unlinked:                                                                           |  |                                                            |        
|Issued by Dor Alon–variable interest(average  annual
    rate as of December 31, 2013 of 3.10%) |  |                                                            | 20,151 
|Issued by Dor Alon - fixed rate 6.65%                                                           |  |                                                            | 108,316
|Convertible Debentures Linked to the Israeli
    CPI: (1)                                       |  |                                                            |        
|Issued by BSRE - fixed rate 6.25%                                                               |  |                                                            | 29,715 
|                                                                                                |  |                                                            | 604,317
|Marketable Securities - Linked to the Israeli CPI                                               |  |                                                            | 130,729
|Marketable Securities – unlinked in NIS                                                         |  |                                                            | 324,037
|Marketable Securities – in other currencies                                                     |  |                                                            | 6,082  
|                                                                                                |  |                                                            | 460,847



(1) See also “Item
5. Operating and Financial Review and Prospects - Liquidity and Capital Resources – Debentures.”



203







For CPI-linked financial
instruments as stipulated in the table above, a one percent increase (decrease) in the CPI would cause an approximately NIS
31.2 million decrease (increase) in net income for the next year.



Inflation Risks



The Company has an
excess of Israeli CPI-linked liabilities over Israeli CPI-linked assets (mainly in respect of outstanding debentures). As a result,
an increase in inflation would have the effect of increasing our financial expenses without any offsetting increase in our assets
and revenues in our financial statements, leading to lower reported earnings and shareholders equity. The extent of this effect
on our financial statements would be dependent on the rate of inflation in Israel.



The table below provides
information about the changes of the CPI and the “known” CPI index:



|     |  | CPI (1) |     |   | The “known” CPI index (2) | 
|---- |  | ------- | --- | - | ------------------------- | 
|     |  |         |     |   |                           | 
|2011 |  |         | 2.2 | % |                           | 
|2012 |  |         | 1.6 | % |                           | 
|2013 |  |         | 1.8 | % |                           | 



| | (1) | Calculated based on actual CPI date (through December of end year).
| | --- | -------------------------------------------------------------------

| | (2) | Calculated based on published PI date (through November of end year).
| | --- | ---------------------------------------------------------------------



The table below provides
an analysis of monetary assets and liabilities by currency and linkage as of December 31, 2013:



|                                                           |  | December 31, 2013 |           |  |              | 
|---------------------------------------------------------- |  | ----------------- | --------- |  | ------------ | 
|                                                           |  | NIS linked to CPI |           |  | NIS unlinked | 
|                                                           |  | NIS in thousands  |          
|                                                           |  |                   |           |  |              | 
|Assets:                                                    |  |                   |           |  |              | 
|Cash and cash equivalents                                  |  |                   | -         |  |              | 
|Short term bank deposit                                    |  |                   | -         |  |              | 
|Investment in securities                                   |  |                   | 130,729   |  |              | 
|Trade receivables                                          |  |                   | -         |  |              | 
|Other accounts receivables                                 |  |                   | -         |  |              | 
|Income taxes receivable                                    |  |                   | 25,223    |  |              | 
|Loan Receivable                                            |  |                   | 74,630    |  |              | 
|Derivative financial instruments                           |  |                   | -         |  |              | 
|Investment in equity securities                            |  |                   | -         |  |              | 
|Other long-term receivables                                |  |                   | 77,104    |  |              | 
|Assets of disposal groups classified as held for sale      |  |                   | 207       |  |              | 
|Total assets                                               |  |                   | 307,893   |  |              | 
|                                                           |  |                   |           |  |              | 
|Liabilities:                                               |  |                   |           |  |              | 
|Credit and loans from banks and others                     |  |                   | -         |  |              | 
|Trade payables                                             |  |                   | -         |  |              | 
|Other accounts payable and accrued expenses                |  |                   | 25,193    |  |              | 
|Customer’s deposits                                        |  |                   | 28,469    |  |              | 
|Income tax payables                                        |  |                   | 3,199     |  |              | 
|Provisions                                                 |  |                   | 10,971    |  |              | 
|Loans                                                      |  |                   | 805,099   |  |              | 
|Debentures                                                 |  |                   | 2,382,055 |  |              | 
|Convertible debentures                                     |  |                   | 91,201    |  |              | 
|Other long-term liabilities                                |  |                   | 9,692     |  |              | 
|Derivative financial instruments                           |  |                   | 889       |  |              | 
|Liabilities of disposal groups classified as held for sale |  |                   | -         |  |              | 
|Total liabilities                                          |  |                   | 3,356,768 |  |              | 







204









For further information
regarding market risks, see note 3 to our consolidated financial statements.



|ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
|-------- | ------------------------------------------------------



| | A. | Debt Securities
| | -- | ---------------



Not applicable.



| | B. | Warrants and Rights
| | -- | -------------------



Not applicable



| | C. | Other Securities
| | -- | ----------------



Not applicable



| | D. | American Depositary Shares
| | -- | --------------------------



Each of our American Depositary Shares,
or ADSs, represents one of our ordinary shares. Our ADSs trade on the New York Stock Exchange.



205







Fees and Expenses



|Persons depositing or withdrawing
        shares or American Depositary Shares
        must pay:                                                                                                                                       |  |   | For:                                                                                                                                                                                                  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                       |  |   |                                                                                                                                                                                                       
|$5.00 (or less) per 100 American Depositary Shares (or portion of 100 American Depositary Shares)                                                                                                                                      |  | · | Execution and delivery of American Depositary Shares, including issuances resulting from a distribution of shares or rights or other property                                                         
|                                                                                                                                                                                                                                       |  |   |                                                                                                                                                                                                       
|                                                                                                                                                                                                                                       |  | · | Surrender of American Depositary Shares for the purpose of withdrawal, including if the deposit agreement terminates                                                                                  
|                                                                                                                                                                                                                                       |  |   |                                                                                                                                                                                                       
|$.02 (or less) per American Depositary Share                                                                                                                                                                                           |  | · | Any cash distribution to American Depositary Share holders                                                                                                                                            
|                                                                                                                                                                                                                                       |  |   |                                                                                                                                                                                                       
|A fee equal to the fee that would be payable if securities distributed to you had been shares and the shares had been deposited for issuance of American Depositary Shares                                                             |  | · | Distribution of securities or property (other than cash, shares or rights) distributed to holders of deposited securities which are distributed by the depositary to American Depositary Share holders
|                                                                                                                                                                                                                                       |  |   |                                                                                                                                                                                                       
|$.02 (or less) per American Depositary Shares per annum (unless a fee was paid for that calendar year for cash distributions)                                                                                                          |  | · | Depositary services                                                                                                                                                                                   
|                                                                                                                                                                                                                                       |  |   |                                                                                                                                                                                                       
|Registration or transfer fees                                                                                                                                                                                                          |  | · | Transfer and registration of shares on our share register to or from the name of the depositary or its nominee when you deposit or withdraw shares                                                    
|                                                                                                                                                                                                                                       |  |   |                                                                                                                                                                                                       
|Expenses of the depositary                                                                                                                                                                                                             |  | · | Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement)                                                                                                           
|                                                                                                                                                                                                                                       |  |   |                                                                                                                                                                                                       
|                                                                                                                                                                                                                                       |  | · | converting foreign currency to U.S. dollars                                                                                                                                                           
|                                                                                                                                                                                                                                       |  |   |                                                                                                                                                                                                       
|Taxes and other governmental charges the depositary or the custodian have to pay on any American Depositary Share or share underlying an American Depositary Share, for example, stock transfer taxes, stamp duty or withholding taxes |  | · | As necessary                                                                                                                                                                                          
|                                                                                                                                                                                                                                       |  |   |                                                                                                                                                                                                       
|Any charges incurred by the depositary or its agents for servicing the shares or deposited securities                                                                                                                                  |  | · | As necessary                                                                                                                                                                                          



206







The depositary collects
its fees for delivery and surrender of American Depositary Shares directly from investors depositing shares or surrendering American
Depositary Shares for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making
distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property
to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions or by directly
billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse
to provide fee-attracting services until its fees for those services are paid.



PART
II



|ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
|-------- | -----------------------------------------------



Not applicable.



|ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
|-------- | ----------------------------------------------------------------------------



A. to E.Not applicable.



|ITEM 15. | CONTROLS AND PROCEDURES
|-------- | -----------------------



(a) Disclosure
Controls and Procedures. We performed an evaluation of the effectiveness of our disclosure controls and procedures that are
designed to ensure that information required to be disclosed on Form 20-F and filed with the Securities and Exchange Commission
is recorded, processed, summarized and reported timely within the time period specified in the SEC’s rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be
disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated
and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding required disclosure. There can be no assurance
that our disclosure controls and procedures will detect or uncover all failures of persons within Alon Blue Square to disclose
information otherwise required to be set forth in our reports. Nevertheless, our disclosure controls and procedures are designed
to provide reasonable assurance of achieving the desired control objectives. Based on our evaluation, our management, including
our Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15(d) - 15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by
this report are effective at such reasonable assurance level.



207







(b) Management’s
Annual Report on Internal Control over Financial Reporting. Our management, under the supervision of our Chief Executive Officer
and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over our financial reporting,
as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act of 1934, as amended. The Company’s internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal
control over financial reporting includes policies and procedures that:



| | · | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our
transactions and asset dispositions;
| | - | --------------------------------------------------------------------------------------------------------------------------------------



| | · | provide reasonable assurance that transactions are recorded as necessary to permit the preparation
of our financial statements in accordance with generally accepted accounting principles;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | provide reasonable assurance that receipts and expenditures are made only in accordance with authorizations
of our management and board of directors (as appropriate); and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition,
use or disposition of assets that could have a material effect on our financial statements.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Due to its inherent
limitations, internal controls over financial reporting may not prevent or detect misstatements. In addition, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.



Under the
supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer,
we assessed the effectiveness of our internal control over financial reporting as of December 31, 2013 based on the framework
for Internal Control-Integrated Framework set forth by The Committee of Sponsoring Organizations of the Treadway Commission
(COSO 1992). Based on our assessment and this framework, our management concluded that the Company’s internal control over
financial reporting were effective as of December 31, 2013.



(c)This Annual Report does not include an attestation report from our independent registered public accounting firm regarding
our effectiveness of internal control over financial reporting. Management’s report was not subject to an attestation report
by our independent registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit
us to only provide management’s report in this Annual Report as we are a non-accelerated filer.



(d)	Changes
in internal controls over financial reporting. There were no changes in our internal control over financial reporting that
occurred during the year ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.



208







|ITEM 16. | [RESERVED]
|-------- | ----------



|ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT
|--------- | --------------------------------



The board of directors
has determined that Avraham Meron is an “audit committee financial expert” as defined in Item 16A of Form 20-F and
is independent in accordance with the NYSE listing standards for audit committees applicable to Alon Blue Square.



|ITEM 16B. | CODE OF ETHICS
|--------- | --------------



As of the date of this
Annual Report, we have adopted a code of ethics that applies to our Chief Executive Officer, President, Chief Financial Officer,
Corporate Controller and employees. This code of ethics is posted on our website, http://www.bsi.co.il/bsi/en/?page_id=119.



|ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|--------- | --------------------------------------



Kesselman & Kesselman,
a member of PricewaterhouseCoopers International Limited, served as our independent public accountants for the fiscal years ended
December 31, 2012 and 2013, for which audited financial statements appear in this Annual Report on Form 20-F.



The following table
presents the aggregate fees for professional services rendered by such accountants to us during their respective term as our principal
accountants in 2012 and 2013.



|                       |  | 2013               |       |  | 2012               | 
|---------------------- |  | ------------------ | ----- |  | ------------------ | 
|                       |  | (NIS in thousands) |       |  | (NIS in thousands) | 
|Audit Fees (1)         |  |                    | 4,837 |  |                    | 
|Audit-Related fees (2) |  |                    | 137   |  |                    | 
|Tax Fees (3)           |  |                    | 213   |  |                    | 
|All Other Fees (4)     |  |                    | 114   |  |                    | 
|TOTAL                  |  |                    | 5,301 |  |                    | 



| | (1) | Audit Fees consist of fees billed for the annual audit services engagement and other audit services,
which are those services that only the external auditor can reasonably provide, and include the group audit; statutory audits;
comfort letters and consents; attest services; assistance with and review of documents filed with the SEC and Sarbanes-Oxley Act
compliance.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Audit-related services in connection with Alon Blue Square and BSRE’s shelf prospectuses
and in connection with reports delivered to the Company’s controlling shareholder.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | Tax fees were for services related to tax compliance, including the preparation of tax returns
and claims for refund, and tax planning and tax advice, including assistance with tax audits and appeals, advice related to mergers,
acquisitions, transfer pricing, and assistance with respect to requests for rulings from tax authorities.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



209







| | (4) | Other Fees were for general guidance related to accounting issues and due diligence in connection
with potential acquisitions.
| | --- | ------------------------------------------------------------------------------------------------------------------------------



Audit Committee Pre-Approval Policies
and Procedures



One of our audit committee’s
main roles is to assist the board of directors in fulfilling its responsibility for oversight of the quality and integrity of the
accounting, auditing and reporting practices of the Company. The Audit Committee oversees the appointment, compensation, and oversight
of the public accounting firm engaged to prepare or issue an audit report on the financial statements of the Company. Our audit
committee has adopted a pre-approval policy for audit and non-audit services.



|ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
|--------- | -----------------------------------------------------------



Not applicable.



|ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
|--------- | -----------------------------------------------------------------------



Below is a list of
purchases of the ordinary shares by the Company and by entities controlling, controlled by and under common control with the Company
during calendar year 2013:



|Period (1)                    |  | Total Number of Shares Purchased |         |  | Average Price Paid Per Share (in NIS) |  |       | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |  |  | Maximum Number of Shares that May Yet Be Purchased Under Plans or Programs | 
|----------------------------- |  | -------------------------------- | ------- |  | ------------------------------------- |  | ----- | -------------------------------------------------------------------------------- |  |  | -------------------------------------------------------------------------- | 
|June 2,2013 to June 13, 2013  |  |                                  | 326,925 |  |                                       |  | 13.42 |                                                                                  |  |  | N/A                                                                        | 
|June 26, 2013, August 7, 2013 |  |                                  | 15,948  |  |                                       |  | 12.85 |                                                                                  |  |  | N/A                                                                        | 



(1) All such purchases were made by Alon.



|ITEM 16F. | CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT.
|--------- | ---------------------------------------------



Not applicable.



210







|ITEM 16G. | CORPORATE GOVERNANCE
|--------- | --------------------



Below is a summary
of the significant differences between our corporate governance practices as a foreign private issuer and those required of
U.S. domestic companies under New York Stock Exchange (“NYSE”) listing standards.



Our corporate governance
practices are derived from (i) the Israeli Companies Law, 1999 and the regulations promulgated thereunder, (ii) our Articles of
Association and (iii) the rules of the NYSE applicable to foreign private issuers. As a foreign private issuer we are permitted
to follow home country practice in lieu of certain provisions of Section 303A of the NYSE Corporate Governance Rules.



Majority of Independent
Directors: Under NYSE Rule 303A.01, domestic listed companies must have a majority of independent directors. We do not have
a majority of independent directors serving on our board of directors, although all of our audit committee members are independent
directors.



Separate meetings
of non-management directors: Under NYSE Rule 303A.03, the non-management directors of each domestic listed company must meet
at regularly scheduled executive sessions without management. Our independent directors do not meet separately from directors who
are not independent, other than in the context of audit committee meetings.



Nominating/corporate
governance committee: Under NYSE Rule 303A.04, a domestic listed company must have a nominating/corporate governance committee
composed entirely of independent directors. We do not have such a committee.



Compensation Committee
Charter: Under NYSE Rule 303A.05, a domestic listed company must have a compensation committee charter that addresses the committees'
purposes and responsibilities, including with respect to appointment and independence of compensation consultant, legal counsel
or other advisor to the Compensation Committee. We do not have a compensation committee charter.



Audit Committee:
Under NYSE Rule 303A.06, listed companies are required to have an audit committee that complies with the requirements of Rule 10A-3
of the Securities and Exchange Act of 1934. Rule 10A-3 requires the audit committee of a U.S. company to be directly responsible
for the appointment, compensation, retention and oversight of the work of any registered public accounting firm engaged for the
purpose of preparing or issuing an audit report or performing other audit, review, or attest services, and that each such firm
must report directly to the audit committee.



Pursuant to the Israeli
Companies Law, our auditors are appointed by the shareholders at the annual meeting of shareholders. Our shareholders have delegated
to the board of directors and audit committee the authority to determine the amount to be paid to our auditors. Our audit committee
is responsible for recommending to the shareholders the appointment of our auditors and for assisting the board of directors in
overseeing the work of our auditors. In addition, pursuant to the Israeli Companies Law, our financial statements must be approved
by our board of directors.



211







Equity Compensation
Plans: Under NYSE Rule 303A.08, shareholders must be given the opportunity to vote on all equity-compensation plans and material
revisions thereto, with certain limited exemptions as described in the Rule.



We do not obtain
shareholder approval of all our equity-compensation plans. Pursuant to the Israeli Companies Law, transactions with officers, directors,
and controlling shareholders regarding the terms of their office and employment, including any compensation in securities, require
special approval (including approval of the audit committee, the board of directors in the case of officers, and including approval
of the board of directors and shareholders in the case of directors and controlling shareholders).



Corporate governance
guidelines: Under NYSE Rule 303A.09, domestic listed companies must adopt and disclose their corporate governance guidelines.
We have adopted a written Policy Regarding the Usage of Insider Information as well as Code of Ethics, although these do not satisfy
the corporate governance guidelines referred to in Rule 303A.09.



212







Part
III



|ITEM 17. | FINANCIAL STATEMENTS
|-------- | --------------------



The financial statements
required by this item are found at the end of this Annual Report, beginning on page F-1.



|ITEM 18. | FINANCIAL STATEMENTS
|-------- | --------------------



We have responded to
Item 17 in lieu of this item.



|ITEM 19. | EXHIBITS
|-------- | --------



The exhibits filed
with or incorporated into this Annual Report are listed in the index of exhibits below.



|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|1.1         |  | Memorandum of Association of the Registrant (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form F-1 (File No. 333-05024)).                                                                                                                                                                                                                                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|1.2         |  | Articles of Association of the Registrant (incorporated by reference to Exhibit 1.2 to Alon Holdings’ Annual Report on Form 20-F for the year ended December 31, 2009.                                                                                                                                                                                                                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|2.1         |  | Form of Amended and Restated Deposit Agreement among Alon Blue Square, The Bank of New York as Depositary, and all Owners and Holders from time to time of American Depositary Shares issued thereunder (incorporated by reference to Exhibit (a) to the Registration Statement on Form F-6 (File No. 333-05158)).                                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|4.3         |  | Form of Letter of Exemption and Indemnity adopted in February 2001 (incorporated by reference to Exhibit 4.13 to Alon Blue Square’s Annual Report on Form 20-F for the year ended December 31, 2000).                                                                                                                                                                                                                                                                               
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|4.4         |  | Form of Letter of Exemption and Indemnity (English translation accompanied by the Hebrew original) (incorporated by reference to Exhibit 4.14 to Alon Blue Square’s Annual Report on Form 20-F for the year ended December 31, 2001).                                                                                                                                                                                                                                               
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|4.5         |  | Form of Letter of Indemnity adopted in June 2008 (English translation) (incorporated by reference to Exhibit 4.11 to Alon Blue Square’s Annual Report on Form 20-F for the year ended December 31, 2008).                                                                                                                                                                                                                                                                           
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|4.6         |  | Special Collective Agreement made on the 28th day of May 1996 between Co-Op Blue Square Consumers Cooperative Society Ltd., the Registrant and The New Federation of Labor in Israel/The Federation of Clerical, Administrative and Services Employees and Consumers Cooperative Union-Central Cooperative Society Ltd. (incorporated by reference to Exhibit 10.4 to the Registration Statement on Form F-1 (File No. 333-05024)).                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|4.7         |  | Special Collective Agreement made on the 3rd day of September 2000 between Alon Blue Square and The New Federation of Labor in Israel. The Federation of Clerical, Administrative and Services Employees / the Commercial Section Employees and the committee of Alon Blue Square employees. (English summary accompanied by the Hebrew original) (incorporated by reference to Exhibit 4.16 to Alon Blue Square’s Annual Report on Form 20-F for the year ended December 31, 2001).



213







|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                  
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                              
|4.8         |  | Collective Agreement, made on August 13, 2003, by and among Alon Blue Square and The New Federation of Labor in Israel/The Federation of Clerical, Administrative and Services Employees and the National Committee of the Blue Square Co-Op Employees (English translation) (incorporated by reference to Exhibit 4.15 to Alon Blue Square Annual Report on Form 20-F for the year ended December 31, 2003).
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                              
|4.9         |  | Collective Agreement, made on October 15, 2003, by and among Alon Blue Square and The New Federation of Labor in Israel/The Federation of Clerical, Administrative and Services Employees and the National Workers Committee of Alon Blue Square (English translation) (incorporated by reference to Exhibit 4.16 to Alon Blue Square’s Annual Report on Form 20-F for the year ended December 31, 2003).    
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                              
|4.10        |  | Special Collective Bargaining Agreement made on the 21st day of January 2005 among Alon Blue Square, the Histadrut and the National Committee of Alon Blue Square. (English translation) (incorporated by reference to Exhibit 4.15 to Alon Blue Square’s Annual Report on Form 20-F for the year ended December 31, 2004).                                                                                  
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                              
|4.11        |  | Special Collective Bargaining Agreement made on April 26, 2006 among Alon Blue Square, the MAOF Histadrut and Blue Square -Israel Employees’ Union (English translation) (incorporated by reference to Exhibit 4.16 to Alon Blue Square’s Annual Report on Form 20-F for the year ended December 31, 2006).                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                              
|4.12        |  | Special Collective Bargaining Agreement made on May 29, 2006 among Alon Blue Square, the MAOF Histadrut and Blue Square -Israel Employees’ Union (English translation) (incorporated by reference to Exhibit 4.17 to Alon Blue Square’s Annual Report on Form 20-F for the year ended December 31, 2006).                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                              
|4.13        |  | Special Collective Bargaining Agreement made on July 16, 2007 among Alon Blue Square, the MAOF Histadrut and Blue Square -Israel Employees’ Union (English translation) (incorporated by reference to Exhibit 4.19 to Alon Blue Square’s Annual Report on Form 20-F for the year ended December 31, 2007).                                                                                                   
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                              
|4.14        |  | Special Collective Bargaining Agreement made on April 5, 2009 among Alon Blue Square, Blue Square Chain Investments & Properties Ltd., the MAOF Histadrut and Blue Square-Israel Employees’ Union (English translation) (incorporated by reference to Exhibit 4.20 to Alon Blue Square’s Annual Report on Form 20-F for the year ended December 31, 2008).                                                   
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                              
|4.15        |  | Transfer Agreement, dated June 21, 2006, between Alon Blue Square and Blue Square Real Estate Ltd. (English translation) (incorporated by reference to Exhibit 4.23 to Alon Blue Square’s Annual Report on Form 20-F for the year ended December 31, 2006).                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                              
|4.16        |  | Split Agreement, dated April 2, 2006, between Alon Blue Square and Blue Square Real Estate Ltd. (English translation) (incorporated by reference to Exhibit 4.24 to Alon Blue Square’s Annual Report on Form 20-F for the year ended December 31, 2006).                                                                                                                                                     



214







|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.17        |  | Lease Agreement, dated August 13, 2006, between Alon Blue Square and Blue Square Real Estate Ltd. (English translation) (incorporated by reference to Exhibit 4.25 to Alon Blue Square’s Annual Report on Form 20-F for the year ended December 31, 2006).                                                                                                                                                                                                                
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.18        |  | Lease Agreement, dated June 23, 2006, between Alon Blue Square and Blue Square Chain Investments & Properties Ltd Blue Square Real Estate Ltd (assigned to BSRE) (English translation) (incorporated by reference to Exhibit 4.26 to Alon Blue Square’s Annual Report on Form 20-F for the year ended December 31, 2006).                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.19        |  | Transfer Agreement, dated March 31, 2009, between Blue Square Real Estate Ltd. and Blue Square Chain Properties & Investments Ltd., together with Addendum No. 1, dated September 13, 2009 (English translation) (incorporated by reference to Exhibit 4.30 to Alon Blue Square’s Annual Report on Form 20-F for the year ended December 31, 2009).                                                                                                                       
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.20        |  | Deed of Trust (for Series B Debenture) made on August 14, 2006, by and between Blue Square Real Estate Ltd. and Hermetic Trust (1975) Ltd., together with second schedule (English translation) (incorporated by reference to Exhibit 4.31 to Alon Blue Square’s Annual Report on Form 20-F for the year ended December 31, 2006).                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.21        |  | First Schedule to Deed of Trust - Debenture Certificate for Registered Debentures (Series B) of NIS 1 par value each (out of series of NIS 650,000,000 par value Debentures (Series B)) (English translation) (incorporated by reference to Exhibit 4.32 to Alon Blue Square’s Annual Report on Form 20-F for the year ended December 31, 2006).                                                                                                                          
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.22        |  | Deed of Trust (for Series C to H Debentures) dated May 19, 2009, by and between Blue Square Real Estate Ltd. and Hermetic Trust (1975) Ltd., together with Addendum to Deed of Trust dated October 18, 2009 (English translation) (incorporated by reference to Exhibit 4.37 to Alon Blue Square’s Annual Report on Form 20-F for the year ended December 31, 2009).                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.23        |  | Deed of Trust (for Series C to G Debentures and Series H to J Debentures) dated February 18, 2010, between Alon Blue Square and Hermetic Trust (1975) Ltd., together with First Schedule - Debenture Certificate for Series C to G, First Schedule - Debenture Certificate for Series H to J, and second schedule (English translation) (incorporated by reference to Exhibit 4.38 to Alon Blue Square’s Annual Report on Form 20-F for the year ended December 31, 2009).
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.24        |  | Protocol, dated April 11, 2010, between TelAviv Wholesale Agricultural Produce Market Company Ltd., Tel Aviv Municipality, Lev Tel Aviv Towers Ltd. and Tel Aviv City Mall Ltd. (English translation) (incorporated by reference to Exhibit 4.42 to Alon Blue Square’s Annual Report on Form 20-F for the year ended December 31, 2009).                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.25        |  | Agreement, dated June 3, 2010, between TelAviv Wholesale Agricultural Produce Market Company Ltd., Lev Tel Aviv Towers Ltd. and Tel Aviv City Mall Ltd., together with Deed of Undertaking by the Interested Parties (English translation) (incorporated by reference to Exhibit 4.43 to Alon Blue Square’s Annual Report on Form 20-F for the year ended December 31, 2009).                                                                                             
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.26        |  | Agreement, dated June 3, 2010, between TelAviv Municipality, Lev Tel Aviv Towers Ltd., and Tel Aviv City Mall Ltd., together with Deed of Undertaking by the Interested Parties (English translation) (incorporated by reference to Exhibit 4.44 to Alon Blue Square’s Annual Report on Form 20-F for the year ended December 31, 2009).                                                                                                                                  



215







|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                  
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                                                                                                                                                                                                                                                                              
|4.27        |  | Document of Principles, dated April 15, 2010, between Blue Square Real Estate Tel Aviv Market Commercial Ltd., Blue Square Real Estate Tel Aviv Market Housing Ltd., Gindi Commercial Tel Aviv Ltd. and Gindi Housing Tel Aviv Ltd. (English translation) (incorporated by reference to Exhibit 4.45 to Alon Blue Square’s’ Annual Report on Form 20-F for the year ended December 31, 2009).
|            |  |                                                                                                                                                                                                                                                                                                                                                                                              
|4.28        |  | Share Purchase Agreement, dated May 17, 2010, between Alon Israel Oil Company Ltd. and Alon Blue Square (English translation) (incorporated by reference to Annex A to Alon Blue Square’s report on Form 6-K, filed on May 27, 2010).                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                                                                              
|8.1         |  | List of Subsidiaries.                                                                                                                                                                                                                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                                                                              
|12.(a).1    |  | Certification by CEO and CODM pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.                                                                                                                                                                                                     
|            |  |                                                                                                                                                                                                                                                                                                                                                                                              
|12.(a).2    |  | Certification by Co-CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.                                                                                                                                                                                                           
|            |  |                                                                                                                                                                                                                                                                                                                                                                                              
|12.(a).3    |  | Certification by CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.                                                                                                                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                                                                                                                              
|13.(a).1    |  | Certification of CEO and CODM, Co-CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                      



216







ALON BLUE SQUARE ISRAEL LTD.

CONSOLIDATED FINANCIAL STATEMENTS

AS OF
DECEMBER 31, 2013



TABLE
OF CONTENTS



|                                                                                             | Page  
|-------------------------------------------------------------------------------------------- | ------
|                                                                                             |       
|REPORT
    OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                  | 2     
|                                                                                             |       
|REPORT OF INDEPENDENT ACCOUNTANT                                                             |       
|for
subsidiary of the Company, Eden Teva Market Ltd.                                         | 3     
|                                                                                             |       
|REPORT OF INDEPENDENT ACCOUNTANT                                                             |       
|for
    associate of the Company, Diners Club Israel Ltd.                                    | 4     
|                                                                                             |       
|CONSOLIDATED
    FINANCIAL STATEMENTS (IN THOUSANDS OF NEW ISRAELI SHEKELS - NIS):           |       
|                                                                                             |       
|Consolidated
statements of financial position                                                | 5-6   
|                                                                                             |       
|Consolidated
    income statements                                                           | 7-8   
|                                                                                             |       
|Consolidated
    statements of comprehensive income                                          | 9     
|                                                                                             |       
|Consolidated
    statements of changes in equity                                             | 10    
|                                                                                             |       
|Consolidated
    statements of cash flows                                                    | 11-13 
|                                                                                             |       
|Notes
    to consolidated financial statements                                               | 14-117
|                                                                                             |       
|APPENDIX
    - DETAILS OF PRINCIPAL SUBSIDIARIES, JOINTLY CONTROLLED ENTITIES AND ASSOCIATES | 118   
|                                                                                             |       



- - - - - - - - - - - - - - - - - -
-



1











REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

To the shareholders of

ALON BLUE SQUARE ISRAEL
LTD.



We have audited the accompanying
consolidated statements of financial position of Alon Blue Square Israel Ltd. and its subsidiaries and investees (collectively
- the "Company") as of December 31, 2013 and 2012 and the related consolidated income statements, comprehensive income
(loss), changes in equity and cash flows for each of the three years in the period ended December 31, 2013. These consolidated
financial statements are the responsibility of the Company’s Board of Directors and management. Our responsibility is to
express an opinion on these financial statements based on our audits.



We did not audit the financial
statements of a consolidated subsidiary as of and for the year ended December 31, 2013, whose assets constitute approximately 2.0%
of total consolidated assets as of December 31, 2013 and whose revenues constitute approximately 3.5% of total consolidated net
revenues for the year then ended. Also, we did not audit the financial statements of an equity method investee as of and for the
years ended December 31, 2013 and 2012, the Company's interest in which, as reflected in the consolidated statements of financial
position as of December 31, 2013 and 2012, is NIS 49.7 million and NIS 31.8 million, respectively, and the Company's share in its
profit is NIS 20.1 million and NIS 19.6 million for the years ended December 31, 2013 and 2012, respectively. Those financial statements
were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included
for the consolidated subsidiary and the equity method investee, is based solely on the reports of the other auditors.



We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by the Company’s Board of
Directors and management, as well as evaluating the overall financial statement presentation. We believe that our audits and the
reports of other auditors provide a reasonable basis for our opinion.



In our opinion, based on our
audits and the reports of other auditors the consolidated financial statements referred to above, present fairly, in all material
respects, the financial position of the Company as of December 31, 2013 and 2012 and the results of its operations, changes in
equity and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with International Financial
Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB").



As discussed in Note 2a to the
consolidated financial statements, the Company changed, retroactively from January 1, 2012, the manner in which it accounts for
joint arrangements under IFRS 11, Joint Arrangements.



|Tel Aviv, Israel | Kesselman & Kesselman                                        
|---------------- | -------------------------------------------------------------
|April
22, 2014   | Certified Public Accountants (lsr.)                          
|                 | A member firm of PricewaterhouseCoopers International Limited












Kesselman & Kesselman, Trade Tower,
25 Hamered Street, Tel-Aviv 6812508, Israel,



P.O Box 50005 Tel-Aviv 6150001
Telephone: +972 -3- 7954555, Fax:+972 -3- 7954556, www.pwc.com/il





2



















Report of independent registered public
accounting firm



to the shareholders of

Eden teva market LTD



We have audited
the balance sheet of Eden teva market Ltd. (“Eden”) as of December 31, 2013
and 2012 and the related statements of operation changes in
shareholders' equity and cash flows for each of the years then ended. These financial statements are the responsibility of the
company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.



Scope



We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of a material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the Company's Board of Directors and management, as
well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.



Opinion



In our opinion, based on our audits,
the financial statements referred to above present fairly, in all material respects, the financial position of Eden as of December
31, 2013 and 2012 and the results of operations, changes in shareholders' equity and cash flows for each of the years then ended,
in conformity with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards
Board ("IASB").



| | Barzily & Co.               
| | ----------------------------
| | Certified Public Accountants
| | A Member of MSI Worldwide   



Tel Aviv, Israel

March 13, 2014







3



















| | Somekh
    Chaikin                  | Telephone | +972
    3 684 8000
| | ----------------------------------- | --------- | -------------------
| | KPMG Millennium Tower               | Fax       | +972 3 684 8444    
| | 17 Ha'arba'a Street, PO
    Box 609 | Internet  | www.kpmg.co.il     
| | Tel Aviv 61006, Israel              |           |                    



Report of Independent Registered Public
Accounting Firm



The Board of Directors and Shareholders

Diners Club Israel Ltd.



We have audited the accompanying consolidated
balance sheets of Diners ClubIsrael Ltd. (and subsidiary) as of December 31, 2013 and
2012, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the years in the
three-year period ended December 31, 2013. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of Diners Club Israel Ltd. and subsidiary
as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2013, in conformity with generally accepted accounting principles in Israel (Israeli GAAP). Furthermore,
in our opinion, the abovementioned financial statements were prepared in accordance with the directives and guidelines of the Supervisor
of Banks.



As described in Note 2 to the (consolidated)
financial statements, a reconciliation of the Company’s financial statements from the prepared basis described above to International
Financial Reporting Standards as issued by the International Accounting Standards Board appears in Note 22 to the consolidated
financial statements.



|Somekh Chaikin                     
|-----------------------------------
|A Member Firm of KPMG International
|March 11, 2014                     



| | Somekh Chaikin,
    an Israeli partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
    Cooperative (“KPMG International”), a Swiss entity. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 





4







ALON BLUE SQUARE ISRAEL LTD.

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION



|                                                     |  |      |  | January 1    |           |  | December 31  |  |           | Convenience translation
(note 2b) December 31, | 
|---------------------------------------------------- |  | ---- |  | ------------ | --------- |  | ------------ |  | --------- | ---------------------------------------------- | 
|                                                     |  |      |  | 2012*        |           |  | 2012*        |  |           | 2013                                           | 
|                                                     |  | Note |  | NIS          |           |  | U.S. dollars | 
|                                                     |  |      |  | In thousands |          
|Assets                                               |  |      |  |              |           |  |              |  |           |                                                | 
|                                                     |  |      |  |              |           |  |              |  |           |                                                | 
|CURRENT ASSETS:                                      |  |      |  |              |           |  |              |  |           |                                                | 
|Cash and cash equivalents                            |  | 9a   |  |              | 53,612    |  |              |  | 261,674   |                                                | 
|Investment in securities                             |  | 10   |  |              | 300,053   |  |              |  | 325,313   |                                                | 
|Short-term deposits                                  |  | 9b   |  |              | 101,312   |  |              |  | 96,146    |                                                | 
|Trade receivables                                    |  | 12   |  |              | 1,549,853 |  |              |  | 1,415,828 |                                                | 
|Other accounts  receivable                           |  | 13   |  |              | 288,940   |  |              |  | 271,258   |                                                | 
|Derivative financial instruments                     |  | 11   |  |              | 2,543     |  |              |  | -         |                                                | 
|Income taxes receivable                              |  |      |  |              | 122,921   |  |              |  | 90,882    |                                                | 
|Inventories                                          |  | 14a  |  |              | 667,203   |  |              |  | 644,809   |                                                | 
|Assets classified as held for sale                   |  |      |  |              | 3,610     |  |              |  | 94,216    |                                                | 
|Assets of disposal group classified as held for sale |  | 8    |  |              | -         |  |              |  | 133,915   |                                                | 
|                                                     |  |      |  |              | 3,090,047 |  |              |  | 3,334,041 |                                                | 
|                                                     |  |      |  |              |           |  |              |  |           |                                                | 
|NON-CURRENT ASSETS:                                  |  |      |  |              |           |  |              |  |           |                                                | 
|Investments accounted for using equity method        |  | 7    |  |              | 748,112   |  |              |  | 926,645   |                                                | 
|Derivative financial instruments                     |  | 11   |  |              | 896       |  |              |  | 1,790     |                                                | 
|Real estate inventories                              |  | 14b  |  |              | 100,035   |  |              |  | 106,064   |                                                | 
|Investment in securities                             |  | 10   |  |              | 29,947    |  |              |  | 45,397    |                                                | 
|Loans receivable, net of current maturities          |  | 18   |  |              | 193,092   |  |              |  | 203,506   |                                                | 
|Property and equipment, net                          |  | 15   |  |              | 2,756,094 |  |              |  | 2,651,678 |                                                | 
|Investment property                                  |  | 16   |  |              | 482,331   |  |              |  | 539,466   |                                                | 
|Intangible assets, net                               |  | 17   |  |              | 1,303,190 |  |              |  | 1,256,611 |                                                | 
|Other long-term receivables                          |  | 19   |  |              | 36,773    |  |              |  | 33,251    |                                                | 
|Deferred taxes                                       |  | 31h  |  |              | 98,493    |  |              |  | 114,805   |                                                | 
|                                                     |  |      |  |              | 5,748,963 |  |              |  | 5,879,213 |                                                | 
|Total assets                                         |  |      |  |              | 8,839,010 |  |              |  | 9,213,254 |                                                | 



|April 22, 2014                              |  |                                                         |  |                                                                                 |  |                                       |  |                                            
|------------------------------------------- |  | ------------------------------------------------------- |  | ------------------------------------------------------------------------------- |  | ------------------------------------- |  | -------------------------------------------
|Date of approval of thefinancial statements |  | Yitzhak BaderExecutiveChairman of theBoard of Directors |  | David WiessmanChief OperatingDecision Maker,Chief ExecutiveOfficer and Director |  | Limor GanotCo-Chief Executive Officer |  | Yehuda van der WaldeChief Financial Officer



The accompanying notes
are an integral part of the consolidated financial statements.



5







ALON BLUE SQUARE ISRAEL LTD.

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION



|                                                                   |  |      |  | January 1    |           |   | December 31  |  |           | Convenience  translation (note 2b)  December 31, | 
|------------------------------------------------------------------ |  | ---- |  | ------------ | --------- | - | ------------ |  | --------- | ------------------------------------------------ | 
|                                                                   |  |      |  | 2012*        |           |   | 2012*        |  |           | 2013                                             | 
|                                                                   |  | Note |  | NIS          |           |   | U.S. dollars | 
|                                                                   |  |      |  | In thousands |          
|Liabilities and equity                                             |  |      |  |              |           |   |              |  |           |                                                  | 
|CURRENT LIABILITIES:                                               |  |      |  |              |           |   |              |  |           |                                                  | 
|Credit and loans from banks and others                             |  | 21   |  |              | 988,601   |   |              |  | 1,129,526 |                                                  | 
|Current maturities of debentures and convertible debentures        |  | 21   |  |              | 212,726   |   |              |  | 556,188   |                                                  | 
|Current maturities of long-term loans from banks                   |  | 21   |  |              | 308,059   |   |              |  | 247,581   |                                                  | 
|Trade payables                                                     |  |      |  |              | 1,224,894 |   |              |  | 1,228,013 |                                                  | 
|Other accounts payable and accrued expenses                        |  | 20   |  |              | 696,724   |   |              |  | 628,915   |                                                  | 
|Customers' deposits                                                |  |      |  |              | 27,733    |   |              |  | 28,011    |                                                  | 
|Derivative financial instruments                                   |  | 11   |  |              | 2,814     |   |              |  | 17,566    |                                                  | 
|Income taxes payable                                               |  |      |  |              | 6,310     |   |              |  | 10,124    |                                                  | 
|Provisions for other liabilities                                   |  | 24   |  |              | 75,989    |   |              |  | 60,578    |                                                  | 
|Liabilities of disposal group classified as held for sale          |  | 8    |  |              | -         |   |              |  | 87,794    |                                                  | 
|                                                                   |  |      |  |              | 3,543,850 |   |              |  | 3,994,296 |                                                  | 
|NON CURRENT LIABILITIES:                                           |  |      |  |              |           |   |              |  |           |                                                  | 
|Long-term loans from banks and others, net of current maturities   |  | 21   |  |              | 1,226,113 |   |              |  | 1,134,436 |                                                  | 
|Convertible debentures, net of current maturities                  |  | 21   |  |              | 118,826   |   |              |  | 90,402    |                                                  | 
|Debentures, net of current maturities                              |  | 21   |  |              | 2,034,047 |   |              |  | 2,048,829 |                                                  | 
|Other liabilities                                                  |  | 22   |  |              | 160,495   |   |              |  | 142,016   |                                                  | 
|Derivative financial instruments                                   |  | 11   |  |              | 16,701    |   |              |  | 6,382     |                                                  | 
|Liabilities in respect of employee benefits, net of amounts funded |  | 23   |  |              | 61,041    |   |              |  | 69,457    |                                                  | 
|Deferred taxes                                                     |  | 31h  |  |              | 131,711   |   |              |  | 139,887   |                                                  | 
|                                                                   |  |      |  |              | 3,748,934 |   |              |  | 3,631,409 |                                                  | 
|Total liabilities                                                  |  |      |  |              | 7,292,784 |   |              |  | 7,625,705 |                                                  | 
|                                                                   |  |      |  |              |           |   |              |  |           |                                                  | 
|EQUITY:                                                            |  |      |  |              |           |   |              |  |           |                                                  | 
|Equity attributed to equity holders of the Company:                |  |      |  |              |           |   |              |  |           |                                                  | 
|Ordinary shares of NIS 1 par value                                 |  | 25   |  |              | 79,881    |   |              |  | 79,881    |                                                  | 
|Additional paid-in capital                                         |  | 25   |  |              | 1,219,279 |   |              |  | 1,219,279 |                                                  | 
|Other reserves                                                     |  | 26   |  |              | (9,672    | ) |              |  | 9,245     |                                                  | 
|Accumulated deficit                                                |  |      |  |              | (106,434  | ) |              |  | (129,666  | )                                                | 
|                                                                   |  |      |  |              | 1,183,054 |   |              |  | 1,178,739 |                                                  | 
|Non-controlling interests                                          |  |      |  |              | 363,172   |   |              |  | 408,810   |                                                  | 
|Total equity                                                       |  |      |  |              | 1,546,226 |   |              |  | 1,587,549 |                                                  | 
|Total liabilities and equity                                       |  |      |  |              | 8,839,010 |   |              |  | 9,213,254 |                                                  | 



| | * | Retroactive application of new standards, see note 2a, 38
| | - | ---------------------------------------------------------



The accompanying notes are an integral part
of the consolidated financial statements



6







ALON BLUE SQUARE ISRAEL LTD.

CONSOLIDATED
INCOME STATEMENTS



|                                                                                                |  |      |  |                                       |            |   |                     |  |            |      |  |  | Convenience           |  
|----------------------------------------------------------------------------------------------- |  | ---- |  | ------------------------------------- | ---------- | - | ------------------- |  | ---------- | ---- |  |  | --------------------- | -
|                                                                                                |  |      |  |                                       |            |   |                     |  |            |      |  |  | translation (note 2b) |  
|                                                                                                |  |      |  |                                       |            |   |                     |  |            |      |  |  | for the year          |  
|Continuing Operations                                                                           |  |      |  | Year ended December 31                |            |   | ended  December 31, | 
|                                                                                                |  |      |  | 2011**                                |            |   | 2012*               |  |            | 2013 |  |  | 2013                  |  
|                                                                                                |  | Note |  | NIS                                   |            |   | U.S. dollars        | 
|                                                                                                |  |      |  | In thousands (except  per share data) |           
|Revenues                                                                                        |  |      |  |                                       | 15,159,447 |   |                     |  | 15,640,331 |      |  |  | 14,860,869            |  
|Less – government levies                                                                        |  |      |  |                                       | 2,813,671  |   |                     |  | 2,955,154  |      |  |  | 2,974,529             |  
|Net revenues                                                                                    |  |      |  |                                       | 12,345,776 |   |                     |  | 12,685,177 |      |  |  | 11,886,340            |  
|Cost of sales                                                                                   |  | 27   |  |                                       | 9,442,009  |   |                     |  | 9,932,721  |      |  |  | 9,268,832             |  
|Gross profit                                                                                    |  |      |  |                                       | 2,903,767  |   |                     |  | 2,752,456  |      |  |  | 2,617,508             |  
|Selling, general and administrative expenses                                                    |  | 27   |  |                                       | 2,611,801  |   |                     |  | 2,576,770  |      |  |  | 2,516,855             |  
|Operating profit before other gains and losses and changes in fair value of investment property |  |      |  |                                       | 291,966    |   |                     |  | 175,686    |      |  |  | 100,653               |  
|Other gains                                                                                     |  | 28   |  |                                       | 1,637      |   |                     |  | 10,822     |      |  |  | 3,049                 |  
|Other losses                                                                                    |  | 28   |  |                                       | (18,529    | ) |                     |  | (6,544     | )    |  |  | (24,567               | )
|Increase in fair value of investment property, net                                              |  | 16   |  |                                       | 41,913     |   |                     |  | 16,874     |      |  |  | 47,589                |  
|Share of profit of investments accounted for using the equity method***                         |  | 7    |  |                                       | 5,746      |   |                     |  | 87,060     |      |  |  | 27,211                |  
|Operating  profit                                                                               |  |      |  |                                       | 322,733    |   |                     |  | 283,898    |      |  |  | 153,935               |  
|Finance income                                                                                  |  | 30   |  |                                       | 156,567    |   |                     |  | 83,002     |      |  |  | 78,168                |  
|Finance expenses                                                                                |  | 30   |  |                                       | (328,493   | ) |                     |  | (324,930   | )    |  |  | (332,184              | )
|Finance expenses, net                                                                           |  |      |  |                                       | (171,926   | ) |                     |  | (241,928   | )    |  |  | (254,016              | )
|Income (loss) before taxes on income                                                            |  |      |  |                                       | 150,807    |   |                     |  | 41,970     |      |  |  | (100,081              | )
|Taxes on income (tax benefit)                                                                   |  | 31   |  |                                       | 48,485     |   |                     |  | (2,863     | )    |  |  | (12,667               | )
|Net income (loss)  from continuing operation                                                    |  |      |  |                                       | 102,322    |   |                     |  | 44,833     |      |  |  | (87,414               | )
|Loss from discontinued operation                                                                |  | 8    |  |                                       | (18,609    | ) |                     |  | (22,468    | )    |  |  | (29,994               | )
|Net income (loss) for the year                                                                  |  |      |  |                                       | 83,713     |   |                     |  | 22,365     |      |  |  | (117,408              | )



| | * | Retroactive application of new standards, see note 2a,
38
| | - | ---------------------------------------------------------

| | ** | No retroactive application of new standards, see note
2a, 38
| | -- | ------------------------------------------------------------

| | *** | Reclassification, see note 2a, 38
| | --- | ---------------------------------



The accompanying notes are an integral part
of the consolidated financial statements.



7







ALON BLUE SQUARE ISRAEL LTD.

CONSOLIDATED STATEMENTS OF INCOME



|                                                                                                     |  |    |  |                                       |         |   |                     |  |         |      |  |  | Convenience           |  
|---------------------------------------------------------------------------------------------------- |  | -- |  | ------------------------------------- | ------- | - | ------------------- |  | ------- | ---- |  |  | --------------------- | -
|                                                                                                     |  |    |  |                                       |         |   |                     |  |         |      |  |  | translation (note 2b) |  
|                                                                                                     |  |    |  |                                       |         |   |                     |  |         |      |  |  | for the year          |  
|                                                                                                     |  |    |  | Year ended December 31                |         |   | ended  December 31, | 
|                                                                                                     |  |    |  | 2011**                                |         |   | 2012*               |  |         | 2013 |  |  | 2013                  |  
|                                                                                                     |  |    |  | NIS                                   |         |   | U.S. dollars        | 
|                                                                                                     |  |    |  | In thousands (except  per share data) |        
|Attributable to:                                                                                     |  |    |  |                                       |         |   |                     |  |         |      |  |  |                       |  
|Equity holders of the Company                                                                        |  |    |  |                                       |         |   |                     |  |         |      |  |  |                       |  
|Continuing operation                                                                                 |  |    |  |                                       | 78,122  |   |                     |  | 4,561   |      |  |  | (115,701              | )
|Discontinued operation                                                                               |  |    |  |                                       | (18,609 | ) |                     |  | (22,468 | )    |  |  | (29,994               | )
|                                                                                                     |  |    |  |                                       | 59,513  |   |                     |  | (17,907 | )    |  |  | (145,695              | )
|Non-controlling interests                                                                            |  |    |  |                                       |         |   |                     |  |         |      |  |  |                       |  
|Continuing operation                                                                                 |  |    |  |                                       | 24,200  |   |                     |  | 40,272  |      |  |  | 28,287                |  
|Discontinued operation                                                                               |  |    |  |                                       | -       |   |                     |  | -       |      |  |  | -                     |  
|                                                                                                     |  |    |  |                                       | 24,200  |   |                     |  | 40,272  |      |  |  | 28,287                |  
|                                                                                                     |  |    |  |                                       |         |   |                     |  |         |      |  |  |                       |  
|                                                                                                     |  |    |  |                                       | 83,713  |   |                     |  | 22,365  |      |  |  | (117,408              | )
|                                                                                                     |  |    |  |                                       |         |   |                     |  |         |      |  |  |                       |  
|Earnings (loss) per ordinary share or ADS attributable to equity  holders of the Company             |  | 32 |  |                                       |         |   |                     |  |         |      |  |  |                       |  
|                                                                                                     |  |    |  |                                       |         |   |                     |  |         |      |  |  |                       |  
|Basic                                                                                                |  |    |  |                                       |         |   |                     |  |         |      |  |  |                       |  
|Continuing operations                                                                                |  |    |  |                                       | 1.18    |   |                     |  | 0.07    |      |  |  | (1.75                 | )
|Discontinued operation                                                                               |  |    |  |                                       | (0.28   | ) |                     |  | (0.34   | )    |  |  | (0.45                 | )
|                                                                                                     |  |    |  |                                       | 0.90    |   |                     |  | (0.27   | )    |  |  | (2.20                 | )
|Fully diluted                                                                                        |  |    |  |                                       |         |   |                     |  |         |      |  |  |                       |  
|Continuing operations                                                                                |  |    |  |                                       | 1.07    |   |                     |  | 0.07    |      |  |  | (1.75                 | )
|Discontinued operation                                                                               |  |    |  |                                       | (0.28   | ) |                     |  | (0.34   | )    |  |  | (0.45                 | )
|                                                                                                     |  |    |  |                                       | 0.79    |   |                     |  | (0.27   | )    |  |  | (2.20                 | )
|Weighted average number of shares or ADSs used for computation of earnings per share (in thousands): |  |    |  |                                       |         |   |                     |  |         |      |  |  |                       |  
|Basic                                                                                                |  |    |  |                                       | 65,940  |   |                     |  | 65,954  |      |  |  | 65,954                |  
|Fully diluted                                                                                        |  |    |  |                                       | 66,167  |   |                     |  | 65,954  |      |  |  | 65,954                |  



| | * | Retroactive application of new standards, see note 2a,
38
| | - | ---------------------------------------------------------

| | ** | No retroactive application of new standards, see note
2a, 38
| | -- | ------------------------------------------------------------



The accompanying notes are an integral part
of the consolidated financial statements.



8







ALON BLUE SQUARE ISRAEL LTD.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME



|                                                                                   |  |      |  | Year ended December 31 |         |   | Convenience translation (note 2b) year ended December 31 | 
|---------------------------------------------------------------------------------- |  | ---- |  | ---------------------- | ------- | - | -------------------------------------------------------- | 
|                                                                                   |  |      |  | 2011**                 |         |   | 2012*                                                    | 
|                                                                                   |  | Note |  | NIS                    |         |   | U.S. dollars                                             | 
|                                                                                   |  |      |  | In thousands           |        
|Net income (loss) for the year                                                     |  |      |  |                        | 83,713  |   |                                                          | 
|                                                                                   |  |      |  |                        |         |   |                                                          | 
|Other comprehensive income (loss) items, net of tax:                               |  |      |  |                        |         |   |                                                          | 
|                                                                                   |  |      |  |                        |         |   |                                                          | 
|Items that may be reclassified subsequently to profit or loss                      |  |      |  |                        |         |   |                                                          | 
|Available-for-sale financial assets:                                               |  | 10   |  |                        |         |   |                                                          | 
|Revaluation                                                                        |  |      |  |                        | 53      |   |                                                          | 
|Gain from sales transferred to income statement                                    |  |      |  |                        | (639    | ) |                                                          | 
|Currency translation differences                                                   |  |      |  |                        | 6,238   |   |                                                          | 
|Total items that may be reclassified subsequently to profit or loss                |  |      |  |                        | 5,652   |   |                                                          | 
|                                                                                   |  |      |  |                        |         |   |                                                          | 
|Items that will not be reclassified to profit or loss:                             |  |      |  |                        |         |   |                                                          | 
|Revaluation reserve of fixed assets reclassified as investment property            |  |      |  |                        | -       |   |                                                          | 
|Re-measurements of post-employment benefit obligations                             |  | 23   |  |                        | (7,692  | ) |                                                          | 
|Total items that will not be reclassified to profit or loss                        |  |      |  |                        | (7,692  | ) |                                                          | 
|                                                                                   |  |      |  |                        |         |   |                                                          | 
|Total – other comprehensive income (loss)                                          |  |      |  |                        | (2,040  | ) |                                                          | 
|Total comprehensive income (loss) for the year                                     |  |      |  |                        | 81,673  |   |                                                          | 
|                                                                                   |  |      |  |                        |         |   |                                                          | 
|Attributable to:                                                                   |  |      |  |                        |         |   |                                                          | 
|Equity holders of the Company                                                      |  |      |  |                        | 56,996  |   |                                                          | 
|Non-controlling interests                                                          |  |      |  |                        | 24,677  |   |                                                          | 
|                                                                                   |  |      |  |                        | 81,673  |   |                                                          | 
|                                                                                   |  |      |  |                        |         |   |                                                          | 
|Total comprehensive income (loss) attributable to equity shareholders arises from: |  |      |  |                        |         |   |                                                          | 
|Continuing operations                                                              |  |      |  |                        | 75,605  |   |                                                          | 
|Discontinuing operations                                                           |  |      |  |                        | (18,609 | ) |                                                          | 
|                                                                                   |  |      |  |                        | 56,996  |   |                                                          | 



| | * | Retroactive application of new standards, see note 2a,
38
| | - | ---------------------------------------------------------

| | ** | No retroactive application of new standards, see note
2a, 38
| | -- | ------------------------------------------------------------



The accompanying notes are an integral part
of the consolidated financial statements.



9







ALON BLUE SQUARE ISRAEL LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY



|                                                                       |  | Equity attributable to equity holders of the Company                                                      |        |  |                          | 
|---------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------- | ------ |  | ------------------------ | 
|                                                                       |  | Ordinaryshares                                                                                            |        |  | Additionalpaid-incapital | 
|                                                                       |  | NIS in thousands                                                                                          |       
|                                                                       |  |                                                                                                           |        |  |                          | 
|BALANCE AT
    JANUARY 1 ,2011                                         |  |                                                                                                           | 79,712 |  |                          | 
|Income for the period
    **                                           |  |                                                                                                           | -      |  |                          | 
|Other
    comprehensive income                                         |  |                                                                                                           | -      |  |                          | 
|Total
    comprehensive income                                         |  |                                                                                                           | -      |  |                          | 
|Employee share-based payment                                           |  |                                                                                                           | -      |  |                          | 
|Transactions with
    non-controlling  interests                       |  |                                                                                                           | -      |  |                          | 
|Exercise of options                                                    |  |                                                                                                           | 143    |  |                          | 
|Issuance of shares upon
    conversion of convertible debentures       |  |                                                                                                           | 26     |  |                          | 
|Acquisition of treasury shares                                         |  |                                                                                                           | -      |  |                          | 
|Dividend paid                                                          |  |                                                                                                           | -      |  |                          | 
|Dividend
    to non-controlling interests of subsidiaries              |  |                                                                                                           | -      |  |                          | 
|BALANCE
    AT DECEMBER 31, 2011                                       |  |                                                                                                           | 79,881 |  |                          | 
|Income (loss) for the
    period *                                     |  |                                                                                                           | -      |  |                          | 
|Other
    comprehensive income                                         |  |                                                                                                           | -      |  |                          | 
|Total
    comprehensive income                                         |  |                                                                                                           | -      |  |                          | 
|Employee share-based payment                                           |  |                                                                                                           | -      |  |                          | 
|Transactions
    with non-controlling  interests                       |  |                                                                                                           | -      |  |                          | 
|BALANCE
    AT DECEMBER 31, 2012 *                                     |  |                                                                                                           | 79,881 |  |                          | 
|Income (loss) for the
    period                                       |  |                                                                                                           | -      |  |                          | 
|Other
    comprehensive income                                         |  |                                                                                                           | -      |  |                          | 
|Total
    comprehensive income                                         |  |                                                                                                           | -      |  |                          | 
|Employee share-based payment                                           |  |                                                                                                           | -      |  |                          | 
|Transactions with non-controlling
    interests                        |  |                                                                                                           | -      |  |                          | 
|Dividends
    distributed to non-controlling interests of subsidiaries |  |                                                                                                           | -      |  |                          | 
|BALANCE
    AT DECEMBER 31, 2013                                       |  |                                                                                                           | 79,881 |  |                          | 
|                                                                       |  |                                                                                                           |        |  |                          | 
|                                                                       |  | Convenience
                                         translation into U.S. dollars in thousands (note 2b) |       
|BALANCE AT JANUARY 1, 2013                                             |  |                                                                                                           | 23,014 |  |                          | 
|CHANGES DURING 2013:                                                   |  |                                                                                                           |        |  |                          | 
|Income (loss) for the period                                           |  |                                                                                                           | -      |  |                          | 
|Other comprehensive income                                             |  |                                                                                                           | -      |  |                          | 
|Total comprehensive income                                             |  |                                                                                                           | -      |  |                          | 
|Employee share-based payment                                           |  |                                                                                                           | -      |  |                          | 
|Transactions with non-controlling interests                            |  |                                                                                                           | -      |  |                          | 
|Dividends distributed to non-controlling interests
    of subsidiaries |  |                                                                                                           | -      |  |                          | 
|BALANCE AT DECEMBER 31, 2013                                           |  |                                                                                                           | 23,014 |  |                          | 



| | * | Retroactive application of new standards, see note 2a,
38
| | - | ---------------------------------------------------------

| | ** | No retroactive application of new standards, see note
2a, 38
| | -- | ------------------------------------------------------------



The accompanying notes are an integral
part of the consolidated financial statements.



10







ALON BLUE SQUARE ISRAEL LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                        |  |                        |          |   | Convenience | 
|--------------------------------------------------------------------------------------- |  | ---------------------- | -------- | - | ----------- | 
|                                                                                        |  |                        |          |   | translation | 
|                                                                                        |  |                        |          |   | (note 2b)   | 
|                                                                                        |  |                        |          |   | year ended  | 
|                                                                                        |  | Year ended December 31 |          |   | December 31 | 
|                                                                                        |  | 2011**                 |          |   | 2012*       | 
|                                                                                        |  | NIS                    |          |   | U.S dollars | 
|                                                                                        |  | In thousands           |         
|CASH  FLOWS FROM OPERATING ACTIVITIES:                                                  |  |                        |          |   |             | 
|Income (loss) before  taxes  on  income from continuing operations                      |  |                        | 150,807  |   |             | 
|Loss before taxes from discontinued operation                                           |  |                        | (20,506  | ) |             | 
|Income tax (paid) received, net                                                         |  |                        | (79,368  | ) |             | 
|Adjustments to net cash provided by operating activities (a)                            |  |                        | 576,664  |   |             | 
|Net cash provided by operating activities                                               |  |                        | 627,597  |   |             | 
|                                                                                        |  |                        |          |   |             | 
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                   |  |                        |          |   |             | 
|Purchase of property and equipment                                                      |  |                        | (261,101 | ) |             | 
|Purchase of investment property                                                         |  |                        | (55,524  | ) |             | 
|Purchase of intangible assets                                                           |  |                        | (30,717  | ) |             | 
|Proceeds (investments) from collection of short-term deposits and other receivable, net |  |                        | (5,858   | ) |             | 
|Proceeds from sale of property and equipment                                            |  |                        | 12,864   |   |             | 
|Proceeds from sale of investment property                                               |  |                        | 50,600   |   |             | 
|Investment in restricted deposit                                                        |  |                        | (102,603 | ) |             | 
|Proceeds from sale of  marketable securities                                            |  |                        | 118,957  |   |             | 
|Investment in marketable securities                                                     |  |                        | (122,646 | ) |             | 
|Acquisition of an associated investee                                                   |  |                        | (36,415  | ) |             | 
|Loans and capital notes to investee companies, net                                      |  |                        | -        |   |             | 
|Grant of long term loans                                                                |  |                        | (145,162 | ) |             | 
|Payments on account of real estate                                                      |  |                        | (9,187   | ) |             | 
|Collection of long-term loans receivable                                                |  |                        | 22,885   |   |             | 
|Interest received                                                                       |  |                        | 16,552   |   |             | 
|Net cash used in investing activities                                                   |  |                        | (547,355 | ) |             | 





| | * | Retroactive application of new standards, see note 2a,
38
| | - | ---------------------------------------------------------

| | ** | No retroactive application of new standards, see note
2a, 38
| | -- | ------------------------------------------------------------



The accompanying notes are an
integral part of the consolidated financial statements.



11







ALON BLUE SQUARE ISRAEL LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                                |  |                          |          |   | Convenience  | 
|----------------------------------------------------------------------------------------------- |  | ------------------------ | -------- | - | ------------ | 
|                                                                                                |  |                          |          |   |              | 
|                                                                                                |  |                          |          |   |              | 
|                                                                                                |  |                          |          |   |              | 
|                                                                                                |  | Year  ended December 31, |          |   | December 31, | 
|                                                                                                |  | 2011**                   |          |   | 2012*        | 
|                                                                                                |  | NIS                      |          |   | U.S dollars  | 
|                                                                                                |  | In thousands             |         
|                                                                                                |  |                          |         
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                           |  |                          |          |   |              | 
|Purchase of treasury shares                                                                     |  |                          | (4,035   | ) |              | 
|Dividend paid to Company shareholders                                                           |  |                          | (75,000  | ) |              | 
|Dividend paid to non-controlling interests                                                      |  |                          | (30,669  | ) |              | 
|Issuance of debentures                                                                          |  |                          | -        |   |              | 
|Repayment of debentures                                                                         |  |                          | (174,955 | ) |              | 
|Transactions with non-controlling interests in subsidiary without loss of control               |  |                          | (15,217  | ) |              | 
|Receipt of long-term loans                                                                      |  |                          | 213,648  |   |              | 
|Repayment of long-term loans                                                                    |  |                          | (382,557 | ) |              | 
|Repayment of long term credit from payables                                                     |  |                          | (1,750   | ) |              | 
|Short-term credit from banks and others, net                                                    |  |                          | 582,503  |   |              | 
|Proceeds from exercise of options in the Company and a subsidiary                               |  |                          | 143      |   |              | 
|Settlement of forward contracts                                                                 |  |                          | -        |   |              | 
|Interest paid                                                                                   |  |                          | (222,771 | ) |              | 
|Net cash provided by (used in) financing activities                                             |  |                          | (110,660 | ) |              | 
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND BANK OVERDRAFTS                            |  |                          | (30,418  | ) |              | 
|Translation differences on cash and cash equivalents                                            |  |                          | 37       |   |              | 
|BALANCE
    OF CASH AND CASH EQUIVALENTS AND BANK OVERDRAFTS AT BEGINNING OF YEAR (note
    9a) |  |                          | 104,131  |   |              | 
|BALANCE
    OF CASH AND CASH EQUIVALENTS AND BANK OVERDRAFTS AT END OF YEAR (note
    9a)       |  |                          | 73,750   |   |              | 



| | * | Retroactive application of new standards, see note 2a,
38
| | - | ---------------------------------------------------------

| | ** | No retroactive application of new standards, see note
2a, 38
| | -- | ------------------------------------------------------------



The accompanying notes are an integral part
of the consolidated financial statements.



12







ALON BLUE SQUARE ISRAEL LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS



|    |  |                                                                                                    |  |                          |          |   | Convenience  | 
|--- |  | -------------------------------------------------------------------------------------------------- |  | ------------------------ | -------- | - | ------------ | 
|    |  |                                                                                                    |  |                          |          |   |              | 
|    |  |                                                                                                    |  |                          |          |   |              | 
|    |  |                                                                                                    |  |                          |          |   |              | 
|    |  |                                                                                                    |  | Year  ended December 31, |          |   | December 31, | 
|    |  |                                                                                                    |  | 2011**                   |          |   | 2012*        | 
|    |  |                                                                                                    |  | NIS                      |          |   | U.S dollars  | 
|    |  |                                                                                                    |  | In thousands             |         
|(a) |  | Adjustments to net cash provided by operating activities:                                          |  |                          |          |   |              | 
|    |  | Adjustments for:                                                                                   |  |                          |          |   |              | 
|    |  | Depreciation and amortization                                                                      |  |                          | 273,746  |   |              | 
|    |  | Increase in fair value of investment property, net                                                 |  |                          | (41,913  | ) |              | 
|    |  | Share of profit of investments accounted for using the equity method                               |  |                          | (5,746   | ) |              | 
|    |  | Dividend received                                                                                  |  |                          | 437      |   |              | 
|    |  | Share based payment                                                                                |  |                          | 3,270    |   |              | 
|    |  | Loss (gain) from sale and disposal of property and equipment, net                                  |  |                          | 2,448    |   |              | 
|    |  | Provision for impairment of property and equipment and intangible assets                           |  |                          | 7,815    |   |              | 
|    |  | Changes in fair value of  derivative financial instruments, net                                    |  |                          | (107,553 | ) |              | 
|    |  | Linkage differences on monetary    assets, debentures, loans and other long term liabilities       |  |                          | 71,465   |   |              | 
|    |  | Employee benefit liability, net                                                                    |  |                          | 177      |   |              | 
|    |  | Decrease (increase)  in value of investment in securities, deposits and long-term receivables, net |  |                          | 1,190    |   |              | 
|    |  | Interest paid, net                                                                                 |  |                          | 184,963  |   |              | 
|    |  | Changes in operating assets and liabilities:                                                       |  |                          |          |   |              | 
|    |  | Decrease in trade receivables and other accounts receivable                                        |  |                          | 104,743  |   |              | 
|    |  | Decrease in trade payables and other accounts payable                                              |  |                          | (10,198  | ) |              | 
|    |  | Changes in advance deposits from customers                                                         |  |                          | 102,603  |   |              | 
|    |  | Decrease (increase) in inventories                                                                 |  |                          | 3,706    |   |              | 
|    |  | Investment in real estate inventories                                                              |  |                          | (5,637   | ) |              | 
|    |  | Payments on account of real estate inventories                                                     |  |                          | (8,852   | ) |              | 
|    |  | Total                                                                                              |  |                          | 576,664  |   |              | 
|    |  |                                                                                                    |  |                          |          |   |              | 
|(b) |  | Supplementary information on investing and financing activities not involving cash flows:          |  |                          |          |   |              | 
|    |  | Issuance of shares upon conversion of convertible debentures of the Company                        |  |                          | 896      |   |              | 
|    |  | Purchase of property and equipment and investment properties on credit                             |  |                          | 10,769   |   |              | 
|    |  | Exercise of options to purchase shares in equity accounted investee                                |  |                          | 154,433  |   |              | 
|    |  | Realization of property and equipment                                                              |  |                          | -        |   |              | 



| | * | Retroactive application of new standards, see note 2a,
38
| | - | ---------------------------------------------------------

| | ** | No retroactive application of new standards, see note
2a, 38
| | -- | ------------------------------------------------------------



The accompanying notes
are an integral part of the consolidated financial statements.



13







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1 - GENERAL:



Alon Blue Square Israel Ltd.
("Blue Square") is an Israeli corporation, which, directly and through its subsidiaries and jointly controlled entities
(together - the Company) mainly operates in Israel. The Company is controlled by Alon Israel Oil Company Ltd ("Alon").
All references to the Company include, unless the context otherwise indicates, Blue Square and its subsidiaries. ADSs and shares
of the Company are listed for trading on the New-York Stock Exchange (the "NYSE") and on the Tel-Aviv Stock Exchange
(the "TASE").



The Company operates in four
reportable segments: (1) Fueling and Commercial sites through Dor Alon Energy In Israel (1988) Ltd. (hereafter-Dor Alon) (2) Supermarkets
through Mega Retail Ltd (hereafter-Mega) (3) Non-Food Retail and Wholesale through Bee Group Retail Ltd. (hereafter-Bee Group),
(4) Real Estate through Blue Square Real Estate Ltd. (hereafter-BSRE). The Company has two more operating segments that do not
meet the quantitative threshold and accordingly are presented as "Other activities" in the segment disclosure: Cellular
activity and the Company's share in issuance and clearance of credit cards activity.



The financial statements are
presented in the New Israeli Shekel (NIS), which is the functional currency of the Company and most of its subsidiaries.



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:



The principal accounting policies
applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently
applied to all the years presented unless otherwise stated (see below).



| | a. | Basis of presentation
| | -- | ---------------------



The consolidated financial statements
of the Company have been prepared in accordance with International Financial Reporting Standards (hereafter – "IFRS")
as issued by the International Accounting Standard Board (hereafter – "IASB").



The consolidated financial statements
have been prepared under the historical cost convention, unless otherwise indicated.



The consolidated financial statements
provide comparative information in respect of the previous period. An additional statement of financial position as at 1 January
2012 is presented in these consolidated financial statements due to retrospective application of certain accounting policies, refer
note 38.



The Company applied for the first
time IFRS 11 at its effective date, January 1, 2013 retroactively effective on January 1, 2012 and that is under the relief stated
in the transition principles of the standard.



The Company reclassified share
of profits in jointly controlled entities and associated which are integral to the Company's activity into the operating profit.



The preparation of financial statements
in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its
judgment in the process of applying the Company's accounting policies. The areas involving a higher degree of judgment or complexity,
or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 4. Actual
results may differ materially from estimates and assumptions used by the Company's management.



14







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES(continued):



| | b. | Functional currency and convenience translation
| | -- | -----------------------------------------------



For the convenience of the reader,
the reported NIS amounts as of December 31, 2013 have been translated into U.S. dollars, at the representative rate of exchange
on December 31, 2013 (U.S. $1 = NIS 3.471). The U.S. dollar amounts presented in these financial statements should not be construed
as representing amounts that are receivable or payable in dollars or convertible into dollars, unless otherwise indicated.



The results and financial position
of all the group entities whose functional currency is different from the NIS are translated into NIS as follows:



Assets and liabilities for
each statement of financial position presented are translated at the closing rate of that statement. However, where the exchange
difference arises on an intragroup balance that, in substance, forms part of an entity's net investment in a foreign operation
then the exchange difference is not recognized in the statement of income but is recognized in other comprehensive income and accumulated
in a separate component of equity until the disposal of the foreign operation.



Income and expenses for each
statement of income are generally translated at average exchange rates.



All resulting exchange differences
are recognized in other comprehensive income.



15







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES(continued):



| | c. | Consolidated financial statements
| | -- | ---------------------------------



The consolidated financial statements
include the accounts of the Company and its subsidiaries. Subsidiaries are all entities over which the Company has control.



Inter-company transactions, balances
and unrealized gains on transactions between group companies are eliminated. Accounting policies of subsidiaries have been changed
where necessary to ensure consistency with the policies adopted by the Company.



After initial recognition, goodwill
in subsidiaries is measured at cost less any accumulated impairment losses. For the purposes of impairment testing, goodwill acquired
in a business combination is, from the acquisition date, allocated to each of the Company's cash generating units that are expected
to benefit from the combination.



Transactions
with non-controlling interests



The Company treats transactions
with non-controlling interests as transactions with equity owners of the Company. For purchases from non-controlling interests,
the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary
is recorded in equity. Gains and losses on disposals to non-controlling interests without loss of control are also recorded in
equity.



Joint
Arrangement



The Company has applied IFRS
11 to all joint arrangements as of 1 January 2012. Under IFRS 11 investments in joint arrangements are classified as either joint
operations or joint ventures depending on the contractual rights and obligations each investor. The Company has assessed the nature
of its joint arrangements and determined them to be joint ventures. Joint ventures are accounted for using the equity method. The
change in accounting policy has been applied as from 1 January 2012. Previously, joint ventures equally controlled by the Company
and the joint venturer have been consolidated to the extent of the Company's control of the joint venture.



Under the equity method of
accounting, interests in joint ventures are initially recognised at cost and adjusted thereafter to recognise the Company’s
share of the post-acquisition profits or losses and movements in other comprehensive income.



Unrealised gains and losses
on transactions between the Company and its joint ventures are eliminated to the extent of the Company’s interest in the
joint ventures. Accounting policies of the joint ventures have been changed where necessary to ensure consistency with the policies
adopted by the company.



The effects of the change in
accounting policies on the financial position, comprehensive income and the cash flows of the Company at 1 January 2012 and 31
December 2012 are shown in note 38.



16







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):



Associates



Associates are companies in
which the Company has significant influence over the financial and operating policies without having control.

The investment in an associate
is accounted for using the equity method.



Goodwill relating to the acquisition
of an associate is initially measured as the difference between the acquisition cost and the company's share in the fair value
of the associate's net identifiable assets, liabilities and contingent liabilities. After initial recognition, goodwill is measured
at cost and is not systematically amortized.



After application of the equity
method, the Company determines whether it is necessary to recognize any additional impairment loss with respect to the investment
in associates. The Company determines at the end of each reporting period whether there is objective evidence that the carrying
amount of the investment in the associate is impaired. If there is objective evidence, as above, the amount of the loss is calculated
as the difference between the recoverable amount of the investment in the associate and its carrying amount.



The recoverable amount is the
higher of value in use and fair value less costs to sell based on the estimated net cash flows to be generated by the associate.



Impairment loss, as above,
is not allocated specifically to goodwill that forms part of the investment and, accordingly, any reversal of that impairment loss
is recognized to the extent that the recoverable amount of the investment subsequently increases.



Profits and losses resulting
from transactions between the Company and the associate are eliminated to the extent of the interest in the associate.



| | d. | Segment reporting
| | -- | -----------------



Segment information is reported
in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision
maker is the function responsible for allocating resources and assessing performance of the operating segments. The chief operating
decision maker does not review information regarding segment assets and segment liabilities in his performance measurement.



| | e. | Foreign currency transactions
| | -- | -----------------------------



The consolidated financial statements
are presented in NIS, which is the functional currency of the Company and its subsidiaries.



Transactions in foreign currency
are translated into NIS using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses
resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities
denominated in foreign currencies are recognized in the statements of income.



Foreign exchange gains and losses
are presented in the income statement within finance income or expenses.



Translation differences on non-monetary
financial assets, such as securities classified as available for sale, are included in other comprehensive income.



17







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):



| | f. | Property and equipment
| | -- | ----------------------



Property and equipment are initially
recognized at acquisition or construction cost. Cost includes expenditure that is directly attributable to the acquisition, construction
or installation of the items, capitalization of borrowing costs during the construction period of qualified assets and expected
costs for dismantling and restoring the site on which it is located. Property and equipment included as part of the acquisition
of a subsidiary is included at the fair value as at the date of acquisition. Repairs and maintenance are charged to the income statement
during the financial period in which they are incurred.



Purchased land is not depreciated.
Depreciation of other assets is calculated using the straight-line method to allocate their cost to their residual values over
their estimated useful lives, as follows:



|                                       | Years            
|-------------------------------------- | -----------------
|Leased lands                           | 100              
|Buildings                              | 50               
|Leasehold improvements                 | 12               
|Fueling stations equipment             | 10-25 (mainly 14)
|Motor vehicles                         | 5-7              
|Furniture, equipment and installations | 3-16 (mainly 10) 



Leased assets and leasehold
improvements are depreciated using the straight-line method to allocate their cost over their estimated useful lives.



An asset carrying amount is
written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount.



Gains and losses on disposals
are determined by comparing the proceeds with the carrying amount and are recognized within "Other gains (losses)" in
the income statement.



When the use of a property changes
from owner-occupied to investment property, which is measured at fair value, the property is remeasured to fair value and reclassified
as investment property. Any gain arising on remeasurement is recognized in other comprehensive income and presented within equity
in a revaluation reserve, unless the gain reverses a previous impairment loss on the specific property, in which case the gain
is first recognized in profit or loss. Any loss is recognized directly in profit or loss.



| | g. | Investment property
| | -- | -------------------



Investment property is held
for long-term rental yields or value appreciation and is not occupied by the Company. Investment property is initially measured
at cost, including transaction costs. Subsequent to initial recognition, investment property is stated at fair value, reflecting
market conditions, determined at least annually by one of the following independent appraisers, "Haushner Civil Eng. &
Real Estate Appraisal Ltd.", "Greenberg Olpiner & co." and "Barak Friedman Cohen & Co. Economic &
Real Estate Appraisal."



18







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):



Fair value of investments property
is based on current prices in an active market-to the extent these are available, adjusted, if necessary, for any differences in
the nature, location or condition of the specific asset. If such information is not available, the Company uses alternative sources
such as recent prices on less active markets or discounted cash flow projections.



Gains and losses arising from
changes in fair value are recorded in the income statement under "Changes in fair value of investment property, net"
in the period in which they arise.



Land that is held under an operating
lease with The Israel Lands Authority or local authorities that is classified and accounted for as an investment property, is initially
recognized as an asset and the lease obligation as a liability, in a manner similar to a finance lease.



Revenue from the sale of investment
property, is recognized when the significant risks and rewards of ownership of the property have been transferred to the buyer;
such revenue is not recognized where there are significant uncertainties as to the collection of the consideration of the transaction,
the costs related thereto, or when the Company has significant continuing involvement in the property that was sold.



| | h. | Intangible assets:
| | -- | ------------------



Goodwill



Goodwill arises on the acquisition
of subsidiaries, associates and joint ventures and represents the excess of the consideration transferred over the interest in
net fair value of the net identifiable assets, liabilities and contingent liabilities of the acquiree.



For the purpose of impairment
testing, goodwill acquired in a business combination is allocated to each of the cash generating units ("CGUs"), or group
of CGUs, that is expected to benefit from the synergies of the combination.



Goodwill impairment reviews
are undertaken at least annually. The carrying value of goodwill is compared to the recoverable amount, which is the higher of
value in use and the fair value less costs to sell. Any impairment is recognized immediately as an expense and is not subsequently
reversed.



Brand names, trademarks and
customer relationships



The cost of brand names, trademarks
and customer relationships acquired in a business combination is their fair value at the date of acquisition. Trade marks that
have indefinite lives are not amortized, but are reviewed for impairment at least annually. After initial recognition, those intangible
assets, that have finite useful lives, are carried at cost less accumulated amortization and any accumulated impairment losses.
Amortization is calculated using the straight-line method to allocate the cost over their estimated useful lives (brand names and
trademarks - eight to fifteen years and customer relationships – seven to fifteen years).



19







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):



Computer software



The costs of separately
acquired computer software licenses are capitalized and amortized over their estimated useful lives (mainly four years).
Computer software development costs recognized as assets are amortized over their estimated useful lives (not exceeding five
years).



Evacuation fees



Amounts paid to assume existing
operating lease agreements are presented at cost net of accumulated amortization and impairments. These costs are amortized over
the remaining term of the lease.



Fees paid on the establishment
of loan facilities



Fees paid on the establishment
of loan facilities are deferred until the draw-down occurs. To the extent that there is no evidence that it is probable that some
or all of the facility will be drawn down, the fee is capitalized as a pre-payment for liquidity services and amortized over the
period of the facility to which it relates.



Favorable and unfavorable operating
lease contracts



The Company determines for
each operating lease acquired whether the terms are favorable or unfavorable. The Company recognizes an intangible asset if the
terms of an operating lease are favorable relative to market terms and a liability if the terms are unfavorable relative to market
terms. The favorable and unfavorable lease contracts are amortized over their contractual terms.



| | i. | Impairment of definite life non-financial assets
| | -- | ------------------------------------------------



Assets that are subject to depreciation
and amortization are reviewed for impairment at each statement of financial position date whenever any events have occurred or
changes in circumstances have taken place, which might indicate that there has been impairment of the non-financial assets. When
such indicators of impairment are present, the Company evaluates whether the carrying value of the asset can be recovered, and
if necessary, records an impairment provision for the amount needed to write down the carrying amount to the recoverable amount.



The recoverable amount of an
asset is the higher of the asset’s fair value less costs to sell and its value in use. Value in use is based on estimated
future cash flows from the continued use of the asset, including those expected at the time of its future retirement and disposal
discounted to their present value using a discount rate that reflects the time value of money and the risks specific to the asset.
In determining the value in use of an asset, the Company uses best available estimates as to the conditions that are expected to
prevail during the remaining useful life of the asset and as to the current condition of the asset. In computing the fair value
less costs to sell of real estate, including land and lease rights, the Company makes use of valuations prepared by appraisers.



20







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):



In the Supermarkets segment,
a CGU can be a single store or a group of stores where the cash inflows of one store are largely interdependent on the cash inflows
of another store in the same geographic area. The food retail activities are grouped into 80 CGUs.



In the fueling and commercial
sites segment the Company evaluates the fueling stations and the convenience stores on its sites together, on one basis, due to
common customer base and business dependence on gas stations revenues. The convenience stores that are not located in fueling sites
are grouped into 16 separate CGUs based on their geographical locations in a manner similar to the food retail activities.



In the Non-Food segment each
of the self-operated stores (115) is considered a separate CGU on the basis of their geographical location and customers.



An impairment loss is recognized
in the income statement under "other gain (losses)". Definite life non-financial assets that suffered impairment are
reviewed for possible reversal of the impairment at each reporting date.



For a cash-generating unit to
which goodwill has been allocated, any impairment loss relating to that unit is initially applied to the goodwill and the balance
to the carrying amount of the other assets.



| | j. | Non-current assets held for sale
| | -- | --------------------------------



Non- current assets (or disposal
groups) are classified as assets held for sale when their carrying amount is to be recovered principally through a sale transaction
and a sale is considered highly probable. They are stated at the lower of carrying amount and fair value less costs to sell.



| | k. | Borrowing costs
| | -- | ---------------



General and specific borrowing
costs directly attributable to the acquisition or construction of any qualifying asset (including investment property, real estate
inventories and land and buildings) are capitalized during the period of time that is required to complete and prepare the asset
for its intended use. Other borrowing costs are expensed in the period they occur.



21







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):



| | l. | Financial assets
| | -- | ----------------



Classification



The Company classifies its
financial assets in the following categories: at fair value through profit or loss, loans and receivables and available for sale.
The classification depends on the purpose for which the financial assets were acquired. Management determines the classification
of financial assets at initial recognition. Financial assets are classified as current assets if expected to be settled or disposed
of within one year from the date of the statement of financial position; otherwise they are classified as non-current.



Financial assets at fair
value through profit or loss



This category includes financial
assets held for trading and those designated at fair value through profit or loss, because they are managed and their performance
is evaluated on a fair-value basis. Derivative financial instruments are also classified in this category since they are not designated
for hedging purposes.



Loans and receivables



Loans and receivables are non-derivative
financial assets with fixed or determinable payments that are not quoted in an active market.



Available-for-sale financial
assets



Available-for-sale financial
assets are non-derivatives that are either designated in this category or not classified to any of the other categories.



Recognition and measurement



Investments are initially recognized
at fair value with transaction costs added to the carrying value for financial assets not carried at fair value through profit
or loss are expensed in the statement of income for all other financial assets. Available-for-sale financial assets and financial
assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are subsequently carried
at amortized cost using the effective interest method.



Gains or losses arising from
changes in the fair value of the "financial assets at fair value through profit or loss" category are presented in the income statements within finance income or expenses in the period in which they arise.



Changes in the fair value of
monetary and non-monetary available-for-sale securities are recognized in other comprehensive income (hereafter – OCI). Interest
on securities that are available for sale calculated using the effective interest method is recognized in the statement of income
as part of "finance income or expenses".



When securities classified
as available-for-sale are sold or impaired, the accumulated fair value adjustments recognized in OCI are reclassified and included
in the income statements as part of finance income or expenses.



22







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):



Assets carried at amortized
cost



The Company
assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets
is impaired. The reversal of the previously recognized impairments loss is recognized in the consolidated income statements.



Assets classified as available
for sale



The Company assesses at the
end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired.
Impairment losses recognized in the consolidated income statements on equity instrument are not reversed through the consolidated
income statements. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and
the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment
loss is reversed through the consolidated income statements.



| | m. | Customers' deposits
| | -- | -------------------



These reflect the amounts that
can be demanded by customers upon the return of containers and other loaned equipment and presented among current liabilities.



| | n. | Derivative financial instruments
| | -- | --------------------------------



Derivative financial instruments
and separable embedded derivatives are initially recognized at fair value on the date a derivative contract is entered into and
are subsequently re-measured at their fair value, with changed recognized as "finance income or expenses", since they
do not meet hedge accounting criteria.



| | o. | Inventories
| | -- | -----------



Inventories are stated at the
lower of cost and net realizable value. Cost, except for real estate inventories, is determined mainly by the “first-in,
first-out” (FIFO) method, and is presented net of provisions for slow moving inventories and for shrinkage of consumer products.



Cost of real estate inventories
is specific and includes capitalization of borrowing costs for long term projects. Real estate inventories are stated at the lower
of cost and net realizable value. Cost includes the directly identifiable expenses of the acquisition of the inventories and capitalized
borrowing costs. Net realizable value is the estimated selling price in the ordinary course of business, less an estimated cost
to complete and applicable selling expenses.



| | p. | Trade receivables
| | -- | -----------------



Trade receivables are recognized
initially at fair value and subsequently measured at amortized cost using the effective interest method, less allowance for doubtful
accounts. If collection is expected in one year or less, they are classified as current assets, if not, they are presented as non-current
assets.



23







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):



| | q. | Cash and cash equivalents
| | -- | -------------------------



Cash and cash equivalents include
cash in hand, short-term bank deposits and other short-term highly liquid investments with original maturities of three months
or less.



Bank overdrafts are presented
within credit and loans from banks and others in current liabilities in the statement of financial position. For the purposes of
the consolidated statement of cash flows, cash and cash equivalents are presented net of bank overdrafts.



| | r. | Share capital
| | -- | -------------



Ordinary shares are classified
as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction from issuance
proceeds. Where the Company purchases the Company's equity share capital (treasury shares), the consideration paid, including any
directly attributable incremental costs is deducted from equity attributable to the Company's equity holders.



| | s. | Trade payables and rebates
| | -- | --------------------------



Trade payables are recognized
initially at fair value and subsequently measured at amortized cost using the effective interest method.



The Company receives annual
rebates from suppliers for which the Company has no obligation to meet specified purchasing targets.



In some cases the Company expects
to receive certain rebates mainly upon meeting specified purchasing targets, such as the fulfillment of a minimum annual purchase
quota (in quantitative or monetary amounts), or an increase in purchases in comparison with purchases made in previous periods.
The related rebates are recognized in the financial statements as earned to the extent to which the Company has reached the target.



Rebates from suppliers are presented
as a reduction of inventories and cost of sales, as applicable.



| | t. | Borrowings
| | -- | ----------



Borrowings (including loans, debentures and convertible debentures) are recognized initially at fair value,
net of transaction costs incurred. The difference, if any, between the proceeds (net of transaction costs) and the maturity amount
is recognized in the income statements over the period of the borrowings using the effective interest method.



For convertible debentures, in which the conversion component constitutes an embedded derivative (and
not equity) whose economic characteristics and risks are not closely related to the debentures, the debentures are initially recognized
as the difference between the total proceeds from issuance and the fair value of the bifurcated embedded derivative at the date
of issuance. Subsequent to initial recognition, the embedded derivative is measured at each statement of financial position date
at fair value with changes recognized in financial income or expenses in the income statements, while the debentures are measured
at amortized cost.



24







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES(continued):



| | u. | Current and deferred income taxes
| | -- | ---------------------------------



Current
taxes



Current tax is the expected
tax payable (or receivable) on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting
date. Current taxes also include taxes in respect of prior years.



Uncertain
tax positions



A provision for uncertain tax
positions, including additional tax and interest expenses, is recognized when it is more probable than not that the Company will
have to use its economic resources to pay the obligation.



Deferred taxes



Deferred tax is recognized in
respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the
amounts used for taxation purposes. Deferred tax is not recognized for the initial recognition of goodwill and for differences
relating to investments in subsidiaries, jointly controlled entities and associates, to the extent that the Company is able to
control the timing of the reversal of the temporary difference and it is probable that they will not reverse in the foreseeable
future, either by way of selling the investment or by way of distributing dividends in respect of the investment.



Deferred tax is measured at
the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted
or substantively enacted by the reporting date.



A deferred tax asset is recognized
for unused tax losses, tax benefits and deductible temporary differences, to the extent that it is probable that future taxable
profits will be available against which they can be utilized.



Offset of deferred tax assets
and liabilities



Deferred tax assets and liabilities
are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes
levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax
liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.



25







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES(continued):



| | v. | Employee benefits
| | -- | -----------------



Retirement benefit obligations



The Company's pension liabilities
are generally funded through payments to insurance companies or trustee-administered funds. The Company has both defined benefit
and defined contribution pension plans.



The Company's defined benefit
obligation is based on the amount of benefits that the relevant employees are entitled to receive upon retirement, which is based
on the number of years of employment and the employee’s last monthly salary.



The retirement benefit obligation
recognized in the statement of financial position is the present value of the defined benefit obligation at the statement of financial
position date less the fair value of plan assets. The defined benefit obligation is calculated annually by Ernst & Young Israel,
an independent qualified actuary (hereafter – the independent qualified actuary) using the projected unit credit method.



The present value of the defined
benefit obligation is determined by discounting the estimated future cash outflows (after taking into account the expected rate
of salary increases and other actuarial assumptions) by reference to Israeli Government bonds that have terms to maturity approximating
the terms of the related retirement liability.



In accordance with IAS 19 "Employee
benefits" the market yields the Company uses to discount expected future cash flows are based on the interest rates of Israeli
Government bonds since the Company's management believes that Israel does not have a deep market for high-quality corporate bonds.



Remeasurement gains and losses
arising from changes actuarial assumptions and from the difference between the interest income on plan assets and the return on
plan assets are charged or credited to equity in other comprehensive income in the period in which they arise.



The Company purchases insurance
policies and regularly contributes to retirement benefit funds to meet retirement obligations. For defined contribution plans in
which the Company has no further payment obligations once the contributions have been paid, the contributions are recognized as
employee benefit expenses when they are paid.



26







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES(continued):



Provision for unutilized
sick leave



Pursuant to employment agreements,
certain employees are entitled to receive payment for a certain number of sick leave days per year which are accumulating to future
periods.



The provision for unutilized
sick leave is based on an annual actuarial calculation by the independent qualified actuary: In making such a computation, the
actuary makes actuarial assumptions (rates of employee turnover, future salary levels etc). The cost of this benefit is recognized
using the same method as is used for defined benefit retirement plans. Actuarial gains and losses are recognized in OCI in the
period which they arise.



Jubilee grant



Pursuant to employee agreements,
certain employees are entitled to receive a jubilee grant upon completion of service of 20, 30 and 35 years.

The statement of financial position
includes a provision in respect of the jubilee grant based on an annual actuarial calculation, by the independent qualified actuary.



Vacation and recreation benefits



Every employee is legally entitled
to vacation and recreation benefits, both computed on an annual basis. This entitlement is based on the terms of employment. The
Company records a liability and expense for vacation and recreation pay, based on the benefits that have been accumulated for each
employee.



Share-based payments



The Company operates an equity-settled,
share-based compensation plan. Under this plan, the Company grants its employees stock options at its discretion. The fair value
of the employee services received in exchange for the grant of the options is recognized as an expense in the statement of income
with a corresponding credit to accumulated deficit in equity. The total amount to be expensed over the vesting period is determined
by reference to the fair value of the options on the date on which they are granted.



Profit sharing and bonus
plans



The Company accruals for bonuses
and profit-sharing for certain employees, based on a formula that takes into consideration the profit attributable to the stores
in which those employees serve, after certain adjustments. The Company recognizes a provision where contractually obligated or
where there is a past practice that has created a constructive obligation.



27







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES(continued):



Termination benefits



Termination benefits are payable
when employment is terminated by the Company before the normal retirement date, or whenever an employee accepts voluntary redundancy
in exchange for these benefits. The Company recognizes termination benefits when it is demonstrably committed according to a detailed
formal plan without possibility of withdrawal to either: terminating the employment of current employees; or providing termination
benefits as a result of an offer made to encourage voluntary redundancy.



Benefits falling due more than
12 months after the statement of financial position date are discounted to their present value.



| | w. | Provisions
| | -- | ----------



Provisions for environmental
restoration and legal claims are recognized when the Company has a present legal or constructive obligation as a result of a past
event; it is probable that an outflow of resources will be required to settle the obligation; and the amount can be reliably estimated.



Provisions are measured at present
value according to management's best estimate of the expenditure required to settle the obligation at the statement of financial
position date. The increase in the provision due to passage of time is recognized as interest expense.



| | x. | Comprehensive income
| | -- | --------------------



Comprehensive income is comprised
of net income for the year and other income and expense items that are not taken into account in determining net income and which
are considered components of other comprehensive income; The Company's other comprehensive income or loss items are in respect
of fair value adjustments of available for sale financial assets, exchange differences on translation of foreign operations, remeasurement
and losses of employee defined benefit plans and revaluation reserve for fixed assets.



| | y. | Revenue recognition
| | -- | -------------------



Revenue comprises the fair value
of the consideration received or receivable for the sale of goods in the ordinary course of the Company’s activities. Revenue
includes government levies collected by the Company within the course of its fueling operations and net of value added tax, returns,
rebates and discounts.



When the Company acts as an
agent or an intermediary without bearing the risks and rewards resulting from the transaction, revenues are presented on a net
basis. However, when the Company bears the risks and rewards resulting from the transaction, revenues are presented on a gross
basis, distinguishing the revenue from the related expenses.



The Company recognizes revenue
when the amount can be reliably measured, it is probable that future economic benefits will flow to the Company and when specific
criteria have been met for each of the Company’s activities as described below. The Company bases its estimates on past experience,
taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.



28







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES(continued):



Sales of goods – retail



Sales of goods and oil products
are recognized when a product is sold to the customer. Retail sales are usually paid for by credit card, by checks or in cash.



Revenue from the sale of gift
certificates is deferred and is recognized as income when the gift certificate is redeemed for the purchase of goods, or when the
likelihood that the customer will redeem the certificate, based on the Company's experience, becomes remote.



Discounts are recognized as
a reduction of sales upon recognition of the related sales.



Revenue from the provision of
the sale of goods on the internet is recognized at the point that the risks and rewards of the inventory have passed to the customer,
which is the point of dispatch. Transactions are settled by credit or payment card.



Liquefied Petroleum Gas (hereafter
– LPG) for domestic use – the sales of LPG are recognized as revenues in accordance with the quantities consumed in
the reported periods.



Sales of goods – wholesale



The Company sells a range of
products (apparel, housewares, infant products and toys) in the wholesale market.



Sales of goods are recognized
when the products are delivered to the wholesaler. The criteria for delivery are satisfied when the products have been shipped
to the specified location, the risks of obsolescence and loss have been transferred to the wholesaler, and either the wholesaler
has accepted the products in accordance with the sales contract, the acceptance provisions have lapsed, or the Company has objective
evidence that all criteria for acceptance have been satisfied.



Sales are recorded based on
the price specified in the sales contract, net of estimated volume discounts returns at the time of sale. No element of financing
is deemed present as the sales are made under normal credit terms, which are consistent with market conditions.



Sales of oil products, lubricants
and gas are recognized at the date of supply to the customer.



Awards and loyalty programs



Participating members in these
programs earn benefits upon purchasing goods, which can be utilized over a specific term.

The Company defers revenue from
such sales representing the fair value of such benefits. The attributed fair value takes into account management estimates of awards
that will expire unexercised. The deferred revenue is recognized in income (carried to sales) when the award is exercised by the
customer.



29







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES(continued):



Rental revenue



The Company’s lease agreements
are “net” lease agreements, which require the tenants to pay all property related expenses. The rental revenue is recognized
on a straight-line basis over the rent period.



Revenue from sales of real
estate assets



Revenue from the sale of real
estate assets are recognized when the significant risks and rewards of ownership have passed to the buyer. Revenue is not recognized
if there are significant uncertainties with respect to the collection of the consideration from the transaction, or the costs associated
with it, or if there is a continuing involvement of the Company with respect to the sold property.



Revenue from cellular operation



Revenues from services is recognized
and recorded when the services are provided. Revenues derived from sale of handsets are recognized upon delivery of the handset
to the customer.



| | z. | Finance income and expenses
| | -- | ---------------------------



Finance income mainly comprises
interest income on funds invested, dividend income, net gains from changes in the fair value of financial assets measured at fair
value through profit or loss, net gains from marketable securities, foreign currency gains, and net gains from changes in the fair
value of derivative instruments that are recognized in the statement of income.

Finance expense mainly comprises
interest expense on loans received and debentures issued, net losses from changes in the fair value of financial assets measured
at fair value through profit or loss, foreign currency losses, financing expenses paid under finance leases and net losses from
changes in the fair value of other derivative instruments.



| | aa. | Advertising costs
| | --- | -----------------



Advertising costs are expensed
as incurred, net of reimbursements from suppliers in respect of specific joint advertising campaigns, in accordance with the terms
of specific agreement.



| | ab. | Leases
| | --- | ------



Leases in which a significant
portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under
operating leases (net of any incentives received from the lessor) are charged to the statement of income on a straight-line basis
over the period of the lease.



Leases of property where the
Company has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalized
at the lease's commencement at the lower of the fair value of the leased property and the present value of the minimum lease payments.



30







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued):



| | ac. | Dividend distribution
| | --- | ---------------------



A dividend distribution to the
Company's shareholders is recognized as a liability in the Company’s financial statements in the period in which the dividends
are approved by the Company’s Board of Directors.



| | ad. | Earnings per share
| | --- | ------------------



Basic earnings per share are
calculated by dividing the net income attributable to equity holders of the Company by the weighted-average number of Ordinary
shares outstanding during the period.



Diluted earnings per share are
calculated by adjusting the net income attributable to equity holders of the Company and the weighted-average number of outstanding
Ordinary shares for the effect of all potential Ordinary shares that are dilutive including share options granted to employees.



| | ae. | Non-current assets and disposal group held for sale
| | --- | ---------------------------------------------------



Non-current assets (or group
of assets and liabilities for disposal) are classified as held for sale if it is highly probable that they will be recovered primarily
through a sale transaction and not through continuing use. These assets are presented at the lower of their carrying amount and
fair value less cost to sell.



Any impairment loss on a disposal
group is initially allocated to goodwill, and then to remaining assets and liabilities on pro rata basis, except that no loss is
allocated to assets not in the scope of the measurement requirements of IFRS 5.



In subsequent periods, depreciable
assets classified as held for sale or distribution are not periodically depreciated, and investments in associates classified as
held for sale are not accounted for by the equity method.



31







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES(continued):



| | af. | New and Amended IFRS and Interpretations
| | --- | ----------------------------------------



| |  | New International Financial Reporting Standards, Amendments to Standards and New interpretations
| |  | ------------------------------------------------------------------------------------------------



The following standards have
been adopted by the Company for the first time for the financial year beginning on or after 1 January 2013 and have a material
impact on the Company:



IFRS
11 – Joint arrangements



IFRS
11 replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly-controlled Entities – Non-monetary Contributions by Ventures.
IFRS 11 removes the option to account for jointly controlled entities (JCEs) using proportionate consolidation. Instead, JCEs that
meet the definition of a joint venture must be accounted for using the equity method. Effective January 1, 2013, the Company applies
IFRS 11 "Joint Arrangements". The application is retrospective. Jointly controlled entities presented in the past in
the consolidated statements using the proportionate consolidation method are presented in these financial statements as part of
the associates. The statement of income statements for the year 2011 has not been restated as a result of the Company's decision
to adopt the relief of IFRS11. See note 38 for the impact of adoption on the financial statements.



IFRS
13 – Fair value measurement



IFRS
13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change when an entity is
required to use fair value, but rather provides guidance on how to measure fair value under IFRS. IFRS 13 defines fair value as
an exit price. As a result of the guidance in IFRS 13, the Company re-assessed its policies for measuring fair values, in particular,
its valuation inputs such as non-performance risk for fair value measurement of liabilities. IFRS 13 also requires additional disclosures.



Application
of IFRS 13 has not materially impacted the fair value measurements of the Group. Additional disclosures where required, are provided
in the individual notes relating to the assets and liabilities whose fair values were determined.



IAS
36 – Impairment of assets



The amendment to IAS 36 includes
new disclosure requirements for situations in which impairment is recognized and the recoverable amount is determined on the basis
of fair value less costs of disposal. Furthermore, the amendment removes the requirement to provide disclosure of the recoverable
amount of material cash-generating units if no impairment was recognized in their respect. The amendment is not mandatory for the
group until 1 January 2014, however the group has decided to early adopt the amendment as of 1 January 2013.



32







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES(continued):



The following new standards
and amendments to standards have been issued, but are not effective for the financial year beginning January 1, 2013 and have not
been early adopted:



| | 1. | IFRS 9 Financial Instruments: Classification and Measurement
| | -- | ------------------------------------------------------------



IFRS 9, as issued, reflects the
first phase of the IASB’s work on the replacement of IAS 39 and applies to classification and measurement of financial assets
and financial liabilities as defined in IAS 39. The standard was initially effective for annual periods beginning on or after 1
January 2013, but Amendments to IFRS 9 Mandatory Effective Date of IFRS 9 and Transition Disclosures, issued in December 2011,
moved the mandatory effective date to 1 January 2015. In subsequent phases, the IASB will address hedge accounting and impairment
of financial assets. The adoption of the first phase of IFRS 9 will have an effect on the classification and measurement of the
Company’s financial assets, but will not have an impact on classification and measurements of financial liabilities. The
Company will quantify the effect in conjunction with the other phases, when the final standard including all phases is issued.



NOTE 3 – FINANCIAL RISK MANAGEMENT
AND FINANCIAL INSTRUMENTS:



| | a. | Financial risk factors
| | -- | ----------------------



The Company’s activities
expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest
rate risk and price risk), credit risk and liquidity risk. The Company’s overall risk management program focuses on the unpredictability
of financial markets and seeks to minimize potential adverse effects on the Company’s result of operations. The Company uses
derivative financial instruments in order to partially hedge certain risk exposures.



The board of directors and senior
management of each company in the group is responsible for determining and supervising the financial risk management fundamentals
of each entity in accordance with each entity's business activities, financial structure and the relevant market conditions.



Risk management is carried
out by the chief financial officer and treasury department of each entity based on policies approved by the board of directors.
Treasury identifies evaluates and hedges financial risks in close cooperation with the Company’s operating units. The board
of directors provides principles for overall risk management, covering specific areas, such as interest rate risk, credit risk,
foreign exchange risk, use of derivative financial instruments and non-derivative financial instruments, raising long- term debt
and investment of excess liquidity.



33







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
3 – FINANCIAL RISK MANAGEMENT AND FINANCIAL INSTRUMENTS(continued):



| | (1) | Market risk
| | --- | -----------



| | (a) | Price risk
| | --- | ----------



The Company is exposed to price
risk in respect of its investments in debt securities and equity securities that are classified as available for sale or at fair
value through profit or loss. To manage its price risk arising from investments in debt securities and equity securities, the Company
diversifies its portfolio in accordance with pre-defined limits.



The Company invests in Israeli
Government debt securities and debt securities of entities that are publicly traded on the Tel Aviv stock exchange that have a
minimum rating of A+ at the date of investment. The Company manages the equity price risk through diversification and by placing
limits on individual and total equity instruments. Reports on the equity portfolio are submitted to the Company’s senior
management on a regular basis.



The table below summarizes the
impact on the Company’s post-tax profit for the year and on Comprehensive income of an increase/decrease of 5% in the market
price of the investments. The analysis is based on the assumption that all other variables are held constant.



|                  |  | Year ended December 31    |    
|----------------- |  | ------------------------- | ---
|                  |  | 2011                      |    
|                  |  | NIS in millions           |    
|                  |  | Impact on post-tax profit |    
|                  |  |                           |    
|Government bonds  |  |                           | 0.6
|Corporate bonds   |  |                           | 1.9
|Equity securities |  |                           | 2.5
|                  |  |                           | 5.0



Post-tax profit for the year
would increase/decrease as a result of gains/losses on debt or equity securities classified as at fair value through profit or
loss. Comprehensive income would increase/decrease, in addition to gains/losses from securities classified as fair value through
profit or loss, as a result of gains/losses on debt or equity securities classified as available for sale (in the event of decline
in fair value other than temporary, decline in fair value will be recognized directly in income or loss).



34







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
3 – FINANCIAL RISK MANAGEMENT AND FINANCIAL INSTRUMENTS(continued):



| | (b) | Foreign currency risk
| | --- | ---------------------



Most of the operating units comprising
the Company are domiciled and operate in Israel. Some of those units import part of their inventories and raw materials from suppliers
with credit liked to the U.S dollar. Those units are exposed to foreign currency risk arising primarily with respect to the U.S.
dollar. Some units use forward currency contracts in order to hedge part of the foreign currency risk. In addition, certain of
Dor Alon's suppliers provide it with credit and hold related deposits which are linked to the exchange rate of the U.S. dollar.



At December 31, 2013 if the NIS
had strengthened / weakened by 5% against the U.S. dollar with all the other variables held constant, the post-tax profit would
have been NIS 5.0 million higher / lower (2012 NIS 4.0 million). As at December 31, 2013 Dor Alon had forward contracts for a notional
amount of U.S. $105.7 million (2012 U.S. $95.6 million) in order to partially hedge the foreign currency risk. These forward contracts
are not accounted for using hedge accounting.



| | (c) | CPI risk
| | --- | --------



As at December 31, 2013, the
excess of financial liabilities over financial assets linked to the CPI was NIS 3,049 million (2012: NIS 2,999 million). As at
December 31, 2013 the Company had forward contracts for a notional amount of NIS 430 million (2012 NIS 500 million) in order to
partially hedge the CPI risk. These forward contracts are not accounted for using hedge accounting.



At December 31, 2013 if the CPI
had increased/decreased by 1% with all other variables held constant, post-tax profit for the year would have decreased/increased
by NIS 22.9 million (2012: NIS 22.5 million, 2011: NIS 21.2 million).



BSRE has also commitments that
are linked to the Israeli Inputs Building Index (hereafter- the Building Index), resulting from engagements with building contractors.
Changes in the Building Index affect the costs of construction of investment properties; as of December 31, 2013, BSRE has NIS
143 million under construction agreements including commitments of an associate company (Residence Company) which has engagements
with contractors to build the apartments that are linked to the Building Index. The Company mitigates its exposure to this risk,
by linking the apartment purchasing agreements to the Building Index.



As of December, 31, 2013 BSRE
has agreements in amount of NIS 10 million which are linked to the CPI.



As to the Company's commitments
for future minimum payments under non-cancelable operating leases, most of which are linked to the CPI for the years subsequent
to the statement of position dates, see note 34a.



35







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
3 – FINANCIAL RISK MANAGEMENT AND FINANCIAL INSTRUMENTS(continued):



| | (d) | Cash flow and fair value interest rate risk
| | --- | -------------------------------------------



Borrowings issued at variable
rates expose the Company to cash flow interest rate risk. Borrowings issued at fixed rates expose the Company to fair value interest
rate risk. At December 31, 2013 if interest rates on borrowings had been 1% (100 basis points) higher/lower with all other variables
held constant, pre-tax profit for the year would have been NIS 17.1 million (2012: NIS 17.6 million, 2011: NIS 18.0 million) lower/higher,
mainly as a result of higher/lower interest expense on floating rate borrowings.

Most of the fixed interest assets
and liabilities of the Company (such as deposits, loans and issued debentures) are not measured at fair value through profit or
loss. Therefore, any change in the interest rate as at the reporting date would not have a material effect on the statement of
income.



The Company’s investments
in debt securities earning fixed rates of interest and short-term deposits expose the Company to fair value interest rate risk.
At December 31, 2013 if interest rates had been 5% higher/lower with all the other variables held constant other components of
equity would have been NIS 7.1 million (2012: NIS 7.1 million, 2011: NIS 7.4 million) lower/higher mainly as result of the decrease/increase
in the fair value of these debt securities classified as available for sale.



| | (2) | Credit risk
| | --- | -----------



Credit risk is managed separately
by each of the Company's operating units. Credit risk arises from cash and cash equivalents, securities, short term deposits with
banks as well as credit exposure to retail and wholesale customers.



Cash and cash equivalents, deposits
and securities are maintained with major banking institutions in Israel.



The Company's investments include
Israeli Government debt securities and debt securities of entities that are publicly traded on the Tel Aviv Stock Exchange and
that have a minimum rating of A+ at the date of investment. According to the Company's investment policy, there are no significant
concentrations of credit risk in respect of investments in debt securities.



Sales to retail customers are
collected principally through use of major credit cards, post-dated checks (partially guaranteed by credit insurance) or cash.
Sales to wholesale and business customers are made on terms of credit of up to 180 days.



Sales of gift certificates are
made on terms of credit of up to 120 days to a large number of different entities.



Sales to wholesale customers
are mainly made under accepted market credit terms. The credit quality of each wholesale customer is assessed. The Company's customers
are diversified, therefore the Company believes that the risk of credit concentration is low. Individual risk limits are set based
on internal ratings that take into consideration the customer’s financial position, credit history and other factors.



36







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 3 – FINANCIAL RISK MANAGEMENT
AND FINANCIAL INSTRUMENTS(continued):



Dor Alon requests collateral
from some of its customers and or the recipients of loans in accordance with management's credit risk assessment. Where relevant,
a credit committee consisting of, among others, the general manager and the finance director meets to discuss the credit risks
to the Company. The provision for doubtful debts is updated on a regular basis by the credit committee, based on the Dor Alon's
policy and to extent necessary with external legal advisers.



BSRE receives
collaterals for third party lease agreements of investment property.



Balances owed to BSRE by the
residence company and the mall company amount to NIS 76.9 million and NIS 75.2 million, as of December 31 2013 and 2012, respectively;
BSRE expects that profits from the wholesale market project will serve to repay this debt. In addition, the other shareholders
of these companies provided guarantee in favor of BSRE in the amount of NIS 76.9 million and NIS 75.2 million as of December 31
2013 and 2012, respectively, and therefore the credit risk of these loans is considered by BSRE as low.



| | (3) | Liquidity risk
| | --- | --------------



Prudent liquidity risk management
implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed
credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, the Company's
operating units maintain flexibility in funding by use of credit facilities.



Management monitors rolling forecasts
of the Company’s liquidity reserve (comprised of borrowing facilities and cash and cash equivalents) on the basis of expected
cash flows. This is generally carried out at corporate level. These reserves vary by location to take into account the liquidity
of the market in which the Company operates. In addition, the Company’s liquidity management policy involves projecting cash
flows and considering the necessary level of liquid assets, monitoring statement of financial position liquidity requirements,
and maintaining debt financing plans.



The table below analyses the
Company’s financial liabilities into relevant maturity groupings based on the remaining period at the date of the statement
of financial position to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash
flows. Therefore, these amounts will not reconcile to the amounts disclosed in the statement of financial position except for balances
due within 12 months which equal their carrying amounts as the impact of discounting is not material.



The table does not include the
liabilities for operating leases, and the related embedded derivatives. Contractual cash flows for operating leases are presented
in note 34a. Cash flows relating to the conversion component of convertible debentures are included in the maturities of the debentures
above.



Between Dor Alon and the controlling
shareholder of Blue Square there is a deposit / borrow agreement under which it can deposit / borrow monies on on-call terms of
up to NIS 150 million (see note 36d).



37







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
3 – FINANCIAL RISK MANAGEMENT AND FINANCIAL INSTRUMENTS(continued):



|                                        |  | December 31, 2013 |          
|--------------------------------------- |  | ----------------- | ---------
|                                        |  | Less than 1 Year  |          
|                                        |  | NIS in thousands  |          
|Credit and loans from banks and  others |  |                   | 849,589  
|Trade payables                          |  |                   | 1,235,627
|Other payables                          |  |                   | 368,444  
|Bank loans and other                    |  |                   | 301,863  
|Debentures and convertible debentures   |  |                   | 738,573  
|Other long-term payables                |  |                   | 6,484    
|Total                                   |  |                   | 3,500,580



|                                       |  | December 31, 2012 |          
|-------------------------------------- |  | ----------------- | ---------
|                                       |  | Less than 1 Year  |          
|                                       |  | NIS in thousands  |          
|Credit and loans from banks and others |  |                   | 1,165,713
|Trade payables                         |  |                   | 1,228,013
|Other payables                         |  |                   | 458,339  
|Bank loans and other                   |  |                   | 297,337  
|Debentures and convertible debentures  |  |                   | 679,649  
|Other long-term payables               |  |                   | 17,566   
|Total                                  |  |                   | 3,846,617



| |  | Market risks that result from the changes in oil products prices
| |  | ----------------------------------------------------------------



Dor Alon holds oil product inventories
with selling prices that change in accordance with the changes of oil prices in the Mediterranean Sea area. Dor Alon has no influence
on these prices or their fluctuations. Dor Alon management considers from time to time whether to enter into hedge transactions,
in order to cover its possible exposure to any decline in oil prices, taking into account the inventory volumes that will be held
during the next month, the trend of prices and the costs of such hedge transactions.

Increase/decrease in the oil products
prices will increase/decrease the Company's gross profit in the following period.



38







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
3 – FINANCIAL RISK MANAGEMENT AND FINANCIAL INSTRUMENTS(continued):



| | b. | Capital risk management
| | -- | -----------------------



The Company’s objectives
in managing capital are to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital
structure to reduce the cost of capital and to meet its financial covenants.



In order to maintain or adjust
the capital structure, the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue
new shares or sell assets to reduce debt.



Consistent with others in the
industry, the Company monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt to EBITDA. Net debt
is calculated as total borrowings (including ‘current and non-current borrowings’ as shown in the consolidated statement
of financial position) less cash and cash equivalents and other liquid financial assets. This ratio is a non-GAAP figure not determined
in IFRS and its definition and calculation may vary from one company to another. The Company considers this ratio to be an important
measure for investors, analysts and rating agencies.



The dividend in 2010 was declared
after the Board of Directors decided on January 14, 2010, in view of the changes and development of the Company since 2003 that
the ratio of net financial obligations to EBITDA is to be calculated by deducting from the net financial obligations the Company's
debt which is related by the Company to real estate that is not in use by the Company. The Board of Directors further resolved
that the net debt to EBITDA ratio for dividend distribution will not exceed 4.5. Following the changes in the Company's activities
and the growing needs for financing deriving from the acquisition of Dor Alon and its operations, the new projects in the real
estate industry and entering the cellular (MVNO) market, the board of directors reconsidered on January 2, 2012 its former resolution
and decided to update the above ratio so that it will not exceed 6. The Board of directors will continue to monitor this ratio
and update it, if required, to suit the changes in the Company activities and its working capital requirements.



The debentures of Blue Square
are rated A3 stable by Midroog, see note 21.



| | c. | Fair value estimation
| | -- | ---------------------



The table below analyzes financial
instruments carried at fair value, by valuation method. The different levels have been defined as follows:

| | § | Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).
| | - | -------------------------------------------------------------------------------------------

| | § | Inputs other than quoted prices included within level 1 that are observable for the asset or liability,
either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2).
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | § | Inputs for the asset or liability that are not based on observable market data (that is, unobservable
inputs) (level 3).
| | - | ------------------------------------------------------------------------------------------------------------------------



39







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
3 – FINANCIAL RISK MANAGEMENT AND FINANCIAL INSTRUMENTS(continued):



The following tables present
the Company’s assets and liabilities that are measured at fair value at December 31, 2013 and 2012:



|December 31, 2013                                           |  | Level 1          |         |  | Level 2 |  |        | Level 3 |  |  | Total balance | 
|----------------------------------------------------------- |  | ---------------- | ------- |  | ------- |  | ------ | ------- |  |  | ------------- | 
|                                                            |  | NIS in thousands |        
|Assets:                                                     |  |                  |         |  |         |  |        |         |  |  |               | 
|Financial assets at fair value through profit or loss:      |  |                  |         |  |         |  |        |         |  |  |               | 
|Government Bonds                                            |  |                  | 30,541  |  |         |  | -      |         |  |  | -             | 
|Corporate bonds                                             |  |                  | 45,488  |  |         |  | -      |         |  |  | -             | 
|Investment in equity securities                             |  |                  | 14,722  |  |         |  | -      |         |  |  | -             | 
|Money market fund                                           |  |                  | 63,641  |  |         |  | -      |         |  |  | -             | 
|Embedded derivatives in rent agreements                     |  |                  | -       |  |         |  | 6,309  |         |  |  | -             | 
|Investment in equity securities – property company          |  |                  | -       |  |         |  | -      |         |  |  | 23,754        | 
|Available-for-sale financial assets:                        |  |                  |         |  |         |  |        |         |  |  |               | 
|Government Bonds                                            |  |                  | 140,136 |  |         |  | -      |         |  |  | -             | 
|Corporate bonds                                             |  |                  | 48,352  |  |         |  | -      |         |  |  | -             | 
|Money market fund                                           |  |                  | 117,967 |  |         |  | -      |         |  |  | -             | 
|Investment in equity securities                             |  |                  | 14,178  |  |         |  | -      |         |  |  | -             | 
|Investment in equity securities – gas exploration companies |  |                  | 9,753   |  |         |  | 50,506 |         |  |  | -             | 
|Total assets                                                |  |                  | 484,788 |  |         |  | 56,815 |         |  |  | 23,754        | 
|Liabilities:                                                |  |                  |         |  |         |  |        |         |  |  |               | 
|Embedded derivatives:                                       |  |                  |         |  |         |  |        |         |  |  |               | 
|Conversion component embedded in convertible debentures     |  |                  | -       |  |         |  | 121    |         |  |  | -             | 
|Forwards contracts over foreign currency                    |  |                  | -       |  |         |  | 5,595  |         |  |  | -             | 
|Forwards contracts over Israeli CPI                         |  |                  | -       |  |         |  | 889    |         |  |  | -             | 
|Rent agreements                                             |  |                  | -       |  |         |  | 2,847  |         |  |  | -             | 
|Total liabilities                                           |  |                  | -       |  |         |  | 9,452  |         |  |  | -             | 
|                                                            |  |                  |         |  |         |  |        |         |  |  |               | 
|                                                            |  | Level 1          |         |  | Level 2 |  |        | Level 3 |  |  | Total balance | 
|December 31, 2012                                           |  | NIS in thousands |        
|Assets:                                                     |  |                  |         |  |         |  |        |         |  |  |               | 
|Financial assets at fair value through profit or loss:      |  |                  |         |  |         |  |        |         |  |  |               | 
|Government Bonds                                            |  |                  | 36,119  |  |         |  | -      |         |  |  | -             | 
|Corporate bonds                                             |  |                  | 25,205  |  |         |  | -      |         |  |  | -             | 
|Investment in equity securities                             |  |                  | 3,159   |  |         |  | -      |         |  |  | -             | 
|Embedded derivatives in rent agreements                     |  |                  | -       |  |         |  | 1,790  |         |  |  | -             | 
|Investment in equity securities – property company          |  |                  | -       |  |         |  | -      |         |  |  | 21,300        | 
|Available-for-sale financial assets:                        |  |                  |         |  |         |  |        |         |  |  |               | 
|Government Bonds                                            |  |                  | 135,749 |  |         |  | -      |         |  |  | -             | 
|Corporate bonds                                             |  |                  | 51,002  |  |         |  | -      |         |  |  | -             | 
|Money market fund                                           |  |                  | 35,908  |  |         |  | -      |         |  |  | -             | 
|Equity securities                                           |  |                  | 15,296  |  |         |  | -      |         |  |  | -             | 
|Equity securities – gas exploration companies               |  |                  | 7,317   |  |         |  | 38,080 |         |  |  | -             | 
|Total assets                                                |  |                  | 309,755 |  |         |  | 39,870 |         |  |  | 21,300        | 
|Liabilities:                                                |  |                  |         |  |         |  |        |         |  |  |               | 
|Embedded derivatives:                                       |  |                  |         |  |         |  |        |         |  |  |               | 
|Conversion component embedded in convertible debentures     |  |                  | -       |  |         |  | 74     |         |  |  | -             | 
|Forwards contracts over foreign currency                    |  |                  | -       |  |         |  | 8,230  |         |  |  | -             | 
|Forwards contracts over Israeli CPI                         |  |                  | -       |  |         |  | 9,336  |         |  |  | -             | 
|Rent agreements                                             |  |                  | -       |  |         |  | 6,382  |         |  |  | -             | 
|Total liabilities                                           |  |                  | -       |  |         |  | 24,022 |         |  |  | -             | 



40







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 3 – FINANCIAL RISK MANAGEMENT
AND FINANCIAL INSTRUMENTS(continued):



The fair value of financial instruments
traded in active markets is based on quoted market prices at the statement of position date. A market is regarded as active if
quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory
agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The quoted
market price used for financial assets held by the Company is the closing market price. These instruments are included in level
1. Instruments included in level 1 comprise primarily investments in Israeli Government debt securities and debt and equity securities
of entities that are publicly traded on the Tel Aviv Stock Exchange. These instruments are classified as available-for-sale or
fair value through profit or loss. The fair value of financial instruments that are not traded in an active market is determined
by using valuation techniques. These valuation techniques maximize the use of observable market data where it is available and
rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable,
the instrument is included in level 2.



If one or more of the significant
inputs is not based on observable market data, the instrument is included in level 3.



Specific valuation techniques
used to value financial instruments include:



| | § | Quoted market prices or dealer quotes for similar instruments.
| | - | --------------------------------------------------------------

| | § | The fair value of forward contracts over the Israeli CPI are calculated as the present value of
the estimated future cash flows based on observable yield curves.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | § | The fair value of forward foreign exchange contracts is determined using forward exchange rates
at the statement of financial position date, with the resulting value discounted back to present value.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | § | For the equity securities which includes an investment in a property company and an investment
in gas exploration companies:
| | - | ----------------------------------------------------------------------------------------------------------------------------

| | a. | The valuation of the property company is based on the following:
| | -- | ----------------------------------------------------------------

1. Current
transaction values of nearby residential and commercial properties;

2. The
assumption for variables such as the discount rate, the liquidity spread, occupancy rates of shopping centers and inflation rates
of apartment prices we used to value other real estate properties as adapted for the specific nature of this real estate property
as well as an estimate of the related expected cash flows such as the selling value of the asset and the date the sale is expected
to occur; and

3. The
tax rates applicable to the income generated by the investee; and

4. After
deducting the property company's recorded liabilities.

| | b. | The investment in gas exploration companies is partly listed and is partly unlisted. The value
of the unlisted shares, which makes up a small minority share in an entity that is involved in the exploration of gas in Israel
is based on the share price of the majority holding of the entity that is listed on the Tel Aviv stock exchange.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



During 2013 the Company recorded
loss from changes in the fair value of the equity securities in the amount of NIS 0.4 million. As of December 31, 2013, the balance
of the equity securities amounts to NIS 23.7 million.



41







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
3 – FINANCIAL RISK MANAGEMENT AND FINANCIAL INSTRUMENTS(continued):



d. Financial Instruments
by category



|                                                  |  | December 31, 2013     |          
|------------------------------------------------- |  | --------------------- | ---------
|                                                  |  | Loans and Receivables |          
|                                                  |  | NIS in thousands      |          
|Current:                                          |  |                       |          
|Cash and cash equivalents                         |  |                       | 322,579  
|Short term bank deposits                          |  |                       | 93,803   
|Investment in securities                          |  |                       | -        
|Trade receivables                                 |  |                       | 1,221,932
|Other receivables excluding prepayments and other |  |                       | 255,208  
|Non-Current:                                      |  |                       |          
|Loans to associates                               |  |                       | 154,746  
|Investment in equity securities                   |  |                       | -        
|Other long-term receivables                       |  |                       | 181,519  
|Non-current derivative financial instruments      |  |                       | -        
|Total                                             |  |                       | 2,229,787



|                                                        |  | December 31, 2013                             |          
|------------------------------------------------------- |  | --------------------------------------------- | ---------
|                                                        |  | Other financial liabilities at amortized cost |          
|                                                        |  | NIS in thousands                              |          
|                                                        |  |                                               |          
|Credit and loans from banks and others                  |  |                                               | 829,812  
|Trade payables                                          |  |                                               | 1,235,627
|Other account payables and accrued expenses             |  |                                               | 487,278  
|Loans from banks and others                             |  |                                               | 1,524,660
|Convertible debentures                                  |  |                                               | 91,201   
|Conversion component embedded in convertible debentures |  |                                               | -        
|Debentures                                              |  |                                               | 2,788,867
|Derivatives financial instruments                       |  |                                               | -        
|Other liabilities                                       |  |                                               | 10,854   
|Total                                                   |  |                                               | 6,968,299



42







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
3 – FINANCIAL RISK MANAGEMENT AND FINANCIAL INSTRUMENTS(continued):



|                                                  |  | December 31, 2012     |          
|------------------------------------------------- |  | --------------------- | ---------
|                                                  |  | Loans and Receivables |          
|                                                  |  | NIS in thousands      |          
|Current:                                          |  |                       |          
|Cash and cash equivalents                         |  |                       | 261,674  
|Short term bank deposits                          |  |                       | 96,146   
|Investment in securities                          |  |                       | -        
|Trade receivables                                 |  |                       | 1,415,828
|Other receivables excluding prepayments and other |  |                       | 247,750  
|Non-Current:                                      |  |                       |          
|Loans to associates                               |  |                       | 165,066  
|Investment in equity securities                   |  |                       | -        
|Other long-term receivables                       |  |                       | 232,243  
|Non-current derivative financial instruments      |  |                       | -        
|Total                                             |  |                       | 2,418,707



|                                                        |  | December 31, 2012                             |          
|------------------------------------------------------- |  | --------------------------------------------- | ---------
|                                                        |  | Other financial liabilities at amortized cost |          
|                                                        |  | NIS in thousands                              |          
|Credit and loans from banks and others                  |  |                                               | 1,129,526
|Trade payables                                          |  |                                               | 1,228,013
|Other account payables and accrued expenses             |  |                                               | 513,378  
|Bank loans                                              |  |                                               | 1,382,017
|Convertible debentures                                  |  |                                               | 119,560  
|Conversion component embedded in convertible debentures |  |                                               | -        
|Debentures                                              |  |                                               | 2,575,859
|Derivatives financial instruments                       |  |                                               | -        
|Other liabilities                                       |  |                                               | 11,141   
|Total                                                   |  |                                               | 6,959,494



43







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
3 – FINANCIAL RISK MANAGEMENT AND FINANCIAL INSTRUMENTS(continued):



| | e. | Credit quality of financial assets
| | -- | ----------------------------------



The credit quality of financial
assets that are neither past due nor impaired can be assessed by reference to the internal composition based on historical information
that has been accumulated in the Company's entities over the years, as follows:



Cash and cash equivalents and
short term bank deposits



Most of the Company's Cash and
cash equivalents and short term deposit at December 31, 2013 were deposited with major Israeli banks.



Trade receivables



|                            |  | December 31      |          
|--------------------------- |  | ---------------- | ---------
|                            |  | 2012             |          
|                            |  | NIS in thousands |          
|Retail:                     |  |                  |          
|Credit cards                |  |                  | 466,603  
|Insured checks receivables* |  |                  | 30,357   
|Wholesale:                  |  |                  |          
|Checks receivables          |  |                  | 106,157  
|Open accounts               |  |                  | 709,497  
|                            |  |                  | 1,312,614



| | * | The Company is engaged with credit check companies to fully receive payments of checks that have
been approved by the credit check company, even if no cover is available at the indicated time of presentation.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



44







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 3 - FINANCIAL RISK MANAGEMENT
AND FINANCIAL INSTRUMENTS (continued):



Available-for-sale debt securities



As described above, most of the
Company's investments are publicly traded on the Tel-Aviv Stock Exchange and are independently rated with a minimum A+ at the date
of investment.



| | f. | Composition of financial instrument balances:
| | -- | ---------------------------------------------



| | 1. | The currency exposure of the Company's monetary assets and liabilities and equity instruments and
their fair values are as follows:
| | -- | -----------------------------------------------------------------------------------------------------------------------------------



|                                                           |  | December 31, 2013 |          
|---------------------------------------------------------- |  | ----------------- | ---------
|                                                           |  | NIS linked to CPI |          
|                                                           |  | NIS in thousands  |          
|Assets:                                                    |  |                   |          
|Cash and cash equivalents                                  |  |                   | -        
|Short term bank deposit                                    |  |                   | -        
|Investment in securities                                   |  |                   | 130,729  
|Trade receivables                                          |  |                   | -        
|Other accounts receivables                                 |  |                   | -        
|Income taxes receivable                                    |  |                   | 25,223   
|Loans receivable                                           |  |                   | 74,630   
|Derivative financial instruments                           |  |                   | -        
|Investment in equity securities                            |  |                   | -        
|Other long-term receivables                                |  |                   | 77,104   
|Assets of disposal groups classified as held for sale      |  |                   | 207      
|Total assets                                               |  |                   | 307,893  
|                                                           |  |                   |          
|Liabilities:                                               |  |                   |          
|Credit and loans from banks and others                     |  |                   | -        
|Trade payables                                             |  |                   | -        
|Other accounts payable and accrued expenses                |  |                   | 25,193   
|Customer's deposits                                        |  |                   | 28,469   
|Income tax payables                                        |  |                   | 3,199    
|Provisions                                                 |  |                   | 10,971   
|Loans                                                      |  |                   | 805,099  
|Debentures                                                 |  |                   | 2,382,055
|Convertible debentures                                     |  |                   | 91,201   
|Other long-term liabilities                                |  |                   | 9,692    
|Derivative financial instruments                           |  |                   | 889      
|Liabilities of disposal groups classified as held for sale |  |                   | -        
|Total liabilities                                          |  |                   | 3,356,768



(*) Financial instrument that are not monetary
assets



(**) The fair value of these monetary balances
is usually identical or close to their carrying value.



45







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 3 – FINANCIAL RISK MANAGEMENT
AND FINANCIAL INSTRUMENTS(continued):



| | 2. | Changes in the exchange rates of the US dollar and the Israeli CPI, in the reported periods are
as follows:
| | -- | -----------------------------------------------------------------------------------------------------------



|Year |  | Exchange rate of
the US dollar |       |  | Israel known CPI (1) |  |     | Israel actual CPI (2) | 
|---- |  | ------------------------------ | ----- |  | -------------------- |  | --- | --------------------- | 
|     |  | %                              |       |  | %                    |  |     | %                     | 
|2013 |  |                                | (7.0) |  |                      |  | 1.9 |                       | 
|2012 |  |                                | (2.3) |  |                      |  | 1.4 |                       | 
|2011 |  |                                | 7.7   |  |                      |  | 2.6 |                       | 



| | (1) | Calculated based on published CPI date (through November
of each year)
| | --- | ----------------------------------------------------------------------

| | (2) | Calculated based on actual CPI date (through December
of each year)
| | --- | -------------------------------------------------------------------



NOTE
4 – CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS:



Estimates and judgments are
continually evaluated, and are based on historical experience and other factors, including expectations of future events that are
believed to be reasonably possible under the circumstances.



The Company makes estimates
and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom identical the related actual
results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of
assets and liabilities within the next financial year are addressed below.



| | 1) | Impairment of non-financial assets
| | -- | ----------------------------------



In accordance with the accounting
policy stated in note 2, the Company reviews at each statement of financial position date whether any events have occurred
or changes in circumstances have taken place, which might indicate that there has been an impairment of property and equipment
and identifiable intangibles. When such indicators of impairment are present, the Company evaluates whether the carrying value
of the asset in the Company's accounts can be recovered from the cash flows anticipated from that asset, and, if necessary, records
an impairment provision to adjust the carrying amount to the recoverable amount.



The recoverable amount of an
asset is the higher of an asset's fair value less cost to sell and its value in use. These calculations require the use of estimates.



Goodwill and indefinite life
intangible assets:



In accordance with the accounting
policy stated in note 2, the Company tests at least annually whether goodwill and indefinite life intangible assets have been
impaired. The recoverable amount of the cash-generating unit (CGU) to which goodwill has been allocated is determined mostly based
on value-in-use calculations. These calculations require the use of estimates. See note 17 for details of key assumptions.



46







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
4 – CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (continued):



Referring to goodwill allocated
to Non-Food Houseware CGU, the Company performed a sensitivity analysis for the key assumption used in its annual goodwill impairment
test and determined that an increase in the pre-tax discount rate of 1.0% and a 1.0% decrease in the growth rate would result in
the estimated recoverable amount of the Houseware CGU falling below its carrying amount by NIS 18 million and NIS 12 million respectively
beyond an impairment of NIS 4.5 million included in the Company's 2013 results.



The recoverable amounts of the
other CGUs are substantially higher than the carrying value.



| | 2) | Change in fair value of investment property
| | -- | -------------------------------------------



Investment property is presented
at fair value based on assessments of external independent appraisers, who have the appropriate qualifications. In certain cases
fair value is determined using discounted cash flows that are based on various assumptions; judgments and estimates are required
for cash flows projections that are expected during the remaining economic life of the asset, in accordance with the lease terms
during the lease period and, after such period, based on suitable rentals that are determined on the basis of market surveys for
similar assets with similar location and terms, using adjustments and discount rates that reflect the current market assessments
as to uncertainties prevailing with respect to cash flow amounts and timing.



In some cases, mainly building
rights or assets under development, the residual value approach is used to determine fair value. The evaluation of the asset's
fair value is based on the value of the completed asset, less estimated constructor's profit and construction costs to complete.



When the rate used for discounting
cash flows is different by 0.5% from management estimate the fair value of investment property will be NIS 37 million lower or
NIS 72 million higher. When the discount rate is different by 1% from management estimate the fair value of investment property
will be NIS 71 million lower or NIS 89 million higher.



| | 3) | Provisions for claims
| | -- | ---------------------



The provisions for legal claims
are recorded based on the estimates of the Company’s management (after consulting with legal counsel) as to the likelihood
that cash flows will be required to settle these liabilities, and at the discounted amounts of such cash flows.



The Company's assessments are
based on the Company's history in these cases, on the stage these claims are at and on the experience of the Company's legal advisers.

The outcome of the legal cases
in court could be different from the Company's assessments. See also note 33.



| | 4) | Income taxes and deferred taxes
| | -- | -------------------------------



The Company recognizes liabilities
for anticipated tax exposures based on estimates of whether additional taxes will be due. Where the final outcome of these matters
differs from the amounts that were recorded, such differences will impact the current and deferred income tax assets and liabilities
in the period in which such determination is made.



47







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
4 – CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (continued):



In addition, the Company recognizes
deferred tax assets and tax liabilities based on the difference between the carrying value of such assets and liabilities and their
amount for tax purposes. The Company continually assesses the recoverability of deferred tax assets, based on historical taxable
income, expected taxable income, the expected timing of the reversals of temporary differences and the application of tax planning
strategies. If the Company is unable to generate sufficient future taxable income, or actual results differ from its other assumptions,
the Company might be required to reduce its deferred tax assets or to increase its deferred tax liabilities, which will increase
its effective tax rate, and negatively affect its results.



| | 5) | Property, plant and equipment
| | -- | -----------------------------



Property,
plant and equipment also represent a significant proportion of the Company’s total assets. Therefore the estimates and assumptions
made to determine their carrying value and related depreciation are critical to the Group’s financial position and performance.



The useful
lives of the Company's assets are determined by management at the time the asset is acquired and reviewed at least annually for
appropriateness. The lives are based on historical experience with similar assets as well as anticipation of future events, which
may impact their life, such as changes in technology.



NOTE
5 – SEGMENT INFORMATION:



The Company
includes segment information according to IFRS 8. The Company's chief operating decision maker (CODM), Mr. David Wiessman, reviews
the Company's internal reports in order to evaluate performance and allocate resources. Company's management has set the operating
segments based on the internal reports.



The Company
presents four reportable segments: (1) Fueling and Commercial sites, (2) Supermarkets, (3) Real estate, (4) Non-food (Retail and
Wholesale). Segments that do not meet the quantitative thresholds consist the cellular activity and the company's share in Diners
Club Israel (issuance and clearance of credit cards activity) and are presented under Other Activities. Virtually all of the Company's
activities are located in Israel.



The performance
of the operating segments is based on a measure of operating profit of the Company and its consolidated subsidiaries and Company's
share in net profit of equity method investees which the CODM reviews. This measurement basis excludes discontinued
operations. In addition, selling, general and administrative expenses of Head Quarters operations and financial income and expenses
are not included in the results of each of the operating segments.



Additional
data provided to the CODM apart from the data provided below is measured in a manner that corresponds to the method of measurement
used in the financial statements.



48







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
5 – SEGMENT INFORMATION (continued):



The
Company's operating segments consist of the following:



| | (1) | Fueling and Commercial sites – Through its subsidiary Dor
Alon the Company is engaged in the development, construction and operation of vehicle fueling stations, adjacent commercial centers
and independent convenience stores, marketing of fuel products and other products through the filling stations and convenience
stores and direct marketing of distillates to customers. The fueling and commercial sites segment is presented according to the
published financial statements of Dor Alon. In the reconciliation to the financial statements the Company reclassified the credit
card fees and includes the amortization of the excess of cost arising at the time of acquisition. As of December 31, 2013, Dor
Alon operated 206 fueling stations and 215 convenience stores in various formats.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Supermarkets – The Company operates the second largest food
retail chain in Israel. Through its subsidiary, Mega Retail Ltd. ("Mega Retail"), which operates supermarket branches,
the Company offers a wide range of food and beverage products and “Non-food” items, such as houseware, toys, small
electrical appliances, computers and computer accessories, entertainment and leisure products and textile products and “Near-Food”
products, such as health and beauty aids, products for infants, cosmetics and hygiene products. As of December 31, 2013, Mega Retail
operates 213 supermarkets. This segment also includes properties owned through BSRE and leased out to the supermarket operation
of Mega.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | Non-Food (Retail and Wholesale) – Mostly through its subsidiary,
BEE Group Retail Ltd. ("BEE Group"), the Company is engaged in Non-Food retail and wholesale activities. As of December
31, 2013, The Company operated 131 Non-Food Retail outlets, some through franchisees, with specialties in houseware and home textile
and infant. In the reconciliation to the financial statements of the Company includes the impairment of goodwill in the amount
of NIS 4.5 million. This segment also includes properties owned through BSRE and leased out to the Non-Food operation.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | Real Estate – Through its subsidiary BSRE the Company is
engaged in generating yield from commercial centers, logistics centers and offices, land for the purpose of capital appreciation
and deriving long-term yield as well as in the development of the "Wholesale Market" residency project in Tel-Aviv. (see
note 34c)
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (5) | Other – The Company is engaged in
cellular "MVNO" activities through its subsidiary Alon Cellular Ltd. The Company is also engaged in issuance and clearance
of credit cards and grant of credit through its associate Diners Club Israel Ltd. (in 2013 the Company's share in Diners profit
amounted to NIS 20 million). In the reconciliation to the financial statements the Company included the amortization of the excess
of cost arising at the time of acquisition (in 2013 the amortization amounted to NIS 11.2 million).The activities
in the Other segment include activities aimed to customer preservation and loyalty in the rest of the segments.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



49







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
5 – SEGMENT INFORMATION(continued):



|                                                                                                               |  | Fueling and
    commercial sites |           |  | Supermarkets |  |           | Non - food
    Retail and
    wholesale |  |  | Real estate |   |  | Other
    activities |        |  | Adjustments |  |         | Total
    consolidated | 
|-------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | --------- |  | ------------ |  | --------- | --------------------------------------- |  |  | ----------- | - |  | -------------------- | ------ |  | ----------- |  | ------- | ---------------------- | 
|                                                                                                               |  | NIS
    in thousands             |          
|                                                                                                               |  |                                  |           |  |              |  |           |                                         |  |  |             |   |  |                      |        |  |             |  |         |                        | 
|Year ended December 31, 2013:                                                                                  |  |                                  |           |  |              |  |           |                                         |  |  |             |   |  |                      |        |  |             |  |         |                        | 
|Net segment revenues                                                                                           |  |                                  | 5,140,486 |  |              |  | 6,329,469 |                                         |  |  | 333,691     |   |  |                      | 38,369 |  |             |  | 44,325  |                        | 
|Inter segment revenues                                                                                         |  |                                  | 39,385    |  |              |  | -         |                                         |  |  | 27,467      |   |  |                      | -      |  |             |  | 2,577   |                        | 
|Net revenues                                                                                                   |  |                                  | 5,179,871 |  |              |  | 6,329,469 |                                         |  |  | 361,158     |   |  |                      | 38,369 |  |             |  | 46,902  |                        | 
|Depreciation and amortization                                                                                  |  |                                  | 88,142    |  |              |  | 157,605   |                                         |  |  | 11,820      |   |  |                      | -      |  |             |  | 4,551   |                        | 
|Operating
    profit (loss) before other gains and losses net and changes in fair value of investment property |  |                                  | 134,751   |  |              |  | 60,437    |                                         |  |  | (20,027     | ) |  |                      | 18,604 |  |             |  | (35,296 | )                      | 
|Segment profit(loss)                                                                                           |  |                                  | 138,566   |  |              |  | 43,937    |                                         |  |  | (21,239     | ) |  |                      | 75,015 |  |             |  | (11,745 | )                      | 
|Unallocated corporate expenses                                                                                 |  |                                  |           |  |              |  |           |                                         |  |  |             |   |  |                      |        |  |             |  |         |                        | 
|Financial expenses, net                                                                                        |  |                                  |           |  |              |  |           |                                         |  |  |             |   |  |                      |        |  |             |  |         |                        | 
|Income before taxes on income                                                                                  |  |                                  |           |  |              |  |           |                                         |  |  |             |   |  |                      |        |  |             |  |         |                        | 
|                                                                                                               |  |                                  |           |  |              |  |           |                                         |  |  |             |   |  |                      |        |  |             |  |         |                        | 
|Year ended December 31, 2012:                                                                                  |  |                                  |           |  |              |  |           |                                         |  |  |             |   |  |                      |        |  |             |  |         |                        | 
|Net segment revenues                                                                                           |  |                                  | 5,773,398 |  |              |  | 6,552,909 |                                         |  |  | 321,116     |   |  |                      | 30,569 |  |             |  | 7,185   |                        | 
|Inter segment revenues                                                                                         |  |                                  | 41,197    |  |              |  | -         |                                         |  |  | 29,458      |   |  |                      | -      |  |             |  | -       |                        | 
|Net revenues                                                                                                   |  |                                  | 5,814,595 |  |              |  | 6,552,909 |                                         |  |  | 350,574     |   |  |                      | 30,569 |  |             |  | 7,185   |                        | 
|Depreciation
    and amortization                                                                              |  |                                  | 87,808    |  |              |  | 167,464   |                                         |  |  | 11,438      |   |  |                      | -      |  |             |  | 2,099   |                        | 
|Operating
    profit (loss) before other gains and losses net and changes in fair value of investment property |  |                                  | 145,527   |  |              |  | 126,231   |                                         |  |  | (12,072     | ) |  |                      | 17,197 |  |             |  | (33,628 | )                      | 
|Segment profit (loss)                                                                                          |  |                                  | 149,534   |  |              |  | 137,036   |                                         |  |  | (15,450     | ) |  |                      | 99,302 |  |             |  | (9,887  | )                      | 
|Unallocated corporate expenses                                                                                 |  |                                  |           |  |              |  |           |                                         |  |  |             |   |  |                      |        |  |             |  |         |                        | 
|Financial expenses, net                                                                                        |  |                                  |           |  |              |  |           |                                         |  |  |             |   |  |                      |        |  |             |  |         |                        | 
|Income before taxes on income                                                                                  |  |                                  |           |  |              |  |           |                                         |  |  |             |   |  |                      |        |  |             |  |         |                        | 
|                                                                                                               |  |                                  |           |  |              |  |           |                                         |  |  |             |   |  |                      |        |  |             |  |         |                        | 
|Year ended December 31, 2011:                                                                                  |  |                                  |           |  |              |  |           |                                         |  |  |             |   |  |                      |        |  |             |  |         |                        | 
|Net segment revenues                                                                                           |  |                                  | 5,301,865 |  |              |  | 6,723,845 |                                         |  |  | 289,045     |   |  |                      | 31,021 |  |             |  | -       |                        | 
|Inter segment revenues                                                                                         |  |                                  | 36,087    |  |              |  | -         |                                         |  |  | 31,810      |   |  |                      | -      |  |             |  | -       |                        | 
|Net revenues                                                                                                   |  |                                  | 5,337,952 |  |              |  | 6,723,845 |                                         |  |  | 320,855     |   |  |                      | 31,021 |  |             |  | -       |                        | 
|Depreciation
    and amortization                                                                              |  |                                  | 96,130    |  |              |  | 159,601   |                                         |  |  | 12,011      |   |  |                      | -      |  |             |  | -       |                        | 
|Operating
    profit (loss) before other gains and losses net and changes in fair value of investment property |  |                                  | 173,681   |  |              |  | 177,346   |                                         |  |  | (19,813     | ) |  |                      | 15,395 |  |             |  | 6,552   |                        | 
|Segment profit                                                                                                 |  |                                  | 173,578   |  |              |  | 169,697   |                                         |  |  | (28,952     | ) |  |                      | 57,307 |  |             |  | 20,369  |                        | 
|Unallocated corporate expenses                                                                                 |  |                                  |           |  |              |  |           |                                         |  |  |             |   |  |                      |        |  |             |  |         |                        | 
|Financial expenses, net                                                                                        |  |                                  |           |  |              |  |           |                                         |  |  |             |   |  |                      |        |  |             |  |         |                        | 
|Income before taxes on income                                                                                  |  |                                  |           |  |              |  |           |                                         |  |  |             |   |  |                      |        |  |             |  |         |                        | 



The Company does not regularly report any segment assets and
liabilities measure to the chief operating decision maker, see also note 2d.



50







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 6 - SUBSIDARIES



| | i) | Information about principal subsidiaries
| | -- | ----------------------------------------



Set out below are the Company's
principal subsidiaries at December 31, 2013. Unless otherwise stated, the subsidiaries as listed below have share capital consisting
solely of ordinary shares, which are held directly by the Company and the proportion of ownership interests held equals to the
voting rights held by Company.



|Name of
        Entity                |  | Principal
        activities                                                        |  | % of Ownership
        by the group
|------------------------------------- |  | ----------------------------------------------------------------------------------- |  | -----------------------------------
|Dor Alon Energy in Israel (1988)
Ltd. |  | Operation of fueling stations and convenience stores, direct marketing and jet fuel |  | 78.43                              
|Blue Square Real Estate Ltd.          |  | Project development and generating yield                                            |  | 74.76                              



For information about principal
subsidiaries of the Company, see appendix.



All subsidiary undertakings
are included in the consolidation. The proportion of the voting rights in the subsidiary undertakings held directly by the Company
do not differ from the proportion of ordinary shares held. The Company further does not have any shareholdings in the preference
shares of subsidiary undertakings included in the group.



The total non-controlling interest
as of December 31, 2013 is NIS 430.8 million, of which NIS 209.7 million is for Dor Alon and NIS 207.3 million is attributed to
BSRE.



| | ii) | Summarized financial information on subsidiaries with material non- controlling interests
| | --- | -----------------------------------------------------------------------------------------



Set out below
are the summarized financial information for each subsidiary that has non- controlling interests that are material to the Company.



Summarized
balance sheet:



|                                         |  | Blue Square Real Estate* |           |   | Dor Alon    | 
|---------------------------------------- |  | ------------------------ | --------- | - | ----------- | 
|                                         |  | December 31              |           |   | December 31 | 
|                                         |  | 2012                     |           |   | 2013        | 
|                                         |  | NIS in thousands         |          
|Current                                  |  |                          |           |   |             | 
|Assets                                   |  |                          | 717,235   |   |             | 
|Liabilities                              |  |                          | 381,257   |   |             | 
|Total current net assets                 |  |                          | 335,978   |   |             | 
|                                         |  |                          |           |   |             | 
|Non- current                             |  |                          |           |   |             | 
|Assets                                   |  |                          | 3,222,928 |   |             | 
|Liabilities                              |  |                          | 2,078,234 |   |             | 
|Total non- current net assets            |  |                          | 1,144,694 |   |             | 
|Net assets                               |  |                          | 1,480,672 |   |             | 
|                                         |  |                          |           |   |             | 
|Non - controlling interest share %       |  |                          | 21.8      | % |             | 
|Non - controlling interest share         |  |                          | 322,490   |   |             | 
|Adjustments:                             |  |                          |           |   |             | 
|Adjustments for consolidation*           |  |                          | (138,837  | ) |             | 
|Fair value adjustments                   |  |                          | -         |   |             | 
|Adjusted non- controlling interest share |  |                          | 186,653   |   |             | 



51







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 6 - SUBSIDARIES (continued):



| | * | BSRE's assets include real estate and deferred taxes as presented in their financial statements
and for the purpose of the consolidation are annulled in the amount of approximately NIS 1,050 million and NIS 235 million respectively
(2012 - NIS 925 million and NIS 231 million).
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Summarized
income statements:



|                                                              |  | Blue Square Real Estate* |         |   | Dor Alon               | 
|------------------------------------------------------------- |  | ------------------------ | ------- | - | ---------------------- | 
|                                                              |  | Year ended December 31   |         |   | Year ended December 31 | 
|                                                              |  | 2012                     |         |   | 2013                   | 
|                                                              |  | NIS in thousands         |        
|                                                              |  |                          |         |   |                        | 
|Revenues                                                      |  |                          | 207,720 |   |                        | 
|Net income                                                    |  |                          | 199,228 |   |                        | 
|Other comprehensive income                                    |  |                          | 981     |   |                        | 
|Total comprehensive income                                    |  |                          | 200,209 |   |                        | 
|Non- controlling interest share-%                             |  |                          | 21.8    | % |                        | 
|Non- controlling interest share                               |  |                          | 43,606  |   |                        | 
|Adjustments:                                                  |  |                          |         |   |                        | 
|Adjustments for consolidation*                                |  |                          | (10,662 | ) |                        | 
|Fair value adjustments                                        |  |                          | -       |   |                        | 
|Adjusted net income attributable to non- controlling interest |  |                          | 32,944  |   |                        | 
|Dividends paid to non- controlling interest                   |  |                          | -       |   |                        | 



*Annulment of revenues and changes in fair value of investment property due to property in own use.



Summarized
cash flows:



|                                                                              |  | Blue Square Real Estate |          |   | Dor Alon                | 
|----------------------------------------------------------------------------- |  | ----------------------- | -------- | - | ----------------------- | 
|                                                                              |  | Year ended December 31, |          |   | Year ended December 31, | 
|                                                                              |  | 2012                    |          |   | 2013                    | 
|                                                                              |  | NIS in thousands        |         
|Cash flows from operating activities:                                         |  |                         |          |   |                         | 
|Income before taxes on income                                                 |  |                         | 237,265  |   |                         | 
|Income tax paid, net                                                          |  |                         | (13,964  | ) |                         | 
|Adjustments to net cash provided by operating activities                      |  |                         | (24,957  | ) |                         | 
|Net cash provided by operating activities                                     |  |                         | 198,344  |   |                         | 
|Net cash provided by investing activities                                     |  |                         | (296,062 | ) |                         | 
|Net cash used in financing activities                                         |  |                         | 294,891  |   |                         | 
|Increase (decrease) in cash and cash equivalents and bank overdrafts          |  |                         | 197,713  |   |                         | 
|Translation differences on cash and cash equivalents                          |  |                         | (1       | ) |                         | 
|Balance of cash and cash equivalents and bank overdrafts at beginning of year |  |                         | 9,360    |   |                         | 
|Balance of cash and cash equivalents and bank overdrafts at end of year       |  |                         | 206,532  |   |                         | 



The information
above is the amount before inter- company eliminations.



52







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 6 - SUBSIDARIES (continued):



| | iii) | Transaction with non- controlling interest
| | ---- | ------------------------------------------



On May 7, 2013, the Company
sold 3.5% of BSRE shares for NIS 49 million. The difference between the consideration and the carrying cost of NIS 20.9 million
after tax effect was directly carried to equity.



Disposal of interest in BSRE
without loss of control:



|                                                            |  | 2013             |       
|----------------------------------------------------------- |  | ---------------- | ------
|                                                            |  | NIS in thousands |       
|Consideration received from non- controlling interests      |  |                  | 48,864
|Carrying amount of group's interest disposed of             |  |                  | 20,926
|Gain on disposal recorded within parent's equity            |  |                  | 27,938
|Taxes on income                                             |  |                  | (6,984
|Gain on disposal recorded within parent's equity net of tax |  |                  | 20,954



NOTE 7 – INVESTMENTS ACCOUNTED
FOR USING EQUITY METHOD



The amounts
recognized in the consolidated statement of financial position are as follows:



|                     |  | December 31      |        
|-------------------- |  | ---------------- | -------
|                     |  | 2012             |        
|                     |  | NIS in thousands |        
|Associates:          |  |                  |        
|Diners               |  |                  | 203,529
|Other associates     |  |                  | 122,685
|                     |  |                  | 326,214
|                     |  |                  |        
|Joint ventures:      |  |                  |        
|City Mall Tel Aviv   |  |                  | 169,376
|Other joint ventures |  |                  | 431,055
|                     |  |                  | 600,431
|                     |  |                  | 926,645



The amounts
recognized in the consolidated income statements are as follows:



|                     |  | Year ended December 31 |       
|-------------------- |  | ---------------------- | ------
|                     |  | 2012                   |       
|                     |  | NIS in thousands       |       
|Associates:          |  |                        |       
|Diners*              |  |                        | 8,557 
|Other associates     |  |                        | 3,467 
|                     |  |                        | 12,024
|                     |  |                        |       
|Joint ventures:      |  |                        |       
|City Mall Tel Aviv   |  |                        | 57,125
|Other joint ventures |  |                        | 17,911
|                     |  |                        | 75,036
|                     |  |                        | 87,060



* The amounts recognized in the consolidated income statements includethe amortization of the excess of cost arising at the time of acquisition.



53







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 7 – INVESTMENTS ACCOUNTED
FOR USING EQUITY METHOD(continued):



| | a. | Investment in associates
| | -- | ------------------------



As of December
31, 2013 the Company has a material associate, Diners Club Israel Ltd (hereinafter - Diners Israel), which is held directly by
the Company and by a subsidiary of the Company, Dor Alon. The Company holds 36.75% of the issued share capital of Diners Israel
and Dor Alon holds 12.25% of the issued share capital of Diners Israel.



Diners
club Israel Ltd



On December 26, 2006, an agreement
(hereinafter – the original agreement) was signed between the Company, and Cal - Israel Credit Cards Ltd. (hereinafter –
CAL) and Diners Israel, a subsidiary of CAL.



CAL is engaged with the issuance
and clearance of VISA and Master-Card credit cards and is a principal member of the international organization of VISA and Master-card
which provides it the right to use these trademarks in Israel as well as the right to issue and clear credit cards in Israel.



Diners has an exclusive license
to use the brand Diners in Israel by "Diners Club International Ltd" and to operate, issuance and clearance services
of Diners cards.



CAL and Diners are also engaged
with grant of loans to their credit card holders.



According to the said agreement,
the Company jointly purchased from CAL 49% of the issued share capital of Diners in consideration for a total amount of approximately
NIS 21.3 million that was financed through a non-recourse loan provided by CAL to the Company. Both parties had the ability to
cancel the agreement in certain circumstances. The Company was entitled to receive income arising from the activity of the loyalty
program and to participate in the profit from activities of Diners (which is not part of the loyalty program) upon meeting some
milestones as specified in the original agreement.



The Company's investment in
Diners was accounted for as an option on Diners' shares. The fair value of the call option was determined based on the binomial
valuation model which took into account Diners' expected profits, earnings multiples of companies in Israel in this field of operations
and costs of recruiting and maintaining credit card users with the addition of the probability of the multiple scenarios of achieving
the milestones.



On May 25, 2011, the Company
agreed to an amendment to the original agreement (hereinafter – "the amendment").



The main features of the amendment
were the elimination of the right of CAL to annul the agreement and the transfer to Diners part of the operations of CAL with regard
to the grant of "off-bank loans" to Diners' credit card holders. The amendment increased the value of the option. On
June 30, 2011 the fair value of the option was estimated to be NIS 156 million.



In July 2011 the non- recourse
loan, in the amount of NIS 36.4 million, was repaid. Upon repayment of the non-recourse loan Diners became the Company's associated
company and thus it is accounted for by the equity method.



54







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 7 – INVESTMENTS ACCOUNTED
FOR USING EQUITY METHOD(continued):



Additionally, the amendment
set the terms as to the business relationship between the parties, including a cancellation mechanism in the event the loyalty
plan was cancelled by the Company.



Allocation of the excess of
cost of acquisition over the share in net book value of equity acquired of Diners Israel, was determined as follows : NIS 71 million
to customer relationships and contractual arrangements which will be amortized over 4.5 to 6.5 years and NIS 104 million to goodwill
which is not amortized (see also note 2c).



The financial statements of
Diners are prepared in accordance with International Financial Reporting Standards and with the directives and guidelines of the
Supervisor of Banks in Israel. The Company includes its share in the profits of Diners in accordance with International Financial
Reporting Standards as issued by the International Accounting Standards Board.



Diners is a private
company and there is no quoted market price available for its shares.



There are no contingent liabilities relating to the
Company's interest in the associate.



Summarized
financial information of Diners Club Israel Ltd.



Financial position statement
data (100%):



|                         |  | December 31      |        
|------------------------ |  | ---------------- | -------
|                         |  | 2012             |        
|                         |  | NIS in thousands |        
|Assets                   |  |                  |        
|Current assets           |  |                  | 815,000
|Non - current assets     |  |                  | 48,000 
|Total assets             |  |                  | 863,000
|                         |  |                  |        
|Liabilities              |  |                  |        
|Current liabilities      |  |                  | 565,000
|Non- current liabilities |  |                  | 98,000 
|Total liabilities        |  |                  | 663,000
|Net assets               |  |                  | 200,000



Summarized statement of income
(100%):



|                                     |  | For the year ended |        
|------------------------------------ |  | ------------------ | -------
|                                     |  | December 31        |        
|                                     |  | 2012               |        
|                                     |  | NIS in thousands   |        
|                                     |  |                    |        
|Revenues                             |  |                    | 138,000
|Operating profit                     |  |                    | 58,000 
|Income before taxes on income        |  |                    | 58,000 
|Taxes on income                      |  |                    | 18,000 
|Net income from continuing operation |  |                    | 40,000 
|Other comprehensive income           |  |                    | -      
|Total comprehensive income           |  |                    | 40,000 
|Dividends received from associate    |  |                    | -      



55







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 7 – INVESTMENTS ACCOUNTED
FOR USING EQUITY METHOD(continued):



Reconciliation
of summarized financial information:



Reconciliation
of the summarized financial information presented to the carrying amount of the Company's interest in Diners Club Israel Ltd.



|                                         |  | Year ended December 31 |        
|---------------------------------------- |  | ---------------------- | -------
|                                         |  | 2012                   |        
|                                         |  | NIS in thousands       |        
|                                         |  |                        |        
|Net assets at the beginning of the year: |  |                        | 160,000
|Profit for the year                      |  |                        | 40,000 
|Closing net assets:                      |  |                        | 200,000
|Interest in associate-%                  |  |                        | 49     
|Interest in associate                    |  |                        | 98,000 
|Fair value adjustments                   |  |                        | 1,312  
|Goodwill                                 |  |                        | 104,217
|Carrying value                           |  |                        | 203,529



| | b. | Investment in joint ventures
| | -- | ----------------------------



The Company holds 50% of City
Mall Tel Aviv, a principle joint venture, through its subsidiary BSRE. The shares of City Mall Tel Aviv are unlisted and there
is no quoted market price available for its shares.



In addition BSRE has immaterial
joint ventures which operate real estate for internal use and third party use and Dor Alon has certain immaterial joint ventures
which operate fuel stations and commercial centers (see appendix to the financial statements).



City Mall Tel Aviv Ltd.



City Mall Tel Aviv Ltd. (the
Mall Company) was established as a jointly controlled entity by BSRE and Gindi Group under the construction project of the wholesale
market complex and according to a Memorandum of Understandings dated April 15, 2010 (the MOU) that regulates the relations between
BSRE and Gindi group in all that concerns the wholesale market in Tel Aviv (see note 34d).



| | a) | Completion of purchasing the leasehold rights in the real estate
| | -- | ----------------------------------------------------------------



In 2012, the purchase of the
leasehold rights in the real estate of the wholesale market project was completed. As of December 31, 2012, the Mall Company paid
the entire consideration for the leasehold rights in the real estate designated for establishing the commercial complex pursuant
to purchase agreements signed between the parties in a total amount of NIS 394 million (the Company's share 50%). The leasehold
rights are for the period ending August 31, 2099. Regarding the loan agreements used to finance the purchase see note 34c.



56







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 7 – INVESTMENTS ACCOUNTED
FOR USING EQUITY METHOD(continued):



| | c. | Summarized financial information of City Mall Tel Aviv
| | -- | ------------------------------------------------------



Financial position statement
data (100%):



|                        |  | December 31      |        
|----------------------- |  | ---------------- | -------
|                        |  | 2012             |        
|                        |  | NIS in thousands |        
|Assets:                 |  |                  |        
|Current assets          |  |                  | 3,744  
|Non-current assets      |  |                  | 697,607
|                        |  |                  | 701,351
|Liabilities:            |  |                  |        
|Current liabilities     |  |                  | 37,598 
|Non-current liabilities |  |                  | 519,185
|                        |  |                  | 556,783
|Net Assets              |  |                  | 144,568



Summarized
statement of income (100%):



|                                                            |  | Year ended December 31 |        
|----------------------------------------------------------- |  | ---------------------- | -------
|                                                            |  | 2012                   |        
|                                                            |  | NIS in thousands       |        
|                                                            |  |                        |        
|Revenues-increase in fair value of investment property, net |  |                        | 174,277
|Taxes on income                                             |  |                        | 37,796 
|Net income                                                  |  |                        | 114,251
|Other comprehensive income                                  |  |                        | -      
|Total comprehensive income                                  |  |                        | 114,251
|Dividends received from associate                           |  |                        | -      



Reconciliation
of summarized financial information:



Reconciliation of the summarized
financial information presented to the carrying amount of the Company's interest in City Mall Tel Aviv



|                            |  | Year ended December 31 |        
|--------------------------- |  | ---------------------- | -------
|                            |  | 2012                   |        
|                            |  | NIS in thousands       |        
|                            |  |                        |        
|Net assets                  |  |                        | 144,568
|Interest in joint venture-% |  |                        | 50     
|Interest in joint venture   |  |                        | 72,284 
|Loans granted by BSRE       |  |                        | 97,092 
|Carrying value              |  |                        | 169,376



57







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 8 – DISPOSAL GROUP CLASSIFIED
AS HELD FOR SALE



Kfar
Hasha'ashuim Marketing Ltd. ("Kfar")



In December 2012, the
Company resolved to realize its investment in Kfar which operates the leisure and toy activity of the Company under the non-food
segment, and as of December 31, 2013, operates 83 stores, mostly through franchisees. As of December 31, 2012, Kfar was classified
as a disposal group held for sale and as a discontinued operation.



In February 2014, BEE
Group completed the sale of 65% of its holdings in Kfar Hasha'shuim for NIS 13 million. This consideration is payable over
a period of up to 5 years; it is linked to the CPI and bears interest of 3%. BEE Group granted the acquirer (the CEO of Kfar) an
option to purchase its remaining holdings in Kfar for NIS 7 million, within two years from closing the transaction (the Call option)
and the acquirer granted Bee Group an option to sell him the remaining investment for the same amount at the end of the two years,
for a period of six months. According to the agreement, if Kfar will be held in the future by a public entity, the Call Option
can be settled in shares of that entity, instead of cash. In addition, the remaining consideration which has not yet been paid
to BEE Group can also be paid in shares of such public entity, provided that the total holdings of Bee Group in the said public
entity will not exceed 20%.



Under the agreement, the
previous agreement with the CEO of Kfar was cancelled; under the cancelled agreement BEE Group sold 10% of Kfar's shares to the
CEO. The Company also provided a guarantee of up to NIS 47 million in respect of credit lines of Kfar. The acquirer committed to
provide an amount which exceeds the debt withdrawn from the bank by NIS 5 million as collateral for the credit liens. In addition,
the acquirer committed to decrease the amount of debt to the bank every year. The guarantee provided to the bank by the Company
will be removed once the acquirer completes the purchase of all shares.



The results of Kfar for
the years ended December 31, are as follows:



|                                               |  | 2011             |         |   | 2012 |  |         | 2013 | 
|---------------------------------------------- |  | ---------------- | ------- | - | ---- |  | ------- | ---- | 
|                                               |  | NIS in thousands |        
|Revenues                                       |  |                  | 136,808 |   |      |  | 115,214 |      | 
|Expenses                                       |  |                  | 124,867 |   |      |  | 91,906  |      | 
|Gross profit                                   |  |                  | 11,941  |   |      |  | 23,308  |      | 
|Selling, general and administrative expenses   |  |                  | (28,371 | ) |      |  | (35,956 | )    | 
|Other losses                                   |  |                  | -       |   |      |  | -       |      | 
|Finance expenses                               |  |                  | (4,076  | ) |      |  | (4,820  | )    | 
|Loss before taxes from discontinued operations |  |                  | (20,506 | ) |      |  | (17,468 | )    | 
|Tax benefit (taxes on income)                  |  |                  | 1,897   |   |      |  | (5,000  | )    | 
|Loss from discontinued operations              |  |                  | (18,609 | ) |      |  | (22,468 | )    | 



| | * | During 2013 the Company impaired goodwill in the amount of NIS 14.1 million in accordance with
the fair value less cost to sell.
| | - | --------------------------------------------------------------------------------------------------------------------------------



58







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 8 – DISPOSAL GROUP CLASSIFIED
AS HELD FOR SALE(continued):



The major classes of assets
and liabilities of Kfar classified as held for sale as at December 31, 2013 are, as follows:



|                                                          |  | December 31      |       
|--------------------------------------------------------- |  | ---------------- | ------
|                                                          |  | 2013             |       
|                                                          |  | NIS in thousands |       
|Assets                                                    |  |                  |       
|Cash and cash equivalents                                 |  |                  | 1,017 
|Trade receivables                                         |  |                  | 58,119
|Other current assets                                      |  |                  | 9,505 
|Inventories                                               |  |                  | 23,330
|Intangible assets, net                                    |  |                  | 7,195 
|Assets of disposal group classified as held for sale      |  |                  | 99,166
|                                                          |  |                  |       
|Liabilities                                               |  |                  |       
|Credit and loans from banks and others                    |  |                  | 46,210
|Trade payables                                            |  |                  | 35,787
|Other current liabilities                                 |  |                  | 3,559 
|Liabilities of disposal group classified as held for sale |  |                  | 85,556
|                                                          |  |                  |       
|Net assets directly associated with disposal group        |  |                  | 13,610



The net cash flows incurred
by Kfar, are as follows:



|                        |  | Year ended December 31, |       
|----------------------- |  | ----------------------- | ------
|                        |  | 2011                    |       
|                        |  | NIS in thousands        |       
|Operating               |  |                         | (6,464
|Investing               |  |                         | (557  
|Financing               |  |                         | 4,414 
|Net cash flow (outflow) |  |                         | (2,607



59







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 9 – CASH, CASH EQUIVALENTS AND
DEPOSITS:



a. Cash and cash equivalents



|                                                               |  | December 31      |        
|-------------------------------------------------------------- |  | ---------------- | -------
|                                                               |  | 2012             |        
|                                                               |  | NIS in thousands |        
|Cash at bank and on hand                                       |  |                  | 33,619 
|Bank deposits with original maturities of three months or less |  |                  | 228,055
|                                                               |  |                  | 261,674



Cash, cash equivalents and bank
overdrafts include the following for the purposes of the statement of cash flows:



|                                                      |  | December 31      |        
|----------------------------------------------------- |  | ---------------- | -------
|                                                      |  | 2012             |        
|                                                      |  | NIS in thousands |        
|Cash and cash equivalents                             |  |                  | 261,674
|Cash at banks attributable to discontinued operations |  |                  | 2,305  
|                                                      |  |                  | 263,979
|Bank overdrafts, see note 21                          |  |                  | (4,934 
|                                                      |  |                  | 259,045



b. Short-term deposits



|                                               |  | December 31      |       
|---------------------------------------------- |  | ---------------- | ------
|                                               |  | 2012             |       
|                                               |  | NIS in thousands |       
|Deposits at suppliers (1)                      |  |                  | 69,406
|Short term deposits relating to debentures (2) |  |                  | 19,026
|Bank deposits (3)                              |  |                  | 7,714 
|                                               |  |                  | 96,146



| | (1) | Linked to the U.S. Dollar, bearing interest of LIBOR plus 2%. Deposits used as a security for suppliers.
| | --- | --------------------------------------------------------------------------------------------------------

| | (2) | Deposit used as security for debentures – see also note 21.
| | --- | -----------------------------------------------------------

| | (3) | Bearing interest of 0.9%.
| | --- | -------------------------



60







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 10 – INVESTMENT IN SECURITIES



| | a. | Comprised as follows:
| | -- | ---------------------



|                                                              |  | December 31      |        
|------------------------------------------------------------- |  | ---------------- | -------
|                                                              |  | 2012             |        
|                                                              |  | NIS in thousands |        
|                                                              |  |                  |        
|Available for sale financial assets – current                 |  |                  | 237,955
|Financial assets at fair value through profit or loss-current |  |                  | 87,358 
|Available for sale financial assets – non-current             |  |                  | 45,397 
|                                                              |  |                  | 370,710



| | b. | Composition per type of security:
| | -- | ---------------------------------



|                  |  | December 31      |        
|----------------- |  | ---------------- | -------
|                  |  | 2012             |        
|                  |  | NIS in thousands |        
|                  |  |                  |        
|Debt securities   |  |                  | 285,557
|Equity securities |  |                  | 85,153 
|                  |  |                  | 370,710



| | c. | Available for sale financial assets
| | -- | -----------------------------------



|                                                |  | 2011             |          |   | 2012 |  |          | 2013 | 
|----------------------------------------------- |  | ---------------- | -------- | - | ---- |  | -------- | ---- | 
|                                                |  | NIS in thousands |         
|                                                |  |                  |          |   |      |  |          |      | 
|At January 1                                    |  |                  | 213,986  |   |      |  | 230,642  |      | 
|Purchases                                       |  |                  | 122,646  |   |      |  | 178,149  |      | 
|Proceeds                                        |  |                  | (106,925 | ) |      |  | (147,937 | )    | 
|Transfers to or from other comprehensive income |  |                  | 1,090    |   |      |  | 19,632   |      | 
|Attributed to statements of income              |  |                  | (155     | ) |      |  | 2,866    |      | 
|At December 31                                  |  |                  | 230,642  |   |      |  | 283,352  |      | 



In 2011, 2012 and 2013 the Company
removed profits from equity into the income statements in the amount of NIS 1,480 thousand, NIS 2,906 thousands and NIS 3,298 thousands,
respectively.



61







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 10 – INVESTMENT IN SECURITIES(continued):



| | d. | Financial assets at fair value through profit or loss
| | -- | -----------------------------------------------------



|                                |  | December 31      |       
|------------------------------- |  | ---------------- | ------
|                                |  | 2012             |       
|                                |  | NIS in thousands |       
|                                |  |                  |       
|Debt securities                 |  |                  | 62,899
|Investment in equity securities |  |                  | 24,459
|Total                           |  |                  | 87,358



NOTE 11 – DERIVATIVE FINANCIAL
INSTRUMENTS:



|                                                                          |  |                                      |  | December
    31      |      
|------------------------------------------------------------------------- |  | ------------------------------------ |  | -------------------- | -----
|                                                                          |  |                                      |  | 2012                 |      
|Derivative financial                                                      |  | Statement of financial
    position  |  | NIS
    in thousands |      
|instruments                                                               |  | Item                                 |  | Assets               |      
|Forward contracts over the                                                |  |                                      |  |                      |      
|Israeli CPI (a)                                                           |  | Derivative
    financial instruments |  |                      | -    
|Foreign exchange contracts
    (b)                                        |  | Derivative financial
    instruments |  |                      | -    
|Embedded derivatives:                                                     |  |                                      |  |                      |      
|Rent agreements                                                           |  | Derivative financial
    instruments |  |                      | 1,790
|Conversion component embedded in the convertible debentures
(see note 21) |  | Convertible debentures               |  |                      | -    
|Total                                                                     |  |                                      |  |                      | 1,790



| | (a) | The notional principal amounts of the outstanding forward contracts over the Israeli CPI at
                                                                   December 31, 2013 were approximately NIS 430 million.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | The notional amount of open forward foreign exchange
contracts (up to 3 months, mostly 2 months) as of December 31, 2012 and 2013 are $95.6 million and $105.7 million respectively.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



NOTE 12 – TRADE RECEIVABLES:



|                                                    |  | December 31      |          
|--------------------------------------------------- |  | ---------------- | ---------
|                                                    |  | 2012             |          
|                                                    |  | NIS in thousands |          
|Trade receivables                                   |  |                  | 1,468,195
|Less: provision for impairment of trade receivables |  |                  | (52,367  
|                                                    |  |                  | 1,415,828



As of December 31, 2013, trade
receivables of NIS 29,269 thousands (2012: NIS 30,766 thousands) were past due but not impaired. These relate to a number of independent
customers for whom there is no recent history of default. Approximately 65% of these past-due receivables are overdue for up to
3 months.



62







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 12 – TRADE RECEIVABLES(continued):



As of December 31, 2013, trade
receivables of NIS 117,973 thousands (2012: NIS 124,815 thousands) were impaired and provided for. The amount of the provision
was NIS 38,273 thousands as of December 31, 2013 (2012: NIS 52,367 thousands). It was assessed that a portion of the receivables
is expected to be recovered. The ageing of these receivables is over 12 months.



Movements in the Company's provisions
for impairment of trade receivables are as follows:



|                                                                     |  | December 31      |        
|-------------------------------------------------------------------- |  | ---------------- | -------
|                                                                     |  | 2012             |        
|                                                                     |  | NIS in thousands |        
|At January 1                                                         |  |                  | 55,528 
|Provisions made during the period                                    |  |                  | 10,821 
|Unused amounts reversed                                              |  |                  | (712   
|Receivable written off during the year as uncollectible              |  |                  | (1,340 
|Transferred to assets of disposal groups classified as held for sale |  |                  | (11,930
|At December 31                                                       |  |                  | 52,367 



The creation and release of
provisions for impaired receivables has been included in the statement of income within "Selling, general and administrative
expenses." Amounts charged to the allowance account are generally written off when there is no expectation of recovering additional
cash.



The maximum exposure to credit
risk at the reporting date is the carrying value of each class of receivables mentioned above. See also note 3, credit risk, as
to collateral held as security.



The fair value of trade receivables
is usually identical or close to their carrying value.



NOTE 13 – OTHER RECEIVABLES:



|                                            |  | December 31      |        
|------------------------------------------- |  | ---------------- | -------
|                                            |  | 2012             |        
|                                            |  | NIS in thousands |        
|Prepayments                                 |  |                  | 16,621 
|Related parties , see note 36               |  |                  | 131,396
|Government authorities                      |  |                  | 5,581  
|Advances to suppliers and others            |  |                  | 6,450  
|Current maturities of loans receivable      |  |                  | 27,545 
|Receivables in respect of gift certificates |  |                  | 20,185 
|Other                                       |  |                  | 63,480 
|                                            |  |                  | 271,258



The fair value of other receivables
is usually identical or close to their carrying value.



63







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 14 – INVENTORIES:



| | a) | Inventories presented in current assets:
| | -- | ----------------------------------------



|                                       |  | December 31      |        
|-------------------------------------- |  | ---------------- | -------
|                                       |  | 2012             |        
|                                       |  | NIS in thousands |        
|Fuel and oil products                  |  |                  | 105,447
|Consumer (including non-food) products |  |                  | 539,362
|                                       |  |                  | 644,809



| | b) | Real estate inventories (presented as non-current assets)
| | -- | ---------------------------------------------------------



Representing
approximately a 240-dunam parcel of property in Point-Wells near Seattle, Washington, USA, acquired by BSRE from a related party
(see note 36a.b); BSRE has also signed a development agreement with the related party to initiate and promote a detailed plan for
the approval of the building of at least 2,000 residential units on the land.



BSRE is operating
to change the zoning of the land from heavy industrial use to urban center zoning, and so far has received an "in principal"
approval for the zoning change from the Snohomish County.



Based on the
new zoning, BSRE filed with the redistrict committee a detailed plan that includes the construction of three residential complexes
at a scope of 3,000 residential units public premises on the real estate and development plans (the detailed plan)., the county
approved 2,700 residential units as Urban Village zoning. BSRE appealed this decision and on January 7, 2013, the appellate court
determined that BSRE is entitled to promote the real estate development according to the detailed plan despite the county's decision.
The opponents to the detailed plan applied to the supreme court of Washington State seeking an additional hearing on the ruling
of the appellate court. Such hearing occurred on October 24, 2013, in the Washington State Supreme Court. On April 10, 2014, the
State of Washington Supreme Court upheld that BSRE has a vested right to the development of the land under the designation of "urban
center", which shall include the construction of 3,000 housing units, public areas and development programs. As of the date
of this report, the Company is unable to estimate the exact duration of time it will take to receive the approval of the competent
authorities for exercising the construction rights under the plan which determined the designation of land as an “urban center”.



Through
December 31, 2013, BSRE invested U.S. $6.4 million (NIS 22.2 million) in the development of property rights and capitalized
borrowing costs of U.S. $4.9 million (NIS 17.0 Million) (in 2012: U.S. $8.8 million and in 2011 U.S. $6.7 million).



The property
serves primarily as a plant for storage and distribution of fuel and oils by the related party, and is rented to the related party
for a period of up to 10 years. According to the development agreement, all demolition and contamination cleanups required for
the land will be the responsibility of the related party and on its account; the related party will also compensate BSRE for any
damages incurred in connection with such activities. In case BSRE was to sell the land the related party will participate in the
consideration net of costs as defined in the agreement, see note 36a.b.



64







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
15 – PROPERTY AND EQUIPMENT:



| | a. | Composition of assets and accumulated depreciation, grouped by major classifications, and changes
therein are as follows:
| | -- | -------------------------------------------------------------------------------------------------------------------------



|                                                   |  | Land, buildings and leasehold improvements (see d. below) |           |   | Fueling station equipment |  |         | Motor vehicles |  |  | Furniture, equipment and installations |   |  | Total |          
|-------------------------------------------------- |  | --------------------------------------------------------- | --------- | - | ------------------------- |  | ------- | -------------- |  |  | -------------------------------------- | - |  | ----- | ---------
|                                                   |  | NIS in thousands                                          |          
|Cost:                                              |  |                                                           |           |   |                           |  |         |                |  |  |                                        |   |  |       |          
|Balance at January 1, 2013                         |  |                                                           | 2,820,928 |   |                           |  | 270,152 |                |  |  | 23,874                                 |   |  |       | 1,432,692
|Additions                                          |  |                                                           | 65,541    |   |                           |  | 36,831  |                |  |  | 1,670                                  |   |  |       | 35,834   
|Disposals                                          |  |                                                           | (17,969   | ) |                           |  | -       |                |  |  | (2,446                                 | ) |  |       | (33,104  
|Transfer to investment property                    |  |                                                           | (20,580   | ) |                           |  | -       |                |  |  | -                                      |   |  |       | -        
|Balance at December 31, 2013                       |  |                                                           | 2,847,920 |   |                           |  | 306,983 |                |  |  | 23,098                                 |   |  |       | 1,435,422
|Accumulated depreciation:                          |  |                                                           |           |   |                           |  |         |                |  |  |                                        |   |  |       |          
|Balance at January 1, 2013                         |  |                                                           | 830,051   |   |                           |  | 46,335  |                |  |  | 14,180                                 |   |  |       | 983,663  
|Additions                                          |  |                                                           | 81,180    |   |                           |  | 27,898  |                |  |  | 3,482                                  |   |  |       | 111,269  
|Disposals                                          |  |                                                           | (11,689   | ) |                           |  | -       |                |  |  | (1,845                                 | ) |  |       | (23,691  
|Transfer to investment property                    |  |                                                           | (565      | ) |                           |  | -       |                |  |  | -                                      |   |  |       | -        
|Balance at December 31, 2013                       |  |                                                           | 898,977   |   |                           |  | 74,233  |                |  |  | 15,817                                 |   |  |       | 1,071,241
|Impairment of property and equipment (see b below) |  |                                                           | (18,071   | ) |                           |  | -       |                |  |  | -                                      |   |  |       | -        
|Net book value at December 31, 2013                |  |                                                           | 1,930,872 |   |                           |  | 232,750 |                |  |  | 7,281                                  |   |  |       | 364,181  



|                                                   |  | Land, buildings and leasehold improvements (see d. below) |           |   | Fueling stations equipment |  |         | Motor vehicles |  |  | Furniture, equipment and installations |   |  | Total |          
|-------------------------------------------------- |  | --------------------------------------------------------- | --------- | - | -------------------------- |  | ------- | -------------- |  |  | -------------------------------------- | - |  | ----- | ---------
|                                                   |  | NIS in thousands                                          |          
|Cost:                                              |  |                                                           |           |   |                            |  |         |                |  |  |                                        |   |  |       |          
|Balance at January 1, 2012                         |  |                                                           | 2,819,246 |   |                            |  | 237,380 |                |  |  | 23,933                                 |   |  |       | 1,428,690
|Additions                                          |  |                                                           | 71,729    |   |                            |  | 32,847  |                |  |  | 2,493                                  |   |  |       | 73,960   
|Disposals                                          |  |                                                           | (13,519   | ) |                            |  | (75     | )              |  |  | (2,552                                 | ) |  |       | (69,958  
|Transfer to and from investment property           |  |                                                           | (56,528   | ) |                            |  | -       |                |  |  | -                                      |   |  |       | -        
|Balance at December 31, 2012                       |  |                                                           | 2,820,928 |   |                            |  | 270,152 |                |  |  | 23,874                                 |   |  |       | 1,432,692
|Accumulated depreciation:                          |  |                                                           |           |   |                            |  |         |                |  |  |                                        |   |  |       |          
|Balance at January 1, 2012                         |  |                                                           | 743,815   |   |                            |  | 17,098  |                |  |  | 12,462                                 |   |  |       | 950,014  
|Additions                                          |  |                                                           | 105,959   |   |                            |  | 29,252  |                |  |  | 3,995                                  |   |  |       | 90,514   
|Disposals                                          |  |                                                           | (8,581    | ) |                            |  | (15     | )              |  |  | (2,277                                 | ) |  |       | (56,865  
|Transfer to investment property                    |  |                                                           | (11,142   | ) |                            |  | -       |                |  |  | -                                      |   |  |       | -        
|Balance at December 31, 2012                       |  |                                                           | 830,051   |   |                            |  | 46,335  |                |  |  | 14,180                                 |   |  |       | 983,663  
|Impairment of property and equipment (see b below) |  |                                                           | (18,121   | ) |                            |  | -       |                |  |  | -                                      |   |  |       | (3,618   
|Net book value at December 31, 2012                |  |                                                           | 1,972,756 |   |                            |  | 223,817 |                |  |  | 9,694                                  |   |  |       | 445,411  



65







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
15 – PROPERTY AND EQUIPMENT(continued):



| | b. | As to liens placed on assets, see note 35.
| | -- | ------------------------------------------

| | c. | Additions during the period – Property and equipment include property under construction
and capitalization of labor and finance expenses in an amount of NIS 4.4 million.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Capitalized lease payments in respect of long-term land leases from the Israeli Land administration
are as follows:
| | -- | -------------------------------------------------------------------------------------------------------------------



|                                                                                          |  | December 31      |        
|----------------------------------------------------------------------------------------- |  | ---------------- | -------
|                                                                                          |  | 2012             |        
|                                                                                          |  | NIS in thousands |        
|Capitalized leases for periods of 999 years                                               |  |                  | 3,984  
|Capitalized leases for periods ending between the years 2013 and 2056, as detailed below: |  |                  |        
|Leases for periods of under 10 years                                                      |  |                  | 6,560  
|Leases for periods of between 10 and 25 years                                             |  |                  | 18,746 
|Leases for periods of over 25 years                                                       |  |                  | 219,521
|                                                                                          |  |                  | 244,827
|                                                                                          |  |                  | 248,811



NOTE 16 – INVESTMENT PROPERTY:



The changes
in the carrying value of investment property for the years ended December 31, 2013 and 2012 respectively, are as follows:



|                                                                                           |  | 2012             |         |   | 2013 | 
|------------------------------------------------------------------------------------------ |  | ---------------- | ------- | - | ---- | 
|                                                                                           |  | NIS in thousands |        
|At January 1                                                                               |  |                  | 482,331 |   |      | 
|Transfer from property and equipment (b)                                                   |  |                  | 45,386  |   |      | 
|Transfer to and from assets held for sale (c)                                              |  |                  | (94,216 | ) |      | 
|Additions (d)                                                                              |  |                  | 76,066  |   |      | 
|Changes in fair value of investment property, net:                                         |  |                  |         |   |      | 
|Charged to increase in fair value of investment property, net in the income statements (e) |  |                  | 16,874  |   |      | 
|Changes in fair value of investment property transfer from property and equipment:         |  |                  |         |   |      | 
|Charged to other income (losses) (b)                                                       |  |                  | -       |   |      | 
|Charged to OCI                                                                             |  |                  | 13,025  |   |      | 
|At December 31                                                                             |  |                  | 539,466 |   |      | 



| | a) | All the Company's investment properties are located in Israel.
| | -- | --------------------------------------------------------------



| | b) | In 2013, due to two assets transferred from property and equipment. Decrease in fair value of investment
property, which transferred from property and equipment, is recognized in the income statements and increase in fair value of such
assets is recognized in OCI.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) | In the last quarter of 2013, after the purchasers did not complete the payments according to the date
set forth in the sale agreement, the sale of the asset was canceled and the property was classified to real estate.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



66







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 16 – INVESTMENT PROPERTY(continued):



| | d) | The additions in 2013, totaling NIS 123.7 million, include an amount of approximately NIS 69 million
in Hadar mall and an amount of NIS 41 million in Comverse (see note 34d). The additions in 2012, totaling NIS 76.1 million, include
an amount of NIS 19 million in Hadar mall and an amount of NIS 33 million in Comverse.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | e) | The changes in fair value in 2013 are due mainly to projects under construction (approximately NIS
25 million), and the reduction of discount rate at 0.25% in some of the commercial properties.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | f) | For details regarding liens and guarantees see note 35.
| | -- | -------------------------------------------------------



| | g) | Association in Israel – based on the current prices in an active market for similar property,
locations and conditions, and based on the discounted cash flows that are expected to arise from the assets. In certain assets
the discount rate was reduces by 0.25% compared to previous years. The range of discount rates used by the appraiser are 7.75%
- 12% per annum (mainly 7.75% - 8.25%).
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | h) | Rental revenue that has been recognized in the statements of income within revenues:
| | -- | ------------------------------------------------------------------------------------



|              |  | Year ended December 31 |       
|------------- |  | ---------------------- | ------
|              |  | 2012                   |       
|              |  | NIS in thousands       |       
|Rental income |  |                        | 30,985



| | i) | Break down of investment property at December 31, 2013 and 2012, by lease rights and ownership of
land:
| | -- | -------------------------------------------------------------------------------------------------------



|                                                                             |  | December 31,     |        
|---------------------------------------------------------------------------- |  | ---------------- | -------
|                                                                             |  | 2012             |        
|                                                                             |  | NIS in thousands |        
|Under ownership                                                              |  |                  | 253,138
|Finance lease from the Israel Lands Administration for a period of 999 years |  |                  | 7,260  
|Total                                                                        |  |                  | 260,398
|Finance lease from the Israel Lands Administration are as follows:           |  |                  |        
|Leases for periods of under 10 years                                         |  |                  | 168,350
|Leases for periods between 10-25 years                                       |  |                  | 25,824 
|Leases for periods of more than 25 years                                     |  |                  | 84,894 
|                                                                             |  |                  | 279,068
|                                                                             |  |                  | 539,466



| | j) | Capitalized borrowing costs:
| | -- | ----------------------------



The amount of borrowing costs capitalized
during the years ended December 31, 2013 and 2012 was NIS 5.2 million and NIS 17.4 million, respectively. The rate used to determine
the amount of borrowing costs eligible for capitalization was 4.8% in 2013 and 5.3% in 2012 (linked to the Israeli CPI).



67







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 16 – INVESTMENT PROPERTY(continued):



| | k) | Fair value of investment property
| | -- | ---------------------------------



The fair value of investment
property items is measured by external independent valuation specialists who are members of the Institute of Real Estate Appraisers
in Israel who possess recognized relevant professional training and ongoing experience on investment property in locations and
classifications that were valued.



Data on measurements of investment
property in level 3



Vacant plots of land



Fair value is measured using
valuation techniques while the valuation model is based on the net price per square meter of comparable properties deriving from
observable transactions in an active market including various adjustments such as size, location etc.



Rental properties



Fair value of investment property
is determined at least annually or when there are indications for changes in value (at the earlier) based on valuations carried
out by external independent valuation specialists with the adequate professional skills.



Fair value is measured using income
capitalization technique: the valuation model is based on the present value of the NOI estimate expected to derive from the property.
The valuation of real estate is based on the net annual cash flows capitalized at capitalization rate reflecting their specific
risks. When there are lease agreements, in respect of which the payments are other than the proper rental fees, adjustments are
made to reflect the rental payments at the end of the lease term.



The valuations take into account
the type of tenants actually occupying the leased property or the responsible parties for meeting the lease liabilities and the
remaining economic life of the property in those locations where such parameters are relevant.



The market value of the rental
data includes a wide range in all of the regions and uses and derives, among others, from the variance of the nature of the leased
property with respect to the age and the finish level of the various properties. For details on the capitalization rates, see b,
as above.



The fair value estimate will increase
if:



| | 1. | The market value of the rental payments will increase.
| | -- | ------------------------------------------------------

| | 2. | Cash flow capitalization rate will decrease.
| | -- | --------------------------------------------



Investment property under construction



Investment property under construction
is presented at fair value, on the date fair value can be reliably measured. As long as investment property cannot be valued, investment
property under construction will be presented at costs invested in the project. Valuation is based on the estimate of the investment
property fair value after construction is complete, net of the present value of the estimated construction costs expected to derive
for the purpose of its completion while taking into account the capitalization rate adjusted to the relevant and typical risks
of the property on the date construction is complete. Construction cost per square meter varies among the various projects according
to the designated use, finish level etc.



68







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 16 – INVESTMENT PROPERTY(continued):



The fair value estimate will
increase if:



| | 1. | Construction costs per square meter will decrease.
| | -- | --------------------------------------------------

| | 2. | The market value of the rental payments will increase.
| | -- | ------------------------------------------------------

| | 3. | Cash flow capitalization rate will decrease.
| | -- | --------------------------------------------



The key data that are not observable
in the market refer to the following factors:



| | 1) | The return rate of investment property, which is based or professional publications in the relevant
markets and comparison with similar transactions.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | Premium (discount) in respect of the quality of the building and rental conditions, which is based
on comparison with similar transactions.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------

| | 3) | Market value of rental payments (market rent) which is based or professional publications in the
relevant markets and comparison with similar transactions.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------



69







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 17 – INTANGIBLE ASSETS:



The composition
of intangible assets and the accumulated amortization thereon, grouped by major classifications, and changes therein in 2013 and
2012, are as follows:



|                                            |  |                      |         |   |          |  |          | Brand    |  |  |               |   |  |            |         |   |       | 
|------------------------------------------- |  | -------------------- | ------- | - | -------- |  | -------- | -------- |  |  | ------------- | - |  | ---------- | ------- | - | ----- | 
|                                            |  |                      |         |   |          |  |          | name and |  |  |               |   |  | Evacuation |         |   |       | 
|                                            |  |                      |         |   |          |  |          | trade    |  |  | Customer      |   |  | Fees and   |         |   |       | 
|                                            |  | Goodwill             |         |   | Software |  |          | marks    |  |  | relationships |   |  | Other      |         |   | Total | 
|                                            |  | NIS
    in thousands |        
|At January 1, 2012                          |  |                      |         |   |          |  |          |          |  |  |               |   |  |            |         |   |       | 
|Cost                                        |  |                      | 827,743 |   |          |  | 167,176  |          |  |  | 143,633       |   |  |            | 138,609 |   |       | 
|Accumulated amortization and impairment     |  |                      | -       |   |          |  | (110,946 | )        |  |  | (12,646       | ) |  |            | (27,683 | ) |       | 
|Net carrying amount                         |  |                      | 827,743 |   |          |  | 56,230   |          |  |  | 130,987       |   |  |            | 110,926 |   |       | 
|                                            |  |                      |         |   |          |  |          |          |  |  |               |   |  |            |         |   |       | 
|Year ended December 31, 2012:               |  |                      |         |   |          |  |          |          |  |  |               |   |  |            |         |   |       | 
|Opening net carrying amount                 |  |                      | 827,743 |   |          |  | 56,230   |          |  |  | 130,987       |   |  |            | 110,926 |   |       | 
|Additions                                   |  |                      | -       |   |          |  | 29,407   |          |  |  | 187           |   |  |            | -       |   |       | 
|Disposals                                   |  |                      | (1,880  | ) |          |  | (149     | )        |  |  | -             |   |  |            | -       |   |       | 
|Amortization charge                         |  |                      | -       |   |          |  | (24,580  | )        |  |  | (4,334        | ) |  |            | (16,585 | ) |       | 
|Transfer to assets of
    disposal group    |  |                      | (23,506 | ) |          |  | -        |          |  |  | -             |   |  |            | -       |   |       | 
|Net carrying amount                         |  |                      | 802,357 |   |          |  | 60,908   |          |  |  | 126,840       |   |  |            | 94,341  |   |       | 
|                                            |  |                      |         |   |          |  |          |          |  |  |               |   |  |            |         |   |       | 
|At December 31, 2012:                       |  |                      |         |   |          |  |          |          |  |  |               |   |  |            |         |   |       | 
|Cost                                        |  |                      | 802,357 |   |          |  | 196,263  |          |  |  | 143,820       |   |  |            | 138,609 |   |       | 
|Accumulated amortization and impairment     |  |                      | -       |   |          |  | (135,355 | )        |  |  | (16,980       | ) |  |            | (44,268 | ) |       | 
|Net carrying amount                         |  |                      | 802,357 |   |          |  | 60,908   |          |  |  | 126,840       |   |  |            | 94,341  |   |       | 
|                                            |  |                      |         |   |          |  |          |          |  |  |               |   |  |            |         |   |       | 
|Year ended December 31, 2013:               |  |                      |         |   |          |  |          |          |  |  |               |   |  |            |         |   |       | 
|Opening net carrying amount                 |  |                      | 802,357 |   |          |  | 60,908   |          |  |  | 126,840       |   |  |            | 94,341  |   |       | 
|Additions                                   |  |                      | -       |   |          |  | 9,503    |          |  |  | 158           |   |  |            | -       |   |       | 
|Amortization charge                         |  |                      | -       |   |          |  | (23,868  | )        |  |  | (4,781        | ) |  |            | (14,117 | ) |       | 
|Impairment                                  |  |                      | (4,500  | ) |          |  | -        |          |  |  | -             |   |  |            | -       |   |       | 
|Net carrying amount                         |  |                      | 797,857 |   |          |  | 46,543   |          |  |  | 122,217       |   |  |            | 80,224  |   |       | 
|                                            |  |                      |         |   |          |  |          |          |  |  |               |   |  |            |         |   |       | 
|At December 31, 2013:                       |  |                      |         |   |          |  |          |          |  |  |               |   |  |            |         |   |       | 
|Cost                                        |  |                      | 797,857 |   |          |  | 205,766  |          |  |  | 143,785       |   |  |            | 138,609 |   |       | 
|Accumulated amortization
    and impairment |  |                      | -       |   |          |  | (159,223 | )        |  |  | (21,568       | ) |  |            | (58,385 | ) |       | 
|Net carrying amount                         |  |                      | 797,857 |   |          |  | 46,543   |          |  |  | 122,217       |   |  |            | 80,224  |   |       | 



70







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 17 – INTANGIBLE ASSETS(continued):



| | a. | Amortization is included in the income statements within Selling, general and administrative
expenses. Impairment losses are presented in other gains or losses.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | Impairment tests for goodwill and indefinite live assets
| | -- | --------------------------------------------------------



Goodwill is allocated to six
identified groups of cash-generating units (CGUs).



The components of goodwill and
indefinite life intangible assets are as follows:



|                                           |  | December 31      |        
|------------------------------------------ |  | ---------------- | -------
|                                           |  | 2012             |        
|                                           |  | NIS in thousands |        
|Supermarkets                               |  |                  | 159,113
|Non - Food retail and wholesale:           |  |                  |        
|Houseware*                                 |  |                  | 111,179
|Fueling and Commercial sites:              |  |                  |        
|Goodwill – filling and commercial stations |  |                  | 500,065
|Goodwill – direct marketing                |  |                  | 18,000 
|Goodwill – jet fuel                        |  |                  | 14,000 
|Indefinite life – brand name               |  |                  | 86,033 
|                                           |  |                  | 888,390



| | * | Goodwill above includes an impairment of NIS 4.5 million
in the Houseware component.
| | - | ------------------------------------------------------------------------------------



The recoverable amount of a
CGU is determined based on value-in-use calculations. These calculations use pre-tax cash flow projections based on financial budgets
approved by management and management estimation covering a five-year period. Cash flows beyond the five-year period are extrapolated
using the estimated growth rates stated below.



The key assumptions used for
value in-use calculations are as follows:



|Segment               |  | Supermarkets |      |  | Non - Food retail 
and wholesale | 
|--------------------- |  | ------------ | ---- |  | -------------------------------- | 
|CGU                   |  | Supermarkets |      |  | Houseware                        | 
|                      |  | %            |     
|December 31, 2013:    |  |              |      |  |                                  | 
|Expected gross margin |  |              | 26.9 |  |                                  | 
|Growth rate (1)       |  |              | 0    |  |                                  | 
|Discount rate (2)     |  |              | 10.3 |  |                                  | 
|                      |  |              |      |  |                                  | 
|December 31, 2012:    |  |              |      |  |                                  | 
|Expected gross margin |  |              | 27.0 |  |                                  | 
|Growth rate (1)       |  |              | 0.25 |  |                                  | 
|Discount rate (2)     |  |              | 9.7  |  |                                  | 



71







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 17 – INTANGIBLE ASSETS(continued):



|Segment                   |  | Fueling and commercial sites  |    
|------------------------- |  | ----------------------------- | ---
|CGU                       |  | Filling and convenience sites |    
|                          |  | %                             |    
|December 31, 2013:        |  |                               |    
|Expected operating profit |  |                               | 3  
|Growth rate (1)           |  |                               | 2  
|Discount rate (2)         |  |                               | 9.5
|                          |  |                               |    
|December 31, 2012:        |  |                               |    
|Expected operating profit |  |                               | 3.6
|Growth rate (1)           |  |                               | 2  
|Discount rate (2)         |  |                               | 9.4



| | (1) | Weighted average growth rate used to extrapolate cash flows beyond the budget management estimations
covering a five-year period.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------

| | (2) | Pre-tax discount rate applied to cash flow projections.
| | --- | -------------------------------------------------------



These assumptions have been
used for the analysis of each CGU.



NOTE 18 – LOANS RECEIVABLE



|                                          |  | December 31      |        
|----------------------------------------- |  | ---------------- | -------
|                                          |  | 2012             |        
|                                          |  | NIS in thousands |        
|Loans to jointly controlled companies (1) |  |                  | 75,169 
|Loans to the Fuel Administration (2)      |  |                  | 31,539 
|Loans to others (3) (4)                   |  |                  | 124,343
|                                          |  |                  | 231,051
|Less current maturities                   |  |                  | 27,545 
|                                          |  |                  | 203,506



| | (1) | Loans bearing interest of 5.26% and linked to the Israeli CPI and the repayment date has not yet been
determined.
| | --- | -----------------------------------------------------------------------------------------------------------------



| | (2) | The loan to the Fuel Administration is in accordance with the Control of Commodities and Service Order
(Settlements in the Fuel Economy), 1988. During December 2013 the loan was fully repaid.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | Mainly owners of fueling stations to which the Company supplies fuel. As at December 31, 2013 and
2012 the amount includes a single debtor balance of NIS 15.1 million and 18.1 million respectively.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | As of December 31, 2013 and 2012 includes a loan to a related party of NIS 53.7 million and NIS 49.3
million, respectively. The loan is linked to the Israeli CPI, bears interest of 5% and matures in January 2015.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The fair value of loans receivables
is usually identical or close to their carrying value.



72







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 18 – LOANS RECEIVABLE(continued):



The long term loans are receivable
in the years subsequent to the statement of financial position date as follows:



|                             |  | December 31      |        
|---------------------------- |  | ---------------- | -------
|                             |  | 2012             |        
|                             |  | NIS in thousands |        
|Second year                  |  |                  | 4,740  
|Third year                   |  |                  | 43,020 
|Fourth year                  |  |                  | 4,224  
|Fifth year                   |  |                  | 3,794  
|Sixth year and afterwards    |  |                  | 20,247 
|Without stated maturity date |  |                  | 127,481
|                             |  |                  | 203,506



NOTE 19 – OTHER LONG TERM RECEIVABLES



|                                                  |  | December 31      |       
|------------------------------------------------- |  | ---------------- | ------
|                                                  |  | 2012             |       
|                                                  |  | NIS in thousands |       
|Conditional grants to owners of fuel stations (1) |  |                  | 20,352
|Prepaid rent (2)                                  |  |                  | 9,726 
|Others                                            |  |                  | 3,173 
|                                                  |  |                  | 33,251



| | (1) | Includes mainly conditional grants the Company paid to the owners of land in connection with the construction
of filling stations. The amounts will become grants after the end of the commitment period or during the period if the filling
station owners meet their undertakings to operate the stations during the agreement period.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company examines the land owners'
ability to meet their liabilities at every statement of financial position date.



Based on past experience, and in
accordance with management assessments, the owners of the filling stations are expected to meet their liabilities. These grants
are charged to the statement of income in selling, general and administrative expenses over the term of the agreements.



| | (2) | The prepaid rent in respect of the fueling and commercial sites is amortized over the term of the
lease. As of December 31, 2013 the remaining term of the leases is between 3 and 13 years.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



NOTE 20 – OTHER ACCOUNT PAYABLES
AND ACCRUED EXPENSES:



|                                                         |  | December 31      |        
|-------------------------------------------------------- |  | ---------------- | -------
|                                                         |  | 2012             |        
|                                                         |  | NIS in thousands |        
|Payroll and related expenses and other employee benefits |  |                  | 150,356
|Government authorities                                   |  |                  | 122,685
|Liability in respect of gift certificates                |  |                  | 145,011
|Accrued expenses                                         |  |                  | 123,059
|Other                                                    |  |                  | 87,804 
|Total                                                    |  |                  | 628,915



73







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 21 – LOANS
FROM BANKS AND OTHERS, DEBENTURES AND CONVERTIBLE DEBENTURES



Composition



|                                |  | December 31      |          
|------------------------------- |  | ---------------- | ---------
|                                |  | 2012             |          
|                                |  | NIS in thousands |          
|                                |  |                  |          
|Loans from banks and others (1) |  |                  | 2,511,543
|Debentures (2)                  |  |                  | 2,575,859
|Convertible debentures (2)      |  |                  | 119,560  
|                                |  |                  | 5,206,962



(1) Loans from banks and others:



|                                        |  | December 31      |          
|--------------------------------------- |  | ---------------- | ---------
|                                        |  | 2012             |          
|                                        |  | NIS in thousands |          
|Current liabilities:                    |  |                  |          
|Bank overdrafts (note 9)                |  |                  | 4,934    
|Loans from banks and others             |  |                  | 1,036,755
|Commercial paper *                      |  |                  | 87,837   
|Current maturities of non-current loans |  |                  | 247,581  
|                                        |  |                  | 1,377,107
|Non-current liabilities:                |  |                  |          
|Loans from banks and others **          |  |                  | 1,134,436
|                                        |  |                  | 2,511,543



| | * | On August 23, 2012 the Company issued commercial paper to institutional investors in an amount
of NIS 80 million for a period of five years. The commercial paper bears a variable annual interest and is repayable every three
months at the demand of the holders. Until December 31, 2013 the Company redeemed approximately NIS 5 million.On June 17,
2013 the Company issued commercial paper to institutional investors in an amount of NIS 45 million for a period of five years.
The commercial paper bears a variable annual interest and is repayable every three months at the demand of the holders.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ** | Including a loan of NIS 9,250 thousand from the controlling shareholder due in 2015. The loan is
unlinked and bears interest of 1.25% as of December 31, 2013.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------



Regarding financing
agreements and term with banks and others, see note 34.



74







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 21 – LOANS
FROM BANKS AND OTHERS, DEBENTURES AND CONVERTIBLE DEBENTURES(continued):



Composition
and details of liabilities based on interest rates and linkage terms



|                                                                          |  | December 31                            |      
|------------------------------------------------------------------------- |  | -------------------------------------- | -----
|                                                                          |  | Weighted average
    interest rate (a) |      
|                                                                          |  | %                                      |      
|                                                                          |  |                                        |      
|NIS - linked to the Israeli CPI and bears a fixed annual interest rate    |  |                                        | 3.51%
|NIS - linked to the Israeli CPI and bears a variable annual interest rate |  |                                        | 4.80%
|NIS - Unlinked and bearing a fixed annual interest rate                   |  |                                        | 7.47%
|NIS - Unlinked and bearing a variable annual interest rate                |  |                                        | 3.68%
|                                                                          |  |                                        |      



| | (a) | Weighted average interest rate, as of December 31, 2013. See also d. below.
| | --- | ---------------------------------------------------------------------------

| | (b) | The long-term loans net of current maturities are repayable in the years subsequent to the statement
of financial position date as follows.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------



|                          |  | December 31      |          
|------------------------- |  | ---------------- | ---------
|                          |  | 2012             |          
|                          |  | NIS in thousands |          
|Second year               |  |                  | 203,426  
|Third year                |  |                  | 164,410  
|Fourth year               |  |                  | 135,776  
|Fifth year and afterwards |  |                  | 630,824  
|                          |  |                  | 1,134,436



| | (c) | The carrying amounts and fair value of the non-current
loans are as follows:
| | --- | ----------------------------------------------------------------------------



|                     |  | December 31      |          
|-------------------- |  | ---------------- | ---------
|                     |  | 2012             |          
|                     |  | NIS in thousands |          
|                     |  | Carrying amount  |          
|Bank and other loans |  |                  | 1,382,017



(*) The fair values of long-term
loans are based on cash flows discounted using a rate based on the capitalization rate of 2.9% (2012: 4.2%).



The carrying amounts of short-term
loans approximate their fair value.



75







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 21 – LOANS
FROM BANKS AND OTHERS, DEBENTURES AND CONVERTIBLE DEBENTURES(continued):



| | (d) | Financial covenants
| | --- | -------------------



Blue Square has a loan with total
of approximately NIS 159 million as at December 31, 2013, regarding which Blue Square has undertaken to meet certain financial
covenants. As of December 31, 2013, Blue Square met the above mentioned covenants.



The terms of the loan to Blue Square
provide for the bank to add 0.25% to the interest rate, in the event that a rating company (Standard & Poor's Maalot or Midroog)
reduces the Company’s rating by two grades. Additional 0.25% will be added in the event that the rating of the Company reduces
to BBB under Maalot rating or Baa2 under Midroog rating. Below BBB or Baa2 rating will entitle the bank to call the loan for repayment.



As of March 18, 2014, the debentures
were reduced from A2 to A3 stable by the rating agency Midroog.



BSRE has a loan with a total balance
of NIS 197.5 million, whereby BSRE has undertaken to meet certain financial covenants. As of December 31, 2013, BSRE met the above
mentioned covenants.



BSRE has a loan with total of approximately
NIS 125 million as at December 31, 2013, with a group of institutional companies to finance the building of the addition to the
Hadar Mall regarding which BSRE has undertaken to meet certain financial covenants. As of December 31, 2013, BSRE met the above
mentioned covenants.



Dor Alon's subsidiaries have loans
with a total balance of NIS 94.1 million as at December 31, 2013 (2012 - NIS 103.6 million) for which they have undertaken to meet
certain covenants. As at December 31, 2013 Dor Alon's subsidiaries met the covenants.



Bee Group has short and long
term loans with a total of NIS 140 million as of December 31, 2013, pursuant to which Bee Group has undertaken to meet
certain financial covenants. These financial covenants include a limitation on the distribution of dividends to Blue Square.



The financial covenants in the
subsidiaries' loan agreements do not restrict the subsidiaries from transferring funds to Blue Square in the form of cash dividends,
loans or advances, except for Bee Group, which is restricted from transferring funds to the Company in the form of dividends. As
of December 31, 2013, Bee Group did not have any earnings to distribute as a dividend.



As of December 31, 2013 Bee
Group and the rest of its subsidiaries did not meet the financial covenants in respect of part of its loans amounting to
NIS 70 million (out of which NIS 50 million are presented among non-current liabilities). Waivers were granted by
the bank lenders, during the fourth quarter, in respect of these balances.



76







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 21 – LOANS
FROM BANKS AND OTHERS, DEBENTURES AND CONVERTIBLE DEBENTURES(continued):



(2) Debentures and convertible
debentures



|                                                               |  |         |  | Weighted Average interest rates at |      |   | December 31      | 
|-------------------------------------------------------------- |  | ------- |  | ---------------------------------- | ---- | - | ---------------- | 
|                                                               |  |         |  | December 31, 2013                  |      |   | 2012             | 
|Debentures                                                     |  | Ref     |  |                                    |      |   | NIS in thousands | 
|Blue Square:                                                   |  |         |  |                                    |      |   |                  | 
|Alon Blue Square (Series A)                                    |  | d(1)(a) |  |                                    | 5.90 | % |                  | 
|Alon Blue Square (Series C)                                    |  | d(1)(c) |  |                                    | 2.50 | % |                  | 
|                                                               |  |         |  |                                    |      |   |                  | 
|Blue Square Real Estate:                                       |  |         |  |                                    |      |   |                  | 
|Marketable debentures-Blue Square Real Estate (Series B)       |  | d(2)(b) |  |                                    | 4.70 | % |                  | 
|Marketable debentures-Blue Square Real Estate (Series C)       |  | d(2)(c) |  |                                    | 4.20 | % |                  | 
|Marketable debentures-Blue Square Real Estate (Series D)       |  | d(2)(d) |  |                                    | 4.50 | % |                  | 
|Marketable debentures-Blue Square Real Estate (Series E)       |  | d(2)(e) |  |                                    | 3.30 | % |                  | 
|                                                               |  |         |  |                                    |      |   |                  | 
|Dor Alon Energy:                                               |  |         |  |                                    |      |   |                  | 
|Marketable debentures-Dor Alon Energy (Series B)               |  | d(3)(a) |  |                                    | 5.00 | % |                  | 
|Marketable debentures-Dor Alon Energy (Series C)               |  | d(3)(b) |  |                                    | 4.10 | % |                  | 
|Marketable debentures-Dor Alon Energy (Series D)               |  | d(3)(c) |  |                                    | 6.65 | % |                  | 
|Debentures of Dorgas Batuchot ltd.                             |  | d(3)(d) |  |                                    | 4.95 | % |                  | 
|Dor Debentures                                                 |  | d(3)(e) |  |                                    | 6.45 | % |                  | 
|Total                                                          |  |         |  |                                    |      |   |                  | 
|                                                               |  |         |  |                                    |      |   |                  | 
|Less- amount of discount (net of
    accumulated amortization) |  |         |  |                                    |      |   |                  | 
|                                                               |  |         |  |                                    |      |   |                  | 
|Less-current maturities                                        |  |         |  |                                    |      |   |                  | 
|                                                               |  |         |  |                                    |      |   |                  | 
|                                                               |  |         |  |                                    |      |   |                  | 
|Convertible debentures                                         |  |         |  |                                    |      |   |                  | 
|Blue Square Real Estate (Series A)                             |  | d(2)(a) |  |                                    | 6.25 | % |                  | 
|Conversion component at fair value                             |  | a)      |  |                                    |      |   |                  | 
|Premium (net of amortization)                                  |  |         |  |                                    |      |   |                  | 
|Total                                                          |  |         |  |                                    |      |   |                  | 
|Less-current maturities                                        |  |         |  |                                    |      |   |                  | 
|                                                               |  |         |  |                                    |      |   |                  | 



77







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 21 – LOANS
FROM BANKS AND OTHERS, DEBENTURES AND CONVERTIBLE DEBENTURES(continued):



| | a) | Conversion component of convertible debentures
| | -- | ----------------------------------------------



The conversion component of the
BSRE convertible debentures is calculated based on a binomial model with using the following assumptions:



|                                      |  | December 31 |       
|------------------------------------- |  | ----------- | ------
|                                      |  | 2012        |       
|Discount rate                         |  |             | 0.06% 
|Share price (NIS)                     |  |             | 81    
|Standard deviation of the share price |  |             | 32.50%



| | b) | Repayment dates of debentures and convertible debentures
(excluding discount or premium):
| | -- | -----------------------------------------------------------------------------------------



|                                |  | December 31      |          
|------------------------------- |  | ---------------- | ---------
|                                |  | 2012             |          
|                                |  | NIS in thousands |          
|First year - current maturities |  |                  | 548,757  
|Second year                     |  |                  | 542,354  
|Third year                      |  |                  | 461,734  
|Fourth year                     |  |                  | 390,989  
|Fifth year and afterwards       |  |                  | 779,837  
|Total                           |  |                  | 2,723,671



| | c) | The carrying amounts and fair value of the debentures
and the convertible debentures are as follows:
| | -- | ----------------------------------------------------------------------------------------------------



|                       |  | December 31      |          
|---------------------- |  | ---------------- | ---------
|                       |  | 2012             |          
|                       |  | NIS in thousands |          
|                       |  | Carrying amount  |          
|Debentures             |  |                  | 2,575,859
|Convertible debentures |  |                  | 119,560  
|Total                  |  |                  | 2,695,419



| | * | The fair values of debentures and convertible debentures, both marketable and not marketable, are
based on market prices and cash flows discounted using a rate based on the capitalization rate of between 0.38% and 5.5%.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



78







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 21 –
LOANS FROM BANKS AND OTHERS, DEBENTURES AND CONVERTIBLE DEBENTURES(continued):



| | d) | Debentures and convertible debentures – additional
details
| | -- | ----------------------------------------------------------



| | 1) | Blue Square
| | -- | -----------



In August
2003, the Company issued NIS 400 million par value debentures to institutional investors in consideration for their par value,
of which NIS 200 million par value debentures (Series A) as follows and NIS 200 million par value convertible debentures (Series
B) which were fully repaid or converted by 2011 (see note 25).



| | (a) | 200 million registered debentures (Series A) of NIS 1 par value each.
| | --- | ---------------------------------------------------------------------



| |  | These debentures are linked (principal and interest) to the Israeli CPI, but in the event that
the Israeli CPI is lower than the base index (index known at date of issuance), the amount of the debentures will not be adjusted
below the base index. The principal is repayable in three equal annual installments on August 5 of each of the years 2012 to 2014,
and bears interest at the rate of 5.9% per annum. The interest is payable semi-annually on February 5 and on August 5.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Other
terms:



| | i) | The terms of the debentures (Series A) provide that in the event that the shares of the Company
are delisted from trading on the TASE, and/or in the event that the shares of the Company are no longer held by the public and/or
in the event that Standard & Poor's Maalot ("S&PMaalot") reduces the Company’s rating to BBB or lower,
then within three months from one of the above mentioned events the Company, subject to the then prevailing law, will offer to
acquire the debentures at a price equivalent to the price of debentures of the same type reflecting a return of 2.5% in excess
of the return on Government debentures with an average life similar to the remaining average life of the debentures of that series
as of the date of the offer, but in no event will the price exceed the carrying value of the debentures of that series.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ii) | On April 26, 2010 Standard & Poors Maalot entered the rating for the debentures of the Company
and BSRE of ilA+ into Credit Watch with negative outlook, due to the Wholesale Market transaction of BSRE. On October 26, 2010,
Standard & Poors Maalot reduced the rating for the Company's debentures from ilA+ to ilA-. Also, on this date, the Company
and BSRE announced they would terminate their rating agreements with Standard & Poors Maalot. From that date, Midroog (a subsidiary
of Moody's) will be the rating agency that will continue to rate the Company's and BSRE's debentures.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



79







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
21 – LOANS FROM BANKS AND OTHERS, DEBENTURES AND CONVERTIBLE DEBENTURES(continued):



| | (b) | On November 9, 2010, following the filing of a Shelf Offering Report, the Company completed its
public tender of Series C par value NIS 100 million CPI linked debentures bearing annual fixed interest of 2.5% payable in two
semi-annual payments on May 4 and November 4 in each of the years 2011 to 2022. The principal will be repaid in 12 equal payments
on November 4 of each of the years 2011 to 2022 (inclusive). The debentures were issued at a discount of 3.2% and for a consideration
of NIS 96.8 million.
On April 11, 2012, Series C was expanded by a private offering of NIS 35 million par value of debentures Series C to institutional
investors for 89.5% of their par value, reflecting a return of 5.7%. On July 10, 2013, Series C was expanded by a private offering
of NIS 100 million par value of debentures Series C to institutional investors for 99.3% of their par value, reflecting a return
of 3.9%. On November 15, 2013, series C was expanded by a private offering of NIS 62 million par value of debentures to institutional
investors for 103% of their par value, reflecting a return of 3.3%.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Subsequent
to December 31, 2013 the debentures series was expanded by a private offering of NIS 150 million par value of debentures (Series
C) to institutional investors for 101.3% of their par value, reflecting a return of 3.8%.



As of December
31, 2013 the Company's subsidiaries hold NIS 32.2 million of Series C of the Company.



Other terms:



As of March
18, 2014, Midroog announced the update of the rating on debentures (series A and C) issued by the Company to A3 with a stable outlook.



| | 2) | BSRE
| | -- | ----



| | a) | BSRE (Series A)
| | -- | ---------------



100 million
registered convertible debentures (Series A) of NIS 1 par value each.



These debentures
are to be redeemed in four equal annual installments on August 31 of each year in the period from 2013 through 2016. The Series
A debentures are linked (principal and interest) to the CPI and bear interest at an annual rate of 6.25%, which is payable every
six months, on February 28 and August 31 of each year from 2007 until the final redemption of the debentures. The Series A debentures
are convertible into registered BSRE ordinary shares of NIS 1 par value at any time through August 16, 2016, except during
the periods from August 17 through August 31 in each of the years between 2013-2015 (inclusive). The conversion rate for these
debentures as at December 31, 2013 was NIS 233.23 par value of debentures per share.



The annual
effective interest rate on the debentures, taking into account the issuance expenses as above, is 5.4%.



80







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 21 –
LOANS FROM BANKS AND OTHERS, DEBENTURES AND CONVERTIBLE DEBENTURES(continued):



| | b) | BSRE (Series B)
| | -- | ---------------



These debentures
with par value of NIS 775 million are to be redeemed in four equal annual installments on August 31 of each year in the period
from 2013 through 2016. The Series B debentures are linked to the CPI and bear interest at an annual rate of 4.7%, which is payable
every six months, on February 28 and August 31 of each year from 2007 until the final redemption of the debentures.



The annual
effective interest rate on the debentures, taking into account the issuance expenses as above, is 5.5%.



As of December
31, 2013 companies in the group hold NIS 4.8 million of Series B of BSRE.



| | c) | BSRE (Series C)
| | -- | ---------------



On October
18, 2009, BSRE issued to the public Series C debentures in the total amount of NIS 300,000 thousand; the debentures were issued
through a tender under a shelf prospectus of the company dated May 20, 2009.



The principal
of debentures is to be redeemed in eight non-equal annual installments on October 31 of each of the years 2011 to 2018 (inclusive),
where six installments each constituting of 7.5% of the amount of the principal of the debentures would be redeemed on October
31 of each of the years 2011 to 2016 and two installments each constituting 27.5% of the amount of the principal of the debentures
would be redeemed in October of each of the years 2017 and 2018.



The Series
C debentures are linked to the CPI and bear interest at an annual rate of 4.2%, which is payable every six months, on April 30
and October 31 of each year from 2010 until the final redemption of the debentures.



The annual
effective interest rate payable on Series C debentures, taking into account the issuance expenses as above is 4.55%.



As of December
31, 2013 companies in the group hold NIS 4.6 million of Series C of BSRE.



| | d) | BSRE (Series D)
| | -- | ---------------



On July 12, 2010, BSRE completed
its NIS 110 million Series D debenture issue in accordance with a shelf prospectus. The Debentures are linked to the Israeli CPI
and bear fixed interest of 4.5%. The Debenture principal is to be redeemed in four equal annual payments, which will be paid on
June 30 in each of the years 2017 to 2020 (inclusive). The Debenture interest is to be paid in semi-annual payments on June 30
of each of the years 2011 to 2020 (inclusive) and December 31 of each of the years 2010 to 2019 (inclusive).



81







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
21 – LOANS FROM BANKS AND OTHERS, DEBENTURES AND CONVERTIBLE DEBENTURES(continued):



On January 4, 2012, the debentures
were expanded by a private offering of NIS 150 million par value of debentures (Series D) to institutional investors for 98.5%
of their par value, reflecting a return of 5.8%. On August 28, 2012, the debentures series was expanded by a private offering of
NIS 49 million par value of debentures (Series D) to an institutional investor for 98.0% of their par value, reflecting a return
of 6.0% and on November 19, 2012, the debentures series was expanded by a private offering of NIS 110 million par value of debentures
(Series D) to an institutional investor for 107.0% of their par value, reflecting a return of 4.8%. On May 20, 2013 the debentures
series of BSRE (Series D) was expanded by a private offering of NIS 76 million par value of debentures (Series D) to institutional
investors for 117.9% of their par value, reflecting a return of 2.8%. On July 11, 2013 the debentures series of BSRE (Series D)
was expanded by a private offering and public offering of NIS 167 million par value of debentures (Series D) to institutional investors
and the public for 117.2% of their par value, reflecting a return of 2.6%. On August 7, 2013, the debentures series of BSRE (Series
D) was expanded by a public offering of NIS 33 million par value of debentures (Series D) for 117.8% of their par value, reflecting
a return of 2.7%.



The annual effective interest
rate payable on Series D debentures, taking into account the issuance expenses as above is 4.3%.



The terms of the debentures
determine that in case Midroog Ltd. or another rating agency were to reduce BSRE's rating to A3 the annual interest rate will
increase by 0.35%. In case BSRE's rating was to be reduced further then the annual interest rate will increase by 0.35% multiplied
by the number of notches that the Company's rating is reduced below A3.



| | e) | BSRE (Series E)
| | -- | ---------------



On October 30, 2013,
BSRE issued by a public offering new debentures series (Series E) of NIS 121.7 million par value for their par value of NIS
120 million (net of issuance expenses), reflecting a return of 3.5%. The debentures are payable in six annual installments
effective from 2018, where the first four installments will represent 7.5% of the par value of the debentures and the last
two installments will represent 35% of the par value of the debentures. The debentures are linked (principal and interest) to
the CPI and bear annual interest of 3.3% payable in semi-annual payments on May 31 and November 30 effective from May 2014.
The debentures are listed for trade and were rated by Midroog with the rating of A1 with a stable outlook.



According to the deed of trust,
BSRE committed to comply with certain financial covenants.



BSRE has committed not to
create a current charge on its entire assets in favor of any third party to secure any debt or liability unless a consent of the
debentures holders (Series E) is obtained or provided that a current charge on its entire assets is created also in favor of the
debentures holders (Series E) at the same ranking.



| | f) | As at December 31, 2013 BSRE's (Series A, B, C, D and E) debentures were rated by Midroog at A1
with a stable outlook.
| | -- | ----------------------------------------------------------------------------------------------------------------------



On February 18, 2014, Midroog
announced that it includes the rating of BSRE debentures to credit review with negative implications.



82







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 21 –
LOANS FROM BANKS AND OTHERS, DEBENTURES AND CONVERTIBLE	DEBENTURES(continued):



| | 3) | Dor Alon
| | -- | --------



| | a) | Dor Alon (Series B)
| | -- | -------------------



In accordance with a prospectus
dated May 29, 2005, these debentures with a par value of NIS 585,220 thousand are linked (principal and interest) to the Israeli
CPI. The interest of 5% per annum is repayable in semi-annual installments on May 31 and November 30 until May 2015. The principal
balance at December 31, 2013 was NIS 144,644 thousand, which is redeemed at annual payments on May 31 over two years, with NIS
72,322 thousand each year.



The annual effective interest
rate payable on Series B debentures, taking into account the issuance expenses as above is 6.65%.



| | b) | Dor Alon (Series C)
| | -- | -------------------



These debentures with a par
value of NIS 81,000 thousand were issued according to a prospectus dated August 20, 2009 on the Tel Aviv Stock exchange. The debentures
bear the interest rate of Israeli government bonds (No.817) with the addition of 2.25% and are paid in quarterly installments up
to December 2017. The principal is redeemed in semi-annual installments on June 1 and December 1 over five years, starting 2013,
with NIS 16,200 thousand each year.



During 2013 the debentures
series was expanded by a private offering of NIS 21 million par value of debentures (Series C) to institutional investors for 97.95%
of their par value, reflecting a return of 5.3%.



| | c) | Dor Alon (Series D)
| | -- | -------------------



| |  | These debentures with a par value of NIS 139,000 thousand were issued according to a prospectus
dated August 20, 2009 on the Tel Aviv stock exchange. The debentures bear a fixed annual interest rate of 6.65%, payable in quarterly
installments up to December 2016.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



These debentures series was
expanded by a private offering to institutional investors, On February 15, 2012 NIS 119.9 million par value of bonds for 100.95%
of their par value, reflecting a return of 6.9% and on August 20, 2012 NIS 46 million par value of debentures to institutional
investors for 101.08% of their par value, reflecting a return of 6.9%.



During 2013 the debentures
series was expanded by a private offering of NIS 129 million par value of debentures (Series D) for 103.8% of their par value,
reflecting a return of 5.2%.



The principal is repayable
in equal semi-annual payments on June 1 and December 1 from 2014 to 2016, with NIS 108,475 thousand each year.



The annual effective interest
rate payable on Series D debentures, taking into account the issuance expenses as above is 6.6%.



83







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
21 – LOANS FROM BANKS AND OTHERS, DEBENTURES AND CONVERTIBLE DEBENTURES(continued):



Series
B, C and D of Dor Alon debentures are not secured. As at January, 2014 the debentures are rated as A2 in the surveillance list
with stable outlook.



| | d) | Dorgas Batuchot Ltd.
| | -- | --------------------



| |  | These debentures with a par value at the date of issue of NIS 96,000 thousand are linked (principal
and interest) to the Israeli CPI. The debentures bear a fixed rate of annual interest of 4.95%. The principal balance at December
31, 2013 was NIS 53,288 thousand, which is repayable over the first six years at rate of NIS 8,074 thousand per annum with NIS
4,844 thousand in the seventh year. As at December 31, 2013 these debentures are rated Aa2.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | e) | Dor Debentures
| | -- | --------------



These debentures (Series 1 and
Series 2) with a par value at the date of issue of NIS 75 million were issued to institutional investors. The principal balance
at December 31, 2013 was NIS 67,251 thousand. At December 31, 2013 the debentures are rated A2.



e) Covenants for debentures
and convertible debentures



| | 1. | The debentures issued by Dor Debentures and Dorgas Batuchout include the requirement to meet certain
covenants. As at December 31, 2013 the covenants for Dor Debentures (Series 2) and Dorgas Batuchot were met.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | As at December 31, 2013 Dor Debentures did not meet the covenants relating to the Series 1 debentures
issued by Dor Debentures. At the request of the trustee, the Company provided a bank guarantee of NIS 6.6 million that was valid
up to January 31, 2014 and was extended to July 2014 (see also note 35e below). Non-compliance with such covenants does not constitute
grounds for immediate repayment.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



NOTE 22 – OTHER LIABILITIES:



|                                                                    |  | December 31      |        
|------------------------------------------------------------------- |  | ---------------- | -------
|                                                                    |  | 2012             |        
|                                                                    |  | NIS in thousands |        
|Rental contracts and value of unfavorable terms of operating leases |  |                  | 130,122
|Other                                                               |  |                  | 11,894 
|                                                                    |  |                  | 142,016



84







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 23 – RETIREMENT BENEFIT OBLIGATIONS:



| | a. | Composition of the liability for defined benefit plans:
| | -- | -------------------------------------------------------



|                                                 |  | December 31      |        
|------------------------------------------------ |  | ---------------- | -------
|                                                 |  | 2012             |        
|                                                 |  | NIS in thousands |        
|Statement of financial position obligations for: |  |                  |        
|Present value of funded obligation               |  |                  | 451,064
|Provision in respect of unutilized sick leave    |  |                  | 43,046 
|                                                 |  |                  | 494,110
|Fair value of the plan assets                    |  |                  | 424,653
|                                                 |  |                  |        
|Total present value of the obligation, net       |  |                  | 69,457 



| | b. | Changes in the liability for defined benefit plans:
| | -- | ---------------------------------------------------



|                                                                        |  | 2012             |         |   | 2013 | 
|----------------------------------------------------------------------- |  | ---------------- | ------- | - | ---- | 
|                                                                        |  | NIS in thousands |        
|Liability in respect of defined benefit plans at January 1              |  |                  | 451,211 |   |      | 
|Benefits paid                                                           |  |                  | (54,978 | ) |      | 
|Current service costs                                                   |  |                  | 48,752  |   |      | 
|Actuarial losses                                                        |  |                  | 30,634  |   |      | 
|Interest costs                                                          |  |                  | 19,186  |   |      | 
|Allocated to liabilities of disposal groups classified as held for sale |  |                  | (695    | ) |      | 
|Liability in respect of defined benefit plans at December 31            |  |                  | 494,110 |   |      | 



*Actuarial losses in 2013,
include experience  adjustments of NIS 9 million.





| | c. | Changes in plans assets:
| | -- | ------------------------



|                                                                     |  | 2012             |         |   | 2013 | 
|-------------------------------------------------------------------- |  | ---------------- | ------- | - | ---- | 
|                                                                     |  | NIS in thousands |        
|Fair value of plan assets at January 1                               |  |                  | 391,107 |   |      | 
|Employer contributions paid into the plan                            |  |                  | 35,636  |   |      | 
|Return on plan assets, excluding amounts included in interest income |  |                  | 24,131  |   |      | 
|Benefits paid                                                        |  |                  | (44,514 | ) |      | 
|Interest income on plan assets                                       |  |                  | 19,129  |   |      | 
|Other adjustments                                                    |  |                  | (310    | ) |      | 
|Allocated to assets of disposal groups classified as held for sale   |  |                  | (526    | ) |      | 
|Fair value of plan assets at December 31                             |  |                  | 424,653 |   |      | 



85







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 23 – RETIREMENT BENEFIT OBLIGATIONS(continued):



The actual return (loss) on plan
assets was NIS 26,637 thousands (2012 – NIS 43,261 thousands, 2011 NIS (6,301) thousands).



Expected contributions to post-
employment benefit plans for the year ending December 31, 2014 are approximately NIS 48,037 thousands.



The accumulated remeasurement component gains (losses) that were recognized in the OCI, net of taxes,
as of December 31, 2013, 2012, 2011 and 2010 is NIS (27,170) thousands, NIS (22,966) thousands, NIS (17,945) thousands and NIS
(10,253) thousands, respectively.



| | d. | Expense recognized in the income statements in respect of defined benefit plans:
| | -- | --------------------------------------------------------------------------------



|                               |  | Year ended December 31 |        
|------------------------------ |  | ---------------------- | -------
|                               |  | 2011                   |        
|                               |  | NIS in thousands       |        
|Current services costs         |  |                        | 42,567 
|Interest cost                  |  |                        | 21,766 
|Interest income on plan assets |  |                        | (19,902
|Other adjustments              |  |                        | 32     
|                               |  |                        | 44,463 



The expense recognized in the
income statements for defined contribution plans was NIS 8,978 thousands in 2013, NIS 9,067 thousand in 2012 and NIS 7,706
thousands in 2011.



| | e. | The expenses were included in the following income statements items:
| | -- | --------------------------------------------------------------------



|                                             |  | Year ended December 31 |       
|-------------------------------------------- |  | ---------------------- | ------
|                                             |  | 2011                   |       
|                                             |  | NIS in thousands       |       
|Selling, general and administrative expenses |  |                        | 42,599
|Financial (income) expenses                  |  |                        | 1,864 
|                                             |  |                        | 44,463



The principal
actuarial assumptions used were as follows:



|                            |  | December 31 |        
|--------------------------- |  | ----------- | -------
|                            |  | 2012        |        
|                            |  | %           |        
|Discount rate               |  |             | 3.4-4.4
|Inflation rate              |  |             | 2.6    
|Future salary increases     |  |             | 1-7.7  
|Rates of employee turnover* |  |             | 1-80   



* A change of 5% in the
rates of employee turnover will result in an increase of NIS 17 million in actuarial gains recorded in the OCI.



Assumptions regarding future mortality
rates are based on actuarial advice in accordance with published statistics and past experience in Israel. Mortality rates are
based on the pension circular 2013-3-1 of the Ministry of Finance.



86







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 24 – PROVISION FOR OTHER
LIABILITIES AND CHARGES:



|                                             |  | Real estate related disputes (1) |        |   | Legal claims |  |         | Total | 
|-------------------------------------------- |  | -------------------------------- | ------ | - | ------------ |  | ------- | ----- | 
|                                             |  | NIS in thousands                 |       
|At January 1, 2012                           |  |                                  | 19,170 |   |              |  | 56,819  |       | 
|Charged (credited) to the income statements: |  |                                  |        |   |              |  |         |       | 
|Provisions made during the year              |  |                                  | -      |   |              |  | 7,689   |       | 
|Unwind of discount                           |  |                                  | -      |   |              |  | 1,630   |       | 
|Provisions reversed during the year          |  |                                  | (350   | ) |              |  | (9,423  | )     | 
|Provisions used during the year              |  |                                  | -      |   |              |  | (14,957 | )     | 
|At December 31, 2012                         |  |                                  | 18,820 |   |              |  | 41,758  |       | 
|Charged (credited) to the income statements: |  |                                  |        |   |              |  |         |       | 
|Provisions made during the year              |  |                                  | -      |   |              |  | 14,691  |       | 
|Unwind of discount                           |  |                                  | -      |   |              |  | 611     |       | 
|Provisions reversed during the year          |  |                                  | -      |   |              |  | (6,929  | )     | 
|Provisions used during the year              |  |                                  | -      |   |              |  | (9,761  | )     | 
|At December 31, 2013                         |  |                                  | 18,820 |   |              |  | 40,370  |       | 



| | (1) | Provisions relating to disagreements with respect to lease
fees required for assets where the lease term has ended, disagreements with respect to balances due to constructors or as to whether
conditions for payment were met, and for development and construction levies that are under negotiation with the authorities (see
also note 33).
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



NOTE 25 – EQUITY



|                                                             |  | Number of     |           
|------------------------------------------------------------ |  | ------------- | ----------
|                                                             |  | Shares issued |           
|At January 1, 2011                                           |  |               | 65,990,879
|Change during 2011:                                          |  |               |           
|Exercise of options                                          |  |               | 143,582   
|Issuance of shares upon conversion of convertible debentures |  |               | 27,399    
|At December 31, 2011                                         |  |               | 66,161,860
|At December 31, 2012                                         |  |               | 66,161,860
|At December 31, 2013                                         |  |               | 66,161,860



The total authorized number
of ordinary shares as of December 31, 2013 and 2012 is 100 million shares with a par value of NIS 1 per share. All issued shares
are fully paid.



In July 1996, the Company completed
a global offering of 6,900,000 American Depositary Shares (ADS), with each ADS representing one Ordinary share, at a price per
share of $11. In addition, in June 1999, 1,500,000 ADSs were issued upon the exercise of stock options.



87







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 25 – EQUITY (continued):



The ADSs are traded on the New
York Stock Exchange (NYSE). The ADSs represent 3% of the outstanding Ordinary Shares of the Company as of December 31, 2013. As
of December 31, 2013 the shares are quoted at $4.21 per ADS.



Commencing November 2000, the
Company’s shares have also been listed for trade on the Tel Aviv Stock Exchange. As of December 31, 2013 the shares are quoted
at NIS 14.60 per ordinary share.



During 2011, convertible debentures
of the Company with par value of NIS 167 thousands and were converted into 27,399 ordinary shares.



On October 3, 2010 in consideration
for the acquisition of Dor Alon the Company issued 20,327,710 ordinary shares.



During the year ended December
31, 2011 the Company purchased 117,545 treasury shares at a total cost of NIS 4 million, relating to shares acquired by executives
upon their exercise of vested options granted to them under the company's 2008 share option plan.



The total number of treasury
shares held by the Company at December 31, 2013 and 2012 is 207,433 shares.



On January 21, 2008, the
Company's Board of Directors resolved to adopt a share options plan (hereinafter - "the plan") for executives and employees
of the Company. The total number of shares reserved for issuance under the plan is 5 million shares, (including options issuable
to the former Company's President and Chief Executive Officer). All exercises of options under the plan are on a cashless basis.
Each option can be exercised to purchase one ordinary share of NIS 1 par value of the Company. Immediately upon allotment, the
ordinary shares issued upon exercise of the options will have the same rights as other ordinary shares of the Company.



Under the plan, employees and/or
executives who exercise the options will be allotted only shares that reflect the benefit component embodied in the options, as
computed at the date of exercise, i.e., the difference between the exercise price of each option and the quoted price of a NIS
1 par value share at the date of exercise.



The employees and executives
are entitled to exercise the options at the end of the following vesting periods: 66.7% at the end of two years from the date of
grant and the remaining 33.3% at the end of three years from the date of grant. The options granted to employees and executives
can be exercised in the period of 30 days and 6 months from the end of the vesting period, respectively. Any options not exercised
by this date will expire.



Following are details of options
granted under the plan during the reported periods:



|Grant date |  | Options granted |           |  | Exercise price at grant date (NIS) |  |             | Share price at grant date (NIS) |  |  | Average fair value (NIS)* | 
|---------- |  | --------------- | --------- |  | ---------------------------------- |  | ----------- | ------------------------------- |  |  | ------------------------- | 
|2008       |  |                 | 5,027,500 |  |                                    |  | 36.15-39.06 |                                 |  |  | 36.15-46.0                | 
|2009       |  |                 | 235,000   |  |                                    |  | 34.42-37.33 |                                 |  |  | 23.74-33.85               | 
|2010       |  |                 | 294,000   |  |                                    |  | 47.7        |                                 |  |  | 45.35                     | 
|2011       |  |                 | 290,000   |  |                                    |  | 36.51       |                                 |  |  | 31.64                     | 



*	 The fair value of the options was computed using the Black & Scholes option-pricing model using the following
assumptions:



88







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 25 – EQUITY (continued):



|Grant date |  | Expected
 dividend yield
 (%) |         |  | Expected
 volatility (%) |  |       | Risk free
 interest rate
 (%) |  |  | Expected term
 until exercise
 (years)
|---------- |  | ----------------------------- | ------- |  | ------------------------ |  | ----- | ----------------------------- |  |  | --------------------------------------
|2008       |  |                               | 6.4-7.5 |  |                          |  | 28-30 |                               |  |  | 4.5-5.1                               
|2009       |  |                               | 6.5     |  |                          |  | 43.45 |                               |  |  | 2.3-3.0                               
|2010       |  |                               | 4.0     |  |                          |  | 43    |                               |  |  | 2.9                                   
|2011       |  |                               | 4.0     |  |                          |  | 38    |                               |  |  | 3.8                                   



Volatility
is based on historical volatility of the Company’s share price for periods matching the expected term of the option until
exercise.



The plan is governed by the terms
stipulated by Section 102 of the Israeli Income Tax Ordinance. In accordance with the track chosen by the Company and pursuant
to the terms thereof, the Company is not allowed to claim, as an expense for tax purposes, the amounts credited to employees as
a benefit, including amounts recorded as salary benefits in the Company’s accounts, in respect of options granted to employees
under the plan - with the exception of the work-income benefit component, if any, determined on the grant date.



Compensation expense (income) included
in the consolidated income statements in respect of the Company's options plan, amounts to NIS 6.5 million, NIS 3.2 million
and NIS (0.5) million for the years 2010, 2011 and 2012, respectively.



Average exercise prices are as
follows:



|                                                   |  | Average exercise price per share *
 (NIS) |       |  | Number of options (thousands) | 
|-------------------------------------------------- |  | ----------------------------------------- | ----- |  | ----------------------------- | 
|At January 1, 2011                                 |  |                                           | 30.71 |  |                               | 
|Granted                                            |  |                                           | 36.51 |  |                               | 
|Exercised                                          |  |                                           | 27.64 |  |                               | 
|Forfeited                                          |  |                                           | 29.80 |  |                               | 
|At December 31, 2011                               |  |                                           | 36.13 |  |                               | 
|Expired                                            |  |                                           | 35.60 |  |                               | 
|Forfeited                                          |  |                                           | 36.08 |  |                               | 
|At December 31, 2012                               |  |                                           | 37.90 |  |                               | 
|Expired                                            |  |                                           | 40.98 |  |                               | 
|Forfeited                                          |  |                                           | 29.76 |  |                               | 
|At December 31, 2013                               |  |                                           | -     |  |                               | 
|Options that can be exercised at December 31, 2013 |  |                                           | -     |  |                               | 



89







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 25 – EQUITY (continued):



Share options outstanding at
the end of the year have the following expiry date and exercise prices:



|                  |  | Number of options (thousands) |    |  | Range of exercise prices (NIS)* |  |               | Average of expiry date (years) | 
|----------------- |  | ----------------------------- | -- |  | ------------------------------- |  | ------------- | ------------------------------ | 
|                  |  |                               |    |  |                                 |  |               |                                | 
|December 31, 2012 |  |                               | 96 |  |                                 |  | 29.76 - 40.98 |                                | 
|December 31, 2013 |  |                               | -  |  |                                 |  | -             |                                | 



| | * | After adjusting the option exercise price at the rate of 50% of cash dividends distributed.
| | - | -------------------------------------------------------------------------------------------



Share options plans in subsidiaries



| | a. | In August 2008, BSRE's Board of Directors resolved to adopt a share options plan for executives
of BSRE. The total number of shares reserved for issuance under the plan is 250,000 shares.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Under the plan, the options to
executives can be exercised in the period of 6 months from the end of the vesting period. Any option not exercised by this date
will expire. The options will be entitled to exercise at the end of the following vesting periods: 66.7% at the end of two years
from the date of grant and the remaining 33.3% at the end of three years from the date of grant.



In August 2008, BSRE granted 125,000
options to BSRE's Chief Executive Officer, during 2010-2012 all options were exercised.



In February 2012, following the
exercise of the option in BSRE, BSRE granted 16,181 shares in BSRE in consideration for their par value.



In August 2011, BSRE's Board of
Directors resolved to adopt an additional share options plan for executives of BSRE. The total number of shares reserved for issuance
under the plan is 125,000 shares under the same terms as determined on the 2008 BSRE option plan.



As of December 31, 2013, no options
above were granted under this plan.



| | b. | Dividends per share
| | -- | -------------------



On December 29, 2011, the Company
paid dividends per share of NIS 1.13.



Regarding capital risk management,
see also note 3.



90







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 26 – OTHER RESERVES:



|                                             |  | Available for sale investments |        |   | Currency translation differences |  |        | Transactions with non- controlling interests |  |  | Asset revaluation |   |  | Total |       
|-------------------------------------------- |  | ------------------------------ | ------ | - | -------------------------------- |  | ------ | -------------------------------------------- |  |  | ----------------- | - |  | ----- | ------
|At January 1, 2011                           |  |                                | (577   | ) |                                  |  | (5,019 | )                                            |  |  | (6,943            | ) |  |       | -     
|Change in other reserves:                    |  |                                |        |   |                                  |  |        |                                              |  |  |                   |   |  |       |       
|Available for sale investments               |  |                                | (1,082 | ) |                                  |  | -      |                                              |  |  | -                 |   |  |       | -     
|Transactions with non-controlling interests  |  |                                | -      |   |                                  |  | -      |                                              |  |  | (1,320            | ) |  |       | -     
|Currency translation differences             |  |                                | -      |   |                                  |  | 5,269  |                                              |  |  | -                 |   |  |       | -     
|At December 31, 2011                         |  |                                | (1,659 | ) |                                  |  | 250    |                                              |  |  | (8,263            | ) |  |       | -     
|Change in other reserves:                    |  |                                |        |   |                                  |  |        |                                              |  |  |                   |   |  |       |       
|Available for sale investments               |  |                                | 11,555 |   |                                  |  | -      |                                              |  |  | -                 |   |  |       | -     
|Transactions with non- controlling interests |  |                                | -      |   |                                  |  | -      |                                              |  |  | (607              | ) |  |       | -     
|Currency translation differences             |  |                                | -      |   |                                  |  | (1,693 | )                                            |  |  | -                 |   |  |       | -     
|Asset revaluation reserve                    |  |                                | -      |   |                                  |  | -      |                                              |  |  | -                 |   |  |       | 9,662 
|At December 31, 2012                         |  |                                | 9,896  |   |                                  |  | (1,443 | )                                            |  |  | (8,870            | ) |  |       | 9,662 
|Change in other reserves:                    |  |                                |        |   |                                  |  |        |                                              |  |  |                   |   |  |       |       
|Available for sale investments               |  |                                | 8,796  |   |                                  |  | -      |                                              |  |  | -                 |   |  |       | -     
|Transactions with non- controlling interests |  |                                | (137   | ) |                                  |  | 153    |                                              |  |  | 20,836            |   |  |       | (427  
|Currency translation differences             |  |                                | -      |   |                                  |  | (4,946 | )                                            |  |  | -                 |   |  |       | -     
|Asset revaluation reserve                    |  |                                | -      |   |                                  |  | -      |                                              |  |  | -                 |   |  |       | 1,055 
|At December 31, 2013                         |  |                                | 18,555 |   |                                  |  | (6,236 | )                                            |  |  | 11,966            |   |  |       | 10,290



NOTE
27 – EXPENSES BY NATURE:



|                                                                 |  | Year ended December 31 |           
|---------------------------------------------------------------- |  | ---------------------- | ----------
|                                                                 |  | 2011                   |           
|                                                                 |  | NIS in thousands       |           
|Change in inventories                                            |  |                        | 3,706     
|Net purchases                                                    |  |                        | 9,297,171 
|Wages salaries and related expenses                              |  |                        | 1,037,180 
|Depreciation, amortization and impairment charges                |  |                        | 273,746   
|Transportation and storage expenses                              |  |                        | 139,232   
|Advertising costs                                                |  |                        | 89,409    
|Rent and maintenance expenses                                    |  |                        | 504,583   
|Other expenses                                                   |  |                        | 708,783   
|                                                                 |  |                        |           
|Total cost of sales, selling general and administrative expenses |  |                        | 12,053,810



* Net
of a one-time legal claim for reimbursement and compensation of NIS 22 million received in the fourth quarter of 2013 for costs
incurred by the Company in prior years.



91







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 28 – OTHER GAINS (LOSSES):



|                                                                       |  | Year ended December 31 |       
|---------------------------------------------------------------------- |  | ---------------------- | ------
|                                                                       |  | 2011                   |       
|                                                                       |  | NIS in thousands       |       
|Other gains:                                                           |  |                        |       
|Gain from sale of property and equipment                               |  |                        | 1,637 
|Other                                                                  |  |                        | -     
|                                                                       |  |                        | 1,637 
|Other losses:                                                          |  |                        |       
|Loss from sale of property and equipment and other assets              |  |                        | 3,500 
|Impairment provisions of property and equipment and intangible  assets |  |                        | 7,426 
|Reorganization costs                                                   |  |                        | 6,403 
|Other                                                                  |  |                        | 1,200 
|                                                                       |  |                        | 18,529



NOTE 29 – EMPLOYEE BENEFIT EXPENSES:



|                                                 |  | Year ended December 31 |          
|------------------------------------------------ |  | ---------------------- | ---------
|                                                 |  | 2011                   |          
|                                                 |  | NIS in thousands       |          
|Wages, salaries, including social security costs |  |                        | 981,827  
|Share options granted to managers and employees  |  |                        | 3,184    
|Post-employment benefits                         |  |                        | 52,169   
|                                                 |  |                        | 1,037,180
|Number of positions at December 31, (100%)*      |  |                        | 9,465    



* In certain cases several employees share
one 100% position, i.e., each employee works part time.



92







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 30 – FINANCE INCOME AND EXPENSES:



|                                                         |  | Year ended December 31 |        
|-------------------------------------------------------- |  | ---------------------- | -------
|                                                         |  | 2011                   |        
|                                                         |  | NIS in thousands       |        
|Income:                                                  |  |                        |        
|Interests:                                               |  |                        |        
|Interest income on short-term bank deposits              |  |                        | 1,693  
|Interest income from bank and others                     |  |                        | 26,708 
|Net gain from marketable securities available for sale   |  |                        | 9,897  
|Net gain from financial instruments                      |  |                        | 11,983 
|Changes in fair value of derivatives:                    |  |                        |        
|Conversion component                                     |  |                        | 4,804  
|Forward contracts on the Israeli CPI                     |  |                        | -      
|Diners option                                            |  |                        | 101,031
|Embedded derivatives                                     |  |                        | 451    
|                                                         |  |                        | 156,567
|                                                         |  |                        |        
|Expenses:                                                |  |                        |        
|Interest and differences from linkage to the Israel CPI: |  |                        |        
|Bank borrowings                                          |  |                        | 127,076
|Debentures and convertible debentures                    |  |                        | 192,100
|Bank commissions and others                              |  |                        | 19,877 
|Changes in fair value of derivatives:                    |  |                        |        
|Forward contracts on the Israeli CPI                     |  |                        | 9,569  
|Embedded derivatives                                     |  |                        | 2,558  
|Net of capitalization of finance expenses                |  |                        | (22,687
|                                                         |  |                        | 328,493
|Net finance cost                                         |  |                        | 171,926



93







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 31 – TAXES ON INCOME:



| | a. | Corporate taxation of the Company:
| | -- | ----------------------------------



| |  | Corporate taxation in Israel
| |  | ----------------------------



| | 1. | The Company and most of its subsidiaries are Israeli
companies and act within the borders of Israel, hence, assessed for corporate tax in Israel.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | Commencing with tax year 2008, the results of operations for tax purposes of the Company and its
subsidiaries are measured in nominal values. Through tax year 2007, the results of operations of the Company and its subsidiaries
were measured having regard to the changes in the CPI in accordance with the Income Tax (Inflationary Adjustments) Law, 1985 (hereafter
– the inflationary adjustments law).
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In February 2008, the Knesset
(the Israeli parliament) passed a law according to which the provisions of Inflationary adjustments law will no longer apply to
the Company in 2008 and thereafter.



| | 3. | Tax rates
| | -- | ---------



On July 14, 2009, the Knesset
passed the Economic Efficiency Law (Legislation Amendments for Implementation of the 2009 and 2010 Economic Plan) – 2009,
which provided, inter alia, an additional gradual reduction in the company tax rate to 18% as from the 2016 tax year. In accordance
with the aforementioned amendments, the company tax rates applicable as from the 2009 tax year are as follows: In the 2009 tax
year – 26%, in the 2010 tax year – 25%, in the 2011 tax year – 24%, in the 2012 tax year – 23%, in the
2013 tax year – 22%, in the 2014 tax year – 21%, in the 2015 tax year – 20% and as from the 2016 tax year the
company tax rate will be 18%.



On December 5, 2011 the Knesset
approved the Law to Change the Tax Burden (Legislative Amendments) – 2011. According to the law the tax reduction that was
provided in the Economic Efficiency Law, as aforementioned, will be cancelled and the company tax rate will be 25% as from 2012.



On August 5, 2013 the Knesset
passed the Law for Changes in National Priorities (Legislative Amendments for Achieving Budget Objectives in the Years 2013 and
2014) – 2013, by which, inter alia, the corporate tax rate would be raised by 1.5% to a rate of 26.5% as from 2014.



Current taxes for the periods
reported in these financial statements are calculated according to the tax rates specified in the Economic Efficiency Law.



Deferred tax balances as at
December 31, 2012 and 2011 are calculated in accordance with the tax rates specified in the Law to Change the Tax Burden, at the
tax rate expected on the date of reversal. The effect of the change in the tax rate on the financial statements as at December
31, 2011 is reflected in an increase in the deferred tax liability of NIS 34.4 thousand.



94







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 31 – TAXES ON INCOME(continued):



The deferred tax balances as
at December 31, 2013 were calculated according to the new tax rates specified in the Law for Changes in National Priorities, at
the tax rate expected to apply on the date of reversal. The effect of the change on the financial statements as at December 31,
2013, was not material.



Capital gains are taxed at
a rate of 25% on the capital gains derived after January 1, 2003 (as to marketable securities – that were acquired after
January 1, 2006), and at the regular corporate tax rates on income derived through the aforementioned date.



Corporate taxation in other
jurisdictions



A subsidiary company incorporated
in the U.S. is subject to U.S. Federal, State and City taxes; the weighted tax rate that apply to the subsidiary is approximately
35%.



| | b. | Tax assessments
| | -- | ---------------



Blue Square has received final
tax assessments for tax years through 2008.



Some subsidiaries have received
final assessments for tax years through 2008-2009. For some of the subsidiaries, no final tax assessments have been received since
their inception.



| | c. | Effect of adoption of IFRS in Israel on tax liability
| | -- | -----------------------------------------------------



In the years 2007 to 2011 a
Temporary Order was in affect (the meaning of the temporary order is that IFRS would actually not be applied upon computation of
the income reported for tax purposes for the said tax years). The Company estimates that at this stage a new legislation shall
not apply to tax years preceding 2014. The Company computed its taxable income for tax years 2007 to 2013 based on Israeli accounting
standards applicable prior to adoption of IFRS in Israel, subject to certain adjustments.



| | d. | Losses for tax purposes, carried forward to future years
| | -- | --------------------------------------------------------



As of December 31, 2013
and 2012 the Company and subsidiaries have operating tax loss carry forwards of approximately NIS 637 million and NIS 470
million. The balance of carry forward losses, in respect of which deferred tax assets were not included, amounted to NIS 173
million and NIS 191 million. In addition, the Company and its
subsidiaries have capital loss tax carry forwards of approximately NIS 7 million and NIS 20.4 million as of December 31, 2013 and 2012. The tax benefit in respect of capital tax
loss carry forwards amounting to NIS 7 million has not been recorded due to uncertainty of their realization.



95







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 31 – TAXES ON INCOME(continued):



| | e. | Taxes on income included in the income statements:
| | -- | --------------------------------------------------



|                                      |  | Year ended December 31 |       
|------------------------------------- |  | ---------------------- | ------
|                                      |  | 2011                   |       
|                                      |  | NIS in thousands       |       
|Current taxes:                        |  |                        |       
|Current tax on profits for the year   |  |                        | 24,212
|Adjustments in respect of prior years |  |                        | 501   
|Total current taxes                   |  |                        | 24,713
|Deferred taxes                        |  |                        | 23,772
|Income tax expense                    |  |                        | 48,485



| | f. | The income tax credited
(charged) to OCI during the year is as follows:
| | -- | -----------------------------------------------------------------------



|                                                                     |  | Year ended December 31 |       
|-------------------------------------------------------------------- |  | ---------------------- | ------
|                                                                     |  | 2011                   |       
|                                                                     |  | NIS in thousands       |       
|Deferred tax:                                                        |  |                        |       
|Tax on actuarial loss on post employment benefits scheme             |  |                        | 2,988 
|Tax on fair value adjustments of available-for-sale financial assets |  |                        | (1,676
|Tax on asset revaluation reserve                                     |  |                        | -     
|                                                                     |  |                        | 1,312 



| |  | The other items transferred to other comprehensive income do not have a tax affect
| |  | ----------------------------------------------------------------------------------



96







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 31 – TAXES ON INCOME(continued):



| | g. | The tax on the Company's profit before tax differs from the theoretical amount that would arise
using the weighted average tax rate applicable to profits of the consolidated entities as follows:
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                                                                                     |  | Year ended December 31 |        
|------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------- | -------
|                                                                                                                                     |  | 2011                   |        
|                                                                                                                                     |  | NIS in thousands       |        
|Profit (loss) before tax                                                                                                             |  |                        | 150,807
|Theoretical tax expenses (tax benefit) (24%, 25% and 25% respectively)                                                               |  |                        | 36,194 
|Tax effects of:                                                                                                                      |  |                        |        
|Realization of Diners option- see note 7                                                                                             |  |                        | (33,731
|Change in future tax rate                                                                                                            |  |                        | 34,398 
|Difference between the measurement basis of income for tax purposes and the measurement basis of income for book purposes, net       |  |                        | 4,667  
|Expenses not deductible for tax purposes, net                                                                                        |  |                        | 3,222  
|Utilization of previously unrecognized tax losses                                                                                    |  |                        | (1,137 
|Tax losses for which no deferred income tax asset was recognized                                                                     |  |                        | 11,993 
|Increase (decrease) in taxes resulting from
    computation of deferred taxes at a rate which is different from the theoretical rate |  |                        | (4,821 
|Non-taxable financial (income) expenses*                                                                                             |  |                        | (1,422 
|Tax impact relating to investments accounted for using the equity method results                                                     |  |                        | (1,379 
|Adjustment in respect of prior years                                                                                                 |  |                        | 501    
|Other                                                                                                                                |  |                        | -      
|Tax charge                                                                                                                           |  |                        | 48,485 



* Mainly resulting from changes in
value of conversion component in convertible debentures.



97







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 31 –
TAXES ON INCOME(continued):



| | h. | Deferred tax assets and liabilities, as presented in the statement of financial position are expected
to be recovered or settled, as follows:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------



|                                                                 |  | December 31      |         
|---------------------------------------------------------------- |  | ---------------- | --------
|                                                                 |  | 2012             |         
|                                                                 |  | NIS in thousands |         
|Deferred tax assets:                                             |  |                  |         
|Deferred tax asset to be recovered after more than 12  months    |  |                  | 74,426  
|Deferred tax asset to be recovered within 12 months              |  |                  | 40,379  
|                                                                 |  |                  | 114,805 
|Deferred tax liabilities:                                        |  |                  |         
|Deferred tax liability to be recovered after more than 12 months |  |                  | (132,511
|Deferred tax liability to be recovered within 12 months          |  |                  | (7,376  
|                                                                 |  |                  | (139,887
|Deferred tax liabilities, net                                    |  |                  | (25,082 



The deferred taxes are computed
at the tax rates of 26.5%. (2012: - 25%). For changes in tax rate enacted during 2013 – see also note 31a.



| | i. | The movement in the net deferred income tax accounts is as follows:
| | -- | -------------------------------------------------------------------



|                                                   |  | Year ended December 31 |        
|-------------------------------------------------- |  | ---------------------- | -------
|                                                   |  | 2012                   |        
|                                                   |  | NIS in thousands       |        
|Balance at January 1                               |  |                        | (33,218
|Statement of income charge:                        |  |                        |        
|Tax charged to tax expenses                        |  |                        | 20,668 
|Tax charged to discontinued operation              |  |                        | (5,000 
|Tax charged directly to other comprehensive income |  |                        | (7,532 
|Balance at December 31                             |  |                        | (25,082



98







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 31 – TAXES ON INCOME(continued):



| | j. | The movement in deferred income tax assets and liabilities during the year, without taking into
consideration the offsetting of balances within the same tax jurisdiction, is as follows:
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Deferred tax liabilities                    |  | Investment property and depreciable property and equipment |          |   | Intangible assets and other |  |         | Total | 
|------------------------------------------- |  | ---------------------------------------------------------- | -------- | - | --------------------------- |  | ------- | ----- | 
|                                            |  | NIS in thousands                                           |         
|Balance at January 1, 2012                  |  |                                                            | (88,624  | ) |                             |  | (37,802 | )     | 
|                                            |  |                                                            |          |   |                             |  |         |       | 
|Charged (credited) to the income statements |  |                                                            | (7,081   | ) |                             |  | (7,250  | )     | 
|Charged directly to OCI                     |  |                                                            | (4,117   | ) |                             |  | (4,897  | )     | 
|Balance at December 31, 2012                |  |                                                            | (99,822  | ) |                             |  | (49,949 | )     | 
|                                            |  |                                                            |          |   |                             |  |         |       | 
|Credited to the income statements           |  |                                                            | (24,795  | ) |                             |  | (11,998 | )     | 
|Charged directly to OCI                     |  |                                                            | (485     | ) |                             |  | (5,482  | )     | 
|Balance at December 31, 2013                |  |                                                            | (125,102 | ) |                             |  | (67,429 | )     | 



|Deferred tax assets                                           |  | Provisions for employee rights |        |   | Carry forwards tax losses |  |         | Derivative instruments |  |  | Provision  for impairment of trade receivables |   |  | Total |       
|------------------------------------------------------------- |  | ------------------------------ | ------ | - | ------------------------- |  | ------- | ---------------------- |  |  | ---------------------------------------------- | - |  | ----- | ------
|Balance at January 1, 2012                                    |  |                                | 33,324 |   |                           |  | 44,505  |                        |  |  | 3,431                                          |   |  |       | 11,948
|                                                              |  |                                |        |   |                           |  |         |                        |  |  |                                                |   |  |       |       
|Charged (credited) to tax expenses in the income statements   |  |                                | 5,681  |   |                           |  | 28,650  |                        |  |  | (2,208                                         | ) |  |       | 2,876 
|Credited to  discontinued operations in the income statements |  |                                | (19    | ) |                           |  | (3,354  | )                      |  |  | -                                              |   |  |       | (1,627
|Charged directly to OCI                                       |  |                                | 1,482  |   |                           |  | -       |                        |  |  | -                                              |   |  |       | -     
|Balance at December 31, 2012                                  |  |                                | 40,468 |   |                           |  | 69,801  |                        |  |  | 1,223                                          |   |  |       | 13,197
|                                                              |  |                                |        |   |                           |  |         |                        |  |  |                                                |   |  |       |       
|Charged (credited) to tax expenses in the income statements   |  |                                | 707    |   |                           |  | 53,212  |                        |  |  | (1,430                                         | ) |  |       | (2,768
|Charged directly to OCI                                       |  |                                | 1,794  |   |                           |  | -       |                        |  |  | -                                              |   |  |       | -     
|Balance at December 31, 2013                                  |  |                                | 42,969 |   |                           |  | 123,013 |                        |  |  | (207                                           | ) |  |       | 10,429



99







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 32 – EARNINGS PER SHARE:



| | a. | Basic
| | -- | -----



Basic earnings per share is calculated
by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue
during the year, (see note 25).



|                                                                                                  |  | Year ended December 31, |           
|------------------------------------------------------------------------------------------------- |  | ----------------------- | ----------
|                                                                                                  |  | 2011                    |           
|Profit attributable to equity holders of the Company(NIS in thousands) from continuing operations |  |                         | 78,122    
|Loss attributable to equity holders of the Company(NIS in thousands) from discontinued operations |  |                         | (18,609   
|Net profit (loss) attributable to equity holders of the Company (NIS in thousands)                |  |                         | 59,513    
|Weighted average number of ordinary shares in issue                                               |  |                         | 65,939,848



| | b. | Diluted
| | -- | -------



Diluted earnings per share are
calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential
ordinary shares. The Company has two categories of dilutive potential ordinary shares: convertible debt and share options. The
convertible debt is assumed to have been converted into ordinary shares, and the net profit is adjusted to eliminate the interest
expense less the tax effect. For the share options, a calculation is made to determine the number of shares that could have been
acquired at fair value (determined as the average annual market share price of the Company’s shares) based on the monetary
value of the subscription rights attached to outstanding share options. The number of shares calculated as above is compared with
the number of shares that would have been issued assuming the exercise of the share options.



|                                                                                   |  | Year ended December 31, |       
|---------------------------------------------------------------------------------- |  | ----------------------- | ------
|                                                                                   |  | 2011*                   |       
|                                                                                   |  | NIS in thousands        |       
|Profit (loss) attributable to equity holders of the Company                        |  |                         | 59,513
|Gain from conversion feature and Interest expense on convertible debt (net of tax) |  |                         | (7,150
|Profit (loss) used to determine diluted earnings per share                         |  |                         | 52,363



|                                                                                                          |  | Number of shares |           
|--------------------------------------------------------------------------------------------------------- |  | ---------------- | ----------
|Weighted average number of ordinary shares in issue adjustments for:                                      |  |                  | 65,939,848
|Assumed conversion of convertible debt                                                                    |  |                  | 227,259   
|Weighted average number of ordinary shares for diluted earnings per share                                 |  |                  | 66,167,107
|Options which were not included in the computation diluted earnings per share due to anti-dilutive effect |  |                  | 704,663   



In addition there are convertible
debentures in Company's subsidiary BSRE that had no dilutive effect on the Company's earnings per share.

*The effect of potential ordinary
shares was not taken into account in 2011 because it had anti-dilutive effect



100







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 33 – CONTINGENCIES:



In the ordinary course of business,
the Company is involved in various lawsuits against it. The costs that may result from these lawsuits are only accrued for when
it is more likely than not that a liability, resulting from past events, will be incurred and the amount of that liability can
be quantified or estimated within a reasonable range. The amount of the provisions recorded is based on a case-by-case assessment
of the risk level, while events that occur in the course of the litigation may require a reassessment of this risk. The Company’s assessment of risk is based both on the advice of its legal counsels and on the Company's estimate of the probable settlements
amounts that are expected to be incurred, if such settlements will be agreed by both parties. The provision recorded in the consolidated
financial statements in respect of all lawsuits against the Company amounted to NIS 43.2 million (see also note 24 regarding provisions).



Described hereunder are the
outstanding lawsuits against the Company, classified into groups with similar characteristic. The amounts presented below are calculated
based on the claims amounts as of the date of their submission to the Company.



| | a. | Customer claims
| | -- | ---------------



In the ordinary course of business,
lawsuits have been filed against the Company by its customers. These are mostly requests for approval of class action lawsuits,
particularly concerning allegations of illegal collection of funds, unlawful conduct or breach of license, or a breach of agreements
with customers, causing monetary and non-monetary damage to them.



Described hereunder are the
outstanding consumer purported class actions with respect to lawsuits with a total claim amount of NIS 1,862 million or which have
not been quantified, broken down by the amount claimed, as of the date of approval of these financial statements:



|                                                  |  | Total claims  amount (NIS in millions) |       |  | Number  of claims | 
|------------------------------------------------- |  | -------------------------------------- | ----- |  | ----------------- | 
|Up to NIS 50 million                              |  |                                        | 334   |  |                   | 
|NIS 51-100 million                                |  |                                        | 147   |  |                   | 
|NIS 101-200 million                               |  |                                        | 619   |  |                   | 
|Above NIS 201 million                             |  |                                        | 762   |  |                   | 
|Unquantified claims                               |  |                                        | -     |  |                   | 
|Total                                             |  |                                        | 1,862 |  |                   | 
|                                                  |  |                                        |       |  |                   | 
|Against the Company and other defendants together |  |                                        | 1,836 |  |                   | 



In September 2013, the court approved
a settlement agreement that was reached by the parties in a mediation process. According to the settlement agreement, the Company
undertook to replace purchase vouchers that have expired since September 2004 with new vouchers. In the opinion of the Company
and its advisors, the provisions included in the Company's financial statements are sufficient to cover the potential liabilities.



101







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 33 – CONTINGENCIES (continued):



| | b. | Employees, subcontractors, suppliers, authorities and other claims
| | -- | ------------------------------------------------------------------



Tax and local authorities:



In January 2012 the Company
received a demand from the National Insurance for additional payments, related to certain benefits granted to employees in the
Company’s branches in the amount of NIS 27.5 million for the years 2001-2004. The Company's appeal was rejected by the National
Insurance. In August 2013 the Company filed an appeal to the Labor Court. In December 2013, the Company received a demand from
the National Insurance for additional payments with respect to years 2005 – 2006 in the sum of approximately NIS 2 million,
and in January 2014 the company filed an appeal with regard to this demand.



In the opinion of the Company,
based on the opinion of its legal advisers, the chances that the Company's position will be accepted are higher than them of being
rejected. Accordingly, the Company did not make any provision in its financial statements for the years 2001-2006.



Business licenses
and permits



The Company’s
operations in Israel require permits from several authorities, including the Health Ministry and the Police and Fire Departments.
In the event that the Company is unable to obtain or maintain the required permits, it may be required to close the affected stores
or departments or take other action. However, the Company does not anticipate that not obtaining the necessary permits will have
a material effect on its business. The Company and some of its directors and managers are indicted in connection with business
licenses and planning and building regarding the Company's stores. As of the date of this Report, there are pending indictments
and provisional closure orders against some of the Company's stores or departments. The Company estimates that these matters will
not have a material adverse effect on the Company's operations.



Contingencies related
to Mega



In August,
2010 the Company and subsidiaries were served with a claim in which it is being sued by a former supplier of fruits and vegetables
claiming that the company breached the agreements between the parties regarding the supply of fruits and vegetables, a breach that
allegedly resulted in damages assessed by the plaintiff at approximately NIS 178 million. As mentioned in the claim, due to court
fees, it was filed for the sum of NIS 100 million.



In September
2013 the court gave its judgment, according to which, Mega paid the plaintiff approximately NIS 3 million. Both sided have filed
an appeal to the Supreme Court.



Restricted
practices



In August 2006, the Restrictive
Trade Practices Court approved a consent decree reached between the Commissioner of the Israeli Antitrust Authority, or the Commissioner,
and certain specific food suppliers. The consent decree stipulates various prohibitions, conditions and restrictions that would
apply to certain practices of these suppliers. The consent decree addresses the following practices: arrangement by which suppliers
influence the number or identity of competing suppliers; acquisition of shelf and off-shelf display space; category management;
the use of suppliers’ representatives to physically arrange the shelves in the chains’ stores; discounts and rebates
in exchange for meeting sales targets; arrangements that determine a supplier’s market share; and exclusivity in sales and
price dictation by suppliers. The Company is not a party to the consent decree; however, it could nevertheless have an effect on
the practices of the Company’s suppliers and indirectly on the Company.



102







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 33 – CONTINGENCIES (continued):



Mega is
now self-arranging all of its product categories other than “van sale” products (such as ice cream, newspapers
and bread products). The Commissioner has committed not to take any enforcement action with respect to the arrangement
of “van sale” products until the end of 2014. Self-arrangement has required the employment by the Company of
many new employees, increasing our employment costs. This may materially adversely affect the Company’s profits unless
the Company is able to pass these costs to suppliers. The Company is in the process of negotiating and entering into
arrangements with several of our suppliers in order to share these costs with such suppliers.



NOTE 34 – COMMITMENTS:



| | a. | Operating lease commitments - the Company leases various retail outlets, filling stations and commercial
centers, offices and warehouses under non-cancellable operating lease agreements. The lease terms are between 5 and 10 years, and
the majority of lease agreements are renewable at the end of the lease period at market rates.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company also leases cars
under cancellable operating lease agreements. The Company is required to give up to two month notice for the termination of these
agreements.



Future minimum payments under
non-cancelable operating leases for the years subsequent to the statement of position dates are as follows:



|                          |  | December 31      |          
|------------------------- |  | ---------------- | ---------
|                          |  | 2012             |          
|                          |  | NIS in thousands |          
|First year                |  |                  | 354,004  
|Second year               |  |                  | 314,346  
|Third year                |  |                  | 286,458  
|Fourth year               |  |                  | 251,677  
|Fifth year                |  |                  | 221,514  
|Sixth year and thereafter |  |                  | 951,951  
|                          |  |                  | 2,379,950



| | b. | Capital commitments
| | -- | -------------------



Capital expenditure contracted
for at the statement of financial position date but not yet incurred is as follows:



|                                    |  | December 31,     |        
|----------------------------------- |  | ---------------- | -------
|                                    |  | 2012             |        
|                                    |  | NIS in thousands |        
|Property and equipment              |  |                  | 8,261  
|Investment property and real estate |  |                  | 164,694



In addition commitment to investments
of jointly controlled entities and associates amounted to NIS 143 million (2012 - NIS 221 million).



103







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 34 – COMMITMENTS(continued):



| | c. | Wholesale market
| | -- | ----------------



| | 1. | Real estate rights and acquisition agreements
| | -- | ---------------------------------------------



During June 2010 two 50%:50%
joint ventures between BSRE and Gindi Investments (hereafter – the purchasers) entered into agreements to purchase land lease
rights in part of the wholesale market area in Tel Aviv for a period ending on August 31, 2099. The rights are for the development,
construction and marketing of a project including apartment buildings complex, areas for commercial use and areas for multi-purpose
use. The rights for the apartment building complex were acquired by City Core Tel Aviv Ltd. ("the Residence Company")
and the rights for the commercial and multi-purpose use were acquired by City Mall Tel Aviv Ltd. ("the Mall Company").
The land rights were acquired for a basic total consideration of NIS 950 million (100%) linked to the CPI together with the obligation
to pay additional consideration in certain circumstances. As of December 31, 2013, the purchasers paid the full consideration in
the amount of NIS 989 million before VAT (BSRE's share in these payment amounts to NIS 495 million).



As part of its commitments to
the sellers, the purchasers are obligated to plan and build public buildings and parking for the sellers. The consideration to
be paid by the sellers is based on cost plus 10%, up to a ceiling of NIS 84 million (which can be extended in certain conditions,
with the sellers approval, to NIS 102 million); any excess of costs will be bore by the purchasers. In addition, the purchasers
are obligated to develop 9 dunams of publicly open landscape, that is the property of the Tel Aviv municipality, and additional
parking places.



| | 2. | Financing of the project
| | -- | ------------------------



On June 26, 2013, Tel Aviv Lev
Towers Ltd. (the residence company) a company held 49.5% by BSRE, and the Tel Aviv Mall Ltd. (the mall company) a company held
50% by BSRE, (the purchasers) entered into financing agreement with banks according to which the banks will extend financing and
credit facilities to the residence company in a total scope of up to NIS 2 billion mainly for granting guarantees under the sale
law to the apartment purchasers and financing and credit lines of up to NIS 450 million to the mall company for completing the
construction of the mall basements and foundation. The credit lines are to be paid on March 31, 2016 (the final payment date) and
will bear an annual interest of Prime + 2%.



The mall company may repay the
entire credit by an early payment subject to the conditions stated in the financing agreement.



Under the agreement with the
banks grounds for immediate payment were determined. As of December 31, 2013, BSRE met the conditions.



To secure the liability of the
residence company, BSRE provided a constant guarantee of NIS 25 million. To secure the liability of the mall company, BSRE provided
a constant guarantee of NIS 50 million. In addition, the purchasers committed that the surplus accumulated in the residential project
after the full credit repayment, will serve as collateral to repay the credit of the mall company.



The financing agreement further
contains a number of conditions for the entry of the agreement into effect, among others, recording mortgage, liens and a warning
note in favor of the banks.



104







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 34 – COMMITMENTS(continued):



On August 8, 2013, the financing
agreements came into force and effect.



As of December 31, 2013, the
mall company and the residence company used NIS 334.4 million out of the credit line for repaying loans taken from a bank, which
is one of financing parties under the agreement.



| | 3. | Principles agreement with Gindi.
| | -- | --------------------------------



In April 2010 BSRE and Gindi
signed an agreement of principles which, inter alia, determined the following:



| | a. | BSRE shall extend 60% of the amounts required to make the first payment and 60% of any additional
amount required to promote the project until the second payment is made and which may not be available under the bank credit line.
As of December 31, 2013 balance stands at NIS 76.9 million and is presented under the item of long term loans granted.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | Gindi will provide management services, including selling and marketing, to the project in return
for a management fee of 16% of the profit from the project, calculated as determined in the agreement. As an advance for the management
fee above, an amount of NIS 15 million will be paid over five years from the date of the acquisition agreement subject to the bank's
approval.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. | Sale agreements with apartment purchasers
| | -- | -----------------------------------------



As of the reporting date, the
residence company entered into commitment for 677 sale agreements (from 722 in the entire project) with a scope of NIS 1,641 million
(including VAT) and received advances of NIS 962 million (including VAT).



| | 5. | Building permit
| | -- | ---------------



As of the reporting date, a
building permit to construct the mall, commercial spaces and the sport center was received.



| | d. | On May 13, 2012, BSRE signed a memorandum of understanding with a third party (the lessee), pursuant
to which the Company agreed to erect a 23,000 square-meter office building on a part of real property it owns in Ra'anana and also
to construct a 3,500 square-meter basement (the structure), both of which will be leased to the lessee for 10 years with a renewal
option for an additional 5 years. The rental fees in this period shall increase by 7.5%. BSRE has undertaken to erect a surrounding
structure at estimated cost of NIS 200 million and to perform all of the finishing work, as far as requested by the lessee, which
is estimated at a cost NIS 75 million. BSRE will be entitled to receive from the lessee a payment equal to 7.5% of the cost of
the finishing work in addition to monthly rental fees if BSRE will perform the finishing work.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



105







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 34 – COMMITMENTS(continued):



BSRE has undertaken to finish
the construction work and to transfer the building at the end of the final quarter of 2014. BSRE and the lessee have determined
acceptable compensation mechanisms. As of the reporting date, BSRE obtained building permits to erect the building and the construction
work has begun. Following the earthwork in the project, in September 2012, the Company entered into an agreement with another contractor
who commenced the construction work. On January 21, 2013, BSRE entered into an agreement for the sale of half of its rights in
the property to Harel Investments, Insurance and Financial Services Ltd. in return for NIS 51 million and shall bear 50% of the
remaining establishment costs. In addition, BSRE is entitled to an additional consideration for building rights of 2,500 sq.m that
were not yet utilized and according to the agreement such consideration is to be payable in a later date.



The agreement further determines
that if the building rights in the real estate are increased, Harel shall have the option to purchase 50% of these rights at a
consideration to be determined according to the value of the rights. A collaboration agreement was signed between BSRE and Harel.



As of the report date, and according
to the request of the tenant to reduce the leased spaces and BSRE's participation in the completion work of the building, the estimated
monthly rental fees for the first lease period are NIS 1.8 million (BSRE's share NIS 892 thousand). VAT will be added to all of
the amounts as required by law and will be linked to the CPI of December 2011.



| | e. | Commitment for establishing a power plant:
| | -- | ------------------------------------------



On February 8, 2012, a corporation
controlled by Dor Alon (55% held) entered into a detailed agreement with Sugat Sugar Refineries Ltd. (Sugat) under which the corporation
shall establish a power plant on its premises with total capacity of up to 124 Mega Watt. At the first stage, the plant capacity
shall be 64 Mega Watt. Under the agreement, the power plant shall provide the energy needs of Sugat for 24 years and 11 months
and in addition, the corporation may sell steam and electricity to third parties.



It was further agreed that in
the stage preceding the first stage, the corporation shall connect the Sugat plant to the natural gas transmission systems, shall
convert the existing energy plant of Sugat to a dual system enabling the operation by fuel oil and natural gas and shall operate
and maintain for Sugat its existing energy plant, all as determined in the detailed agreement.



On March 1, 2012, the corporation
entered into an agreement with Israel Natural Gas Lines Ltd. ("INGL") to connect Sugat to the national transmission system
for natural gas and to provide natural gas transmission services by INGL (the agreement).



Pursuant to the agreement, INGL
shall establish the infrastructures that include, inter alia, the transmission piping and the facilities necessary to connect the
Sugat plant to natural gas and shall install the infrastructures necessary for natural gas transmission to the power plant which
is planned to be built by the corporation on the Sugat plant premises.



The agreement is for a period
until July 31, 2029 with a renewal option of five additional years.



Pursuant to the agreement, the
corporation shall bear the connecting expenses to the transmission system which is estimated at NIS 15 million. In addition the
corporation is committed to pay the current annual payments to INGL for transmission services until the end of the agreement term
in an immaterial amount, regardless of whether the corporation uses the transmission services or not.



106







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 34 – COMMITMENTS(continued):



| | f. | On December 9, 2012, the Corporation entered into an agreement to purchase natural gas from the
partners in Tamar partnership (the partnership agreement) for the purpose of operating existing installations and a power plant,
when established, the purpose of which, is to supply the energy needs of Sugat. Dor Alon's Board of Directors approved the transaction
as an extraordinary transaction, in which the controlling shareholders may have a personal interest, pursuant to the Companies'
Regulations (Relieves in Transactions with Interested Parties) – 2000. Pursuant to the agreement, Tamar partnership partners
committed to supply the partnership with natural gas at a scope of up to 1.68 billion square meters according to the conditions
set forth in the supply agreement. The term of agreement is 15 years or the end of consuming the contractual quantity, whichever
is earlier, and is expected to commence during 2014.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | g. | In July 2002, Dor Alon transferred its offices to a site close to Kibbutz Yakum. The lease agreement
was signed for a period up to July 2013 and was extended during 2012 to July 2014 with the option for the extension of one year.
The annual rental is NIS 2,622 thousand, linked to the December 2001 CPI.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | h. | Dor Alon has agreements with the owners of land for the building and operation of 22 fueling stations
and two agreements for the building of commercial centers. Dor Alon has undertaken to pay Alon Israel Oil Company Ltd. an amount
equal to U.S. $250 thousand for each of the above agreements that is exercised. An agreement is considered exercised when the fueling
station or commercial center has started providing services to the public. As of December 31, 2013, two commercial centers and
two filling stations had started operation.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | i. | In November 2013, Dor Alon entered into an agreement to purchase natural gas from the partners
in Tamar partnership (the "agreement", the "sellers" and "Tamar partnership", respectively). The
term of the agreement commenced in the fourth quarter of 2013 and will end at the end of 7 years or on the date Dor Alon will consume
the overall contractual quantity, as defined below, whichever is earlier (the term of the agreement).
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Pursuant to the agreement, the
sellers committed to supply Dor Alon with a natural gas at a total scope of up to 0.36 BCM estimated at U.S. $85 million under
the conditions set forth in the agreement. Dor Alon committed to Take or Pay for the annual quantity of gas at the scope and according
to the mechanism set forth in the agreement. A condition precedent for the agreement to come into effect is obtaining an approval
from the Antitrust Authority.



| | j. | As part of Dor Alon's formal negotiations with the Environment Ministry it suggested a multi-annual
plan for identifying and rectifying pollution in filling station sites operated by Dor Alon and which were built after the Water
Regulations came into force. Under the plan Dor Alon will perform the above plan over a period of 8 years. The said plan and any
activity performed in the framework of this plan are considered to be of a positive nature by the Environment Ministry. Such positive
actions may be taken into account when deciding whether to take Dor Alon and its officeholders to Court. In addition, Dor Alon
and the Ministry reached an understanding on the installation of a system designed to prevent fuel fumes emissions (stage 2) in
the fueling stations operated by Dor Alon. As part of the said understandings, Dor Alon would install such systems in sites that
are located up to 40 meters from residential properties. During 2013 Dor Alon installed such systems in approximately 130 fueling
stations that it operates, and during 2014-2015 it intends to install such systems in approximately 72 fueling stations. Dor Alon
expects that its investment in the relevant equipment, in order to implement the provisions of the said Regulations, in 2014 will
be approximately NIS 13 million. In addition, Dor Alon expects that it will be required to invest further amounts also in future
years.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



107







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 35 – LIENS AND GUARANTEES:



LIENS:



BSRE



| | a. | As of December 31, 2013 there are charges on fourteen of properties transferred to BSRE by Mega
for the purpose of securing the liabilities of the vendors of the above properties acquired by BSRE to third parties (mainly banks).
The balance of loans as of December 31, 2013, for which the liens were placed amounted to approximately NIS 197.5 million.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition to the above, at
the date of approval of these financial statements on two of the assets which were transferred as part of the split off from Alon
Holdings in 2006, together with the foundation of BSRE, liens were placed to secure the liabilities to third parties (mainly banks)
relating to these properties to Alon Blue Square.



Also, charges have been registered
on five further properties from among the properties transferred. In the latter case, however, the Company has received ‘exclusion
letters’ (hereinafter - the conditional ‘exclusion letters’) from the holders of the above charges. The Company
has advised BSRE, that it has abided by, or will abide by, the terms of the conditional ‘exclusion letters,’ and that
there is no significant impediment to the completion of their transfer to BSRE.



| | b. | On December 31, 2013 a BSRE subsidiary had a loan in an amount of NIS 69 million to finance the
establishment of logistic center in Beer Tuvia. A first ranking lien on the property and the accompanying rights was registered
in favor of the bank.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. | As of December 31, 2013 there is a charge on one of the properties transferred from Mega to BSRE
for the purpose of securing the liabilities of the vendors of the property acquired by Mega to the third parties. In addition,
a charge has been registered on one further property transferred by Mega to BSRE in favor of a third party.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d. | To secure the repayment of the loans of the Residential Company and the Mall Company, the rights
in the real estate were pledged in favor of the bank that extended the loans to the purchasers (see note 34.c.2).
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | e. | As a collateral to pay the loan to expand Hadar mall in Jerusalem (BSRE's share in the mall is
50%)(including the additional loan, if exercised) BSRE charged in favor of the lenders the entire rights in the real estate of
the mall including related rights (such as the Company's rights in lease agreements signed and/or to be signed with tenants in
the mall, placing charges on the Company's rights in insurance policies). In addition, BSRE placed charges in favor the lenders
by floating charge on its rights in a designated account in which lease fees are to be deposited (the Company's share) and shall
charge its shares in the management company of the mall (50%).
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



108







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 35 – LIENS AND GUARANTEES(continued):



| | f. | As security for the financing arrangement from a bank who provided a credit line of NIS 115 million
for the development of the parking area in Giv'on, Tel Aviv Parking lots Ltd. (a 50% jointly controlled entity of BSRE) has registered
a fixed and floating charges on all the assets and rights of the lender, including BSRE's shareholding in the lender. To secure
the loan, a lien on the property and the accompanying rights will be registered in favor of the bank. Furthermore, BSRE will provide
guarantees in an unlimited amount to the bank and up to 50% from the joint venture's liabilities. As of December 31, 2013 NIS 30
million from the credit line was used.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | g. | As security for the financing arrangement from a bank who provided a credit line of NIS 90 million
for the construction of a logistic center Eyal Baribua (a 50% jointly controlled entity of BSRE) has registered a fixed charge
on the asset. As of December 31, 2013 NIS 76 million from the credit line was used.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Dor Alon



In order to secure the liabilities
of Dor Alon and its subsidiaries to banks, the balance of which as of December 31, 2013 amounted to NIS 932 million, Dor Alon and
its subsidiaries placed floating charges on all their assets, share capital and goodwill, excluding relating to the domestic sales
of LPG. Some of the unlimited charges are in accordance with a development contract with the ILA. Liens were also placed on ownership
rights in certain real estate assets and rights to receive funds and notes, insurance rights etc. in connection with these real
estate assets. To secure the liabilities of other subsidiaries to commercial banks a fixed and a current charge were placed on
the current assets, the fixed assets, the goodwill, the insurance rights, the receipts from credit card companies and share capital.



In addition, Dor Alon
recorded a first degree pledge on the shares of 14 jointly controlled entities and all the accompanying
rights, a first degree pledge on rights which were pledged to Dor Alon in connection with commercial centers and fuel
services, including insurance rights and the right to receive funds from various debtors and shareholders of the
proportionally consolidated entities.



BEE Group



The BEE Group and some of its
subsidiaries (including NIS 46 million in Kfar) placed unlimited, fixed and floating charges and a first ranking lien on the warehouse
and all its assets, property, book debts, rent, goodwill, profits, revenues, rights of ownership and other benefits in favor of
banks to secure their liabilities to banks, amounting as of December 31, 2013 to NIS 186 million.



In order to secure the liabilities
of Na’aman, Bee Group has undertaken not to pledge any of their assets and/or provide any kind of guarantee to a third party
without prior approval of the banks.



109







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 35 - LIENS AND GUARANTEES(continued):



GUARANTEES:



| | a. | Blue Square has provided bank guarantees for third parties such as service suppliers, for gift
certificates and customers in an aggregate amount of approximately NIS 3.6 million.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | Mega has issued the following guarantees:
| | -- | -----------------------------------------



| | i. | Mega has provided bank guarantees for its subsidiary, Eden Teva Briut, in an aggregate amount of
approximately NIS 100 million.
| | -- | -------------------------------------------------------------------------------------------------------------------------------

| | ii. | Mega provided a bank guarantee to a third party in an amount of approximately NIS 3.4 million.
| | --- | ----------------------------------------------------------------------------------------------



| | c. | BSRE has issued the following guarantees:
| | -- | -----------------------------------------



| | i. | A guarantee for the liabilities of the purchasers to the sellers as part of the Wholesale market
transaction. In addition, BSRE guaranteed the liabilities of the City Core Tel Aviv company and City Mall Tel Aviv company discussed
in note 34c.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ii. | A guarantee for a bank loan to the logistic center company of NIS 69 million.
| | --- | -----------------------------------------------------------------------------



| | iii. | In the amount of NIS 4 million to the Tel-Aviv municipality and the building contractor for the
Tel Aviv parking lots.
| | ---- | ----------------------------------------------------------------------------------------------------------------------

| | iv. | In an unlimited amount for its 50% share to a bank as part of the credit and loan agreement for
Eyal Baribua Ltd, a jointly controlled company.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------



| | d. | Dor Alon provided guarantees in the amount of NIS 21.1 million in connection with tenders in which
it participates as a bidder and in connection with legal proceedings to which it is a party.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | e. | Dor Alon provided a guarantee of NIS 6.6 million to secure its debentures.
| | -- | --------------------------------------------------------------------------



110







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 36 – RELATED-PARTY DISCLOSURES



Key management
personnel – includes the members of the board of directors and senior managers in the Company, and CEO's of Dor Alon, BSRE,
Mega and BEE Group.



The principal
related parties of the Company are: Alon Retail Ltd., Alon Israel Oil Company Ltd., Alon USA LP, Bielsol Investments (1987) Ltd.,
collective acquisition entities of kibbutzim in Israel that hold Alon Israel Oil Company Ltd, and other companies, whose interests
are controlled by the Company's directors among others. In addition there are related parties who are not principal related parties
by virtue on the Company's holding in jointly controlled entities or associates that are held at more than 25%.



| | a. | Transactions with related parties:
| | -- | ----------------------------------



|                                      |  | Year ended December 31 |        
|------------------------------------- |  | ---------------------- | -------
|                                      |  | 2012                   |        
|                                      |  | NIS in thousands       |        
|Fuel sales to related parties(a)      |  |                        | 204,592
|Sales to joint control entities(a)    |  |                        | 836,774
|Rental income (b)                     |  |                        | 6,551  
|Management fees to parent company (c) |  |                        | 5,902  
|Directors' fees (d)                   |  |                        | 2,733  
|Legal consulting (e)                  |  |                        | 5,127  
|Purchases (f)                         |  |                        | 808,749
|Discounts (g)                         |  |                        | -      



| | a. | Relate to transactions that are carried out in the normal course of business in accordance with
regular market prices and credit. Includes sales of fuels of Dor Alon to joint control entities and sales of products of Mega to
Joint control entities.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In January
2004 the shareholders of Blue Square approved an agreement according to which it provides joint control entities of Dor Alon purchasing
and supply services for stores operated by them. In consideration for these services, the Company is entitled to payment equivalent
to the cost of the services provided with the addition of a margin as stated in the agreement. In 2013 and 2012 the sales amounted
to approximately NIS 60 million.



| | b. | Point Wells
| | -- | -----------



During 2010,
BSRE signed agreements with subsidiaries of Alon U.S.A, a related party, for the acquisition and development of a property in Point-Wells
near Seattle, Washington, USA (presented as real estate inventories - see also note 14(2).). The property, which currently serves
primarily as a plant for storage and distribution of fuel and oils of the related parties was acquired for U.S. $19.5 million.



111







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 36 – RELATED-PARTY DISCLOSURES(continued):



According
to the development agreement, all demolition and contamination cleanups required for the land will be the responsibility of the
related parties and on their own account; the related parties will also compensate BSRE for any damages incurred in connection
with such activities. In case the Company was to sell the land the related party may participate in the consideration net of costs
as defined in the agreement.

The agreements
provide for the lease of the property to the related parties for a period of up to 10 years. Rental income received by BSRE amounts
to $1.7 million for the years 2013 and 2012, respectively.



| | c. | In December 2010, Alon and Dor Alon renewed the management services agreement ("Management Services
Agreement"), effective from January 1, 2011, by which Alon provides the following services and rights to Dor Alon (the "Services"):
(i) various management services, including those related to the chairman of the board and president of Dor Alon, day to day management
of Dor Alon, strategy and business development, supplementary legal counsel, corporate secretary services provided by Alon's in-house
counsel, and (ii) the right to use the "Alon" and "Alonit" brand names. As consideration for the Services,
since 2011, the quarterly management fees paid by Dor Alon to Alon equal the aggregate of 3% of Dor Alon's EBITDA profits according
to Dor Alon's quarterly consolidated financial statements, but not more than NIS 1,250 thousand on a quarterly basis, linked to
the consumer price index. Alon received approximately NIS 6.0 million for the Services (2012 - NIS 5.9 million). On March 2014,
the management services agreement was extended for an additional three year period with similar terms but not more than NIS 1,500
thousand on a quarterly basis, linked to the consumer price index published on February 2004.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d. | Commencing November 15, 2005, the Company's Chief Executive Officer, Mr. David Wiessman receives
compensation for his services of NIS 49,000 per month plus reimbursement of actual expenses incurred in connection with his services
to the Company. The compensation amount is linked to the Israeli CPI (base index – November 2005), and is updated every three
months. Due to the recent amendment to the Israeli's Companies Law, this arrangement was re-approved by our audit committee, board
of directors and shareholders meeting for additional three years commencing on February 2, 2012.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | e. | Legal services
| | -- | --------------



The Company
receives legal services from S. Biran & Co. a related party of the Company.



| | f. | Goods purchase from related parties
| | -- | -----------------------------------



Mega purchases
goods from Tnuva. These arrangements are in the ordinary course of our business, and the terms and conditions of these arrangements
are at "arm's-length". The Company purchases most of its dairy, fresh produce and poultry products from the Tnuva corporation,
which holds a leading position in the domestic dairy and poultry markets. To our knowledge, some of the collective acquisition
entities of kibbutzim in Israel that hold shares of Alon, our controlling shareholder, hold 21.5% of Tnuva.



112







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 36 – RELATED-PARTY DISCLOSURES(continued):



| | g. | Discounts
| | -- | ---------



On
September 13, 2005, the Company’s general shareholders meeting approved a discount arrangement for some of the
employees of the companies holding directly or indirectly in the Company’s shares (some of the employees of Alon
Group) (hereinafter - “the entitled employees”).



The discounts
to be given to the entitled employees will be identical to those given to the Company’s employees, which during 2013 were:
12% at the Mega In Town stores, 12% at Mega on-line, 6% at the Zol Beshefa stores and Mega Bool stores, 50% in Vardinon and 30%
in Na'aman.



The discounts
are limited to purchases in a total amount of NIS 8,500 a month.



Gift cards



The Company
sells gift certificates for the par value in the certificate less a discount, according to commercial terms negotiated with the
clients during the regular course of business.



Employment
agreement with Ms. Moran Wiessman



Beginning
in January 2009, Ms. Moran Wiessman has been employed by Alon's wholly-owned subsidiary Bee Group as the manager of the Bee Group
internet sites. Ms. Wiessman is the daughter of Mr. David Wiessman, the Company's Chief Executive Officer. As of December 31, 2013,
Ms. Wiessman receives a monthly salary of NIS 16,000, a cell phone at the expense of Bee Group, and Bee Group assigned a car to
Ms. Wiessman as is customary in Bee Group for employees at the same level. In addition, Ms. Wiessman is entitled to standard
social allocations by Bee Group (5% for provident fund, 8.33% for severance payments and 1% for disability insurance) and other
social benefits that are standard for an employee in her position.



Salary increases or bonuses shall be granted as is customary in Bee Group based on the professional performance
of Ms. Wiessman. Ms. Wiessman's monthly salary may be increased up to 20% annually. Bee Group management is entitled to grant Ms.
Wiessman an annual bonus as is customary in Bee Group of only up to six monthly salaries a year. The grant requires the approval
of the audit committee that will confirm that the bonus was given according to the grant's policy in Bee Group.



Acquisition
of apartment



During the year
2010 the Company's Co-Chief Executive Officer acquired an apartment from a jointly controlled entity for NIS 2,330 thousand.



113







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 36 – RELATED-PARTY DISCLOSURES(continued):



Purchase of natural
gas



Regarding purchase
of natural gas from a third party see note 34.i.



| | b. | Balances with related parties
| | -- | -----------------------------



Year-end balances
arising from sales/purchases of goods/services:



|                                                           |  | December 31,     |        
|---------------------------------------------------------- |  | ---------------- | -------
|                                                           |  | 2012             |        
|                                                           |  | NIS in thousands |        
|Diners credit card customers                               |  |                  | 126,691
|Other receivables                                          |  |                  | 131,396
|Loan to related party                                      |  |                  | 49,325 
|Loans to investments accounted for using the equity method |  |                  | 75,169 
|                                                           |  |                  | 382,581
|Trade payables                                             |  |                  | 44,987 
|Other payables                                             |  |                  | 20,573 
|Loan to parent Company                                     |  |                  | 9,250  
|                                                           |  |                  | 74,810 



The receivables
from related parties arise mainly from sale transactions and are due two months after the date of the sales. The receivables are
unsecured in nature and bear no interest. There are no provisions held against receivables from related parties.



As to a loan
receivable from a related party, see note 18.



| | c. | Acquisition of Dor Alon
| | -- | -----------------------



In connection
with the acquisition Alon and the Company obtained a pre-ruling from the Israeli Tax Authority. The pre-ruling is subject to various
conditions and provides, among other things, that the cost basis and the purchase date of the shares of Dor Alon for tax purposes
in the possession of the Company following the acquisition will be the original price and acquisition date, respectively, as they
had been for Alon prior to the acquisition. Alon has clarified to the Company that, in connection with the payment of tax at the
time of any future sale by the Company of all or part of its shares in Dor Alon, if any, to a third party, Alon will pay that portion
of any applicable tax payable in an amount equal to the amount of tax deferred by the Tax Authority in its pre-ruling (i.e., the
amount of tax that would have been payable by Alon in connection with the acquisition had the acquisition not been tax exempt according
to the pre-ruling).



114







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 36 – RELATED-PARTY DISCLOSURES(continued):



| | d. | Dor Alon
| | -- | --------



| | 1. | Pursuant to the agreement entered into in May 2005, and subsequently extended on January 6, 2011
until January 2016, Dor Alon may, from time to time, deposit funds with Alon and receive in return funds on ON CALL terms (on an
on-demand basis). The amount of funds lent from each party to the other party may not exceed NIS 150 million at any time (linked
to the prime rate less 1.25%). Against the deposits, the depositor is entitled to require the recipient party to provide her /or
third parties bank guarantees or letters of credit. Each party is entitled to redeem or require redemption of the balance by giving
notice of three banking business days. Either party may terminate the agreement by providing three-month prior written notice.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | As part of the transfer of assets and operations that took place in 2004, Alon undertook to indemnify
Dor Alon for expenses Dor Alon may incur relating to the period through the date of transfer of the assets and Dor Alon undertook
to indemnify Alon in case lawsuits would be brought against it in respect of expenses relating to the period subsequent to the
transfer of assets to Dor Alon. Also, Dor Alon undertook to indemnify Alon in respect of the tax liability to which Alon would
be subject if Dor Alon were to breach the provisions of Section 104A of the Income Tax Ordinance regarding the transferred assets.
Alon has undertaken to indemnify Dor Alon in respect of any amount Dor Alon would be required to pay in connection with the period
during which 21 employees of Alon that were transferred to Dor Alon as part of the transfer of operations were employed by Alon.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | For additional information regarding transactions with related parties see note 34.
| | -- | -----------------------------------------------------------------------------------



Key management compensation



|                                                |  | Year ended December 31 |       
|----------------------------------------------- |  | ---------------------- | ------
|                                                |  | 2011                   |       
|                                                |  | NIS in thousands       |       
|Salaries and other short-term employee benefits |  |                        | 16,760
|Share-based payments                            |  |                        | 1,581 
|Total                                           |  |                        | 18,341



NOTE
37 – EVENTS SUBSEQUENT TO DECEMBER 31, 2013:



| | a. | On January 27, 2014, BSRE completed the exchange of NIS 200 million par value of bonds (Series
B) (recorded in the books at a liability value of NIS 238 million) pursuant to a partial exchange tender offer against an expansion
of bonds (Series E) at a par value of NIS 265 million. The exchange had no effect on the statement of profit or loss.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | On February 23, 2014, an ordinary purchase offer of BSRE was completed for the purchase of 7.8%
of its issued and outstanding share capital for NIS 160 million. The purchase offer was responded by 99.2% of BSRE shareholders
including the Company. The Company's share in the purchase offer's consideration was NIS 120 million. The holding rate of the Company
in BSRE, after the purchase offer, is 74.71%.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



115







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 38 – IFRS11 Joint Arrangements:



The Company applied
for the first time IFRS 11 at its effective date, January 1, 2013 retroactively effective on January 1, 2012 and that is under
the relief stated in the transition principles of the standard. The statement of income statements for the year 2011 has not been
restated as a result of the Company's decision to adopt the relief of IFRS11.



The Company reclassified
share of profits in jointly controlled entities and associated which are integral to the Company's activity into the operating
profit.



The effect of
applying IFRS 11 on the Company’s financial statements is as follows:



The effect
on the statement of financial position:



|                                              |  | December 31, 2012       |      
|--------------------------------------------- |  | ----------------------- | -----
|                                              |  | As previously  reported |      
|                                              |  | NIS in millions         |      
|                                              |  |                         |      
|Current assets                                |  |                         | 3,387
|Non-current assets                            |  |                         |      
|Investments accounted for using equity method |  |                         | 349  
|Other non-current assets                      |  |                         | 5,757
|                                              |  |                         |      
|Current liabilities                           |  |                         | 4,074
|Non-current liabilities                       |  |                         | 3,813
|                                              |  |                         |      
|Equity                                        |  |                         | 1,606



|                                              |  | January 1, 2012         |      
|--------------------------------------------- |  | ----------------------- | -----
|                                              |  | As previously  reported |      
|                                              |  | NIS in millions         |      
|                                              |  |                         |      
|Current assets                                |  |                         | 3,157
|Non-current assets                            |  |                         |      
|Investments accounted for using equity method |  |                         | 203  
|Other non-current assets                      |  |                         | 5,734
|                                              |  |                         |      
|Current liabilities                           |  |                         | 3,651
|Non-current liabilities                       |  |                         | 3,897
|                                              |  |                         |      
|Equity                                        |  |                         | 1,546



116







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 38 – IFRS11 Joint Arrangements
(continued):



Effect on
the statement of income:



|                                                                     |  | Year ended December 31, 2012 |       
|-------------------------------------------------------------------- |  | ---------------------------- | ------
|                                                                     |  | As previously  reported      |       
|                                                                     |  | NIS in millions              |       
|                                                                     |  |                              |       
|Revenues, net                                                        |  |                              | 12,850
|Gross profit                                                         |  |                              | 2,842 
|Operating profit before changes                                      |  |                              | 184   
|Share of profit of investments accounted for using the equity method |  |                              | -     
|Increase in fair value of investment property, net                   |  |                              | 107   
|Other gains, net                                                     |  |                              | 23    
|Operating profit after changes                                       |  |                              | 314   
|Finance expenses, net                                                |  |                              | (246  
|Tax benefit (taxes on income)                                        |  |                              | (16   
|Share in gains of associates                                         |  |                              | 12    
|Net income from continuing operation                                 |  |                              | 64    



The main decrease
in the profit for the year ended December 31, 2012 derives from eliminating profit, resulting from loss of control in a jointly
controlled entity in the amount of NIS 19.6 million as a result of applying IFRS 11.



The transition
did not have any impact on the OCI for the period.



Effect on
the statement of cash flows:



|                                                                  |  | Year ended December 31, 2012 |     
|----------------------------------------------------------------- |  | ---------------------------- | ----
|                                                                  |  | As previously  reported      |     
|                                                                  |  | NIS in millions              |     
|                                                                  |  |                              |     
|Net cash provided by operating activity                           |  |                              | 299 
|Net cash used in investing activity                               |  |                              | (573
|Net cash provided by financing activity                           |  |                              | 482 
|Increase in cash and cash equivalents                             |  |                              | 208 
|Balance of cash and cash equivalents at the beginning of the year |  |                              | 74  
|Balance of cash and cash equivalents at the end of the year       |  |                              | 282 



# # # # # #



117







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DETAILS
OF PRINCIPAL SUBSIDIARIES, JOINTLY CONTROLLED ENTITIES AND ASSOCIATES AT DECEMBER 31, 2013



APPENDIX



|Holding Company                       |  | Name
    of Company                                           |  | Percentage
    of ownership and control by holding Company as of December 31, 2013 |        |  | 
|------------------------------------- |  | ------------------------------------------------------------- |  | ---------------------------------------------------------------------------------- | ------ |  | 
|Alon Blue Square Israel Ltd.          |  | Mega Retail Ltd.                                              |  |                                                                                    | 100%   |  | 
|                                      |  | Blue Square Real Estate Ltd.                                  |  |                                                                                    | 74.76% |  | 
|                                      |  | BEE Group Ltd.                                                |  |                                                                                    | 100%   |  | 
|                                      |  | Diners Club Israel Ltd.                                       |  |                                                                                    | 36.75% |  | 
|                                      |  | Dor Alon Energy in Israel (1988)
    Ltd.                     |  |                                                                                    | 78.43% |  | 
|                                      |  | Alon Cellular Ltd.                                            |  |                                                                                    | 100%   |  | 
|Mega Retail Ltd.                      |  | Eden Briut Teva Market Ltd.                                   |  |                                                                                    | 51%    |  | 
|                                      |  | Doctor Baby Marketing Ltd.                                    |  |                                                                                    | 100%   |  | 
|                                      |  | Loyalty plan-partnership "YOU"                                |  |                                                                                    | 75%    |  | 
|                                      |  | Radio Non-Stop Ltd.                                           |  |                                                                                    | 33%    |  | 
|                                      |  | Radio "Zafon" Ltd.                                            |  |                                                                                    | 12%    |  | 
|Blue Square Real Estate Ltd.          |  | Kenyon Hadar Management Company
    Ltd.                      |  |                                                                                    | 50%    |  | 
|                                      |  | Hyper Lod Center Ltd.                                         |  |                                                                                    | 100%   |  | 
|                                      |  | Gamda trade Ltd.                                              |  |                                                                                    | 100%   |  | 
|                                      |  | Joint venture Blue Square -
    Hadar                         |  |                                                                                    | 50%    |  | 
|                                      |  | Logistic Center Bee Square Real
    Estate Ltd.               |  |                                                                                    | 100%   |  | 
|                                      |  | Izdarehet Investments Company
    Ltd.                        |  |                                                                                    | 50%    |  | 
|                                      |  | City Core Tel Aviv Ltd.                                       |  |                                                                                    | 49.5%  |  | 
|                                      |  | City Mall Tel Aviv Ltd.                                       |  |                                                                                    | 50%    |  | 
|                                      |  | Tel Aviv Parking lots Ltd.                                    |  |                                                                                    | 50%    |  | 
|                                      |  | Einat real estate investment agriculture
    cooperative Ltd. |  |                                                                                    | 50%    |  | 
|                                      |  | Eyal Baribua Ltd.                                             |  |                                                                                    | 50%    |  | 
|                                      |  | BSRE U.S.A Inc                                                |  |                                                                                    | 100%   |  | 
|                                      |  | BSRE Point Wells Lp                                           |  |                                                                                    | 99.9%  |  | 
|Bee Group Ltd.                        |  | Na'aman Group Porcelain Ltd                                   |  |                                                                                    | 77.51% |  | 
|                                      |  | Kfar Hasha'ashuim Marketing
    Ltd.                          |  |                                                                                    | 90%    |  | 
|Dor Alon Energy in Israel (1988) Ltd. |  | Dor Alon Gas Technologies Ltd.                                |  |                                                                                    | 100%   |  | 
|                                      |  | Dor Alon retail sites management
    LTD                      |  |                                                                                    | 100%   |  | 
|                                      |  | Alon fuel management and operation
    networks (1999) Ltd.   |  |                                                                                    | 100%   |  | 
|                                      |  | Loyalty plan-partnership "YOU"                                |  |                                                                                    | 25%    |  | 
|                                      |  | Dor energy holdings (2004) ltd                                |  |                                                                                    | 100%   |  | 
|                                      |  | Diners Club Israel Ltd.                                       |  |                                                                                    | 12.25% |  | 
|                                      |  | Mercury Aviation                                              |  |                                                                                    | 31.25% |  | 



118









SIGNATURE



The registrant hereby
certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this Annual Report on its behalf.



| | ALON BLUE SQUARE ISRAEL LTD.
| | ----------------------------
| |                             
| | By:                         
| |                             
| |                             
| |                             
| | By:                         
| |                             
| |                             
| |                             
| | By:                         
| |                             
| |                             



Date: April 22, 2014





119