Meet Israel's Secret Oligarchs

Thanks mainly to faulty government policy, food importers often enjoy double-digit profit margins and a market impervious to competition.

Bloomberg

The Finance Ministry dropped a bombshell on Sunday when the weekly survey its chief economist revealed that food importers are the richest people in the country. They have the highest average annual income, about 5.5 million shekels ($1.4 million,) compared with just over 5 million for owners of high-tech and financial service companies. Over the past two decades, food importers have collectively generated nearly 2 billion shekels in salary and dividend income for themselves.

Although the ministry didn’t reveal the name of the most profitable food importer, it is thought to be the liquor importer M. Akkerman, which enjoys an amazing 40% profit margin.

Without much attention from the media or politicians, food importers have overtaken industrial barons, high-tech executives and bankers for the most spots in the 1% of the country’s earners. That’s no surprise. The others have a much greater influence on the economy and attract more regulatory and media scrutiny, while the importers just quietly handle shipments and let the supermakrets and manufacturers take the heat for high food prices.

It merits mentioning that imported food is supposed to provide badly-needed competition to local products and restrain price rises in an industry concentrated in a relatively limited number of players. After the 2011 cost-of-living protests, the government pinned its hopes on imports as the best way of breaking the power of the major local manfacturers.

But, as the Finance Ministry’s study reveals, nothing of the sort has happened. Instead of creating price competition, imports are a major contributor to high food prices. How did it happen?

The Finance Ministry’s chief economist offers a few, inconclusive answers.

As the report points out, it’s not as if the food-importing businsses is dominated by a few oligopolistic firms: Unlike the food-manufacturing industry, the number of players hasn’t fallen over the past decade.

Nevertheless, the profits earned by the 10 biggest importers have skyrocketed 230% to half-a-billion shekels in 2013 (the last year covered in the study.) But not everyone is earning big bucks from importing food. Among the large importers, some are generating profit margins of as little as 2%, while others make as much as 40%.

Profits took a sharp upward turn in 2007-2008, after which they held steady for all food importers. But, for the top 10, profits continued to grow until 2013.

Prices and profits

What is clear is that the jump in the food importers’ profits came as retail food prices climbed sharply.

The Israeli food industry has consolidated in the hands of fewer and fewer players over the past decade, which has caused food prices to climb sharply since 2006. The importers simply took advantage of the situation and hitched a ride as the prices of locally-made products increased.

The first effective price hike by importers came in 2008, when a strengthening shekel, should have led to cheaper imported products. failed to get them to lower prices. After that, the importers played follow the leader, taking their cue from the major domestic producers Tnuva, Strauss and Osem when they raised prices.

In a truly competitive market, where importers compete with each other and with the domestic makers, no one would risk raising prices in tandem with all the others. The fact that a shekel depreciation didn’t translate into lower prices on the store shelf – but rather into higher profits – says it all about competition, or the lack thereof.

That being the case, how we can ensure competition when importers aren’t doing their job? After all, there are a lot of importers and the barriers to entry for new ones is low.

The treasury’s chief economist points the finger at two guilty parties. One is the consumer, who insists on buying the most expensive brand name products no matter what the price. Do Israelis really need to drink Jack Daniel’s whiskey or Finlandia vodka instead of cheaper tipple? With M. Akkerman’s profit margins at 40%, a little discernment by drinkers could lead to much lower prices.

By the same token, consumer loyalty to Tnuva cheeses has enabled the company to be the catalyst for the constant increases in food prices over the past decade. Tnuva could count on consumers to buy its cheese no matter how much it cost. And the data up to the the 2011 social justice protests bear that out.

The second and most porminent finger is directed toward the government. The fact that food importing in Israel isn’t the kind of business that new players can easily enter is the fault of policy makers and regulators who have erected high barriers, mainly because of kashrut and red tape.

Kashrut not only adds significantly to the cost of importing food, but dramatically limits the range of products that can be imported. In the dairy sector, for instance, the number of foreign producers that make kosher cheese is small; when it comes to meat, the number is even smaller.

Bureaucracy makes things worse. The Health Ministry, for instance, has erected major barriers in its role as regulator over the most health-sensitive foods. After the 2003 scandal over the import of Remedia baby formula, which led to the death of two babies, the govenrment made the unfortunate decision to press criminal charges against the officials who were responsible. As a result, the risk-averse ministry has since blocked virtually all new food products.

Food imported by companies not already known to the ministry and products which have no local represenatives in Israel almost never get approval. That makes it especially tough for small importers from competing with the bigger ones or for more products to enter the market.

Meanwhile, the government’s Standards Institute has an the anticompetitive habit of applying uniquely Israeli standards to food and other products that keep imported competition at bay. The standards, which of course require special testing, provide jobs for hundreds of standards institute employees.

It’s also why H.J. Heinz – a name synonymous with ketchup – was forced to delete the word from its Israeli labels. It‘s almost certainly no coincidence that the committee that set the ketchup standard included representatives from domestic ketchup manufacturer Osem.

It isn’t milk

For the same kind of reasons, the soft drink Fanta can’t be imported into Israel (it has a picture of fruit on the label, in violation of local rules) and neither can soy milk (because it can’t be called milk.)

Frankly, none of this should come as a surprise. A government panel on reducing import barriers pointed this out a year ago, when it found that among 270 imported products, 60% were more expensive in Israel than abroad – 31% substantially more. The reason, it said, was the barriers imposed by regulation, with no less than 37 government agencies overseeing imports, each with its own set of requirements for the issue of an import license.

“The requirements of each agency are made without any coordination with those of the other authorized agencies and without an overall view of policy goals, including taking into account the issues of competition and the cost of living,” the committee said.

“Regulation and barriers are gradually pushing small importers out of the market, leading to greater concentration in a substantial portion of the Israeli consumer product market. Instead of offering a solution to the problem of concentration, the import sector has become part of the problem.”

So, yes, imports are part of the cost-of-living problem in Israel rather than part of the solution. That’s due to foolish government bureaucracy, in which officials make sure they avoid blame and see to it that Israelis are protected from the slightest risk, other than to their pocketbooks.

It’s not just that the bureaucracy has given food importers an entree into the 1%. That step up has come at the expense of the other 99%, who see their weekly shopping bills needlessly inflated and their hard-earned money disappearing into the upper stratum of the economy.