The edible oil manufacturer Shemen Industries, which has been marketing its products to Israeli consumers for years, recently changed its marketing strategy. Shemen controls about 47 percent of sales in the edible oil industry, but has been reporting relatively low profits of less than 3 percent.
This indicates a risk to the future financial results of the company, which could be significantly influenced by external events. Shemen and its shareholders had high hopes for developing some centrally located land owned by the company, but the worldwide crisis in high-tech and capital markets have put the plans on hold.
These two factors prompted Shemen to look for new, more profitable, products. Like other large companies, Shemen is interested in maintaining its position against stiff competition in the low price market, while at the same time creating a new brand name for which consumers would be willing to pay more.
Shemen will also try to create a completely new market share for simple brand-name vegetable oil. Shemen CEO Boaz Zafrir says that he hopes the new strategy will lead the company to 12 percent profits by 2003.
Shemen's sales for the first half of 2001 were lower than in the parallel in 2000, mainly due to a drop in demand for its products and erosion in prices. Increased competition has pushed prices down, though the main reason for the sharp drop in the cost of oil is the abolition of excise tax on imported oil - it was reduced to 0 percent at the beginning of 2001 but has recently been reinstated at its original level of 5 percent.
The battle in the vegetable oil market is simply a price war. Consumers are not looking for a quality product and are quite apathetic to brand names, buying whatever is on special offer. Manufacturers are therefore unable to charge a premium for their brand and it is not worth investing in developing a better product for the consumers' benefit.
To wake up consumers, Shemen has invested in developing a new series of oil products, made from soybeans, sunflower seeds, canola, corn and safflower. Shemen's marketing campaign focuses on creating a connection between vegetable oil and nature. The real question remains, after making consumers believe all the nice things about the new oils, will they be willing to pay more for them?
The regular price of a bottle of soy oil is NIS 4-6 and as low as NIS 3 on special offers. Hence it is almost impossible to increase profitability. A bottle of the new oil will cost about NIS 2 more than the other oils, with less than a shekel of that reaching the manufacturer. Shemen's main goal, however, is to have its oils in the premium oils section of stores, and not to get involved in the ruthless price war.
The success of the market penetration of the new brand name will increase Shemen's profitability because the manufacturing costs are not much greater than for the regular oils, despite the high cost of development and initial marketing in the short term.
Iris Fine, marketing vice president at Shemen, says the goal is to have consumers look at the product from a quality point of view, and less from the point of view of price.