Land of Milky and Honey: Behind Israel's High Cost of Pudding

Food industry executives helped TheMarker get a rough estimate about the cost of making, shipping, selling and marketing the pudding.

Daniel Bar-On

The retail price for Milky – the popular chocolate pudding that has become the newest symbol of high Israeli food prices – typically costs about 3 shekels (80 cents) when it’s not on sale.

But how do the grocers get to a price like that? Talking with people in the food industry and at the big retail chains, it’s possible to get a rough estimate about the cost of making, shipping, selling and marketing the pudding.

It turns out the single biggest component in the price is its raw materials, first and foremost raw milk. Milk alone makes up 45 agorot of the shelf price, or 15% of the total, including packaging. Cocoa and sugar add another 35 agorot approximately, or 11%.

It should come as no surprise that so much of Milky’s cost is in the milk: At most 2.20 shekels a liter, raw milk prices in Israel are high compared to many countries. That, in turn, is due to quotas that limit production and to inefficient producers.

People in the food industry, apart from the dairy farmer, say the target price for milk – the government-set price dairy farmers get for the milk – is inflated. “A lot of dairy farms are making a lot of money on the target price,” said one.

The government’s committee on food prices last year acknowledged there are serious structural problems in the dairy sector and how the target price was fixed. The way the price is calculated, by surveying farmers’ costs, only encourages them to inflate them. The influence the Dairy Council and growers have on price supervision only exacerbates the problem, it said.

Industry executives claim that for dairy products the cost of distributing goods to retailers averages about 15% of the final price – that is, 45 agorot in the case of Milky. Part of the high cost, they admit, is that distribution is Israel is extraordinarily inefficient.

Not all the supermarket chains operate logistics centers and many they don’t have facilities to keep dairy products chilled properly at their store warehouses. That means manufacturers have to deliver new products every day to stores.

Maintaining kashrut only amounts to 1% of the total production cost, they say. But the cost of kashrut supervision is mainly indirect, because it prevents many products from being imported and competing with local goods, which would bring down retail prices.

Calculating Milky’s cost offers an insight into the operating profit its manufacturer, Strauss Group, earns, which is about 12%. What it can’t reveal is the gross profit the company earns, which takes into account items such as CEO Gadi Lesin’s compensation. In 2013, the cost of employing Lesin was 10.7 million shekels.

Other high-cost executives include Ofra Strauss, its chairman, whose salary cost was 3.9 million shekels, and Todd Morgan, who headed its coffee division before he was ousted at a cost of 7.8 million shekels.

Strauss’ gross profit margin last year was 38.5%. That year it spent about 3.3 million shekels on advertising Milky, according to data from the market research firm Ifat. If so, that means about 7.5 agorot of each Milky is going to pay for marketing, or about 2.5% of the total cost.

When a Milky leaves the factory, it is sold to retailers for 2.06 shekels before value-added tax, but after the customary discounts Strauss offers, the price is more likely to be about 1.92. Factoring in VAT, the price rises to an average of 3 shekels when it reaches the supermarket shelf, according to Nielsen, the market research company.

If so, that means the supermarket chains are earning an estimated gross margin of 20.6% and an operating margin of 3-4%.

And then there is VAT itself. Unlike many countries in Europe, which have lowered their VAT rates and/or lowered them for many food products, Israel has a steep and mostly uniform 18% – equal to 46 agorot of the final price.