Tnuva analysis: Can a billion Chinese, minus one, be right?

Apr. 27, 2014

They say a billion Chinese can’t be wrong, and the potential Tnuva sale proves that a billion Chinese, minus one, are not mistaken. This overused joke, also broadcast on the “State of the Union” satirical TV show recently, raises questions in light of the progress of negotiations over the sale of Tnuva – Israel’s largest food manufacturer – to Chinese food company Bright Food.

Reports say the negotiations between Bright Food and from the Apax Partners private equity fund are nearing a close. The deal is estimated to place a $2.5 billion value on Tnuva, making it one of the most profitable deals the British fund has ever made.

Apax bought control of Tnuva eight years ago at only half that value. For the Chinese, nonetheless, the deal holds a lot of uncertainty given question marks over possible state intervention in Tnuva’s status.

Will the state here intervene? This question is now being examined as part of the effort to reduce the cost of living in Israel, since the fear is that as long as the local food industry remains so concentrated in the hands of such a small number of suppliers, food prices will never fall.

An analysis conducted by the Knesset’s Research and Information Center three months ago revealed the large differences in food prices between Israel and the rest of the world. In some areas, they reach 50% or more – and not to Israelis’ benefit. On average, Israeli food prices were found to be 20% to 25% higher.

An analysis of the causes for the discrepancies showed the main reason to be the large concentration of power in the Israeli food sector, starting with the planning of the food sector – especially in eggs and dairy products – and in the small number of huge food manufacturers, each of which enjoys complete, or almost complete, control in specific food categories.

The five leading food manufacturers are Tnuva (14%), Strauss (10%), Osem (8%), Coca-Cola and Tara (6%), and Unilever (4%). Three of them are officially monopolies, as declared by the Antitrust Authority: Tnuva in milk products; Strauss in yoghurt-style dairy products; and Coca-Cola in soft drinks.

Almost all of them are huge and grew locally, old-time food manufacturers who bought up more and more companies over the years and turned into vast and diversified food conglomerates. The Antitrust Authority, which for years stood watch over the buying-up of competitors, did not prevent the large food suppliers from buying up other firms in sectors outside their core businesses.

Since these were not direct competitors, in theory they weren’t mergers that endangered competition. In practice, what happened is that each of these food suppliers grew enormous with a wide range of products it supplies to the supermarket chains – and in doing so, became a supplier that no chain can allow itself to fight.

A balance of terror developed between these suppliers and their customers: The suppliers need the supermarkets to put their products on the shelves, but the supermarket chains don’t want to land in trouble and find themselves without the leading brands in many areas on their shelves. The conflict between the two sides has become impossible.

The Antitrust Authority woke up too late to see that these horizontal mergers in the food industry eliminated any possibility for competition. In the dairy sector, for example, only two significant independent dairies are left: Ramat Hagolan and Gad. The state also woke up too late to see that when the industry is controlled by huge horizontal monopolies, competition is destroyed at the same time in all sectors – since each giant supplier avoids disturbing their neighbor in a different sector, in return for peace and quiet in their own.

The state is not exactly making major efforts to open up the food industry to competition via imports. But as long as the big suppliers keep the supermarket chains dangling within their noose, it’s far from clear that the supermarkets will agree to grant the new importers shelf space, anyway. In such a situation, all the competitive importation will not succeed in creating competition.

That’s why the state is now reconsidering its position on the large food manufacturers – first and foremost, Tnuva. The Knesset’s information center, which usually avoids including recommendations in its research, made a rare exception in this case and recommended “dismantling the huge food suppliers, limiting the monopolies in one subsector from production activities in other subsectors.”

In a nutshell: To require Tnuva, Strauss, Coca-Cola and Osem to sell most of their food brands, and to make them focus only on one leading brand, in which each is a monopoly. It’s a clear anti-cartel move to break up the big monopolies, something that has rarely been done – in Israel or elsewhere – and therefore the state is extremely wary of taking this step.

Another possibility, much more moderate than actually breaking up the companies, is to put strict price controls in place on a significant number of products from Tnuva, to ensure that the company is not exploiting its market power. And since all of its competitors always toe the line with Tnuva on prices, this will affect its competitors’ prices, too.

Both of these options are being considered at the same time, but it’s not clear whether one will be chosen, or whether any decision will be made at all. What is clear is that Tnuva’s position is uncertain, and that this has occurred precisely on the eve of the potential sale.