Crunching the Numbers Behind Israel's Drinks Market

Israelis are steering away from soft drinks in favor of water and, encouraged by a cut in the alcohol tax, the hard stuff too.

Hagai Amit
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If you've drunk anything today, it's likely it had something to do with Tempo. Credit: Daniel Bar-On
Hagai Amit

Corporate financial reports can be very boring. After all, except for revenues, net profit and equity, they have all sorts of other information – and a reader without the necessary financial background  will easily get lost in the endless rows and columns of numbers stretching over hundreds of pages.

But financial reports have an entire world hidden inside them about our lives as consumers. This is the case for Tempo Beverages International, one of Israel’s largest and best known makers of soft drinks and other beverages, alcoholic and otherwise. Tempo uploaded its 2015 reports on March 31, the very last day for filing for publicly traded firms.  

Anyone who follows corporate financial reporting – and probably almost everyone else too – knows to be suspicious of a company that files at the very last moment: In many cases they are trying to hide something embarrassing, or worse. But this is not true in Tempo’s case, as the beverage maker had an excellent year and ended 2015 with a 33% jump in profits and a 5.2% revenue increase compared to the previous year.

Tempo is the only one of the huge companies that control the Israeli drinks market that has to open its financial reports to the public, the others are privately-owned – so in addition to the financial reports showing the company increased its market at the expense of its competitors in many categories, and that the prices of sugar and plastic fell, we have the opportunity to understand what has changed in Israeli beverage consumption over the past year. 

Concentrated drinks

If you've drunk anything today, it's likely it had something to do with Tempo. Its sales of 1.14 billion shekels ($300 million) in 2015 came from a long list of brands the company sells, whether they manufacture or import them. Heineken, Maccabee, Goldstar, Nesher, Murphy’s, Paulaner, Samuel Adams and Newcastle Brown Ale are just some of the beers Tempo sells.

It also distributes hard liquors such as Absolut, Chivas, Jameson, Keglevich and Stock, as well as Barkan, Ashkelon and Carmel Zvi wines, along with Pepsi, XL, Jump and Cider Hagalil. And even if all you drink is water, then Tempo has Aqua Nova and San Benedetto mineral waters for you.  

Tempo’s market share shows how concentrated the Israeli drinks market is. The company controls 47% of beer sales in Israel. Its Barkan Winery is the biggest harvester of grapes in Israel, and No. 2 in sales with 20.8% of the local table wine market while Carmel Mizrahi has a 25.3% share. Tempo sells 18.7% of the vodka in Israel, and 15.9% of the whiskey. 

As for non-alcoholic beverages, Tempo has a 15.7% market share in Israel, just behind that of the Central Bottling Company (Coca Cola Israel) and Jafora Tavori.

If you ask any of the three biggies who share power in this market about competition, they will tell you immediately it’s a wild and fierce fight for market share.

But the same question makes Israeli bar and restaurant owners laugh (or cry). As one businessman who owns a number of such locations in the center of the country told TheMarker: “What competition? As a restaurant owner, what you see facing you is either the Central Bottling Company or Tempo – and the prices of both of them are the same.”

An average customer who goes to a bar to have a beer can tell you the same thing – the prices of almost all the brands are just about the same everywhere, with only a few shekels difference. The competition between the companies is basically over market share, and is reflected in the fight over bars and restaurants, which are described as the “cold market,” as opposed to the “hot market” of the supermarket chains and grocery stores – but this competition never translates into the price paid by the consumer. The cold market is where Tempo showed impressive sales growth last year, while its hot market shrunk.

“If the bar or restaurant is important to the manufacturer, they will do everything to keep them as a customer. If it is the hottest club in town, the owners will get a big discount. In bars you will find places where the owners receive a check of hundreds of thousands of shekels in advance, which is intended to ensure the place works with them for the next year,” says a small importer.

This lack of competition in beverages is not unique to Israel – it’s a global phenomenon. It is hard to find much of a difference between the price of a can of Coke and Pepsi anywhere in the world. Alcoholic drinks are not much better – the markets are controlled by a few huge corporations. In Israel Coca Cola represents the British drinks giant Diageo, with brands such as Smirnoff, Johnnie Walker and Guinness, while Tempo represents French multinational Pernod Ricard.

The first reason for Tempo’s sales growth in 2015 was Operation Protective Edge in Gaza during the summer of 2014. The fighting paralyzed the Israeli economy for a short time, so 2015, when nothing similar occurred, became a great year. What we must do instead is compare 2015 figures to those of 2013.  

Tempo’s growth happened in a period without many reasons for optimism for beverage manufacturers and importers. Nielsen figures show only a 0.4% increase in sales for the entire industry in Israel in 2015 (by quantity) compared to 2014. Looking further back, between 2012 and 2015 the industry grew by 10% in terms of the amount of beverages consumed in Israel.

The story of the soft drinks business is simply that Israelis are abandoning unhealthy drinks filled with calories and sugar, and turning to healthy drinks. Fortified water sales climbed 42.5% (in terms of amounts sold, not revenues) in 2015, and the consumption of carbonated water rose by 30.7%. Meanwhile, cola sales dropped 7.8%.

But don’t let these numbers fool you. Tempo’s growing profit did not come from water, where it is a marginal player compared to Eden Springs and Neviot, which share most of the market. The place to look for Tempo’s success is in alcohol.

Breaking a Coke addiction

In recent years, restaurants and coffee houses have begun deciding they are no longer willing to be Coca Cola’s agents, says the owner of a restaurant and bar chain. Many chains decided that if they don’t have to have Coke on their shelves, they are switching to Tempo. They are getting a lot more than small change for the move, he said.

“The result is that Tempo jumped from being a company with a 600 million-shekel turnover six or seven years ago to a turnover of over a billion shekels. You can say the arrangements with the big companies are a sort of restrictive trade practice, but no business owner fights with them because of the big discounts they offer for this exclusivity.”

Coca Cola cuts prices on Coke, and Tempo on Pepsi, just to get you to buy their beer, he added.

Once you factor out Coke, Tempo’s advantage in the alcoholic beverages market is very large. They are dominant in bars, so they had a good year and a successful summer. Their mix of alcohol products is powerful, and restaurants think “why should I sit on a 15% to 20% discount for Coca Cola if I can have 40% to 45% with Pepsi,” he says. The discount on 7 Up is bigger than for Sprite, and if the customer drinks water the discounts are even bigger.

Tempo is not the only one seeing rising sales of alcohol. Israelis bought 11.4% more alcoholic beverages in 2015 (in terms of quantities), and 12.2% more in terms of money spent. Supermarket and liquor store sales of whiskey rose 42% last year. The main reason for this jump in sales of alcoholic drinks is not attributable to a change in societal norms or other revolutionary changes – it is because the treasury lowered alcohol taxes, in addition to the Gaza warfare in 2014.

Israelis were once big vodka drinkers, but not because of the Russian roots of many of them, rather because the tax regime favored cheap alcohol such as vodka. In mid-2012 the Knesset voted to raise taxes on beer from 2.18 shekels to 4.19 shekels per liter, and in July 2013 purchase taxes on alcohol were set at a standard price per liter of alcohol, regardless of the cost of the product.

Beer prices jumped 33%, while hard liquor sales shifted, with lower-cost items such as vodka and arak becoming more expensive while the higher priced drinks dropped in price and super-premium whiskies took off. In September 2015, Finance Minister Moshe Kahlon decided to lower purchase tax on alcohol.

A few other interesting trends are revealed in Tempo’s financial reports. Sales via distributors actually fell from 9.3% in 2013 to 6.3% in 2015. This means the company is selling more directly to the customer, which gives the company better control over the customer and reduces logistics costs. But it also includes a change by distributors and suppliers who can no longer make a living, and they have opened their own independent stores.  

Another change is Tempo putting more money aside to cover bad debts that its customers can’t pay, though the main culprit is the Mega supermarket chain, which has delayed payments time after time and forced Tempo to classify some of the debts as likely never to be paid.  

Another trend is a drop in advertising and marketing spending, which is even more pronounced because sales rose. A number of factors are behind the cut in ad spending: Some of it is because suppliers are participating more in paying for ad campaigns, while marketing costs are down because of the new Food Law, which requires Tempo to classify money given to the large chains as “discounts” and not marketing and sales expenses.

In addition, legal restrictions passed in early 2012 on advertising and marketing alcohol affected ad spending. Finally, the overall trend of moving to cheaper digital media – affecting almost all industries – may reflect part of the drop in ad spending.