Coca-Cola Israel Subsidizing Tara Dairy’s Losses

Tara said to have given retailers a 20% discount on its new cheese, discount not passed onto shoppers.

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The Tara dairy lost an estimated 253 million shekels (about $70 million) last year, due to heavy costs on launching its new dairy.

The smallest of Israel’s Big 3 dairies, Tara caused heavy losses for its owners, the Central Bottling Company (better known as Coca-Cola Israel), which is thought to be subsidizing the dairy through the high prices of its more profitable enterprise, Coca-Cola.

Tara built its new facility in Noam, near Netivot, at an investment of 1 billion shekels ($284 million), and launched it with great fanfare last July. Yet the facility only began operations in the fourth quarter of 2012, which meant that for nine months, Tara was paying to maintain two facilities – the old one in Tel Aviv, and the new one. This is thought to have cost more than $50 million extra.

Other factors causing losses included the poorly-managed transfer to the new facility, which included products being destroyed due to faulty production, and an expensive advertising campaign.

Tara’s sales declined 5.1% in 2013 due to the problems with the new production facility, according to Storenext data. Sales dropped despite the massive increase in advertising spending, from 6 million shekels in 2012 to 43 million shekels last year.

The Central Bottling Company stated in response that the new dairy was necessary in order to make Tara a real competitor versus market leaders Tnuva and Strauss, and to bring genuine competition to Israel’s dairy market. It said this was the reason for what it termed “a campaign of false rumors intended to harm Tara” in recent days.

Meanwhile, antitrust Commissioner David Gilo is currently investigating whether the Central Bottling Company used its monopoly in the soda market to push stores to buy Tara products.

The company’s Coca-Cola operations are hugely profitable. It sold 5.2 billion shekels in soft drinks in 2012. Sales at Tara were at 1 billion shekels that year, while sales of drink subsidiary Prigat stood at 600 million to 650 million shekels. Other subsidiaries include the Tabor winery, a beer brewery and Fuze iced tea.

Coca-Cola sales alone totaled 2 billion shekels. It costs the company 2 shekels to manufacture a 1.5-liter bottle of Coca-Cola, estimate industry sources, while Coke Zero, diet cola and Sprite cost 10% less, since sugar increases production costs. The list price for retailers is 5.60 shekels for a 1.5-liter bottle, while the company offers an average discount of 8% - working out to 5.15 shekels. That translates into gross profits of 61% for Coca-Cola and 65% for the other products.

The company is thought to have even higher profitability on its 500-milliliter bottles, which sector sources estimate cost less than a shekel to manufacture but are sold to retailers for an average of 3.3 shekels, after accounting for discounts.

After figuring in transport, advertising and royalties to Coca-Cola International, the Central Bottling Company is left with profit estimated at 25% to 30% of revenues, meaning operating profit of 500 million to 600 million shekels a year.

Claims against Tara

Meanwhile, a supermarket executive claimed that when Tara launched its new Noam hard cheese last July, salespeople for the dairy offered the supermarket chains discounts up to 20 percent on the product to the chains, on condition that they not pass on the saving to consumers, the executive told Haaretz, speaking on condition of anonymity.

The executive told TheMarker that he was offered a buy-two/get-eight-free offer on 3-kilo blocks of Noam cheese, so long as he did not lower the price to consumers. This condition was an attempt to avoid harming Noam’s positioning as a premium cheese, superior to Tnuva’s Emek.

“Tara wants to create a demand for their products, but apparently does not want to play with the price,” he said.

The offer is tempting to retailers because hard cheese is a regulated product, whose profit margin including discounts is about 15% of turnover. With estimated operating expenses at 22% of turnover, cheeses are a necessity item that retailers lose out on.

The hard cheese market in Israel reached nearly a billion shekels ($286 million) last year. Tnuva’s market share slid from 91.1% in 2012 to 88.2% in 2013, while Tara’s share jumped from 2.6% to 6.6% during the same period in the wake of the introduction of Noam.

“It is certainly a problem when the wholesaler dictates to the retailer the consumer price,” said an expert on anti-competitive business practices. “An arrangement regarding a set price can be considered a restrictive arrangement. Still, Tara is allowed to market Noam products at very similar prices to Tnuva. You may always adjust your prices to the competitor.”

Another supermarket executive says he also was offered a free block of cheese for buying several blocks of Noam. “There condition was that it would not be realized as a discount to the consumer, so I refused,” he said. “At Tara they told me they want to increase Noam’s market share in the store deli and to up the shelf space by 20%.” He noted they told him Tara did not have money for a sale, so he should keep the difference and drive salespeople in the delis to push Noam to customers. “Tnuva never has a sale on Emek in the deli, and Tara didn’t want to start a policy of deli sales,” he added, stressing deli sales on hard cheeses are a rarity in Israel.

Industry observers expected a price war when Noam entered the market in July, but competition never materialized after Tara elected to charge the same price as Emek. Tara grabbed a 13% share as compared to 82% for Tnuva, say industry players.

Milk and other dairy products in a supermarket.Credit: Ofer Vaknin