Israel's Big Food Companies Distributing Smaller Rivals' Goods to Enhance Market Power

That's the new logic of the big food companies vis a vis their smaller rivals: If you can't buy them, deliver their goods. Antitrust officials are looking askance.

Moti Milrod

A team of executives from the food-importing group Neto are due to meet with antirust regulator next week to get permission to distribute the frozen food products made by the Israeli company Vita Pri-Hagalil.

Neto, the fifth biggest player in the Israeli food industry, has been seeking permission for several months, but regulators are still deciding whether it will give the company too much power in the market. Frozen food accounts for about half of the 350 million shekels ($90 million) of food Vita Pri-Haglil, a medium-sized maker, sells every year.

The Antitrust Authorities have already deemed the tie-up problematic and have signaled it won’t win a go-ahead. But Adi Ezra, Neot’s chairman, is convinced it will get a nod.

“The agreement between Neot and Pri-Hagalil will increase competition in the frozen-vegetable segment, which is now controlled by Sunfirst, which is owned by Teva.”

But in fact distribution agreements between the Israeli food industries’ biggest companies and their small and medium-sized rivals have become more common, especially in the last few months, as the giants have discovered their room to grow through outright acquisitions, as they have in the past, is limited.

“Because the big companies no longer can get permission to acquire other companies, they’re moving to distribution,” said one industry executive, who asked not to be identified. “That’s they way they can grow. If they can enter a new category by distributing a product, they’ve bought themselves market power.”

TheMarker has learned that Osem will begin distributing Baracke tahini and halva products in January. In August, Tnuva began distributing products produced by Yad Hamelech, a maker of prepared salads. Two years ago, Tnuva began distributing Pasta Noona products, the first time since 2006 it undertook to do so for an other company since 2006.

Soglowek, the maker of prepared meat products, has gotten into the action, too: At the start of the year, it began distributing Priniv juices and a month afterward, the sauces and other products of Golan Dairies.

For the big food companies, acting as distributors doesn’t mean simply delivering products to retailers. It also involves storage and managing sales with retailers – supermarkets, minimarkets and small grocers. They decide which stores will sell which products at what price retailers buy them, and what will be the recommended prices to the consumer.

Soglowek is the only big food company that doesn’t offer these services on top of basic delivery.

In exchange, most of the big food companies get between 25% and 30% of the wholesale price. Tnuva is an exception and buys the products it’s distributing for others and then re-sells them to retailers.

Distribution not only creates a profit center for the big companies but enables them to widen their product range and give them more power vis a via retailers. Tnuva, for instance, can offer prepared salads, a category it doesn’t make on its own.

Smaller food makers see the agreements as a way to survive in an industry where the top 10 players control 60% of the market, making it difficult for them to win space on grocery shelves. It gives them entrée into stores across the country they would have trouble reaching on their own.

“It’s a win-win situation,” said a manager for one of the big food makers.

The biggest producers had been snapping up smaller rivals – Osem, for instance bought six companies in recent years – putting too much of the market into too few hands. Critics say the distribution agreements are simply another way for the big food companies to extend their reach.

“The problem starts with the fact that big companies are managing the negotiations over products of smaller makers,” said an executive at one food retail chain. The company knows it can’t do so openly because it’s unlawful, but their sales people know how to elegantly hint that it would be a good idea for me to sell the products they’re distributing instead of the product of some other small manufacturers they don’t distribute for.”

He points to the Tnuva-Yad Halemech tie for the later Salatei Hagalil products. “If they weren’t being distributed by Tnuva, I would never bother to meet with a company that’s offering me different types of prepared salads in a market full of manufacturers,” he said, asking not to be identified.

A food manufacturing manager said small companies didn’t necessarily benefit from the arrangement either, since the big producers naturally favor their own products, which bring them higher profit margins.