The fact that Israeli food manufacturing is dominated by a handful of companies is something Israelis face every time they visit the supermarket. Not only are prices unbelievably high, but selection is limited. Israelis have a choice of two to four brands in virtually every category at the supermarket, and that’s two to four products for which competition is small — if it exists at all.
In 2012, the consulting firm Monitor conducted a study on Israel’s food sector for a special panel on food-price policy, the Kedmi committee. The firm looked at the top three manufacturers’ market share in countries around the world in various food categories.
A total of 22 categories in seven Western countries were examined. In half the categories, Israel had the highest level of concentration — meaning the least competition. In another five categories, Israel’s concentration was second-worst.
Israel had the worst concentration in the dairy sector, where 90% of the market was controlled by the three large dairy companies. In both the carbonated-beverage and soup-and-concentrate sectors, the three top firms also enjoyed 90% control. For both ice cream and juice this number was 80%, for mineral water it was 70%, for coffee it was 83% and for tea it was 80%.
Monitor came to the conclusion, which the Kedmi committee adopted, that Israel’s high food prices stemmed mainly from the highly concentrated food-manufacturing and importing businesses, which caused a lack of competition.
The big question is how we got to this state of affairs and who was benefiting. After all, there was supposedly a balance of power among the major food manufacturers and the big supermarket chains.
Super-Sol and Mega are mega players
The highly concentrated food-manufacturing sector is mirrored in the food-retailing business. The combined market share of the country’s two biggest supermarket chains, Super-Sol and Mega, was 60% in 2009, Monitor reported. Ostensibly, the power of the major players in the food sector was supposed to be diffuse, with the companies' efforts offsetting one another.
Strong supermarket chains, for example, were supposed to keep a lid on food manufacturers’ prices with the threat that if wholesale prices rose too much, manufacturers would find that their products were no longer for sale. That’s a threat no food company could stomach, but it seems the manufacturers and retailers have overlapping interests.
Worse, even the newer supermarket chains, which in recent years have eaten into Super-Sol and Mega’s market share, seem to have joined the cozy relationship between food manufacturers and retailers. The supermarkets are benefiting from the lack of competition among suppliers. The larger a supplier and the greater its profits — at the public’s expense of course — the more the retailers benefit through manufacturers’ sales bonuses.
These bonuses that suppliers provide the supermarket chains come in various forms. One supplier, for example, may pay to advertise the opening of a supermarket chain’s new store, or maybe it saves the retailer the expense of stocking shelves by doing the job for the retailer.
This of course pushes competition out of shelf space. The most common incentive is the volume-discount method. The more a retailer sells a product, the greater the discount. This gives retailers a clear incentive to sell the products provided by the supplier, who can also link bonuses on one product to sales volume for another.
Remember that major food manufacturers have lots of brands for a variety of products. Dairy firm Tnuva, for example, distributes Sunfrost frozen foods, Ma’adanot’s frozen pizza and Adom Adom’s and Tirat-Zvi’s meat products.
Food company Strauss’ brands include Yad Mordechai, Elite and water dispenser Tami 4. Osem distributes Nescafe and Nestle products in Israel, along with Tivall frozen foods, Materna baby formula and Beit Hashita canned goods, among others products.
So the linking of sales targets among various products is widespread. In fact, the link doesn’t even have to be made explicit.
One big truck
There’s also an incentive in the convenience of a single Osem truck pulling up to a store with products filling 10 different shelves. This encourages the supermarket to give Osem priority rather than to work with 10 different small suppliers, each producing a single product.
Market concentration also helps supermarket chains dampen competition among themselves. For example, it’s enough for one agreement to be fleshed out with Tnuva in which it sells its cottage cheese at the same price to all the chains. In the process, it eliminates the retailers’ need to worry about price.
That apparently is one reason we haven’t expected the chains, even the newer ones, to put much pressure on manufacturers to cut wholesale prices for leading products. Why should they?
Market domination and a lack of competition are therefore convenient phenomena for the major players, leading to the question of how this state of affairs can be changed, if at all.
The people at the Israel Antitrust Authority are licking their chops over the new food law that goes into effect at the beginning of next year. The law bars bonuses between the major food suppliers and the supermarket chains other than the reduction of product prices. It prevents manufacturers from stating a suggested retail price, unless we’re talking about a suggested reduction in price.
It will also make it illegal for suppliers to stock retailers’ shelves. Under extreme circumstances, the legislation also gives the Antitrust Authority the power to arrange supermarket shelves itself and free up space controlled by one company.
Once the bonus system is eliminated and the retailers no longer have the incentive to work with one major supplier, stores will find it more attractive to change course and increase the selection of brands on their shelves, the Antitrust Authority says. Their competitiveness will improve when they work with a broader range of less-expensive and less-powerful suppliers.
Too much chumminess
The new food law also addresses the concentration of market share among the supermarket chains themselves, giving the Antitrust Authority the power to limit the number of branches that a particular retailer has in a given geographic area. The authority recently gave the chains maps showing their geographic distribution; this information is expected to bar the largest chain, Super-Sol, from opening new locations in most areas of the country where it already has a presence.
The new law is designed to disrupt the chumminess among the players in the sector, but it doesn’t require or even encourage the supermarket retailers to increase their range of brands or work with new suppliers.
The only incentive that the chains have to work with new companies is the subject of controversy. The Antitrust Authority has interpreted the new law in a way that lets the major food suppliers continue to stock retail shelves, but only when at least 50% of a store’s shelf space is taken up by products from small suppliers.
As far as is known, the Antitrust Authority has found that at some of the newer discount supermarket chains, the small suppliers do indeed have a large market share. This contrasts with Super-Sol and Mega, which largely rely on the major food suppliers. Thus the new chains will apparently also be able to cut costs by being permitted to let the major manufacturers continue to stock their shelves.
There is, of course, something absurd about this; it means retailers who give more space to small suppliers are the ones that will be dependent on the major manufacturers to stock their shelves. It’s doubtful that this was the kind of competition that the smaller suppliers were hoping for.
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