“The [Israeli] back-to-school market is characterized by emotional purchasing, not necessarily well planned. That means the price isn’t necessarily a factor when it comes to buying something, rather the brand, what’s in fashion and the variety of products offered.”
That statement doesn’t come from a consumer advocate but from a press release issued by Office Depot. It’s a sure sign that the back-to-school industry of manufacturers, importers and retailers know their market well: The Israeli consumer who checks prices and waits for sales at the supermarket loses control when August comes round and it’s time again to buy the kids school supplies.
Back-to-school is a big business, with sales running about 500 million shekels ($142 million) annually. Dun & Bradstreet estimates that before a child enters the classroom for the start of the school years, his or her parents have spent an average of 600-700 shekels. For some families that can add up to thousands of shekels.
Almost half of that spending goes to a single product – an “orthopedic” book bag. A product regarded as a functional necessity for older children in much of the rest of the world is a cult item for Israeli children (who want a bag decorated with whatever theme is hot this year) and parents (who worry about their children’s backs).
These orthopedic book bags account for 70% of all sales and range in pries from 230 to 400 shekels, the latter for bags that have wheels. One reason prices are so high is that the market is controlled by a few suppliers. “With pencils there are hundreds of suppliers, for notebooks scores of them but for orthopedic book bags, which are the biggest single expense for families, there are just a few suppliers and there’s no competition over price,” said one retired manager for an office equipment chain, who asked to remain anonymous.
Ironically, the retailers themselves make little profit on the bags, but they have no choice because any store that doesn’t have the ones children want stands to lose their entire back-to-school business to the store that does.
“Brands like Kal-Gav and Modan are strong and their attitude is, ‘If you don’t want to ask the price we recommend, don’t buy from us.’ They advertise a lot, create strong brands and know that children want only their bags. If a chain doesn’t have it, it’s as if they’re not in the back-to-school game at all,” said the manager.
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Where retailers earn their profits is from selling everything else. As the retired manager explained, an eraser that sells retail for three shekels costs the store 20-30 agorot. A 10-shekel whiteboard costs three to four shekels wholesale and an eight-shekel glue stick 1.50 shekels.
Between 80%-90% of the market for orthopedic book bags is controlled by three companies – Kal-Gav, Modan and NICI. The remainder of the market, for simpler bags directed mainly at older children, is for throwaway bags. There the competition is stiffer and prices are lower.
As a result, gross margins on book bags for retailers range between 25%-30%,according to D&B, although margins have been falling in recent years. That’s not what the stores really earn on them because covering their own overhead what’s left is a few percentage points of profit.
The manufacturers of the most expensive bags say the high prices represent the high cost of producing them, although on overseas shopping sites equivalent products can be founds for prices tends of percent lower than in Israel.
“Retailers buy from a regular book bag for 130 shekels before value-added tax and the trolley bags for 170 shekels before VAT. That leaves them a margin of 35%-40%,” said Moshe Gantz, who own Kal Gav. “It’s true it’s not especially profitable for him, but you have to look at retailers’ profits overall: They profit a lot from pencils, notebook and all kinds of small items, so their back-to-school profits are reasonable.”
Among his costs are a design team of five people. There’s the cost of licensing branded characterers like Minnie Mouse, which can reach 10%-15% of the product’s cost, and special features for the Israeli climate. “A book bag like ours in Europe would cost 100-120 euros [$111-133].”