Analysis

An Amazon Logistics Center Would Bring Glad Tidings to Israelis

The move would cut the outsized profits of the country’s importers and malls, while cutting prices and improving delivery

FILE PHOTO: The Amazon logo is seen on a new logistics center.
Michel spingler/AP

All sorts of people in Israeli business were mad at antitrust chief Michal Halperin for saying three weeks ago she wasn’t sure she would object to Amazon opening an Israeli logistics center. But this anger seems to be coming from overly concentrated industries in Israel that have been raking in huge profits at consumers’ expense.

Some are members of the chambers of commerce, which represent the large importers and retailers and work for them to limit tax-free imports – actually purchases – by individuals, based on claims such imports worsen inequality and harm Israeli businesses.

A few small importers, which serve as brokers between manufacturers overseas and Israeli consumers, have joined in the chorus. But these small importers are expected to disappear anyway as online shopping improves. If they don’t provide the customer with added value beyond what the consumer can save such as higher assurance of timely and safe delivery, their fate is sealed.

In comparison, Amazon serves small Israeli manufacturers and exporters that wouldn’t survive without it against the big importers and manufacturers.

Large importers obviously fear an Israeli Amazon logistics center that would solve many of the problems that make individual imports so difficult. Today, many orders disappear or are delayed on the way to the customer. A local logistics center would remove this barrier. For Israel’s largest importers, this would mean a sharp drop in their extremely high profit margins.

In 2016, the Finance Ministry published an analysis that showed the cumulative profits of the three large toiletry importers in Israel – Schestowitz, Unilever and Diplomat – and of Israeli manufacturer Sano. They climbed from 175 million shekels ($50 million) in 2012 to 295 million shekels in 2014, the highest profits these firms have made in 20 years, reflecting the overconcentration and the companies’ market power.

In 2015, the Finance Ministry published another report on the profitability of food importers. The ministry said the 10 largest food importers had cumulative profits of 500 million shekels in 2013, a 230% rise after inflation compared with 2005. It was largely the big importers that made the outsized profits, though mid-sized importers also showed very high margins. The report stressed the importance of removing barriers to imports.

The large importers aren’t alone; virtual malls and logistics centers threaten Israeli malls too. Israeli retail real estate space is a very concentrated market with only two major mall groups: Azrieli and Melisron (Ofer). Anyone who wants to open a national chain must work with them.

The large malls work quite well with the major chains such as Fox, Super-Pharm, Castro and Golf. They all receive decent conditions from mall owners.

If you want to reach Israeli consumers today, you have to go through these malls. You can sell online, but this is still filled with the childhood diseases of delivery, customs and heavy regulation of imports – which make online alternatives much less attractive.

The more there are online alternatives, and the easier it is to receive next-day delivery and/or return items, the more the brick-and-mortar malls and chains will face competition. This is great news for consumers and will shake up the retail market. Today’s players will need to rethink their business models.

Amazon has been accused of predatory pricing; selling goods for below cost to drive out competitors so it can hike prices and even attain monopoly power. But these claims don’t seem to match reality. Most sellers on Amazon are private businesses; they’re the ones that set the prices. Amazon only takes its cut.

Amazon’s size and efficiency will certainly lower prices in Israel. And even if it achieves major market power as a result – Amazon accounts for about half of all online sales in the United States – the Antitrust Authority can always ensure it doesn’t abuse this power.

So Halperin is right when she considers Amazon’s Israeli logistics center a tool to create competition and remove barriers. This could improve delivery and lower prices, exactly what the government has been trying to do with reforms.

It’s true some small importers will be hurt by Amazon, but it’s impossible, and unwise, to stop the online sales revolution just to protect them. Global trade is changing and the revolution is gaining momentum. If Israel’s smaller importers want to play on the global online field, they’ll have to adapt.

In the early ‘90s, the Israeli economy opened to imports, despite the fierce opposition from manufacturers. This move contributed enormously to the growth of local industry. An Amazon logistics center in Israel would force small importers to change immediately, and they too could catch the wave of global trade.