The Same Skinny Jeans, but at a Fatter Price

On the morning of the opening of the IKEA housewares store in Netanya, thousands of shoppers lined up outside and there was heavy traffic on the surrounding roads.

Israelis love it when international retail chains bring their merchandise to Israel, especially those renowned for their reasonable prices. However, a survey by TheMarker found that in many cases Israeli consumers will be disappointed if they expect prices similar to those abroad, because when global chains come to Israel they tend to jack up their prices.

Sources at a few international retail companies with branches in Israel blame the price differences on logistics and transportation costs, the foreign exchange rate and taxes.

Based on IKEA's 2010 catalog, for example, the store's prices in Israel are an average of 23% higher than in branches in Turkey and 57% higher than in Britain).

A Billy bookcase measuring 202x80 centimeters costs NIS 450 in Israel, 63% more than the same bookcase in Turkey, where it costs the equivalent of NIS 276 (at an exchange rate of NIS 2.53 to the Turkish lira).

A two-seater Klippan couch at IKEA Israel costs NIS 1,345 while the same model is NIS 1,161 in Turkey. H&M has published a sample price list for its products in Israel, which will cost an average of 37% more than in Britain. A shirt that costs NIS 90 in Britain (at an exchange rate of NIS 5.96 to the pound sterling) will cost NIS 119 in Israel, 32% more.

Skinny jeans that cost the equivalent of NIS 149 in Britain will cost NIS 199 here. Boots priced at NIS 298 in Britain will sell for NIS 349 in Israel.

IKEA Israel CEO Shlomi Gabbai says that the price differences stem mainly from transportation costs, which are related to Israel's size and geographical position. "Since Israel is such a small country," he says, "the advantages of a large market are lost. A small country in Europe, for example, benefits from being adjacent to other countries. A logistics center in the middle of Europe can distribute merchandise to all the surrounding countries. Israel has no neighboring countries with which it can share the logistics costs here, which are among the company's highest (anywhere)." Gabbai says prices in Israel should be compared, if at all, to those in Turkey, not to those in Britain. Merchandise sent to both Israel and Turkey arrives mainly by sea, rather than by truck or train from a central warehouse.

A source at Match Retail, which has the franchise for H&M in Israel, said that the company's pricing policy is identical in all countries. "There may be small differences in certain places, mainly due to taxation, transportation costs or the exchange rate," said the source, adding that the company is committed to offering competitive local prices, relative to similar merchandise in Israel and around the world.

Jacob Levy, a managing partner at Programa, a logistics systems consulting agency, was unconvinced by the importers' arguments.

"Logistics costs in Israel really are higher than in Europe," he said. "But not so high that they can cause 30% higher prices." Levy says that the cost of shipping, import duties, storage, distribution to stores and sales personnel's wages can add up to 7%-10% of sales revenue and should be an equivalent proportion of the retail price. "The financing costs for ordering inventory too many months in advance, and the cost of surplus inventory that is not sold can add 2%-4% or more if inventory is really mismanaged," he added. Transportation of the shipping containers in which products are packed can also add to the cost. Companies such as IKEA and the fashion chains, whose items take up a lot of space but are relatively inexpensive, pass these costs on to the consumers. "When an item is cheap, the impact is higher than on expensive items whose prices cover their costs," says Osi Tagger, vice president of marketing and sales at Fritz Companies, which provides air and sea distribution and logistics services.

"This is because transporting a shipping container costs the same whether it is full of cheap items or expensive ones."

Senior executives at local retailers battered by stiff competition from international chains are skeptical of all the explanations offered by the Israeli franchisees of the foreign concerns. "How much can logistics cost?" asked a senior source at a local retailer. "I guess this is how the concessionaires maintain their profit margins. Of course they have transportation and other costs, but (to charge) over 10% more is excessive. A lot of the merchandise comes from the Far East, so it doesn't really matter if it is brought to Israel or to Europe. Also, the shekel is strong against foreign currencies just now. The only reason items cost more in Israel is that both the international chain and the local concessionaire need to make a profit."