It is no secret that food manufacturers have been making large profits for years at the expense of the Israeli consumer. An investigation by "Globes" of the actual per-kilo price we pay for goods reveals a long list of products for which the profit margins can only be described as crazy. A check by the Prices website, for example, shows that we pay NIS 120 or more for a kilo of wafers, NIS 260 per kilo of chewing gum, NIS 130 per kilo of cookies, NIS 90 per kilo of red bamba, NIS 150 per kilo of chocolate, and no less than NIS 550 per kilo of green tea.
It is obligatory in Israel to state the price per 100 grams, but this mark appears only in very small letters on the label and on the shelf, next to the product price. It can be assumed that were these products sold by weight, like nuts and seeds for snacks sold in specialist stores, instead of in a closed package, the prices would probably deter most consumers and affect the volume of sales.
Food manufacturers in Israel are facing growing criticism because of the cost of living. Despite a high degree of consumer awareness, however, some companies have managed to stay below the consumer radar. They and other manufacturers are quietly managing to utilize their brand name power, and are using the packaging size to sell products at particularly high prices.
In practice, as stated by former senior food industry executives, the profit margin on almost every product sold to the consumer at over NIS 100 per kilo or more (including VAT) is exceptionally high. According to one former industry executive, the threshold for an exceptionally high profit margin is far below NIS 100 per kilo. Products that make headlines, and which are important in the consumer, such as fresh meat and steak, deviate from this pattern.
The executive said, "This is a catastrophe for the consumer. It's a carzy profit margin. The consumer pays for three elements: the material, the production process, and marketing psychology. In these products, marketing psychology is considerable. They're selling the consumer an experience and a million and one things, and it's legitimate to take money for that. If I can create the feeling that it's worthwhile paying for this, because it's enjoyable, why are you measuring this in material? After all, we wake up in the morning in order to feel good."
"Globes": Maybe the consumer is not paying attention, and is unaware of the price he is paying per kilo.
"That's true. The consumers measure in units. They aren't aware of the weight."
"Wissotzky is a crazy monopoly"
One conspicuous example is the Wissotzky company, which almost totally dominates the tea market in Israel. Wissotzky enjoys especially prominent displays on supermarket shelves, and the price that the consumer pays for the brand name is almost unknown in other food products. Wissotzky is a private company owned by Shalom Seidler, who was elected chairman of the Manufacturers Association of Israel Food Association a few days ago. The fact that the company's financial performance is unknown helps it evade consumer criticism. It has been successfully exploiting consumers for years because of extraordinary brand loyalty.
Wissotzky has two simple tea products: one in a blue package and the other, which is more popular, in a green package. The consumer price is NIS 130 per kilo. That sounds high, but it is low compared with the price of the company's other products, which account for a considerable proportion of its tea sales. Over the years, Wissotzky has developed the green tea category, the herbal tea category, and has even created a tea for children segment. In each of these categories, the consumer price is very high, although the cost of production, even if it is higher, cannot justify such differences.
In the herbal tea category, the consumer price for mint, peach, and other flavors of Wissotzky tea is NIS 230-350 per kilo. In the tea for children category, the price is NIS 270 per kilo, and when we come to the green tea category, the price balloons to NIS 660 per kilo.
A retail source said, "Wissotzky's high consumer prices are due to the high prices it charges the stores. I believe that all the retailers in Israel are dissatisfied with their profit margins on Wissotzky. A customer who comes into a branch and sees tea at this price thinks we're making a big profit, while we're actually making just a few percent."
Ostensibly, such a high price invites competition, but in Israel, the brand most capable of generating the strongest competition, Lipton, is sold at a similar price.
"Some consumers do whatever they feel like. It's simply unbelievable. The numbers are phenomenal. There's no doubt that Wissotzky is one crazy monopoly. Competition from the Lipton brand is questionable, because it follows Wissotzky, and shares in its excess profits. What's amazing is the Israeli consumer. There are competing brands, but why doesn't the consumer take the cheapest brand from the shelf?," asks a former food industry executive, referring to the private brands.
The executive continues, "There's no doubt that Wissotzky is one of the manufacturers that has managed to stay under the radar and is making very big profits. The media has been attacking manufacturers for years. Some of them have changed their attitude, and it's having a good effect on them. Others have continued as before, with excessively high profit margins."
Still, the consumer is paying NIS 550-650 per kilo of Wissotzky green tea. How is that possible?
"Have you visited their factory? They're packaging and selling air. They do marketing. They're very good at doing business."
How do you explain the fact that Unilever is not competing with Lipton against Wissotzky?
"Why compete when you don't have to? It works. It's not like the retailers."
Doesn't Unilever have an interest in competing?
"Read between the lines. It's like asking why Jafora-Tabori doesn't cut its price to the bone on its product corresponding to Coca Cola. There is a small number of players, a reasonable distribution between them, mild competition - and each of the players is comfortable with its market share."
Black pepper at NIS 150 per kilo
Wissotzky is exceptional, but it is not the only one. The price of all brands of chewing gum - Wrigley's Orbit and 5 gum, Strauss Group Ltd.'s (TASE:STRS) Must, and the Mentos brand - is no less than NIS 160 per kilo at a bargain price. The ordinary price is NIS 150-200 per kilo. The chewing gum category is known for its high profit margins for the manufacturer, and is also considered profitable for retailers. The candy category is also especially profitable, and the price of Tic-Tac candy is NIS 200 per kilo.
The retailers constantly complain about low profit margins on Tasters Choice coffee. The consumer price is NIS 130 per kilo.
In the chocolate category, both the packages of the international brands and those of Elite-Strauss are sold at a particularly high price. The price of Ferrero Rocher chocolate is NIS 185 per kilo, Merci chocolate is sold at NIS 105 per kilo, and Elite-Strauss's heart bonbon chocolate is sold at NIS 174 per kilo.
Another highly profitable category is savoury snacks. Sweet bamba, sold in a package of only 30 grams, is one of the most profitable snacks. The consumer price averages NIS 90 per kilo. Spices are also extraordinarily profitable in Israel. To illustrate the point, the consumer price of black pepper is NIS 150 per kilo.
Strauss-Elite announced a few months ago that it was reducing the size of products in its health and quality of life division in order to adjust the consumer price and make them more accessible. At exactly the same time, it issued new products in its pleasure and enjoyment division. When the price of these products per kilo is calculated, the profit margin on them is clearly excessive.
Under the Elite brand, the company launched two packages of cookies: 80-gram Belgian wafer crispy cookies, whose price averages NIS 132 per kilo, and 100-gram thin almond cookies, which are sold at a bargain price of NIS 100 per kilo. Elite also launched a series of chocolate snacks based on existing brand names, such as Kif Kef sticks sold in a 40-gram package at a consumer price of NIS 140 per kilo.
In order to understand the extent of these excessive profits, including for the international brands mentioned, take note of what a former food industry executive says: "If we ignore for the moment the manufacturing processes and their complexity and deal only with the material, there are three types of food material in the world: carbohydrates (flour, sugar), vegetable protein (various types of cereals), and animal protein. In the raw materials industry, the carbohydrates are the cheapest, vegetable protein is in the middle, and animal protein is the most expensive. Whenever you find products in the first two categories with consumer prices above NIS 100 per kilo, it's definitely an out-of-this world profit margin, because the raw material is relatively cheap."
Like cookies sold to the consumer at NIS 100-130 per kilo?
"This is a catastrophe. Take burekas (filled pastries), a cheap product. You can buy a 700-gram package at NIS 14-15 per kilo, and it has carbohydrates and a little cheese. Why are burekas so cheap and cookies so expensive? The raw materials are the same. Burekas are an extreme example, because to the best of my knowledge, it is not a particularly profitable item, but it highlights the scale of the cost."
And if you add almonds to the cookies?
"All right. What proportion of the product consists of almonds? Almonds can make the price of the product NIS 30 a kilo, but not NIS 100."
The Elite-Strauss group said in response, "There is no basis for comparing prices of various products solely on the basis of your calculations by weight. Different manufacturing processes, raw materials, and technologies are only some of the substantive differences affecting prices and profit margins, which in any case have not been uniform throughout the years, and do not justify the argument."
Unilever said in response, "The complaints are unfounded."
Wissotzky declined to respond to the report.
Published by Globes [online], Israel business news - www.globes-online.com - on December 8, 2016
© Copyright of Globes Publisher Itonut (1983) Ltd. 2016