The kottege cartel strangles Israeli consumers

By Abby Wisse Schachter September 15, 2011, 2:37 pm 0 Edit

Who is the great Israeli hero of this summer’s consumer awakening? He is 25 years old and used Facebook to get more than 100,000 Israelis to join him in a boycott of kottege (Hebrew for cottage cheese).
But there the stereotype of a rebellious youth ends, because Izhak Alrov lives in the ultra-Orthodox neighborhood of B’nei Brak and is a cantor by training.
Still, it was Alrov who started a movement that led to massive protests throughout Israel this summer, with hundreds of thousands of Israelis taking to the streets across the country demanding change. And it all started with cottage cheese.
“We realized the protest must start in a place that applies to the entire public,” Alrov said.
He opened a group called “Consumer Boycott of Food Products,” which planned to boycott a new Israeli-made product, each month, whose price is 50 percent higher than in Europe or the United States.
“Israeli products are sold abroad for less than they are in Israel,” Alrov said. Everywhere else “where price regulation is eliminated, the prices drop because of competition — but not in Israel. Here, everything just rises, a real cartel.”
And he is perfectly correct when it comes to lots of consumer goods.
Omer Moav, a professor of economics at the Hebrew University and at Royal Holloway University in the United Kingdom, agrees. “How can it be that Kellogg’s bran flakes in Israel cost more than twice what I pay for a box in London?” he asked.
According to Moav, a lack of competition is the problem: Israel puts limitations on imports, including Israeli dairy products. No competition is meant to protect local industry. Internally, the problem is too much concentration.
“The Israeli economy is not sufficiently competitive,” Moav said. “There is also the high cost of moving goods with seaports and airports controlled by unions, which makes things less efficient. The economy itself is largely controlled by a group of very wealthy families who hire strong lobbyists who work to reduce competition.”
Meanwhile, our hero, Alrov, decided his successful boycott, which lead to a freeze on the price of kottege for one year and a government commission to find out why food prices are so high, wasn’t good enough. He wanted to prove that Israeli-made dairy could be cheaper — 30 percent cheaper, in fact.
He enlisted some friends and a few small dairy farmers and together they produced 4,000 liters (just over 1,000 gallons) of high-quality kosher-certified milk. The final price of a one-liter container of 3 percent milk was 3.40 shekel, including sales tax — exactly 32 percent less than the current retail price of 5 shekels, which, by the way, is set by the government. Oh, and one more small detail, the government also sets quotas for each farmer’s production.
“We deliberately chose a basic good whose price is controlled by the [government] and is … supposed to be a low and fair price,” said Alrov.
“[Our] test raises the thought-provoking question about the insufferable ease at the price hikes for basic price-controlled goods as well as about the regulator who is asleep on duty to protect consumers’ rights,” Alrov added. “Every citizen buying a container of milk should know that he is paying 30 percent more than he should.”
Economist Daniel Doron agrees with Alrov, but says the problem goes beyond the government. Producers are a problem too.
“The government-sanctioned milk producing monopoly that is dominated by the kibbutzim and moshavim has been practicing price gouging. Their members must be well aware that those who suffer most from inflating the price of milk are the poorest families,” Doron said, not when the
government commission studying dairy prices suggested that milk imports might increase competition and thereby lower prices, kibbutz and moshav apparatchiks responded with “over our dead bodies.”
It isn’t just the government or the producers, it’s the entire food-supply chain. “Big players control three sections of the supply chain — importing, production and sales. Their dominant position is responsible for the sharp increase in food prices — including those of fresh fruits and vegetables — from 2005 to 2011, beyond the rise in the consumer price index for that period,” concluded the government committee charged with researching high food prices.
“There are 1,700 factories producing food in Israel, yet the industry is highly concentrated,” states the report. “More than 40 percent of all retail sales (including other consumables) are from four big groups — Tnuva, Strauss, Osem and the Central Bottling Company.”
A separate Finance Ministry report similarly concluded that the Israeli economy is controlled by relatively small number of companies and that this economic concentration is growing. The study’s authors warn that the level of concentration constitutes “a systemic risk to the economy.”
Moreover, as Doron explains, the concentration in the market hurts everyone. “The control by very few people over most large firms in Israel, the fact that six people use a third of all credit and control the media, is cause not only for high prices, but also for lack of competition, low productivity, low salaries and distorting public debate.”
It is impossible to know where the summer protests ultimately will lead but one thing is important to remember. Rising discontent with a too-high cost of living is the result of Israel’s miraculous economic success. It is only because Israelis have gotten wealthier that justifiable “me too-ism” can blossom and perhaps a market-oriented reform of the government and the oligopoly will follow.