Food for thought

The government recently submitted a new draft law intended to promote competition in the Israeli food industry.

By BOAZ GOLAN
SOCIAL PROTESTERS rally in Jerusalem 370 (photo credit: Marc Israel Sellem)
SOCIAL PROTESTERS rally in Jerusalem 370
(photo credit: Marc Israel Sellem)
The government recently submitted a new draft law intended to promote competition in the Israeli food industry. This draft is representative of the deep crisis Israeli regulators are experiencing and the sad aftermath of regulation created to satisfy public sentiment.
To fully understand the draft it is essential to understand what led to its introduction.
Two years ago social protesters flooded Israel’s streets on an unprecedented scale. Their major claim was that the cost of living immediately be reduced. The presentation of the draft should be understood in this context, and in fact, one might say that this draft signifies the seriousness of the regulator’s response to the crisis caused by the protests.
The draft proposes to promote competition in the food industry through a series of obligations and prohibitions on food suppliers, chain stores and other retailers.
Nevertheless, careful consideration of the draft’s provisions reveals that the obvious result of this draft will be the exact opposite of what it is trying to achieve, as it will most likely restrict competition rather than increase it, and consumers will pay more for food.
The draft misses its target because it sets definitions that are too broad, thereby imposing prohibitions and obligations without competitive justification. For example, consider the way the draft defines “large retailers,” which are subject to special obligations and prohibitions.
“Large retailers” are defined in the draft as any retailer that owns more than three stores and has an annual turnover of over $70 million. The absurdity becomes clear when one considers the structure of the Israeli food market.
There are currently two dominant firms with a market share of about 30 percent each and revenue of over $1.5 billion. The competitive fringe is comprised of much smaller companies, each holding only a small percent of the market. Nevertheless, these smaller competitors fall within the scope of the draft’s broad definition of “large retailers.” It is clear that applying the same regulation to these much smaller competitors is, simply put, a distortion of the competitive picture. In practical terms, the result will be the imposition of fixed costs on small firms, which in turn will limit their ability to compete.
To demonstrate this point, all “large retailers” will be obligated to provide online, and in real time, all of their prices, in each of their stores. The draft requires that these prices be updated within two minutes of the change of any price at any of the large retailer’s stores.
Given the fact that the product portfolio of a given retailer may consist of over 100,000 products, and bearing in mind the number of stores each retailer operates, the reality of this obligation is that maintaining and updating such an online database will cost many millions of dollars each year. For the two dominant retailers, this fixed cost will be spread on revenue that exceeds $1.5b., but to other, smaller retailers this new cost represents a significant portion of revenue and will handicap their ability to compete.
Another limitation is the prohibition on stock arrangers employed by the supplier.
It is now customary in Israel that the supplier itself arranges the shelves in the retailer’s store, while the retailer dictates the product’s location on the shelf and has sole discretion regarding prices.
The draft seeks to prohibit the use of stock arrangers employed by the supplier at large retail stores, reasoning that small suppliers that can’t afford to employ people to arrange the goods in the retailer’s stores are at a competitive disadvantage.
However, this approach misses the point that once the stock arranger puts the goods on the shelf, the supplier oversees product quality and is in effect responsible for paying attention to expiration dates and defective products. This enables retailers to avoid losses due to defective products.
The effect of stock arrangers is irrelevant when considering small chain stores. The above-mentioned concern of disadvantaged small suppliers is relevant only in relation to the two dominant retailers which each hold a market share of approximately 30 percent. Denying smaller retailers the opportunity to work with suppliers that assume responsibility over defective products means an additional cost they will have to bear, without real justification competition-wise.
Indeed, this draft reflects the present crisis among Israeli regulators. It appears that the draft has been formulated to appease public outrage, and is not based on solid professional considerations. Unfortunately, a more thorough examination of the proposed draft indicates that the likely outcome will be the restriction of competition, leaving Israeli consumers to pay the price at the cash register.
Boaz Golan heads the antitrust and competition practice at the Herzog Fox Neeman law firm. This post and others in various law fields can be found at Herzog Fox Neeman’s law blog: unfolding.co.il